Katharine Kenny - Vice President, IR Tom Reedy - Executive Vice President and CFO Bill Nash - President and CEO

Matt Fassler - Goldman Sachs Scot Ciccarelli - RBC Capital Markets Sharon Zackfia - William Blair Brian Nagel - Oppenheimer Seth Basham - Wedbush Michael Montani - MN Matthew Ziehl - Oppenheimer Funds John Murphy - Bank of America Derek Glynn - Consumer Edge Research David Whiston - Morningstar Chris Bottiglieri - Wolfe Research Brian Nagel - Oppenheimer

Good morning. My name is Kim and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fiscal 2018 Q4 KMX Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. Thank you. I would now like to turn the call over to Katharine Kenny, Vice President, Investor Relations. Please go ahead.

Thanks Kim, and good morning, everyone. Thank you for joining our fiscal 2018 fourth quarter earnings conference call. On the call today are Bill Nash, our President and Chief Executive Officer; and Tom Reedy, our Executive Vice President and CFO. Before we begin, let me remind you that our statements today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company’s annual report on Form 10-K for the fiscal year ended February 28, 2017 filed with the SEC. Thank you in advance for asking only one question and a follow-up before getting back in queue. Now I’ll turn it over to Bill.

Thank you, Katharine. Good morning, everyone. I’ll be in today’s call with our quarterly results than I’ll turn it over to Tom, who will be financing and later I will update you on our initiatives. Our used unit comps for the fourth quarter decline by 8% and total used units fell by 3.1%. This is driven by lower traffic and relatively flat conversion. Remember that in the fourth quarter, we were facing our toughest year-over-year comparison. We are disappointed with the decrease in our quarterly comps, which we believe it’s partly due to macro pricing factors that resulted in a softer sales environment. Although used vehicle pricing has fallen since October 17th, valuations were still significantly higher than in last year’s fourth quarter. The increase in CarMax’s average selling price in the fourth quarter was due to growth in our average acquisition costs and would have been higher absent the changes in our sales mix. At the same time, new vehicle pricing appears to have fallen further with [indiscernible] still higher than last year. These dynamics, which vary over time lead us to believe that during our fourth quarter, the pricing spread between new and late-model used vehicles was pressured which we think adversely affected our sales. Despite the softness in our fourth quarter, we are encouraged by the fact that the used market has historically been self-correcting and we believe that off lease supply that continues into the market should drive used prices lower. For the calendar year, our data shows that we were able to grow our comp market share by almost 7%, the largest increase in 4 years. Our website traffic grew in the fourth quarter by 16% as we continue to enhance our website and SEO capabilities. Gross profit per used unit once again remained consistent at 2,147 compared to 2,134 in the fourth quarter of last year. Our wholesale units grew by 9% year-over-year in the fourth quarter due primarily to the growth in our store base and the continuation of a higher buy rate. The buy rate was supported by the higher used vehicle valuations. Gross profit for wholesale unit of $946 was similar to the $938, we reported in last year’s fourth quarter. The decrease in other gross profit was primarily driven by lower unit sales, which impacted EPP and service. In regard to service, we also saw some compensation related pressure due to the fact that approximately one half of our discretionary bonus was allocated to service. Before I turn the call over to Tom, let me cover our sales mix and SG&A expense. As a percentage of our sales, zero to four-year old vehicles decreased to about 76% versus 77% in the fourth quarter last year. Large and medium SUV and truck sales were slightly above 27% down about a 0.5% from last year’s fourth quarter and up from 26% in the third quarter. On SG&A, expenses for the quarter increased approximately 6% to $409 million or year-over-year increase of $207 per unit. Several factors impacted SG&A expense including the opening of 19 stores since the beginning of the fourth quarter of last year, which represents an 11% growth in our base and a decrease of $9 million or $0.47 per unit related to share-based compensation expense. In addition, as we discussed in the past, our SG&A expense growth continues to be affected by our investment in technology platforms and digital experience. However, this quarter’s deleverage was largely due to our comp sales decline. Lastly, while Tom will review how tax perform impacted quarterly results, let me briefly address our strategy on the use of cash flows created by the reduction in our effective tax rate. Our goal is to continue to invest in our associates and in our company and drive higher shareholder returns. As we mentioned in our press release, we paid a one-time discretionary bonus to eligible associates which was about 80% of our population. For FY ‘19 we implemented additional associate benefit options and we’ll be evaluating more enhancements in the future. We also plan to invest incrementally in our business including our digital and technology capabilities. While this thing will put pressure on pre-tax income growth in FY ‘19, we would still expect 70% to 85% of the tax benefit to impact our bottom-line. These investments don’t change our current outlook on SG&A leverage. We continue to estimate that we would begin to reduce our SG&A expense per unit at the higher end of our long-term guidance of mid-single-digit comps. Now, I will turn the call over to Tom.

