Bill Nash - President, Chief Executive Officer Tom Reedy - Executive Vice President, Chief Financial Officer Katharine Kenny - Vice President, Investor Relations

Scot Ciccarelli - RBC Capital Markets Sharon Zackfia - William Blair Matt Fassler - Goldman Sachs Brian Nagel - Oppenheimer Seth Basham - Wedbush Securities Armintas Sinkevicius - Morgan Stanley Craig Kennison - Baird Michael Montani - MoffettNathanson James Albertine - Consumer Edge John Murphy - Bank of America Nick Zangler - Stephens Matthew Paige - Gabelli David Whiston - Morningstar Chris Bottiglieri - Wolfe Research

Good morning. My name is Jamie and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax fiscal 2019 second quarter earnings 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.

Good morning and thank you, Jamie. Thank you all for joining our fiscal 2019 second quarter earnings conference call. As always, I’m here with Bill Nash, our President and CEO, and Tom Reedy, our Executive Vice President and Chief Financial Officer. Before we begin, let me mention that CarMax celebrated our actual 25th birthday last week. Congratulations again to our associates past and present and our millions of customers who drove our success over the years. Next, 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, 2018, filed with the SEC. Last as always, let me ask you in advance to only ask one question and get back in the queue for your follow-ups. We appreciate it. Now I’ll turn the call over to Bill.

Thank you Katharine, and good morning everyone. In the second quarter, we were pleased to return to positive comps. Used unit comps grew by 2.1% compared to 5.3% in the prior year quarter and were driven by better conversion, partially offset by lower traffic. Total used units grew by 5.8%. Our industry continues to experience an unusual depreciation environment. In this quarter, our mix-adjusted vehicle acquisition costs remained high and were only somewhat lower than what we experienced in the first quarter. This contrasts with the prior year second quarter when our mix-adjusted vehicle acquisition costs were significantly lower year over year. Our website traffic grew in the second quarter by 19%, up from 17% in the previous year’s second quarter and 16% in the first quarter. On average, we saw volume of more than 20 million visits per month. Our retail gross profit per used unit remained stable at $2,179 compared to $2,178 last year. We had a strong wholesale quarter with units up almost 15% year-over-year in the second quarter. This was a result of higher appraisal traffic, the growth in our store base, and an increase in our buy rate. Our gross profit per wholesale unit decreased by about $30 to $919 in the second quarter compared to $950 in the prior year period. Other gross profit increased by over 12%, driven by higher EPP revenue and improvement in third party finance fees. Like last quarter, EPP revenue grew with sales and benefited from provider cost decreases and approximately $4 million related to the acceleration of revenue recognition under the new accounting standard adopted at the beginning of this fiscal year. These were partially offset by lower service profits. 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 77% versus 80% in the second quarter of last year, but similar to the first quarter. Large and medium SUV and truck sales were about 27%, almost exactly the same as a year ago and down slightly since the first quarter. On SG&A, expenses for the quarter increased about 12% to $454 million, or a year-over-year increase of $126 per unit. Several factors impacted SG&A expense, including the opening of 18 stores since the beginning of the second quarter of last year, which represents a 10% growth in our base, a $7 million or 18% year-over-year increase in advertising expense which is largely due to timing, an increase of $6.5 million or $28 per unit related to share-based compensation expense, and our continuing investment in technology platforms and digital initiatives. Now I’ll turn the call over to Tom.

