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

Brian Nagel - Oppenheimer Scot Ciccarelli - RBC Sharon Zackfia - William Blair Craig Kennison - Baird Seth Basham - Wedbush Michael Montani - MoffettNathanson James Albertine - Consumer Edge Aileen Smith - BofA Merrill Lynch John Healy - Northcoast Research Rick Nelson - Stephens Seth Sigman - Credit Suisse Armintas Sinkevicius - Morgan Stanley Colin Ducharme - Sterling Capital David Whiston - Morningstar Chris Bottiglieri - Wolfe Research Brian Nagel - Oppenheimer

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Year 2019 Third Quarter CarMax 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.

Thanks you, Amy, and good morning, everyone. Happy holidays. Thank you for joining our fiscal 2019 third quarter earnings conference call. I’m here today with Bill Nash, our President and Chief Executive Officer; and Tom Reedy, our Executive Vice President and CFO. 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. Lastly, let me thank you in advance for asking one question getting back in the queue for more follow-ups. Bill?

Great. Thank you, Katharine, and good morning, everyone. In the third quarter, used unit comps fell by 1.2% compared to a positive 2.7% in the prior quarter. This is driven by lower traffic largely offset by better conversions. Total used units grew by 2.3%. We are pleased to report a 10% increase in pre-tax income. This is a testament to the strength of our diversified business model. While we are disappointed to report negative comps in the quarter, they were materially affected by the dynamics in the six Houston-area stores following Hurricane Harvey. Remember, the hurricane positively impacted our results in the third quarter of last fiscal year. If we exclude the impact of the Houston market this quarter, the company experienced positive comps of 2.3%. Our website traffic grew in the third quarter by 17%. On average, we saw a volume of about 20 million visits per month. Our retail gross profit per used unit remains stable at $21.33 compared to $21.48 last year. Once again, we had a strong wholesale quarter with units up 10% compared to last year’s third quarter. This was a result of the growth in our store base, and an increase in our buy rate. Our gross profit per wholesale unit was similar year-over-year, $949 this quarter compared to $933 in the prior year period. Other gross profit increased by over 16%, again, driven by higher EPP revenue and improvement in our third-party finance fees. EPP revenue is expanded by 11%, primarily as a result of provider cost decreases that we discussed previously. During the quarter, we did not recognize any additional extended service plan revenue associated with the new accounting standards. 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 81% in the third quarter of last year, but were similar to the second quarter. Total SUVs and trucks accounted for about 45% of our sales, up from 42% this time last year. On SG&A, expenses for the quarter increased 2.5% to $410 million or a year-over-year of $5 per unit. Several factors impacted SG&A expense, including our continued investment in technology platforms and digital initiatives and the opening of 19 stores since the beginning of third quarter of last year, which represents an 11% growth in our store base. These are partially offset by a decrease of $7 million or $42 per unit related to share-based compensation expense. Now, I’ll turn the call over to Tom.

Thank you, Bill, and good morning to everyone. During the quarter, we saw slight decline in year-over-year credit applications. Our Tier 2 lenders continued to deliver strong performance accounting for 18.3% of used unit sales compared with 15.4% last year. Q3 penetration was 9.3% compared to 10.8% last year. During the quarter, we made some changes to the routing of Tier 3 apps. An overall conversion of these applications, which is how we judge performance, ended up in line with last year's third quarter. CAF penetration net of three-day payoffs was consistent with last year’s third quarter at 44%. Our net loans originated in the quarter grew by 3.4% to $1.5 billion due to our sales growth and the increase in the average amount financed. CAF income increased 6.7% to $110 million. This was a result of the 8.4% growth in average managed receivables, partially offset by the continued slight compression in portfolio interest margin. Total portfolio interest margin was 5.6% of average managed receivables compared to 5.7% in both the third quarter of last year and this year's second quarter. The provision for loan losses was $41 million compared to $38 million in last year's third quarter. This increase is in line with our growth in average managed receivables. Our loans originated during the quarter. The weighted average contract rate charged to customers was 8.5% versus 7.7% a year ago. And this number was consistent again with the second quarter. The allowance for loan losses was 1.12% of any managed receivables similar to last quarter and to last year's third quarter as well. Lastly, I'll touch on capital structure. During the third quarter, we repurchased 3.7 million shares for $254 million. And as you may have seen in the 8-K we filed in October, CarMax's Board of Directors also authorize a $2 billion expansion in the current repurchase program. Now, I’ll turn the call back over to Bill.

