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CarMax, Inc. (NYSE:KMX)

Q2 2010 Earnings Call

September 22, 2009 9:00 am ET

Executives

Tom Folliard – President & CEO

Keith Browning – EVP & CFO

Katharine Kenny – VP IR

Analysts

Matt Fassler - Goldman Sachs

Ivan Holman - RBC Capital Markets

Jaison Blair - Rochdale Securities

Scott Stember - Sidoti & Company

Bill Armstrong - CL King & Associates

Craig Kennison - Robert W. Baird

Rod Lache - Deutsche Bank

Jordan Hymowitz – Philly Financial

Willis Taylor – Gagnon Securities

Operator

At this time I would like to welcome everyone to the second quarter fiscal year 2010 conference call. (Operator Instructions) I would now like to turn the call over to Ms. Kenny.

Katharine Kenny

Good morning. We’re calling from happy CarMax this morning. My name is Katharine Kenny, Vice President of Investor Relations. Thank you for joining our fiscal 2010 second quarter earnings conference call.

On the call with me today as usual are Tom Folliard, our President and Chief Executive Officer, and Keith Browning, our Executive Vice President and Chief Financial Officer.

Before we begin, I need to once again 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 can affect these expectations please see the company's Annual Report on Form 10-K for the fiscal year ended February 29, 2008 filed with the SEC.

Tom Folliard

Thank you Katharine, good morning everyone and welcome to our second quarter conference call. We are pleased to report today a record level of quarterly earnings despite what is still a very challenging economic environment.

We are especially pleased that the strength is broad based with contributions from all major areas of our business. The government’s cash for clunkers program certainly helped drive consumers into the market in late July and August, similar to the employee discount for all from a couple a years ago, and keep America rolling, from 2001.

Cash for clunkers had far reaching appeal that drove not only new car traffic, but also created enthusiasm for used cars. However our traffic improvement was only partially due to this program, traffic has gradually trended higher since late last winter, before the spike from the clunkers program in late July and August.

We also experienced an improvement in sales execution this quarter which was even more impressive given that CAF further tightened it’s lending standards at the start of the quarter reducing our used unit cost by a few additional percentage points.

We believe that several factors contributed to our higher sales conversion rate, including our new sales training initiatives and having a better overall inventory position. In this economy we believe there has also been an increase in the percentage of motivated buyers and fewer customers who are just looking.

Now let me review some of our key financial highlights, first on sales, in the second quarter total revenues increased 13% to $2.08 billion, used revenues climbed 16% in the quarter due to a 10% increase in unit sales and a 6% increase in average selling price.

Comp store used units increased by 8%. The higher selling price reflected the continued appreciation in used car wholesale values that’s occurred since the start of the calendar year. Wholesale revenues increased 6% on a 5% increase in unit sales and a 1% increase in average selling price.

While our appraisal traffic improved sequentially it remained below last year’s level. However our buy rate improved significantly which more than offset the lower appraisal traffic. This was partially due to the stronger wholesale industry prices which allowed us to make more attractive buys to customers as well as the increase in motivated buyers.

On the gross profit, in the second quarter our total gross profit per unit increased by $363 to $3,116 per unit compared with $2,753 per unit in last year’s second quarter. Used vehicle gross profit per unit increased by $250 to $2,120 per unit from $1,870 per unit last year.

The dollar amount of the year over year increase was similar to the improvement posted in this year’s first quarter and it resulted from a combination of factors. The continued appreciation in used car wholesale values and the robust sales environment both supported the strong gross profit per unit, as did having a fourth consecutive quarter where we improved our inventory turns.

Our wholesale gross profit per unit remained strong at $826 per unit this quarter although it dipped from $897 per unit reported last year. We continue to have strong dealer attendance at all of our auctions.

Now I’ll ask Keith to review the CarMax Auto finance results.

Keith Browning

Thanks Tom, good morning. We experienced a significant rebound in CAF income to $72.1 million in this year’s second quarter versus a loss of $7.1 million in last year’s quarter. The results for both periods were affected by adjustments related to loans originated in prior periods, $36.2 million of favorable adjustments in this year’s quarter, and $28.2 million of unfavorable adjustments in last year’s quarter.