Thanks, Bill. Good morning everyone. Unlike the last two quarters where we saw modest declines in the volume of credit applications, we experienced growth in applications across the credit spectrum in the second quarter. During the quarter, we continued to see strong lender performance in Tier 2 which accounted for 17% of sales compared with 16% last year, but we saw weaker performance in the third party Tier 3 space which represented 8.8% of used unit sales compared to 9.6% last year. CAF penetration net of three-day payoffs was modestly higher than last year’s second quarter at 43.9% compared to 43.5%. Our net loans originated in the quarter grew by 8.8% to $1.7 billion due to our sales growth, an increase in the average amount financed, and the slight increase in CAF penetration rate. CAF income increased 1.6% to $110 million. This was a result of the 8.6% growth in average managed receivables partially offset by an increase in the provision for loan losses and the continued slight compression in portfolio interest margin. Total portfolio interest margin was 5.7% of average managed receivables compared to 5.8% in the second quarter of last year, but flat compared to the first quarter. For loans originated during the quarter, the weighted average contract rate charged to customers increased to 8.5% compared to 7.6% a year ago and 8.4% in the first quarter. The loan loss provision for Q2 was $40 million compared to $33 million in the prior year period. This arose from the growth in the managed receivables as well as fluctuations that are often experienced with quarterly loss provisioning. The ending allowance for loan losses was 1.13% of average managed receivables, flat sequentially from the first quarter and down from 1.15% in the second quarter of last year. Moving to capital structure, during the second quarter we continued to return capital to shareholders and repurchased 2.3 million shares for $171 million. Now, I’ll turn the call back to Bill.

Thank you, Tom. During the second quarter, we opened three stores: two in existing markets, including Santa Fe, which we include in the Albuquerque market, and Oklahoma City, and one in a new market Macon, Georgia. In the third quarter of fiscal 2019, we plan to open another four stores, all in new markets for us. They include Wilmington, North Carolina, which will actually open today; Lafayette, Louisiana; Corpus Christi, Texas; and Shreveport, Louisiana. As I’ve done before, let me update you with some of our individual product initiatives. We recently rolled out our alternative vehicle delivery options to a second market. These options will allow customers to complete most of the vehicle shopping and purchase process from their homes after which they can decide how they want to receive the car. In addition to the Charlotte market, this is now available in all three stores in the Raleigh market. It includes our expedited or express pickup service, which kicked off in Raleigh in August, and our home delivery service, which launched in early September. In addition, we began testing an online appraisal estimator in 10 stores in August. After answering just a few questions, the online estimator provides customers with the opportunity to quickly receive an approximate offer on their vehicle. While the offer is an estimate, it is based on actual CarMax appraisal data. Also, we now have a customer experience center. This call center provides customers and test markets with support at any point along the way throughout the progression of their shopping and purchase journey. These consultants can work with the customers until they are ready to either go to the store for pickup or schedule home delivery. Last quarter, I talked about how we are working to combine all of our online products together into one comprehensive offer. We are building a full omni-channel experience that enables customers to seamlessly move across the online and in-store experience with ease. Customers want the flexibility and independence to do much of their shopping and buying online. Given the complexity of a vehicle purchase, they also often want the help and assistance of our expert store associates at various points along the journey. We believe our ability to provide this integrated experience across both online and in-store is unique in the automotive industry. Because of our skilled and knowledgeable associates, our national footprint, brand strength, infrastructure, inventory scale, and continued investment in technology and digital capabilities, we believe we will have a clear competitive advantage to lead the industry in delivering this experience to our customers. Later this year, we will bring this integrated omni-channel experience to a major market. This will help us learn how to best operationalize all of our offerings and scale them across the entire organization. We will provide you more information on this in the future. Now we’ll be happy to take your questions.

[Operator instructions] Your first question comes from Scot Ciccarelli from RBC Capital Markets. Your line is open.

Good morning, guys. Bill, given the success of one your online-only competitors out there, can you help us understand what the impediment has been to rolling out the alternative delivery and full digital capabilities maybe faster than what we’ve seen so far? I know it’s in the works, but just wondering if you can help us understand kind of the – maybe what the process impediments have been to rolling that out thus far.

Well Scot, it really goes back to this experience that I’m talking about, this omni-channel experience. We want to make sure that we can connect all the different pieces, and so for example, the alternative delivery, whether it is home delivery or the express pick-up, that’s only one small piece of the whole equation. We want to be able to combine that with all the other tests that we’re doing. The other thing that we want to do is we want to make sure that our sales consultants are trained on how to continue to progress the customers in a different way than they do today. So, I’m actually pleased with the progress that we’ve made over the last couple years. It’s a big change for the organization, there’s a lot of technology involved, and I think we’re on the right track. So, I’m excited about it.