Thanks, Tom. During the third quarter, we opened four stores in new markets for CarMax, Wilmington, North Carolina; Lafayette, Louisiana; Corpus Christi, Texas; and Shreveport, Louisiana. In the fourth quarter, we plan to open another five stores. Two stores open earlier in December, one in Buffalo, which is the new market, and one in Melbourne, Florida, which we opened this week. This is our fourth store in the Orlando market, and our 200th store overall. Later in the fourth quarter, we will open two more stores in new markets, Montgomery, Alabama; and New Orleans. We will also open our third store in the Portland, Oregon market. Early this month, we announced the launch of our new omni-channel experience in the Atlanta market. Atlanta is our oldest large market and has a high CarMax brand awareness and market share. In addition, we see an opportunity to reach more customers within the perimeter of the city by offering alternative vehicle delivery options. Our extensive testing and research has shown us that customers' expectations are changing. Buying a car is still a complex process, and customers are looking for an experience that give them more control and independence in buying and selling a car. However, they also want advice and guidance at any point in the journey. That is why we've developed the omni-channel experience that delivers upon this unmet customer need. The launch in Atlanta provides an experience that is flexible, convenient and fully personalized. In addition to our great in-store experience, customers can complete some or all the car buying process from home, including finance, appraisal, and paperwork. They can have their vehicle delivered directly to home or work and test drive before buying. There's no requirement for customers to purchase prior to having the vehicle delivered. Customers can also receive help from informed CarMax consultants both in-person at our stores or through our customer experience center via phone, text or e-mail. Last quarter, we shared that we opened our first center in Raleigh that now supports our Atlanta area customers. Consultants in the center are available to help customers find their ideal vehicle, navigate financing and provide any support needed until they are ready to either go to the store for pickup or schedule a home delivery. We also introduced a new express pickup option at all Atlanta-area locations giving the customer the ability to save time by completing most of the process online and then finalizing their purchase at the store in as little as 30 minutes. In December, we opened our first standalone CarMax Express in Atlanta, which serves as an additional convenient location for test drives, appraisals and express pickup of vehicle purchases. Finally, we launched a completely new website experience for Atlanta. The new online experience provides a modern and fresh brand look and includes enhanced, simplicity and flexibility for shopping and buying that easily transitions to a home delivery or in-store experience. We are excited to put the customer in the driver's seat. This experience is a unique and powerful integration of our own in-store and online capabilities. Keep in mind, we will continue to improve both the customer and associate experience in Atlanta and use these learnings to inform how we rollout into other markets. As we previously announced, we anticipate having the omni-channel experience available to the majority of our customers by February 2020. To expand omni-channel, we anticipate opening additional customer experience centers. We're currently in the process of planning the next locations, while taking state regulations into consideration. In terms of cost implications, we will continue to invest, but still expect to leverage SG&A at the upper end of a mid-single digit comp range. While there are incremental costs and inefficiencies in the near term, we've also identified potential cost savings through process changes and other improvements that can help offset these expenses over time. We believe that no other company is in a better position to deliver the best experience efficiently and profitably. While it is early, we are pleased with the feedback on omni-channel from both our customers and associates, has been very positive, and that the experience is highly representative of the CarMax brand. Let me remind you, we got into this industry in 1993 in order to provide an exceptional customer experience. We have never wavered from this commitment, which is why we've led the industry for more than 25 years. It is absolutely a part of our DNA. We believe we have a clear advantage to continue to lead the automotive industry and delivering a truly integrated and seamless experience both online and in-store. This advantage is enabled by continuing to leverage our strengths, including our skilled and knowledgeable associates, our national footprint and transportation infrastructure, our inventory scale and merchandising capabilities, our continued investment in technology and digital capabilities and our industry leading brand. All of these factors combined will allow us to deliver an unmatched experience that we believe will be the future of car buying. Now, we'll be happy to take your questions.

At this time we'll be conducting our question-and-answer session. [Operator Instructions] Your first question comes from the line of Brian Nagel with Oppenheimer. Brian, your line is open.

Congrats on the launch in Atlanta.

Thank you.