This year’s adjustments included a $28.5 million of mark-to-market write-ups in the value of our retained subordinated bonds, another $5.6 million more from favorable funding terms and costs for loans that were funded in the warehouse facility at the start of the quarter, and $2 million of other net favorable items.

The mark-to-market write-ups reflect significant narrowing in the automotive ABS spreads that has occurred over the last few months. At the start of the quarter we implemented additional tightening in CAF’s lending standards. We felt that it was prudent to do so in order to increase the [financability] of our new CAF loan originations and reduce CAF’s credit enhancements associated with future CAF securitizations.

We expect loss rates on new originations will be significantly reduced, which will in turn, lower our required credit enhancements. As a result of our capital preservation strategy CAF’s loan penetration rate net of three day payoffs, was below 30% for this year’s second quarter versus a penetration rate in the mid 30’s in last year’s second quarter.

On a combined basis this tightening together with the tightening CAF implemented in the second half of 2009, adversely affected our second quarter used unit comps by several percentage points. During the quarter we also renewed our warehouse facility agreement.

The facility limit was reduced to $1.2 billion from $1.4 billion primarily reflecting our reduced originations. While the funding cost spread increased from the previous agreement it was considerably lower then what we originally anticipated.

Our funding cost spread assumption on the new warehouse facility is approximately 270 basis points above the applicable benchmark rate. At August 31 we had $625 million available warehouse capacity.

Excluding the adjustments related to prior period originations, CAF income still climbed more than 70% versus last year’s quarter primarily due to an increase in the gain origination and higher interest income. The gain percentage was 4.2% this quarter versus 1.8% in last year’s second quarter and it benefited from both lower benchmark funding rates and from lower enhancement requirements resulting from the tightening of our lending standards.

CAF interest income includes the interest that we’re earning on the retained subordinated bonds, and we’re currently holding roughly twice the amount of the sub bonds compared with a year ago. Now I’ll turn the call back over to Tom.

Tom Folliard

Thank you Keith, on to SG&A, we were able to reduce our SG&A spending to $218.1 million from $225.1 million last year and this is despite a 10% increase in used unit sales. The reduction in total spending primarily reflects decreases in advertising and growth related expenses such as relocation and pre-opening costs as well as benefits from our ongoing waste reduction initiatives.

Together the improvement in sales, gross profit per unit, CAF income, and SG&A leverage drove our net income to a record $103 million from $14 million in last year’s second quarter. Diluted EPS was $0.46 in this year’s quarter versus $0.06 last year.

Even excluding the $0.10 per share of favorable CAF adjustments this quarter we had a record level of earnings per share notably higher than our next best quarter which was $0.30 per share in the first quarter of fiscal 2008.

Again while cash for clunkers had a positive effect on our sales this quarter it was only one of many elements that drove our success. So in summary I’d like to emphasize how well I think our associates have performed over the last several quarters during the most challenging environment our company has ever faced.

We have been able to improve our sales execution, we’ve done a nice job controlling inventory, managing through successive periods of both record depreciation and appreciation in used vehicle values, while steadily improving inventory turns year over year.

We’ve kept our inventories closely aligned with sales trends which has allowed us to optimize gross profit per unit while still offering great values to our customers. We have managed through one of the most challenging credit environments in recent history and positioned CAF to be a continuing strong contributor to our business going forward.

We have made substantial progress in our key initiatives of increasing operational effectiveness and reducing waste. We’ve also been able to reduce SG&A costs to adapt to the changes in sales levels. We will continue to focus on improvements in all these areas and on making permanent business enhancements that will serve us well in all economic environments.

In closing let me thank all of you for your interest and support of CarMax, and as always I’d like to also thank the more than 13,000 CarMax associates for all you do every day. Now Keith and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matt Fassler - Goldman Sachs

Matt Fassler - Goldman Sachs

Congratulations on your performance here, a couple of questions if I could largely on credit, could you just go into a little more color on the increase in the underlying gain on sale of loans sold to 4.2%. You talked about funding costs, you spoke about credit enhancements, just a little more color on what exactly went on and also on how sustainable you think that 4% rate would be.