Maybe if I were to rephrase the question a little bit then, if you roll it out to this major market that you’re expecting in the back half and you like what you see, how quickly could it be rolled out from that point into other markets?

We’ll wait and see on that, Scot. I mean the plan would be once we get it into market, we’ll obviously want to iterate quickly on that, and so that’s what our focus will be. Our first focus is to get in the market, and the second one will be to iterate it quickly from there, because I think what you’ll see is the first version of it will not be the end state.

Okay, got it. Thank you.

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

Hi, good morning. I guess a follow-up question on the omni-channel paradigm. As you think about that going forward, and I know you’re still early, can you talk about what the targeted margin profile would be for a car that would be delivered versus picked up? Are you looking to maintain that gross profit per car, or how do you think about that? Secondarily, I don’t think you’ve ever given any metrics in Charlotte about the number of customers that actually choose to get delivery or inquire about delivery. Is there any metric you can give us on what you’re seeing in Charlotte?

Okay, on the first question, Sharon, it is a little early to talk about the cost profile and the structure. We’re still learning. As I’ve talked about, we’ve got a call center there opening up. I think there’s opportunity and we’re testing different opportunity on compensation structure, so I think there’s a lot of things that we’re continuing to work through, so I can’t really give you any guidance on that at this point. As far as the number of customers, you’re correct - we haven’t talked about that, but the majority of customers by far still want to interact with our expert sales consultants and still want to come into the store at some point. The key is that we want to make sure that we individualize each customer’s journey and help them at the points that they need help so that it’s not one size fits all.

Okay, thank you.

Your next question comes from Matt Fassler with Goldman Sachs. Your line is open.

Thanks so much, and good morning. I’d like to ask a question on CAF. So, the interest spread, I think essentially stabilized sequentially. I know that the last securitization, I saw a little bit of a better spread than the prior one, but generally speaking the spreads on your securitizations have been coming down as the pace of increasing your cost of funds has moved a little bit faster than the average rate you’ve been able to charge, even as that’s been moving higher. How is it that that spread was able to stabilize as you’re still essentially mixing towards, I think, those lower spread securitizations?

Matt, it’s stabilized quarter over quarter, but it’s still a little bit down versus last year. In general, as I’ve talked about, we in reaction to interest rate increases immediately start testing, so you’re naturally going to see a little bit of a lag, I think, in our ability to increase rates in response to benchmarks rising. But if I look back at what benchmarks have done over the last year, they’re up a little over 100 basis points, and if you look at what we’re charging customers in this quarter versus a year ago, it’s up a little under 100 basis points, so I think we’ve been successful in migrating rates up. We’ve kept an eye on the three-day payoffs, which have been very stable this year. When we first starting increasing rates, we saw a little bit of a tick up in that, but I think it’s normalized now. You know, the reality is it just takes some time to respond to rate increases. We’re not going to preemptively increase rates on a prediction that rates are going to go up, so I think we’ve done a pretty good job of moving things up, but in an increasing rate environment, you’re naturally going to see a little bit of lag there.

Thank you.

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

Hi, good morning. Nice quarter. My question centers on the used car business. Clearly with a two-one comp, like you said Bill in your prepared comments, it returned to positive comps, but what’s encouraging there is even on a stacked basis, it’s stronger on both two and three years. I want to understand better from your perspective what’s happening in the overall environment. You talked a bit about used car pricing - it sounds like that’s still a headwind, so maybe elaborate further on that, and then, are there other factors out there that are helping drive better sales, and how do we think about the sustainability of those factors for the back half of this year? Thanks.