So I wanted to ask my one question. I just wanted to focus on the comps trend. And you gave us a nice color there with regard to the impact of the Huston boost last year. So the question I have is -- the one when we look at Huston, could you help us understand better when that happened? How that -- when that happened in the quarter? Was there also some type of benefit in the prior quarter? And then recognizing you don't give or provide guidance. But as we look into the fiscal fourth quarter, we're now cycling pass a negative eight. So how should we think about the trade rate a bit -- the trend of business against that negative eight. So is it as simple as that is now is a very easy comparison? Or is it something that other servicing corpse we should think about when modeling against that number? Thanks.

Yes, Brian, let me first -- so let’s talk a little bit about Houston. So if you remember last year, in the third quarter, we did recognize and call out that the comps were driven by the performance in the Houston market. And truthfully, we feel like we did an unbelievable job leveraging our strengths, our infrastructure, our transportation network to get vehicles down there to customers that needed them. And we facilitated through reductions in transportation and a lot of free transfer. So that obviously gave us a boost last year. That’s why we -- and we called it out last year, we call it out again this year. I think one of the things I didn’t have in my opening remarks is that, I think it’s still interesting to notice. We’re still experiencing a very unusual pricing environment. And really, since the Hurricanes, prices have been elevated. And it's started in last year’s third quarter, if you remember. But even as recently this quarter that we just finished, there are some interesting pricing dynamics that in part of the quarter, we saw some flat to maybe a slight appreciation, which you normally don’t see this time of year. So I think there’s some pricing dynamics that are coming into play, which also impacts the new versus late model used car gap, which has been fairly consistent. It’s little bit up, little bit down. I would say from what we can tell is fairly consistent. So I think those factors are playing into what we’re seeing right now as well.

Your next question comes from the line of Scot Ciccarelli from RBC. Scot, your line is open.

So Bill, you guys are launching your digital strategy or omni-channel strategy in Atlanta. And I would think that should help level of point view [ph] again some of your online competitors. But how do you expect to improve CarMax's pricing or positioning from a value perspective through the marketplaces like CarGurus. I mean, they have -- CarGurus, if you look at them, they have something like 5.5 million vehicles on their site, lot of dealers are using them. And if you do a scan of kind of CarMax vehicles through CarGurus window, if you will, CarMax doesn’t show up as with a lot of great deals and good deals the way they segmented. And how do you guys plan to or do you plan to try and address that challenge, if you will?

Okay. Scot, yes, let me first just talk a little bit about our pricing. I mean you follow us for a long time. We’re very focused on the price and how it compares to all the competitors. I mean, after all, you can’t sell more than 700,000 cars a year with uncompetitive prices. And we look at those pricing in a bunch of different ways with this mark-to-market versus competitors versus wholesale prices. And we’re constantly doing some pricing elasticity test. Now in regards to CarGurus, there’s lots of vehicle listing services out there. And I think those sites have made it easier for dealers to get their cars out there and view that. And I think they made it easier for consumers to search. Absolutely, they’ve done that. We use some of the listing services to complement our website, which is really kind of an economic exercise for us if that gives us the right ROI. The one thing on the listing site is they aren’t always good, maybe for research, for example, being able to compare the quality of the car. So I think that scenario where we can continue to make sure that we do a better job calling out not only the quality of our cars, but the value adds of the options that we have and change up our messing a little bit and change up our merchandising the way we have it on the website, and continue to work with the listing companies to help call out the quality because not every car on those listing sites -- they're all very different. And so -- at times it does make it difficult to compare because the quality of the car just may not be the same.

So specifically, how do you plan to change that or change whether it's on the marketplace or like -- is it a pricing change? Is it some sort of messaging or marketing like, I guess I'm just curious in terms of broad picture, how do you plan to change it?

Yes, as far as the pricing change, look, like I talked about earlier, we're looking at prices all time, we think we're very competitive. There's a lots been written about our pricing highlights to the competitors. And what I would encourage folks to do is if you go out and do the analysis and make sure that you truly do an apples-to-apples comparison, not just look at make model but look at make model trim with the options and mileage stands, what you'll find is that we're very competitive. In a lot of cases we beat competitors and in some cases we're less than competitors. And the difference that you're talking about is not that significant. But as far as getting that price perception out there, I think we can do at a combination of ways in both how we merchandise our vehicles on the website and calling attention to whether it's options that are on certain cars and what value that adds or reconditioning that we've done to the car was specific value-adds of what's been put into that car. So I think it's going to be also -- it also be a combination of how we advertise the quality message in addition to working with some of the listing agencies that we work with to figure out how to call it out a little bit better.