Keith Browning

We saw a measurable decrease in the benchmark rates so that’s the principal reason and then based on our current outlook, our enhancements are down significantly and then the other piece that goes in with that Matt, is the fact that the losses will also be substantially lower based on our projections, all gets baked into the increase.

Whether we can sustain the what used to be called the normalized range of 3.5% to 4.5%, obviously will depend on what the consumer tells us so as you know we are very cognizant of three day payoffs and will adjust consumer rates accordingly.

But as far as those other elements then it just depends on what happens to benchmark rates in the short term and we wouldn’t expect any material change in the loss rates and the enhancement levels that we assumed in this quarter.

Matt Fassler - Goldman Sachs

Was the tightening in credit standards during the quarter incremental to the second quarter, or is it something that you’ve been implementing kind of over the past couple of quarters.

Keith Browning

We did some testing in the first quarter of what we ended up doing, rolling out more broadly in the second quarter, so we’ve been doing some incremental tightening actually since the second half of last year. Early last year we were basically focused on capital preservation and as I think we described it, we were talking more about what’s a level of equity a consumer had to be and then as time progressed, we ended up starting declining customers that we previously approved.

In the first quarter this year we actually were testing further declining customers that we would have previously approved and based on the results of that, we rolled that out at the beginning of the quarter.

Matt Fassler - Goldman Sachs

And we had noted I guess in your latest securitization filings for the past couple of months looked a little bit rougher from a delinquency perspective relative to typical seasonal trends then we had seen earlier in the year, is that part of what led you to make this move.

Keith Browning

Well the delinquencies are up across most polls versus history. The last two polls had some very unique circumstances related to them. The first one that we did this year basically was much more seasoned and so when we compare that to the relative, versus the other polls prior to that, given the stressed economy, actually the delinquencies are in line with our expectations.

And the same thing is true of the one we did most recently, it has a little bit different twist on it. While it isn’t as seasoned because there was some noise around Texas, we have a larger concentration of Texas loans in that particular securitization, and they typically do perform worse. That’s baked into our loss assumption and baked into the delinquencies there.

So again in all honesty, all the polls are performing in line with our expectations and the good news is that we believe that we have the losses pegged accordingly.

Matt Fassler - Goldman Sachs

Where are your marks right now on the subordinated bonds retained on balance sheet after the mark up this past quarter.

Keith Browning

I don’t know the full book value—

Matt Fassler - Goldman Sachs

Just trying to get a sense that if you bring it back to par what the additional gains would be.

Keith Browning

For the non discounted bonds I think that you can say that we basically got them back to par. For the large tranche that we did where we discounted them and then they obviously have a long way to go and obviously all of that is going to be subject to volatility and what happens to spreads going forward.

Operator

Your next question comes from the line of Ivan Holman - RBC Capital Markets

Ivan Holman - RBC Capital Markets

Congratulations on a very solid quarter, I was just wondering if you could comment, offer a little bit of color with regards to the sustainability of increasing gross profit dollars per unit. You suggested in the past that $2,000 was a tough number to sustain for used vehicles. Do you still believe this to be the case.

Tom Folliard

Yes, I would say the same thing which is it’s a tough number to sustain but as always it’s a balancing act for us between margin in retail, margin in wholesale, what we are able to make at CAF, and what total sales turn out to be.

We happen to be operating in an environment where we have a pretty significant tailwind with appreciation where you know when you sell, if you sell a car and you turn around and go buy it back the next week, you’re going to pay more then what you just had in that car.

So that really helped us in the quarter. We talked about that same phenomenon in the first quarter this year and so I think we were able to do what we did this quarter and at the same time still feel like we were passing on a great deal to the consumer because again, each time we sold a car we had to go back and replace it at a higher value.

But in terms of sustainability it’s always going to be a balancing act for us but this was a pretty good quarter for us.

Ivan Holman - RBC Capital Markets

Can you please try to size the impact of the cash for clunkers program just to try to figure out what a real run rate would be ex cash for clunkers.