Thanks, Bill. And good morning, everyone. In the fourth quarter we saw some of the same year year-over-year trends in sales mix by finance channel that we’ve seen in recent quarters, specifically some decline in Tier 2 originations, growth in Tier 3 and modest expansion in the percent of sales where customers paid cash or brought their own financing. The allocation of sales across our lending channels was largely driven by the mix of credit applications. Tier 2 accounted for 15.4% of sales compared with 18.2% last year. Third-party Tier 3 grew to 11.7% of sales -- used unit sales compared to 9.4% last year. And CAF penetration net of three-day payoffs remained flat at 42.8% versus 42.9% of last year’s fourth quarter. CAF net loans originated in the quarter were flat at 1.4 billion. While unit sales were lower, we saw an increase in the average amount financed commensurate with the growth in CarMax’s average selling price. CAF income increased 22% to 101 million. This was due to result of a lower loss provision and the 9.4% growth in average managed receivables, partially offset by a slight compression in the portfolio of interest margin. Total portfolio of interest margin was 5.6% of average managed receivables compared to 5.7% in both the fourth quarter of last year and the third quarter of this year. For loans originated during the quarter, the weighted average contract rate charged to customers increased to 7.9% compared to 7.4% a year ago and 7.7% in the third quarter. Our ending allowance for loan losses was 129 million or 1.11% of ending managed receivables. That’s flat sequentially from Q3 and down from 1.16% in the fourth quarter of last year. Before I turn the call back over to Bill, let me make a few points about tax and about capital structure. As you saw in the release, the revaluation of our deferred tax asset was 32.7 million which is significantly lower than our early forecast. This was largely the result of deliberate tax fining actions. Between the December when tax reform enacted and the end of our fiscal year, we identified and executed on a number of opportunities to optimize tax savings related to the change in tax law. For future quarters, we expect our effective tax rate to be around 25%. Remember, as we have seen in the past, there has been variability around that estimate due to state taxes and other items such as the adaptation in fiscal 2018 of the FASB guidance regarding share-based comp concession. We would expect this potential variability to continue in the future. Regarding capital structure, during the fourth quarter, we repurchased 1.9 million shares for $128 million. For the full year, we repurchased 8.9 million shares at a cost of $574 million. As of the end of the year, we have approximately $1 billion remaining in our authorization. Now, I’ll turn the call back over to Bill.

Thanks Tom. During the quarter we opened four stores, two in new markets for CarMax, [indiscernible] South Carolina and [indiscernible] and two in existing markets, Boston and Denver. During fiscal 2018, we opened 15 stores and had 188 stores open at the end of the year. In the first quarter of fiscal 2019, we planned to open three stores. Our store in the Greenville North Carolina market opened last week and is a new market for CarMax. The other two were opened in Dallas and Miami both of which are existing markets for us. During fiscal 2019, we once again plan to open 15 stores, 10 of which will be in what we define as small markets as MSA’s with a population of 600,000 or less. We also plan to open between 13 and 16 stores in fiscal 2020. Now I want to update you on some of our strategic initiatives. During the fourth quarter, we completed the full roll out of our new enterprise wide customer relationship management or CRM platform to all stores. The new CRM platform enables a more seamless and personalized car buying experience by delivering a unified view of our customer shopping and selling history across all locations. We are also testing an extra [ph] pick up feature in our Charlotte North Carolina in Lynchburg Virginia stores. This option allows the customer to do virtually everything from home and complete the purchase at the store. The expatiated pickup can take us as little as 15 minutes but it's all driven by customers interest in reviewing information about the vehicle for completing the test ride. In addition, we completed the roll out of our new 360 degrees in terracotta featured to all stores. As part of the roll out, we also updated our photo software in all stores which will dramatically improve our ability to quickly innovate our photo capabilities in the future. And finally, we rolled out our new mobile appraisal platform for buyers to nearly stores this quarter. The platform enables our buyers to be more efficient which has reduced appraisal time. We are very pleased with the progress we’ve made on both advancing our technology capabilities for associates and our digital experience of our customer, not only for the quarter but for the year. This coming year, we will continue to focus on meeting the customer on their terms, whether it's in the store, online or a combination of the two. Customers want flexibility and control in their shopping and buying experience. Our associates, our national footprint, brand strength, infrastructure, inventory scale and our continued investments in technology and digital capabilities position us to continue to leave used car industry. At this time, we’ll be happy to take questions. Kim?