Yes Brian, I’ve been here a long time and it’s a very unusual market right now. As I’ve said in my opening remarks, acquisition costs are still, when you look at a year-over-year basis, much higher than they were a year ago, and we had a little bit of an offset on acquisition prices because our inventory that we sold skewed to be a little bit older, but it wasn’t enough to offset the increase in acquisition prices. At the end of the first quarter, we were starting to see--although your starting point of prices was higher, at the end of the first quarter we were starting to see depreciation trends more normalized. It really stopped after the end of the first quarter. Second quarter, we’ve seen unusual depreciation curves - in other words, normally you’d see continued depreciation during this time of year, and we just really didn’t see that. It’s very different than in past years - it’s been very flat. I think there’s probably, and this is just my belief, some of what’s driving that may be anticipation of tariffs on new cars and people speculating and trying to buy up used cars; but to be honest with you, I don’t really know why that is. New car prices are obviously still as high as ever and they continue to go up, so as far as the outlook going forward, I would think at some point we would start to see depreciation trends more normalize, even if your cost is at a higher starting price. I would think that we’d start to see it more normalize, especially as continued inventory comes in off of the lease increases that we’ve seen over the last few years.

On that, so with the hurricane [indiscernible] we recently saw hit the east coast, could that further exacerbate the pricing dynamic within the used market?

It’s hard to tell. I think the industry so far is saying that this is not from a destruction of automobiles, this is not to the magnitude of, say, Harvey was. I think I saw some estimates of maybe 20,000 vehicles or so, so I don’t think we’re going to see to the magnitude that we did a year ago.

Okay, thank you.

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

Thanks a lot, and good morning. My question is on the hurricane impacts on sales. Last year, I think you had some negative impact on your sales at the end of the second quarter and some positive impact in the third. How do we think about that from a year-over-year perspective this year, considering Hurricane Flo? Can you give us some color there, please?

Yes, so as far as the hurricanes last year, you’re right - it really impacted us only the last week of the quarter, so the real impact is next quarter. As far as Flo goes, we’ll talk more about that because it happened in the third quarter, but I will tell you we did have a period of time where we had several stores shut down, but we as an organization fared very well from a property standpoint. The stores and the inventory, we did not see some of the impacts that we saw last year. Keep in mind, when we have these weather events, generally it’s the timing and then we’ll get the sales back afterwards.

Did you pull forward the opening of the Wilmington store to capitalize on potential demand in that market?

Actually, we delayed the Wilmington because it was supposed to open up pretty much right in the mix of the hurricane prep, so we delayed it, which is why it’s opening today.

Thank you.

Your next question comes from Armintas Sinkevicius with Morgan Stanley. Your line is open.

Good morning. Thank you for taking the question. I can appreciate, having been done in Virginia, the capabilities that you have in-house and continue to develop, and that you can transport cars the same way as Carvana can. I’m curious - what do you think it will take for the market to realize that your capabilities are similar? Do you think it will be the launch of the bundled offers? Just curious on your thoughts there.

I don’t know, I mean, we’re focused on making sure that we deliver this omni-channel. We understand that customers want to do more online, and like I said earlier, the complexity that’s involved with used cars, we feel like there is points in that process where the customer wants assistance, so that’s our focus. Our focus is on right now delivering the omni-channel, and we’ll see how the market responds after that.

What are your market shares in the Carvana markets, and how has that changed?

We don’t speak specifically to individual competitors. We view our competitive set as much broader than, say, digital type players, and again we’re focused on all competitors. Just like we don’t talk about geographic differences, we won’t speak to competitor differences.

Okay, thank you so much.

Your next question comes from Craig Kennison with Baird. Your line is open.

Good morning. Thanks for taking my question. Bill, you mentioned rolling out the online appraisal tool in more markets. I’m curious, in those pilots, how accurate have those online appraisals proven to be?

Actually Craig, let me clarify a little bit. What I talked about in the opening remarks was the estimator - that’s a different tool than what we’re testing. We have several tests going on. One is the estimator, which is the new one, which is just a series of simple questions a customer can fill out, we give them an estimate. In the markets where we’re doing online appraisals, we have several different versions of that, that we’re testing as well. What we’ve found is that we can be very accurate on the online appraisal offers. What we’re really trying to figure out is what’s the best delivery mechanism for those, what’s the best process for individual customers, and how we communicate those offers. With some customers, depending on the vehicles, there may be different solutions, so that’s why we’ve been testing several different things and continue to test several different things.