Tom Folliard

It’s impossible to really figure out the total impact of cash for clunkers until some more time has gone by. Before cash for clunkers started there was a lot of publicity around it and I think that had some impact on consumers’ mindset. Clearly when it happened it created a spike for us which we talked about and now we’re only a few weeks into it’s end, and I think some more time has to elapse before we can really quantify the exact impact of it.

And it’s very difficult for us too, because if you saw our traffic numbers for the quarter, they were actually down slightly year over year, so it’s hard to say that cash for clunkers helped our traffic in the quarter. So although it created a spike during the five or six week period when it ran, the total impact I think is yet to be seen.

Ivan Holman - RBC Capital Markets

And so are you saying that after that five to six week period there was a drop off, or was there a gradual deceleration in traffic trends, was there a—

Tom Folliard

The five to six week period ended at the end of August and that was only three weeks ago. We’re in the middle of, this is just the beginning of our quarter, so we’re not going to talk about this quarter at all.

Operator

Your next question comes from the line of Jaison Blair - Rochdale Securities

Jaison Blair - Rochdale Securities

Bravo, congratulations on navigating through a very challenging environment, can you provide additional color on the potential to streamline refurbishment. My understanding is that the cost is currently about $1,500 per vehicle and that you’ve already pulled out about $100 per vehicle versus an average operating margin of about $800. So can you talk about how you’re thinking about that opportunity going forward, could you reduce refurbishment by another $100.

Tom Folliard

We talked about the $100 that we’ve achieved at the end of the first quarter. It was a similar number in the second quarter. We believe there’s more to be had there but with a bunch of moving parts there it’s difficult to really say exactly what that number is.

But we absolutely believe that there’s more that we can get and our operations teams are working very hard to figure out how to streamline operations in a number of different ways and to get those costs lower if possible and like I said, we believe there’s more but we have yet to quantify it.

Jaison Blair - Rochdale Securities

And then the follow-up would be you’ve taken your SG&A down pretty meaningfully, I think you’ve gone from 180 employees per store to 130, can you talk about philosophy to add SG&A as sales increase and how you balance out maintaining a lean cost structure with potentially preparing to restart growth and what we might expect to see over the next six to 12 months assuming we, at current trends are sustainable.

Tom Folliard

We don’t really look at our employees like that on a per store basis across the broad number, but I will tell you that almost all of our drop-off in employees on a store by store basis is directly related to our sales volume.

So at the end of the year we were down on a run rate basis, our comps were down 26% at the end of the fourth quarter and our employees were down accordingly. If you look at our SG&A number this quarter compared to the last two quarters, it’s down year over year but it’s up some sequentially and that’s because our sales have moved back up.

So in terms of our employees per store, a big key for us as a retailer is to match our employees with our sales rate, which I think we’ve done a pretty decent job of over the last year. And I would expect we would add that piece of SG&A back as sales come back.

And we’re hopeful that we can do that. As far as restarting growth, we’re not going to get too excited over one quarter in this environment and we’re going to let some time pass and when we start evaluating when we would restart growth, then we’ll talk more about the SG&A associated with that.

Jaison Blair - Rochdale Securities

Have you achieved any additional insights into the implementation of FAS 166 and 167 and the potential for restating your financial statements.

Keith Browning

No, we’re still navigating that as the deeper we get into it, the more little quirks we find and so it’s not as easy as it might appear on the surface. So we have to work our way all the way through that and make sure that when we do it we do it right, and we disclose it appropriately and so when we’re ready we’ll absolutely tell you exactly what we plan on doing.

But obviously the clock is ticking and we only have six months to get it done.

Operator

Your next question comes from the line of Scott Stember - Sidoti & Company

Scott Stember - Sidoti & Company

Could you talk about supply of used cars right now. Lots of reports out there about supply constraints and how you would expect that’s going to impact your gross margins going forward.

Tom Folliard

Yes there have been a lot of reports and supply is down and it’s largely down because new car volumes have been so down for well over a year now. Ultimately the supply is going to be driven by what the new car run rate is going forward and without knowing what that’s going to do, it’s difficult to predict supply over the next few years.