[Operator Instructions]. Your first quarter comes from Matt Fassler from Goldman Sachs. Your line is open.

My question relates to the dynamic focus in the macroenvironment and it's really -- have you ever seen the reactions [Technical Difficulties].

Hey Matt your question broke up a little bit but I think you were asking about the macro pricing environment and kind of what we think about, as I said, obviously first-of-all we ‘re confident about a tough year-over-year but a big factor of that is the pricing environment. I think it really hits on two sides, it's not only that our acquisition price went up on all inventory, but also I think that there was pressure on the spread as I mentioned in my opening remarks, I think there was pressure on the spread between a late model used car and a new car, but because of our acquisition price going up and new car prices coming down in relative terms year-over-year. If I look back over the last two years, we've been seeing prices all of last year we saw our acquisition prices going down. The first two quarters of this year, we saw our acquisition prices going down. Third quarter, we saw a little bit of an uptick and then we saw significant uptick in the fourth quarter. I think this is one of those things we have seen in the past what it goes through like I said in my opening remarks, is the wholesale market is pretty much self-corrected. It takes a little bit of time but it will end up correcting itself. The other thing I would just say is from a comparison stand year-over-year, we've lack some big technology improvements the biggest being on finance. Last year we saw a larger supply of affordable large and medium SUVs which we haven't seen year before. So, I think there is a lot of noise that's basically going on there.

Can you hear me a bit better now? If we look for clues for improvements, should we be more focused on used car pricing so that we can follow that or focus on what we [Technical Difficulties].

I think really what we should be focused on is just the overall wholesale environment and what is doing to prices across the board, are the acquisition prices going down or they going up. New car certainly plays and its part of that when you talk about the spread. So, it will be interesting to see as we go forward. Although it seems like incentives have started to come down a little bit, they are still higher than they were a year ago.

Your next question comes from Scot Ciccarelli from RBC Capital Markets. Your line is now open.

Good morning, guys. Can you help us better understand some of the various pressures on gross profit in the other category for the quarter specifically on the service revenues et cetera?

Sure, Scot. Like I said, on the service side, we had a little bit of headwind. I mentioned one for Thank You bonus, a big chunk of Thank You bonus went right to the service line. So, it was overcoming that. We also saw an increase in some health and welfare fringe benefits that went into that that line up as well. And then of course just the impact of lower use sale and the deleveraging by not selling as many cars also was an impact.

Hey Scot, and to give you a little additional color too. I mean the way that we are accounting for this service business is that we have like kind of a standard cost and fee to each car. And we have to cover our overhead which is pretty much fixed and based on the staffing that we have. If we have a reduction in the cars versus our expectations, it doesn't cover -- that line item is not going to cover all of the overhead that we've got buried in there. Also, with regards to kind of compensation and health and welfare it's a very big piece of the overall P&L for service and some changes and it's a relatively small profit lines from a P&L perspective. So, swings in that part of the service line will have a more dramatic impact on the overall profitability there and then they do for the company overall reap all of the SG&A.

And then I guess the mix on the lending tier 2 to tier 3, that's pretty much a direct flow through from revenue down to the profitability, that's 100% flow through that $5 million.

Yeah, I mean as we've talked before. Every tier 2 that swaps through the tier 3, you lose $300 in commission that we get from Tier 2 and it turns into paying out a $1,000, so there is roughly a $1,300 swing and everything you see move out of Tier 2 and into Tier 3. We’ve also seen growth in other which represent zero versus something paid in Tier 2.

Your next question comes from Sharon Zackfia from William Blair. Your line is now open.

I appreciate the color on the full year market share, and I know that shorter periods are kind of harder to discern. But I’m just wondering, if you believe, you’ve seen any signs of competitive infringement over the past few years or anything that would kind of impede the longer-term unit growth runway or market share runway?