Your next question comes from the line of Sharon Zackfia with William Blair. Sharon, your line is open.

I guess I wanted to ask a question about the kind of a longer-term algorithm for CarMax, which I think, historically had kind of been based on that 4 to 7 comp. And I think you just mentioned earlier that you need to be kind of at the higher end of the mid-single digit to leverage SG&A. But when I look over the last five years, you guys only kind of hit that 4 to 7, maybe once or twice on an annual basis. Is there something happening where you think 4 to 7 is not the right number going forward either investments being made in the business, where you think there is a reacceleration and sustainable comp going forward? I'm just trying to reconcile the last five years with that longer-term guidance?

Yes, Sharon. So if you go back to FY '17 and FY '18, and both those years -- half of the quarters were in that range, in the 5 to 8 range. We saw it slow down last year when you get to the third quarter with the hurricane in the marketplace spike. I still believe at longer-term, that's absolutely a target that we should be shooting for. And I think things like making sure that we have the best experience and put the customer in the driver seat with things like omni-channel, I think will help to continue us to get there.

Can I ask a follow-up for that? I mean, do you feel like -- so oftentimes when you see the comps flow like that or you're hitting the target half the time, the competitive gap may have narrowed vis-a-vis the others. And I know on imagery, maybe you're a little bit behind on the internet you're catching up there. Are there any particular areas of focus that kind of lighten that gap for CarMax relative to the competition again?

Yes, look, I think in any given quarter, I mean, the competition is absolutely robust. It's been robot for a while. Look, we're in a great industry, and we would always expect competition and now certainly is no different. I think sometimes the competition is rational, sometimes it may be a little irrational. As far as specific things, I think, our whole investment that we've been doing over the last couple years is both in our website, in our associate systems, in the experience that we're giving to the customer. That's what we've been focused on to continue to make sure we lead the industry. And I would say that's what our near-term focus is on because we do see customers wanting a better experience. We have a great in-store experience and the folks -- and make sure we're all clear. The majority of our customers still want to come into the store at this point. But we're seeing the trend where a lot of customers want to do more and be equipped and empowered on their own, but they still want the help. They just want it on their terms and their timing and that's what we're really focused on.

Your next question comes from the line of Craig Kennison with Baird. Craig, your line is open.

Question is on your advertising message. With the omni-channel rollout underway, does CarMax need to change its advertising message to tell that story? And specifically, what are you doing in Atlanta with respect to advertising to get that omni-channel message out?

We absolutely need to change up the advertising a little bit, and we have done that. We started the new advertising campaign recently in Atlanta. And what we're focused on is making sure that the consumer understands that all the greatness that they know about CarMax up to this point is still there that we have an even better offering. So the real idea of putting the customer in the driver's seat, whichever way is their way is the way that the car buying will be. And that's what the focus has been on Atlanta, drawing the strengths of our stores, drawing the strengths of the digital technology that we've been investing in and drawing the strengths to our knowledgeable and skilled associates. So yes, the answer of your question is we have changed it up and I would expect that to continue to evolve over time.

Your next question comes from the line Seth Basham with Wedbush. Seth, your line is open.

My question is around CAF. If you can provide some color Tom, on what's happening with Tier 3 and the declining penetration there that will be helpful.

Yes. So as I mentioned in my prepared comments, Seth, one thing we've got to keep in mind is with Tier 3 performance it's a combination of both what they're doing with the applications they see and the nature of the applications that they see as well, because they're -- after CarMax takes a look at it and Tier 3 takes a look at it, they're seeing whatever manages to move down to their space. And so as I mentioned on the call, we've seen some very strong performance as it relates to conversion of the applications viewed in the Tier 2 space, which is a good thing for us, because, as you know, we make significantly more money on the Tier 2 sales than we do in the Tier 3. And they're more likely to converting into sales because in general, the terms are a little bit better. So that's very positive for us though. What that sometimes it relates to is we're promoting customers from the Tier 3 space into the Tier 2 space meaning the Tier 3 sees a little bit less that there may be a little bit less robust mixed than they normally do. So they have, I would say, different pool to work with depending on what's going on with Tier 2. And this quarter, as I mentioned in the call, overall conversion was consistent with what we did last year, which means of the applications they saw they converted alike amount to last year just means that the nature and quantity that they saw didn't quite get there. So overall, between Tier 2 and Tier 3, we're very happy with our lending partners and the performance and they're doing good bias.