What’s happened over the last couple of quarters is with supply being down we’ve seen wholesale prices continue to appreciate and it’s just a basic supply and demand model. The good news for us is we still represent a very small percentage of total used cars sold, so in terms of our ability to go out and acquire inventory that’s attractive for our customers, it’s really not that much of an issue.

We’ve talked about our market share being less than 2% of one to six year old used cars, and we’re only in 45% of US markets so that number is still true today. But trying to predict the supply going forward without really knowing what the new car run rate is, is very difficult.

Scott Stember - Sidoti & Company

Could you anecdotally just quantify where you stand with that inventory at the end of the quarter.

Tom Folliard

We feel very good about our inventory being aligned with our sales rate which is what we’ve been focused on over the last, during this really, really tough time for the country and for our company, we’ve been very focused on making sure that we can keep our inventory in line with our sales, keep out turns up, allow us to manage our margins better, allow us to keep our inventory fresh, and allow us to carry what the consumers really want to buy.

So I’m very proud of the fact that over the last four quarters each quarter compared to the prior year’s quarter we’ve improved our inventory turns now for four consecutive quarters in a row and where we stand right now, is we feel pretty good about our position as it relates to our sales rate.

Scott Stember - Sidoti & Company

And could you touch on do you think or have you seen any proof that you’re gaining any share from some of the domestic new car dealership closures.

Tom Folliard

At the end of the last quarter we talked about share being a, it’s not an exact science and there’s not a lot of great data out there. Again we feel great about where our sales came out for the quarter but we’re only going to report share now at the end of each year.

In the short-term it’s been so volatile and so inaccurate I just don’t think it makes sense to keep reporting it on a short-term basis, when we’re not very confident in the accuracy of the numbers. So we’ll report that at the end of the year.

Scott Stember - Sidoti & Company

And on store openings, obviously with a little bit of light at the end of the tunnel here and things improving, are we still in a holding pattern.

Tom Folliard

We are. We consider the light at the end of the tunnel to still be dim. It was bright for a little while.

Operator

Your next question comes from the line of Bill Armstrong - CL King & Associates

Bill Armstrong - CL King & Associates

I had a question on gross profit, with higher wholesale prices per vehicle, I would have expected your cost of supply to be detrimental to your retail gross profit and conversely it would have been beneficial to your wholesale gross profit, yet that seemed to be the reverse this quarter. I was wondering if you could just drill down on that a little bit for us.

Tom Folliard

The dynamic with retail is if you have heard how we’ve talked about managing our inventory in the past, as inventory ages we mark it down. So if we’re improving our turns year over year, then there is less need to mark inventory down.

If the other thing that’s going on at the same time is you have record appreciation, then each time you sell a car as I mentioned earlier, when you turn around and go re-acquire that inventory you have to pay more for it which makes even less sense to have more aggressive markdowns.

So that’s the dynamic in the tailwind for margins that we have seen really since the beginning of this year and continued through the summer. If you look at any external data from Manheim or [ADESA], or any of the auction chains, it’s continued through the summer at really an unprecedented rate of appreciation.

And I understand your question but it actually creates, it helps us with margin on retail. As far as wholesale is concerned, our volumes are up in the quarter and our margin was down I think $60 or $70. We’ve said that last year’s second quarter was a really high profit margin for us and again what we’re focused there on, is turns.

And we turn our inventory dramatically faster at wholesale then we do in retail and if we’re within $50 or so, then we think that’s pretty good. So the $50 or $70 that we were down in wholesale profit is not a number of concern for us.

Bill Armstrong - CL King & Associates

Turning to comps, I know new vehicles are a very small piece of your business but new vehicle comps were down 19% while your used comps were up 8% and you’d think with the clunkers, you’d get a direct benefit on the new vehicle side. Why were new vehicle comps down so much.

Tom Folliard

It’s a very small percentage of our business and, so in the big scheme of things it’s such a small number for us. We did less than 700 clunker deals in all of our new car stores combined. So it’s just not a big number. I’m not sure why the difference is year over year.