Could you just remind me of the difference between an estimate and an appraisal?

Sure. The estimate is just what I said - it’s an estimate offer that still has to be brought to the store or leveraged through our online appraisal offer. The online appraisal offer is one that we will back, assuming that the customer didn’t oversee some type of condition that impacts the vehicle.

Got it, thank you.

Your next question comes from Michael Montani with MoffettNathanson. Your line is open.

Hey, good morning. Thanks for taking the question. Just wanted to ask, Bill, for your thoughts around potential impacts from tariffs, to the extent that we were to see those happen. How do you see that playing out for your business and the industry a little bit more broadly?

I think we’ll have to wait and see, but obviously the tariffs on new cars would certainly cause the new car prices to go up, and then you’d have to look at what that did to the gap between new cars and late model used cars. I would think that that would widen, which I think would be helpful for our business. The other thing that we’d have to stay tuned on is really the parts and things that we use in our reconditioning process, so we’re staying close to it and we’ll continue to monitor it as it progresses.

Thank you.

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

Great, thank you, and good morning everyone. I wanted to ask on the EPP side, if possible. I know there is some cost benefit that you alluded to in the press release, and there’s an accounting adjustment there, a benefit; but wanted to get the sense on the unit side, given the zero to four-year-old mix fell, are you seeing attachment actually increase, because I would imagine that would be a factor driving monthly payments higher and so make the comp performance look even better in that regard.

Jamie, we’ve seen pretty darn consistent EPP attach rates over the years, and that was part of the reason we were able to take a little bit more margin with the cost reductions from our competitors in lieu of passing it onto customers in the form of lower prices earlier this year, because we’ve seen that elasticity and it’s come through. We haven’t seen a reduction in our attach rate at all. With regard to the accounting standard, that’s something that we have to look at every quarter now. We have to put a receivable on the books for those retro payments that we’re entitled to based on the contracts, and every quarter we’ll look at it and we’ll make an estimation of what we believe has changed and what we expect to collect on some of those plans. One thing that I think might be helpful to point out, though, is the methodology that we use to predict that receivable includes some seasoning of the plans before they’re going to get put into the consideration set, so that every quarter we’ll be looking at additional plans that have seasoned to the point where they’re worth looking at and making assessments based on that. The thing could move either direction, but one dynamic I think it’s important to know is there are new plans being put into the consideration set every quarter, and in recent years, as I talked about last quarter, we’ve seen over-performance for the vendors in those plans and we’ve been expecting to get a payback.

So just a point of clarification, you’d expect with older vehicles that the attachment rate would fall, I would imagine, and so if we were to, say, see a surge in zero to four-year-old vehicle demand in the coming quarters, being flat now, arguably you might even see an uptick from here. Is that fair?

I mean, I don’t have the data in front of me, but I would think the opposite would be, off the top of my head, true. The newer vehicles still have some of their manufacturer’s warranty left on them, and frankly the older vehicles, the EFP is a better value proposition for the customer because it’s going to protect them when they don’t have a warranty.

Understood. Great, thank you so much.

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

Good morning, guys. Just a question as we think about the competitive dynamics in the market, and you kind of talked about this a little bit but I wanted to put it all together. Are there any specific markets where competitive is being disruptive, or any markets you can point to that you’re being disruptive? What I’m trying to get at here is there is an increasing focus by the new vehicle dealers, there’s obviously some digital competitors that are out there, but at the same time as you launch your omni-channel efforts and kind of really coalesce what you’re doing online and within home delivery, you might be disruptive. I’m just trying to understand the competitive dynamics and if you can give us any examples in markets where you see market share shifts or opportunities. It just seems there’s a lot going on right now, and you’re probably going to be one of the big winners but I think there’s a lot of concern out there.