No. From a competition standpoint, we believe our prices are absolutely competitive and part of that is just by the continued large volume of vehicles that we sell in any given location. I mean we’re still averaging for the year over 330 vehicles per location. And that being said, we also monitor our competitive pricing both regionally and locally. And Sharon as you know, we’re constantly testing every quarter raising prices, I’m sorry taking our margin and maybe lowering it, raising it. We’re doing pricing test all times to see elasticity on the impact that it has on sales. And what I would tell you is that we’re obviously trying to sell as many cars as we can, but to also optimize total gross profit dollars. So, we feel very comfortable on the competitive landscape at this point.

Can you also give us an update on where your aggregate market share is at this point and where is your top market share now? Is that Richmond or Charlotte? And where does that stand?

Yes. So, our top markets are going to be our oldest markets, because they’ve obviously been through the most buying cycles. So, it’ll be your older markets, the Richmond market, the Charlotte market some of these older markets. I think you’re asking about the national market share how do we stand there?

Right. Relative to kind of where you are in those oldest markets.

Okay. Nationwide, we obviously gain market share. Market share on the national actually was a little bit higher gain. I think 7% was the comp, national was a little bit higher than that. National was still about, when you look at zero to 10, we’re still around 3.3% in the comp markets were more like 4.5%, 4.6% and then in our most mature markets, we’ve talked about before, being at above 10%.

Your next question comes from Brian Nagel from Oppenheimer. Your line is open.

The question I have, Bill I just want to dive a little bit deeper [indiscernible] the first question was asked is with regards to the pricing dynamic now and you’re calling out that being sales the headwinds here in the fourth quarter. But just looking at how do we make sense of the various costs for example. Because there's clearly a larger supply of all these vehicles now hitting the market, which should be, it should weigh upon pricing. We go back to your third quarter conference call, I think we talked about post-hurricane this dynamic being an issue. But it sounded like it has started to normalized or abate somewhere early in the fourth quarter. So, I guess, the question I’m asking is, what’s behind all this, what’s happening out here? And then is there still a hurricane, if you’re and give us more specifics on how we should think about, when this this dynamic should abate?

Sure Brian. So, as I think about the supply. Like I said earlier, if you go back all through last year and through the first two quarters of this year, the added supply of let’s say of leased cars coming into the marketplace absolutely benefited us from an acquisition cost. Our acquisition cost all of last year and for the first two quarters of this year were down, which we would expect to see when you have a higher supply of vehicles. There was the third quarter dynamic where you had this big push on inventory demand because of the hurricane replacement. So, in the third quarter we saw our acquisition prices start to tick up in the third quarter that continued into the fourth quarter. And remember, we were buying inventory during that period and we were buying inventory that will get us through a couple of months ahead of time. So, do I think that the -- we’re kind of through the inventory anomaly that was post hurricane, I do think we are through that but prices still have to recover. While they are depreciating, they still haven’t gotten back to where they were a year ago.

Okay. And then as far as my follow-up and I understand it’s difficult. But is there a way to isolate what specific impact this had on your comps and I guess another way to think about that is, is it -- is there a group of -- given the vast way of cars you sell, is there a group of cars that are just proportionately skewed to this?

No, I mean when we look at it, it’s basically broad-based. Acquisition cost is up for pretty much everything. So, I wouldn’t say it’s skewed to one group or another. And I think that’s also just reflected in our wholesale performance and having a higher buy rate, more units in wholesale because it’s reflective of trickling down the expenses up on everything.

Is there any quantification of the impact on Q4 starting the comps?

Yes, I mean it’s hard to say of the 8% -- negative 8% ex-amount. It’s hard to say because it really trickles down into so many different things because for example not only is everything more expensive but last year we saw a little bit of a tailwind because there was more affordable large and medium SUVs. Well now everything is up. So, there’s an impact on that. So, it’s hard to actually quantify certain specific percent. But I personally believe it’s been a large headwind.

Your next question comes from Seth Basham from Wedbush. Your line is open.

Thanks a lot, and good morning. When you look at this quarter’s comp, was there a bigger deterioration in comp traffic or conversion relative to the last fiscal quarter?

So, our conversion was basically flat. We had a larger decline in traffic when you think about it from quarter-to-quarter. So, I would say more of it was on the traffic than the conversion.

Got it. And when you think about conversion, it did slow somewhat. What do you think the drivers are of the slower conversion this quarter, is it simply flapping the roll out of things like pre-approval of financing online, are there things that you can point to from a conversion standpoint?