Bill Armstrong - CL King & Associates

And then just in your CarMax used superstores, what actions did you take if any to drive traffic into your stores knowing that the clunkers traffic was going to be all around. Did you run any specific promotions or advertisements to get people to come into a CarMax store.

Tom Folliard

Well a couple of things, one we have shifted our campaign towards the conditions in the economy and we’ve been calling that our smart campaign and trying to make the point that now more than ever CarMax is the smart place to shop.

We got some traction in that campaign through the first half of this year and I think that message, it resonates with the consumer even through the cash for clunkers program. We also upped our ads, our mix of advertising on appraisals. And I think when people are out there, we’ve talked about this before, but when there’s any promotion that drives demand and drives enthusiasm around new cars, often times consumers will get out there and realize that they didn’t qualify the way they thought they would for that particular promotion.

And you find out that some of the new car dealers aren’t as willing to buy whatever the car is that they’re driving and that generates, can sometimes generate appraisal traffic for us. So we did shift towards appraisals in terms of our mix in our campaigns in anticipation of that excess customer being out there who finds out that the incentive they thought was good for them just wasn’t.

Bill Armstrong - CL King & Associates

So kind of telling people come on in and get a free appraisal from CarMax and then see what you can get, is that the idea.

Tom Folliard

That’s the mix of the campaign, but of note is that we still lowered our advertising expense significantly in the quarter year over year.

Bill Armstrong - CL King & Associates

Right, how much did you lower it by, can you disclose that.

Tom Folliard

It will be down, hopefully it won’t be down because hopefully we see things change in the second half of the year, but it will be down 30% or 40% year over year at the end of the year.

Bill Armstrong - CL King & Associates

For the full year.

Tom Folliard

Yes.

Operator

Your next question comes from the line of Craig Kennison - Robert W. Baird

Craig Kennison - Robert W. Baird

Congratulations, could you discuss the recent appetite for securitizations out there and how the market might look without TALF at the end of the year.

Keith Browning

I’d say the market is looking a lot better. In fact most recent deals with the exception of the three year paper are getting done without TALF because the pricing, the spread is actually 90 or lower. So it’s feeling better and we are optimistic that having the additional three months will allow us to basically get our deals done without TALF.

And we’re not even certain whether our next deal will need TALF or not quite honestly.

Craig Kennison - Robert W. Baird

How many would you expect to do by the end of the year.

Keith Browning

Well we certainly will have to do a minimum of one, and whether we get the two done by the end of the fiscal year or not remains to be seen. But at least one, probably two.

Craig Kennison - Robert W. Baird

So with the securitization market functioning better you feel like you have the right size in the warehouse to deal with your sales even though sales are clearly better than expected.

Keith Browning

Yes, relatively speaking our sales are still down year over year in aggregate based on what we have seen and so we have plenty of cushion. We stepped up to $1.4 billion last year to give ourselves plenty of room for unforeseen events in the securitization market.

So looking at kind of the place where we were we felt like we still have the same additional capacity to weather any disruptions should they materialize but like I said, it doesn’t look like that they, anything is coming.

Craig Kennison - Robert W. Baird

Are there any changes in the origination fee structure you get as you tighten your credit policies.

Keith Browning

Not currently.

Operator

Your next question comes from the line of Rod Lache - Deutsche Bank

Rod Lache - Deutsche Bank

I was wondering whether you’ve had any ability to quantify the impact of appreciating used vehicle prices on your margin. You mentioned, sort of a disinclination the discounting and I would imagine that just the time period between purchasing of inventory and selling it in an appreciating environment is helpful. If you could just give us a little color on that factor and just the sustainability of higher margins as I would imagine that that’s going to be affected by the consolidation of some of your competitors.

Tom Folliard

I kind of already talked about that but I think that is still yet to be seen. Some of our, the profit this quarter is really the sequential starting point from the first quarter as well. Our comparison to last year although it’s pretty significant, is not that big a comparison compared to the first quarter and if you look back at last year, the numbers, they’re harder to move sequentially in big chunks.

So some of it is just the comparison to last year, but in terms of predicting margin going forward, we have no idea.