Yes John, you’re right - the competition is robust from a lot of different angles, whether it’s digital players, whether it’s brick and mortar players, standalone players, that kind of thing, and we’re focused on all of them. I’m not going to talk specifically about any particular markets because I can tell you, it’s a very complicated analysis when you try to dial into an individual market, looking at all the different competitive sets that are there, what are those competitors doing, what are we doing differently, you have to take into consideration age of our stores. There’s a whole bunch of things that you have to look at. What I would just tell you is that we’re really positioning ourselves to be that solution for the customer, allowing the customer to really drive the transaction on their terms, individualize every single customer interaction. That’s what our focus is on and less so about, okay, what’s this one player doing. We think that this omni-channel solution is going to be the future of where customers want to go.

Maybe just a really quick follow-up. When you think about that competition and the ramp-up and the focus on this specific channel in the market, or used vehicles in the market, is the upward pressure on pricing because of that, or is it because of the end market consumer, meaning is there an increasing acceptance that maybe lower grosses by this increasing competition might be what’s driving up the used vehicle pricing in a way that just seems very counterintuitive to supply and demand in normal depreciation curves?

Yes, the way I think about it, John, is look - I feel very good about our pricing and the competitiveness of our pricing. As you know, we look at it all the time, we test it all the time. I think what happens is because there is a focus from a lot of different areas, there is in any given market probably some confusion out there because a lot of different competitors are advertising, so I think there’s some confusion there. But I’m less worried about the pricing at this point because there’s a lot of different things that we can do to improve our price without, say, changing what our gross profit per unit is. I think more right now, there’s just a lot of awareness out there, or confusion out there of a bunch of different competitors.

Thank you very much.

Your next question comes from Rick Nelson with Stephens. Your line is open.

Hey guys, Nick Zangler in for Rick here. More of a strategic question. From your early findings, can you talk about the importance for a customer to physically see a vehicle in person before they commit to a purchase - what’s your view there? Then related, I think the value of delivery in general could be debated, but do you foresee a capability that allows a customer to conduct virtually the entire vehicle transaction online and simply come into the store, verify the vehicle condition and pick it up there, and does the consumer desire that capability as well? Thanks.

Okay, so on your first question, do they want to see the car? Absolutely, the majority of our customers want to see the car. On your second question, the value of delivery - listen, what you described is what we’re talking about when we say expedited or express delivery. That’s our first attempt into that foray, where the customer can do most everything online and then they come into the store just to test drive it, if they want to test drive it, understand what the options are. Again, the customer will determine how much time they want to be in the store. If they want to be in and out in 15 minutes, they can be out in 15 minutes. If they want to take it for a test drive, obviously it will be a little bit longer than that. But most of what we see on the customer side is that they still want to see and, in a lot of cases, test drive the vehicle.

Great, thanks.

Your next question comes from Matthew Paige with Gabelli. Your line is open.

Good morning, and congrats on a nice quarter. I wanted to ask potentially a longer term question. Obviously fully these are a small but growing piece of the U.S. market, but have you learned any lessons or how to make any changes to your CarMax appraisal system to deal with those kinds of vehicles that might have a potentially different depreciation schedule?

I’m not exactly sure what you’re asking, Matthew.

EVs, I don’t have a historical basis for how your appraisal system likely does other kinds of cars. How have you dealt with new entries into the market?

Yes, so if you’re talking specifically, let’s say EVs, obviously I think the industry as a whole would have thought that EV sales would have been a bigger percentage as compared to where it is today. That being said, we do get EVs through the appraisal lane, we buy them offsite Because of our data set, because we look at so many cars both in the appraisal lane and offsite, we’ve honed that muscle as well, just like with the traditional cars. So far, even though it’s a small subset, we feel very comfortable in being able to price that type of vehicle, and again because of the data that we have and the number of vehicles that we look at on a weekly basis, we learn very quickly and then we can react to those learnings.

Great, I appreciate you taking my question.

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

Thanks, good morning. My question is on the digital omni-channel and the whole ecommerce platform that you’ve been working on. Have there been some real big challenges in states where the laws are really behind the times tech-wise, and do you think those issues are resolved? If you can just talk about those issues a bit, thanks.