Yes, it’s interesting because we’ve been having some incremental conversion each quarter, here recently, and this one was a little softer. If you look website traffic for us, it’s up again double-digit and a lot of that growth has been driven by SEO which generates leads just like paid advertising. I think when you look at the leads any specific [indiscernible] converts the same whether its SEO or SEM but what you have to look out on a quarterly basis is the quality of those leads, some leads convert a little bit better than other leads and I think during the fourth quarter we saw an increase in leads that don’t necessarily correlate as high as some other more vehicle specifically. So, what do I mean by that? In the fourth quarter, we saw more appraisal leads, appraisal leads don’t necessarily convert as high to sales as say a vehicle appointment leads. So, in any given quarter, you can have a mix in the lead types and I think that probably plays into a little bit of the where we landed in conversion this time which I also think is highly impacted by some of these more macro pricing environments.

Got it, okay. So, continuation from last quarter in terms of the quality of the leads deteriorating a little bit in terms of the absolute growth in digital online leads, are you still doing double digit?

Yeah, we’re still doing double digits but it's not as big double digits as what we’ve seen in the past. And I think that’s probably because we’re lapping over some investments and some roll out and some things and I also its partly because of what we’re seeing from a pricing standpoint.

Your next question comes from Michael Montani from MN. Your line is open.

Hey good morning thanks for taking the question. Just wanted to ask first off if I could, can you just discuss a little bit the credit and lending environment and in particular if there is any incremental tightening either from cash or Tier-2 partners or if you are more still in the motor cycling tightening that I think again around three quarters ago?

This is Tom, I can kind of walk through. With regard to cap, we talked about some tightening last year and early this year but we’ve been pretty much consistent in our lending behavior since then. Obviously, we’re looking at rates that we all heard now with the increase in the benchmarks, but that’s something we’re doing on an ongoing basis. As I mentioned, generally the shift in mix and the lending environment has been a result of the kind of the nature of the volume of applications coming through the door. I can comment a little bit on Tier-2 and 3, Tier-2 is down year-over-year about 2.8 points one is we have seen the application volume is down across the board, but most heavily in that kind of middle range. And we’ve also seen some deteriorating and conversion which we have in kind of sales to applications if you look at in that Tier-2 space. I think some of that’s the nature of the applications they’ve been seeing and some of is lender performance in that space. We’ve been talking about weakness in the last several quarters with at least one of Tier-2 lenders. I also think that in Q4 of last year we have been doing a little bit by some lender testing by other Tier-2 folks. So, you know year-over-year in the fourth quarter I think Tier-2 was probably a bit of a headwind from us based on those factors. Tier-3 continues to perform well and we’ve seen consistent over the course of this year at least since early call it April year-over-year improvement in their sales applications so in the quality of their activity for us and I think they’ve also benefitted from some trickle down from Tier-2 not proving us strong. But overall, I would describe the environment in our stores as robust as ever, they’re significantly more than 90% of customers are getting approval coming the door and, in the Tier, -2 phase I’d also mentioned that we've introduced another lender of course the year. And that is that Chase Auto.

Okay, great. That's helpful color. And if I could just follow up on two fronts. One is if you can provide an update on the home appraisal initiatives that you all have been doing as well as home delivery? And then the other question was just around finding that right downs between GPU and share. Because some of the data we have seen it looked like there was a modest growth to the market for used car units, but it came at a really heavy cost in terms of GPU when we think about some of the franchise dealer peers. And you all have always been -- think a little bit more disciplined in terms of balancing that. So here is the question was are you comfortable kind of continuing to sacrifice some shares if need to be in order to maintain or hold the GPU?

Okay so on the first couple of points, online appraisal and home delivery. So online appraisals we continue to test in 10 stores. We're actively working on different presentations to the customer and we're continuing to learn some different things. So, I don't really have an update for you on that at this point. Home delivery, I tend to think about home delivery on a more broader view which is alternative delivery, home delivery being one of them. We've been focused on building out the capability to enable not only home delivery but things like expedited delivery and as you heard, we've started to test expedited delivery in some stores. So, I'm pleased with the progress that we're making on both of those fronts. As far as the GPU and share. Look, I talked a little bit about it on earlier question. We want to maximize the sales and maximize -- we want to maximize sales but we also want to maximize total gross profit dollars. And could we have sold some additional cars if we lowered our margins and lowered our prices the answer is yes. Do we feel like net, net it would have netted out more total gross profit dollars, no. But that being said, we're continuing every quarter, we test that elasticity and we're doing test. So, it's not that we're opposed to changing up the GPU as long as it produces more as long as it produces better financial results and total gross profit dollars.