That's helpful. And as a follow-up, looking at your loan loss performance, that was pretty good this quarter better than we expected. Or during on some of your securitizations 2018-2, I'm just sorry, 2018-3, returning to the elevated delinquency trends, are you concerned at all about the trends that we’re seeing there?

No. I think if you look at the most recent venues, it’s too early to make any judgment. But, overall in the portfolio, you’re right, the delinquencies are little harder than last year, but we seen losses consistent to a little bit better. So as we’ve talked couple -- we’re trying to originate a portfolio that has accumulative net loss somewhere in the 2% to 2.5% range. We’re very comfortable that we’re trending within that range, and that’s the goal and make sure it's financeable in the securitization mark. Feel good about all of that.

Your next question comes from the line of Michael Montani with MoffettNathanson. Michael, your line is open.

Just wanted to ask on the other overhead costs bucket, there was 15% increase there. So I wanted to understand a little bit better, was that driven by the multi-channel initiative in Atlanta? And if that is the case, how should we think about that evolving over the course of the year as you guys expand more rapidly into other markets?

Yes, Michael. That increase is directly tied to our initiatives whether it’s the omni-channel it’s also some work we’re doing on the platforms. It’s really the thing that we’ve been talking about for a period of time. And as far as going forward, like I said, we were going to continue to invest and the SG&A leverage point that we talked about in the past is still where we think we need to be in order to leverage that.

Can you share anything maybe to that end about the early learnings that you’ve had in Charlotte and potential comp list that you would have seen from some of the initiatives there? How should we think about that as we look to Atlanta for validation of the strategy?

What I would tell you is Charlotte is not a good example to draw comparisons because the Charlotte offering is very different than what we have in the Atlanta offering. So, for example, one big thing is, it was a totally different website experience. Atlanta, we have a whole new website experience, which allows the customer progress. We didn’t have that in Charlotte. Charlotte has really been the test market for us where we’ve done a lot more things manual behind the scene. So, and in the early days, we really were just kind of pushing some folks over there so we could operationally figure it out. So I think we really don’t have a good comparison to go off of at this point. And look, it’s obviously very early in the rollout to Atlanta. But as I said in my remarks, our customers and our associates like it. Conversion on ones that we have done on delivery is higher than what you see in conversion in the stores, which is to be expected, finance penetration is roughly the same as you see in the store. So we’ve seen some things early, but again, it’s very, very early.

Your next question comes from the line of James Albertine with Consumer Edge. James, your line is open.

At the risk -- and I understand to your prior comments, it’s very early, but when we think about the white paper some time ago and the -- so trajectory of CarMax as a growing brick-and-mortar strategy, clearly, you’re learning now very rapidly about the benefits of omni-channel. If we think, maybe a little bit longer term, maybe kind of 3 to 5 year outlook, are we at a point now what we can say that CarMax can grow perhaps even faster with digital or omni-channel presence as opposed to primary focus on brick-and-mortar? And in so doing, is there a line of sight to an SG&A per unit level as steady-state that can be lower and a CapEx rate at steady state that can be lower relative to your brick-and-mortar strategy as you continue to gain share via omni-channel?

Yes, James, what I'll tell you is, first of all, omni-channel can only be enabled with our brick-and-mortar strategy. You have to have a great network of stores. If you don't, you really can't bring omni-channel a like-for-like, which is putting the customer in the driver seat. I think it's a little early on the SG&A side, like I said in the opening remarks. I think here in the near-term, we're going to be a little inefficient on the omni-channel, because we want to get it right. We want it to be a great customer experience, we want it to be a great associate experience, but we've also identified cost levers that we can pull that will offset those costs. So what I'm telling you is we need to learn some more to be able to definitively say, hey, is this going to be a cheaper cost structure or not? But we're encouraged by the progress that we've made, and we're encouraged by the progress we think we can still make.