I think from a regulatory standpoint, there’s a couple different things. Some states still require that vehicle sales occur at the dealership’s physical location and that the customer has to actually visit the dealership - we call that darkening the door. Other states, you have to have a physical location but you don’t necessarily have to have the customer come in and do the transaction in the store, and then other states obviously are more liberal and you don’t have to have either one of those requirements. As we continue to work through this, we’ll obviously make sure that we follow any applicable laws, and again our goal is to meet the customer on their terms and we’ll do that in a legal way.

Okay, thank you.

Your next question comes from Jacob Moser with Wolfe Research. Your line is open.

Hi everyone, this is Chris Bottiglieri at Wolfe Research. I had a couple questions--well, one with a follow-up, to follow Katharine’s rules. Given the store traffic was challenged but you saw higher appraisal traffic, can you maybe just connect the two? Are you starting to see the [indiscernible] improve or some of your digital efforts driving increased appraisal traffic, if you could talk about that?

Yes, I think the appraisal traffic is probably a combination of things, whether it’s some of the stuff that we’re doing - marketing online. I also think it’s a very favorable pricing environment where, as I talked about earlier, acquisition prices are higher, we can put more money on people’s vehicles, and when you can do that, that certainly helps your buy rate. On the opposite side, if there’s a depreciating market, that generally hurts your buy rate a little bit. So I think a lot of it is based off the environment that we’re in, in addition to a lot of other things that we’re working on.

Got you. As a follow-up, I assume it’s connected, can you just give an update on your self-sufficiency ratio and how that’s been trending more recently?

Sure. Self-sufficiency, we’ve typically talked about the range, 40 to 50%, and right now we’re in the lower end of that range.

Got you, okay. Thank you for the help, appreciate it.

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

Hi, just a follow-up question. I know market share data is hard to get until you get to an annual basis, but how do you feel like you’re likely to shape up this year? Do you feel like you are continuing to gain share in the marketplace? Then secondarily, there’s been a lot of discussion about disruption in the marketplace, and you’ve been a disruptor over the years as well. I guess I’m curious if you’ve seen anything particularly in Atlanta, which is where Carvana’s oldest market is.

Okay, you’re going to be disappointed, Sharon, on both of your questions. The first one on the market share, to your point, when you look at it in the short term, it’s not as valid, which is why we look at it on an annual basis. As you probably recall, last time we reported on it, it was last year’s calendar year which we saw one of our biggest comp market share gains that we’ve seen in a while. I don’t have any updates on that front at this point. The other thing as far as disruption in a specific market, again I really don’t want to get into talking about any individual markets or, for that fact, any individual competitor. Our competitive set is huge, and that’s what we’re focused on. We’re focused on overall competition. I know neither of those answers are satisfying to you, but that’s what I’ve got for you.

All right, thanks.

Your next question comes from Michael Montani with MoffettNathanson. Your line is open.

Hey guys, just wanted to follow up on maybe an alternative revenue channel and just get your thoughts here. When you think about the growth and maturation we’re seeing from Uber and Lyft and then some of the partners they have, like a hire car or a fare, I’m just wondering if you can provide any updates or thinking about the potential growth opportunity in that channel, just because it would seem potentially to be substantial.

Michael, what I’d say is, look - I think that this is an exciting time to be in the automotive industry just outright because of so many different things that are changing. I think there’s lots of opportunities for CarMax, and I would tell you, I wouldn’t take anything off the plate at this point. We’re constantly looking at the business and how we can continue to improve, as well as make sure that we plan for the future as the business changes. I would just tell you, we’re pretty much open to a lot of different options, and we’re working with some different strategic partners trying to do different things. When we have something material to talk about, we’ll talk about it at that point.

Got it, thank you.

Your next question comes from Matt Fassler with Goldman Sachs. Your line is open.

Thanks a lot. Thanks for having me back on. I have a couple follow-ups on the numbers. The first relates to ASP. Your new car ASP--I’m sorry, your used ASPs were up slightly year-on-year, and that would be consistent presumably with what we saw in the market broadly. Your wholesale ASPs, I guess were under a tad of pressure--not pressure per se, but just down a little bit. What was going on in the wholesale ASP realm in terms of mix that was different from what was transpiring in the market more broadly?