Your next question comes from Matthew Ziehl from Oppenheimer Funds. Your line is open.

Yes, hi, thanks for taking my question. Just wanted to ask if there was any weather related and I guess it would showed up in geographic in the fourth fiscal quarter related to winter weather we got back to normal to and at times nasty winter. Did you noticed any meaningful difference in comps between [Sunbelt] and more northern markets that's weather could have some impact and maybe had an aggregate impact?

Sure Matt, yeah, we obviously had lots of weather during the quarter. But like we were said in the past, weather generally once you get through the weather, you eventually went back those sales we don't think that it was any type of driver on where we ended up on comps. Because generally the only impact that would impact as you had a big weather events in a lot of stores at the very end of the quarter. And we did not see that. So, while there was impact on weather, we felt like, like we're always do that you generally get those sales back once the weather has passed.

Okay, thank you. And just following up just to not the beat the horse too much on the gross profit question, you actually had your GPU tick up this quarter and it was a bit surprising that you’re willing to forgo so much sales without even giving up any gross profit. its saying all or nothing 200 bucks or 300 bucks like some of your public competitors have. But it does seem a little surprising that, that you’re willing to hold the line so hard on gross profit than it actually kicked up this quarter. Is that, how, maybe I don’t understand, how you do your testing and how real time it is. But is it possible that you’re actually surprised at the end of the day by how much sales were down and maybe your testing methodology of testing elasticity isn’t quite as real time or rapid feedback as you need it to be?

No. First of all on the slight tick-up, that’s within the noise range for us. That’s not [indiscernible] we’re going to make even more. That’s just within the noise range. And again, I go back to, I feel very comfortable with our testing methodology and because we do it every quarter and we can see the results real time. So again, if you ask me if there was a surprise that we gave up so much sales, I just don’t think that -- I don’t see that.

Your next question comes from [indiscernible]. Your line is open.

I guess, what surprised me this quarter was looking at the used car sales data from Edmonds for the industry looked like the number was up 3% year-over-year for December, January and February. So, given the lift there and then companies paying out employee bonuses including yourselves means people have more money in their pockets for purchases including cars. So, in light of those tailwinds, I was surprised to see the same-store sales coming where they were. Can you sort of walk me through what I might be missing there?

Yes. So, I can’t speak to the Edmonds data. What I can speak to is, we look at market share on a 12-month period, because what we have found is that the market information is lagging. And it takes a couple of three months for it to catch-up, that’s why we reported on 12 months calendar year basis since we have a better understanding. And we used pocked data, which is DMV data. So, what I would say is what we seen is for the calendar year at least that the overall used for market was fairly flat. So, I can’t speak to the Edmonds for the last couple of months. Nor, I’m not sure how accurate it is on such looking at it on such a short basis.

Okay. And I’m sure, it’s hard to extrapolate, but have you seen anything as far as employees with the bonuses and coming back to your stores or just given the commentary you’ve had on traffic that it’s maybe not so much?

I wouldn’t have anything that would call it out.

Okay. And just one more. You’re opening up 15 new stores, 10 in small markets. Maybe you can talk a little bit about plans to drive same-store profitability given sort of the emphasis on driving profitability in stores versus the actual store count?

Yes. So, we are opening up 15 stores this year. And I’ve talked about this before. While we still have plenty of runway to continue to open up stores. We want to continue to try to push comp growth in our existing stores. We want to try to get more out of the existing boxes that we have and we feel like a lot of these strategic initiatives that we are working on will help to enable that. So, when we think about growth, we think about market share and how do we continue to gain market share. And while adding stores is one component of that, equally important is continuing to make sure that we leverage the existing footprint that we have.

Your next question comes from John Murphy from Bank of America. Your line is open.

Good morning, guys. Just a first question, I mean given all the volatility or sort of spike up in used vehicle pricing, I mean Bill do every consider may be going a little bit slightly older in the age spectrum in these periods of time we get a little bit further away from since competition with new vehicles, try to help same-store sales, I understand you’re very focused on GPUs and managing those but is there an opportunity to may be just drop six months or a year in the age spectrum?