If I can follow-up on that point, and I know you've never put a line in the sand and we've always kind of talked about, everyone has got their own sort of estimates. Is it 300 stores at maturity? Is it something greater or is it something lower? Maybe, can I push you to make a comment to the extent that may be the algorithm, as you're learning about omni-channel? So as your omni-channel accelerating -- you're favoring the under versus the over, right? So ultimately at maturity, you're going to need fewer stores over time. Is that a fair comment at this point?

Well, I think the longest time we said we're going to open 200 to 300 stores, if you remember. Well, you can take 200 off, since we just opened that this week. As far as the upper end, I'm cautious on saying what the end state is. Look, I think we can add -- we have plenty of potential to add additional stores. I would just caution to say -- let's better understand the omni-channel. It would be great to be able to deliver more units out of existing footprint. So if our digital initiatives allow us to leverage our stores in ways more efficiently than we have in the past that could ultimately cut down or maybe some smaller footprint stores, I think that's a win. So I guess my short answer is we have room to continue to grow stores. But we also want to make sure we're growing market share in the most effective way possible. We've said we're -- we've already announced we'd open between 13 and 16 stores while, obviously come back in the fourth quarter update that will be in that range. But let's give omni a little bit more chance to see what we can do in existing market.

Your next question comes from the line of John Murphy with Bank of America Merrill Lynch. John, your line is open.

Good morning. This is Aileen Smith on for John. Another question on the omni-channel initiative. I realized it maybe early days on this. But can you give a little bit of color on the economics you expect for the omni-channel model? Should we be thinking about this business once it reaches the sustainable level on scale as gross profit per unit for vehicles sold through omni-channel is being similar to vehicles sold through the physical footprint? And how do you --SG&A and other expenses compare across those according to your estimates?

Yes, I think, obviously it's a little early. I think on the omni-channel, we have opportunities to optimize our staff. I think we have opportunity in transportation, I think we have opportunity in the compensation, our store roles. So while there are some incremental expenses right now on the actual delivery of vehicles, like I said earlier, we had the opportunity to pull on some leverage to offset them. And I don't see any reason at this point where GPU has to change. It has to change. But again, we're -- it's early on in the process. And keep in mind, we've only had this for a partial month of the quarter.

Yes, absolutely. And just a quick follow-up to that. On optimizing the staff and transportation some of the other things you mentioned and the target that you'll get a majority of your markets, this rolled out by February 2020. Should we be thinking about that as the timeline where some of those efficiencies are realized or is this a longer dated dynamic?

We're actively working on it right now. It'll be right in tandem.

Your next question comes from the line of John Healy with the Northcoast Research. John, your line is open.

Bill, I just wanted to ask just your view on markets outside of Atlanta for the omni-channel offering. I know you guys have said February 2020 that you would have the rollout completed. So over the next 15 months, how fast should we expect additional markets to come online? And as you enter into new markets like Buffalo for instance, will you be watching omni-channel simultaneously with the brick-and-mortar store? So just trying to understand kind of the pace from here.

Yes. So I just wanted to -- I want to clarify something. So we will have the majority of our customers being able to experience it by February 2020. As I said in the opening remarks, one of the things that we need to continue to do is expand our footprint on customer experience centers. We're actively looking at that right now for the next locations. And part of that is going to be dependent on state regulations. So for example, there are some states if you're involved in the selling activity, which your customer experience consultants are, they would require those folks to be licensed in the state, further complicated, if some of those states have requirements that those people physically come and get their license in those states. So that's an example of things that we're working through right now to figure out, okay, how many CTCs do we need, where the next CTC is going to be? As far as your question that we're going to roll it out with the new stores, we did not roll it out with Buffalo, we did not roll it out with Melbourne. We're going to roll it out in a very systematic way that makes sense for us. And we'll have more information on that next quarter.

Your next question comes from the line of Rick Nelson with Stephens. Rick, your line is open.

Curious if you do anything different from a pricing standpoint when you launch in the Atlanta market and to try to drive share and mind share?

Yes. Rick, we're constantly doing pricing tests all the time. And I would say the Atlanta just falls in that bucket with everything else that we're doing when we look at doing pricing test.

And you chose Atlanta because you mentioned it's an older market, high market share. Are those the types of markets that we should expect just to rollout to going forward?

As far as the order, again, it's a little early to tell. The other thing that's interesting about Atlanta is that we have six stores that are pretty much in the suburbs of Atlanta. So we kind of surround the perimeter. And we certainly looked at as a good opportunity to say, okay, can we get better penetration inside the perimeter of Atlanta? And I think this is a good -- a good test to be able to do that?