Rod Lache - Deutsche Bank

Right but just supporting north of $2,000 per vehicle, you mentioned that $100 improvement and in your cost structure, but is there some quantifiable amount that is related to an inflationary used car environment or is that not possible.

Tom Folliard

As I said, it’s impossible to predict and as I said earlier it’s always a balancing act. I couldn’t tell you right now that if we got another $100 of savings in reconditioning that we wouldn’t put it in to lower margins to try to drive incremental sales if the external environment and all the other factors that we utilize in deciding what to shoot for in margins, if that environment changes, and we feel like it would be best to lower margins to drive sales, then we would do that.

Rod Lache - Deutsche Bank

Just on this 4.2% gain on sale, could you just give us a little color on what your average loss assumption and retail rate would be on this or what is the amount of enhancement that’s factored into that and any additional color on the new accounting scheme and how that would have affected what you will report as profitability in this business.

Keith Browning

The loss rate assumption will be less than 2%, hopefully that will help. And as far as 166, 167, again we still have a lot of work to do. In general as I said before it’s going to add $4 billion in assets on the balance sheet along with $4 billion non recourse debt. And then we’ll earn the income evenly over time but there’s a lot of details to be worked out as far as whether we can restate, how we can restate, etc., etc.

Operator

Your next question comes from the line of Jordan Hymowitz – Philly Financial

Jordan Hymowitz – Philly Financial

Congratulations on a good quarter, two quick questions, first of all with the wholesale vehicle gain per vehicle was there any operating change on that or was it just the function of volume. In other words, did you deliberately try and sell more cars through wholesale or not really.

Tom Folliard

No, the amount of cars we sell through wholesale is directly related to the amount of wholesale cars we buy in the appraisal lane. We don’t shift the, there are pretty stringent retail standards and we buy everything that we, we make an offer on every single car, we buy whatever the consumer wants to sell us and whatever of that mix comes out to wholesale, that’s what our volume will be.

We didn’t change anything about, it’s just the way it came out.

Jordan Hymowitz – Philly Financial

With the new accounting next year, what’s being debated the way I understand is how to quantify the historical balance sheet but there will be no gain on sale, correct next year, that you’re going to earn them on an interest income methodology so there won’t be, it’s not whether it will be 3.5 or 4.5, there’ll be no gains next year you just got to earn it as the income comes in, correct.

Keith Browning

That’s correct and so what will happen is, is that at the beginning of the year, the first entry will be to basically take the majority of the retained interest and run that through OCI and then you’ll be earning the income on all the prior years’ originations that are still out there that haven’t been recognized and so whether that’s a net positive or negative, we have to work through the math.

Tom Folliard

In other words, we’ll have a whole different set of questions to answer but one of them won’t be gain on sale.

Jordan Hymowitz – Philly Financial

And if, you said there was a 2% loss allowance that’s a lifetime allowance for the new pool.

Keith Browning

I said, yes, less than 2%.

Jordan Hymowitz – Philly Financial

So mathematically it’s about a 2.2 year average life, that would be about a 1% loss reserve per year on your new stuff.

Keith Browning

Less then that, correct.

Operator

Your final question comes from the line of Willis Taylor – Gagnon Securities

Willis Taylor – Gagnon Securities

You mentioned earlier that your sales execution improved because of some new training programs, could you elaborate more on what those were, please.

Tom Folliard

It’s a number of different things, one thing we talked about at the end of the year was that without growth it gives us an opportunity to focus substantially more on execution in the stores, and on waste reduction initiatives and sales execution is more of a broad based training, various training programs and things of that nature that we’ve been able to I think make some progress on in the first half of the year.

But there are a number of factors that go into execution and that’s just one of them.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Tom Folliard

Once again thank you for joining us and I want to give one last thanks out to all of our CarMax associates in our stores, our home office and our CarMax Auto Finance. It’s a direct result of their dedication and commitment that has allowed us to perform fairly well in this very difficult environment. Thank you once again and we’ll see you next quarter.

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Source: CarMax, Inc. F2Q10 (Qtr End 08/31/09) Earnings Call Transcript
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