Well, John, we will put out there on the front lot whatever the customers are looking for. We sell up to 10-year-old cars. Retail, we also have a huge wholesale business. So, we want to make sure that the cars we put out there obviously meet our quality standards. If they don’t, we put them in wholesale. So, when I think about old vehicles, I kind of have to think about it and the aggregate of both retail and wholesale because I think as we look at some of the competitors out there, and they add lighter model used cars, that’s really kind of something that we have been doing but we do it through it through the wholesale channel. So as customers want that eight, nine-year-old car, then we’ll absolutely go and source it. But the pricing dynamic that you saw whether its light model used car or if it’s an eight or nine-year-old, it still exists and the price is still up. So that’s a headwind no matter which piece of the inventory you are looking at.

Okay. And then just a quick second question and follow-up. Our understanding was there was a huge stocking of inventory out of the rest of the country into Texas and Florida post the storms and that really created this weird dynamic where there was excess inventory in those markets and not enough in other markets. So, for the supply of used vehicle pricing, it really just you need those vehicles to flow back out of those markets. It doesn’t seem like that’s happening that quickly and pricing is remaining fairly high. So I know you kind of answered this question before, but I mean do you see that kind of dynamic in your stores and the options your buyers are going to where those vehicles are flowing out, we’re getting this adjustment that was kind of back out towards the end of last year, and just trying to gauge when this normalizes because doesn’t seem it’s normalized quite yet?

Yes, I don’t think inventory availability in our stores was a cause for concern for us. I agree I think there was a big influx of vehicles that went down there. We certainly supported our stores by moving inventory down there. But inventory has still been available around the country, so I don’t think that that is a big factor. I do feel like we managed inventory very well this quarter given the softness in sales that we saw, inventory only grew slightly and that was really just to support the growth of the new stores.

Your next question comes from James Albertine from Consumer Edge Research. Your line is open.

Yes, hi. Thanks for taking my question. This is Derek Glynn on for Jamie. I just had a follow-up on some of your initiatives. So, you had the logistics in place and the technology backbone to enable home delivery, your expedite pickup, if you decide to roll this out across your store base, how quickly could you scale this, what would that roll out basically look like?

Not really prepared at this point to talk about timing on that. I agree with you, I think we have an unbelievable logistics network that we continue to improve or continuing as I think about the investments we’re making in the business, I think that’s another area that we continue to invest in, in our transportation and our systems. What I would tell you is you know, we move a lot of cars, we’re moving close to 2 million cars a year, moving cars is not an issue for us and moving cars and getting them to individual homes, that is not an issue for us. We want to make sure that when we rolled this, it's the product that we want out there representing CarMax which is why we have been so focused on building out the capabilities. So, I’m not ready to talk about the full roll out on this but we’ll talk more about that in future quarters this year.

Your next question comes from David Whiston from Morningstar. Your line is open.

Thanks, and good morning. Question on the small market expansion, are you noticing any real difference in the customer demographics there versus your legacy markets in terms of the credit income and the expectation either on service or also on back to John’s question on the age of the vehicle they’re looking more?

No, we haven’t noticed anything that would be worth calling out and the main reason that we talked about the small markets just to give you an idea of the size of the store and therefore the volume but we have not noticed any noticeable difference on customer demographics.

I’d add a little color there. I mean we see differences in every market that we go to, Boston is different than Atlanta is different than Houston et cetera and we contemplate those differences in demographics in our estimates of how we can sell cars there and the small markets are no different. They’re going to vary a little bit between themselves but in our models, we will contemplate those factors and make sure that we’re investing the right amount of money to get the returns we need.

Okay. Just one more question on buybacks, obviously you had a soft quarter now and there is a lot of uncertainty in the macro environment. My question is if you get a rather noticeable sell-off in the stock in fiscal ’19 are you willing you accelerate your buybacks to be more aggressive?

So the answer is yes, we’re not going to share, we don’t have any view at this point on what we would do and when we’re continuously looking at that and as you know as we talked about in the past we take a programmatic approach to the buyback program targeting a certain target range for leverage to the extent we have more cash flow and need to manage to that level. We’ll see a pick up, we took our real place so that our programs automatically buy more when the stock is looking at a lower value and buys less when it’s a bit rich but we have the opportunity to do additional volume if we see fit and if that ever comes to fruition we’ll obviously tell you about it.

Your next question comes from Chris Bottiglieri from Wolfe Research. Your line is open.