Your next question comes from the line of Seth Sigman with Credit Suisse. Seth, your line is open.

I wanted to talk a little bit about the shift in the business that you’ve seen over the last couple of quarters with zero to four being lower again in Q3, and obviously a little bit worse in Q2. I know, you noted, that’s where you’re seeing some of the impact from that new versus used pricing gap although that’s been the case for a few quarters now. So I’m just curious, are there any other factors that could be driving that maybe the hurricane from last year? Does that have a disproportionate impact on zero to four? So you can address that. And then just the second part of the question is around pricing. And what do you think is still driving that gap, and if there’s any signs of sort of normalization of that depreciation cycle? Thank you.

Yes, Seth. So if you look at our average selling price, it went up again. And that’s because our acquisition price is up. Now, I did know in my opening remarks that we had a bigger percent of customers moving into the older vehicles, which would inherently take your average selling price down. But it wasn’t enough to lower the sales price plus we had additional increases in higher class cars, which is why the pricing went up. There’s a lot going on in the market right now. There’s a lot of noise. I think some of the dynamics we're saying still some carryover from. And again, this is just my belief, is carried over from some of the conversation around tariffs, what’s going to happen to pricing, and there’s just a lot of things going on in the news. And I think consumers are thinking about monthly payments and thinking about if I’m going to buy a car, how much do I want to get into? So again, it’s dynamics that we’ve seen in the past and we’ll continue to work through them.

Your next question comes from the line of Armintas Sinkevicius with Morgan Stanley. Armintas, your line is open.

I was curious when we start to see the omni-channel starts to flow through the financials that probably shows up in same-store sales growth as you drive better penetration in your existing markets. For the model to meet your return hurdle rates, what sort of impact should we thinking about for same-store sales? And then also, what’s the cost to launch a new market for omni-channel versus a new market in a brick-and-mortar fashion? And what do you have to open up for an omni-channel market to be launched? Is it -- you mentioned the customer experience center, but is it thing sort of proximate transportation in that sort of thing? That would be helpful.

Yes. So first of all, the omni-channel experience. This is all about the customer and putting them in the driver seat. We’re doing this because this is where the customer is going, and this is where we want to make sure we get ahead of. So I don’t really think about as the incremental cost is doing it. I think about it as, hey, we want to be the best when it comes to serving our customers. And I’m sorry, what was the second part of your question?

The second part was what we’re trying to -- you sort of expecting to or what sort of impact do we see those as same-store sales to meet the hurdle rate on return side for the omni-channel experience?

Yes. I think the way you should think about success in the short-term for Omni, first is it's getting this experience everywhere and evolving it to make sure that the best experience for both our customers and associates. That is the near-term goal. And then, in tandem, we want to execute it the most effectively, efficiently that we can. So we’re going to be working on that. Now, all of this obviously is to increase market share over time. But I really don't want to get any more specific at this point given that we just haven't had much experience with it.

Your next question comes from the line of Colin Ducharme with Sterling Capital. Colin, your line is open.

Questions have been answered. Thank you.

Thank you, Colin.

Your next question comes from the line of David Whiston with Morningstar. David, your line is open.

I know I'm probably little early in asking this. But I'm just curious with some of the chatter going around in the financial prospect perhaps due to the withholding law change the tax refunds maybe a bit disappointing. Are you considering -- how are you factoring that in the planning? What kind of inventory levels you want in March and April?

Yes. I think that's the big question is where are the tax refunds? We're obviously going to follow that very closely. I think we have shown over time that we manage our inventory very, very well and can meet the customer needs. And I would say, I think we're in a great position. But we're also looking at the same things that you are to better understand how my tax refunds impact the upcoming quarter and the quarter beyond.

And as a follow-up on the current sourcing environment, are you having any issues with perhaps quality late model vehicles not ever making it to auction because they're selling -- staying at the dealer level as they come off lease?

No. We are not having any issues with obtaining inventory -- quality inventory.

The next question comes from the line of Chris Bottiglieri with Wolfe Research. Chris, your line is open

Consider a very ambitious rollout target to cover all the markets next few years given Atlanta appears to be your first real attempt at this. So I was hoping if you can maybe walk us through the mechanics in the market conversion. Just help us understand where you see down at the market level to even allow last mile delivery or online retailing? And then what are the bottlenecks of the corporate size to all these capabilities?