Yes, if you mix-adjust the wholesale, our prices--because it is a stronger market, our prices actually went up, but we did have a mix shift where we had more older cars which generally will bring the price down as well as the mix, we had some more compacts come through which will change the pricing as well. You have different factors going in different directions. Then on the used side, again acquisition price was higher and it was partially offset by the shift into older vehicles.

Understood. Then the follow-up relates to your other overhead spend. There’s been a lot of talk on this call about innovation, and presumably a lot of the things you’re doing, presumably the way that manifests in the P&L in any given quarter is the other overhead line, and I think you alluded to that in your press release. That spend was up 24%, which is as big as it’s been since late ’16, and about as big an increase as you’ve typically had. I know you don’t guide on a go-forward basis, but should we expect that this line item remains a big focus for you as you potentially accelerate some of the innovation on your end?

Well, keep in mind a couple things. The total SG&A was up. Part of that was because of the advertising and the timing of the advertising. In the other category, where we do have some investments in our strategic initiatives, I’ve said all along this year that we’re continuing to invest and put back into the business, and I think some of the increase that you saw there - there’s some consulting, there’s some contracting, there’s software as a service - some of those things will stick around, some of those things will go away as certain projects come to completion, that kind of thing. So I think there is some timing in there, but again this is a year that I’ve said all along that we’re going to continue to invest in the organization.

Totally understood. Thanks so much.

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

Hi guys. I don’t think you had enough CAF questions just yet, so I had one. I think during Tom’s brief remarks earlier, he referenced weaker performance in the Tier 3 space. I guess I was wondering, is that just referencing the mix being down a touch, or did you actually see tighter lending standards there?

No, I guess I wasn’t clear enough. As I mentioned in my prepared comments, we saw application volume up pretty much across the spectrum in all credit grades. It may have been a little more robust in the middle space where the Tier 2 is, but it was up across the board. The degradation in Tier 3 resulted--you know, it was a combination of increased volume but a decrease in the performance by the lender, so we’ve seen conversion in the Tier 3 space over the course of the quarter actually deteriorate, and that’s--

So if it deteriorates during the quarter, does that suggest maybe that will continue as we roll into third quarter, then?

Well, we’ll see how that progresses. We’ve talked about--we’ve got a number of lenders in there, it’s one in particular. We’re looking at our alternatives and as third quarter materializes, we’ll tell you how it went. But obviously we’re looking at it carefully.

Understood, thank you.

Again that’s star, one if you would like to ask a question. Your next question comes from Seth Basham with Wedbush Securities. Your line is open.

I also have a question on CAF for you, as it relates to the lending outlook, the tightening that we’ve seen at the subprime level. Do you think that’s indicative of something we might see on a wider basis going forward, and as it relates to your CAF portfolio loss rate performance specifically, how would you characterize that right now? We’re seeing it tick up a little bit more than historical seasonal averages. Would you expect it to maintain the current level, or do you expect it to increase a little bit going forward?

I’ll start with your second question, Seth. We’re not seeing anything in our Tier 3 lending that is surprising us, so--obviously it’s a different animal than what we do in the prime space and a different customer relationship, different expected losses, but we haven’t seen anything there that has given us any pause. As I mentioned, it’s really performance by one lender, so I can’t speculate on whether it’s something that could be global in the future. That’s why we have multiple partners, because different institutions have different credit committees, they get different leadership at different points in their evolution, and they can change their mind about how they want to behave.

Okay, thank you.

There are no further questions at this time. I will turn the call back over to Mr. Nash for closing remarks.

Thank you, Jamie, and thank you all for joining the call today. As Katharine mentioned when she first started out, it was our 25th anniversary as a company last week, and that truly is a testament to our associates. I’m once again reminded why our associates are a differentiator for CarMax, and it’s because of the way they live our values with each other, our customers, and the communities. I want to thank them all for everything they do. They have absolutely been the key to our success in the past, and they will continue to be the key to our success in the future. Thanks for your time and interest in CarMax, and we will talk to you again next quarter.

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