Hi, thanks for taking the question. I just want to focus on the expense a little bit, if you maintained your mid-single digit algorithm despite the announced reinvestment, simple as we put back in the core algorithm. I want to get a sense as that just a lapping investment like smaller store growth on versus lease on something else, then I have a follow up?

Chris actually a function while we are continuing to invest, it’s really a function of being very disciplined and making sure that we’re taking waste out of both our SG&A and our cost of goods sold. We’ve been focused on and I talked about our focus on that really for the last year and half two years. On the SG&A side, we’ve really been focused on strategic sourcing and procurement, staff utilization on the cost to good sold side, we have been focused really on parts and labor efficiencies. And as I look at those two buckets over the last couple of years we've taken tens of millions of dollars out of there. And I think in addition that, knowing that we're doing some incremental investments I've talked about in the past now allowing at all to be incremental and being disciplined on what we're spending our discretionary money on as we continue to advance the organization forward. So, I think it's a combination of things.

That's helpful. And then, just want to step back in the mid-single digit algorithm. Can you just spend on the flexibility out there, obviously taking some cost out? But wanted to get sense how much of that's tied to like store growth and how much that's tied to like growth initiatives that you have. Just like what it could have to be in the mid-single digits and how do you think about that long term.

That's just the guidance that we basically have given. As we continue to grow we've always said it's going to take in that mid-single digit range. Although it's a little bit higher right now given the strategic investments. I would expect that overtime, as we have more stores and our new growth store growth becomes less of the percent of the store base. We should to be able to leverage less than that. What I would tell you is that time is not right now because we're investing back into the organization and into the future of the company.

Your next question comes from Brian Nagel from Oppenheimer. Your line is open.

Hi good morning again. So, I wanted to just go back again just pricing dynamic in the environment. What we're seeing in our channel checks if there is maybe a dislocation with regard to residual values and the off-lease vehicles going back to market. So, the question I have is, are you seeing that, is that interpreting to this pricing environment that you're highlighting. And if so, how does that came at the pace at which that they --?

Yeah and I assume when you're talking about the dislocation of the residual value you're talking about the cars that coming back and surprisingly they're not worth what they originally thought that were going to worth is that what's you're talking about?

Yeah that's exactly what I'm talking about.

Yeah, I don't want to say I told that so. Back when we saw the high lease penetration, everybody is getting the leasing putting residual value on a vehicle is a tough thing to do. And as history repeats itself these cars come back, they're not worth what people thought they're worth. For us because we're not taking those cars in right from direct from the deal manufacturers buying those from the auction, they're going to do for what they're worth. They may hold on to them hoping that they'll bring more, but ultimately, they're going to end up selling it. So, we're buying them, we don't necessarily have to worry about what they have them and what they have to get out them. We're going to pay what we're willing to pay. So, I think while it may be impact some of the publicly traded retailers, that dynamic does not necessarily impact us.

And from a bigger perspective, you've stepped back [indiscernible] you guys are not in well positioned to that. But could residual issue also be leading to even artificially higher prices in the marketplace with which you have to compete against, and then this has actually slowed down the pace of those cars eventually making their way to CarMax.

Yeah. Like I said, we've seen increased supply coming in for the prior six quarters before the third. I don't see we're supposed to have to a step up. And having to pay more on these vehicles to acquire them. If they do I actually think that's a good thing for us. Because our acquisition prices are going to be higher than what our acquisition price is through the auction line. So, I think that's actually a plus for us.

Your next question comes from Jonathan [indiscernible]. Your line is open.

I don’t mean to beat the dead horse on GPU, but can you be very specific for a 1% change in comp sales? How many dollars you think that takes at the moment and how that has changed over some period of time?

No. I’m not going to be specific and tell you what 1% of sales which you have to do, from a pricing standpoint. And again, we look at this every quarter and surprisingly, it’s been fairly consistent. The ratio has been fairly consistent but that’s not to say that it doesn’t change from time-to-time and we continue to evaluate every quarter.

There are no further questions at this time. I turn the call back over to Bill Nash.

Thank you. I want to thank everyone for joining the call today. I especially want to thank our associates for everything they do. If you didn’t see in February, we were honored again on Fortune Magazine’s 100 best companies to work for. This was our 14th consecutive year on the list and this is truly a testament to our associates and how they care for each other, how they care to customers and how they care to the community. I want to thank you all for your time and your interest in CarMax and we will talk again next quarter.

This concludes today’s conference call. You may now disconnect.