Yes. So one of the things we've talked about already is the CEC, the customer experiences centers. We have to stand those up. That really takes we call e-Office shifts out of the stores. So right now, the sales consultant that works in our stores works both the e-Office and they work on the floor. They have shifts for both our customer experience centers take to e-Office shift out. As far as the delivery fees, we obviously have vans that are taking the vehicles out. The way we rollout Atlanta is probably going to be a little bit different from that perspective as far as how we staff those and leverage associates in the existing stores. We're the first rollout to get it out there. Now, we're really fine tuning what the future rollouts will be. And truthfully, I think we'll get better and better and more efficient as we as we do more.

And then, I guess, separately, it's very early you expect to see more dynamic. I guess, what gave you the confidence in the first place such as -- such an aggressive target for the rollout rather than maybe proven that it works before setting that? I guess how much flexibility is there on that timeline? Thank you.

Well, keep in mind, we've been testing and talking to consumers for the last couple years. This is something that just didn't happen overnight. And it's one of the reasons we've taken the time that we have to really understand what the customer wants. And that's what this is about. It's all about where the customer is going, what they're looking for. So I do feel that it's an aggressive rollout given the new capability that you're going to introduce, but I also feel that it's very doable.

[Operator Instructions] Your next question comes from the line of Brian Nagel with Oppenheimer. Brian, your line is open.

So as my follow-up, I wanted maybe show up two questions -- two quick questions together. But first up, with regard to expenses, as we've talked a lot about it in the call, the ongoing reinvestment in the company, if I'm not -- if I'm correct here in the fiscal third quarter look like expense growth slowed. So I just and I can't recall if you discussed it in the prepared comments. So any color around that that's right in third quarter whether that means this trend going forward? And then my second question is just on the buyback and not that long ago you announced pretty substantial additional buyback. Your stock with the market has been hit here. How are you thinking about philosophically towards fulfilling that buyback? Thanks.

Yes. So Brian, on the expenses slowing the third quarter. So keep in mind, when the sales down you are going to have a little bit of hiccup from variable, because you won't have as much variable. But in addition to that, we feel good because we've gotten -- we've rolled out -- we've been focused on SG&A as well as cost to good sold, we've done some staffing optimization, so there's some good guys in that as well. So not only we continue to invest all along I've said, there's going to be incremental expenses we're going to invest, but it shouldn't all the incremental. We should challenge ourselves to find offset. So I feel good about that. As far as buybacks, look, we think it's a great way to give back to the shareholders. We, just as Tom talked about earlier, have authorization to do some more. And we'll continue to do that.

Yes, Brian, we've talked about this before. We structured the program to get a little bit more aggressive when the valuation is down, and a little bit more conservative looks like the valuation is high relative to what our research. And as you can see during the quarter, we brought back more than we did in Q2 for that very purpose. So we're aware of -- very aware of what our stock price is doing. And we -- as we plan to buyback programmatically, that's kind of the way the guardrails work. We also have the ability to do additional as we see it be the right thing.

Your next question comes from the line of Colin Ducharme with Sterling Capital. Colin, your line is open.

Hello?

That was on mute. Just kidding. I did think of one. Bill, I had a quick question for you. What metrics are you going to be using over the ensuing months to help you throttle the cadence of the omni-channel rollout? Thanks.

Sure, Colin. So I think we're going to be looking at variety of metrics. We're looking at how well it's received by our customers. I think we're going to be looking at how well we do on conversion? How it impacts the store performance? The expenses, how efficiently we can do it? What are the levers? There isn't any one single, because this is such a new thing. We have a whole host of different things that we're going to be looking at over the ensuing months to make sure that, one, we're giving the best experience; two, we're doing it the most efficiently; and three, that we're ultimately driving market share.

This concludes our question-and-answer session. I will now turn the call back over to Bill for closing remarks.

Great. Thank you. I want to thank all of you for joining the call today. I really want to thank our 25,000 associates. They are the differentiator for CarMax in the way they live our values and how they do that with each other, our customers and all the communities that we're in. I hope everyone has a wonderful holiday season and has time to enjoy with the family and friends, and a great New Year. And we will talk to you next year. Thank you.

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