CarMax's (KMX) CEO Tom Folliard on Q1 2015 Results - Earnings Call Transcript

Jun.20.14 | About: CarMax Group (KMX)

CarMax, Inc. (NYSE:KMX)

Q1 2015 Results Earnings Conference Call

June 20, 2014 9:00 AM ET

Executives

Katharine Kenny - Vice President, Investor Relations

Tom Folliard - President and CEO

Tom Reedy - Executive Vice President and CFO

Analysts

Brian Nagel - Oppenheimer

Sharon Zackfia - William Blair

Liz Suzuki - Bank of America

Scot Ciccarelli - RBC

Craig Kennison - Baird

Matt Fassler - Goldman Sachs

Seth Basham - Wedbush Securities

James Albertine - Stifel

Rick Nelson - Stephens

David Whiston - Morningstar

Alex Knight - Tiger Management

Bill Armstrong - CL King & Associates

Operator

Good morning. My name is Beth, and I will be your conference operator. At this time, I would like to welcome everyone to our FY15 First Quarter 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. (Operator Instructions)

Thank you. Katharine Kenny, you may begin your conference.

Katharine Kenny

Thank you, Beth. Good morning. And thank you all for joining our fiscal 2015 first quarter earnings conference call. On the call with me today as Tom Folliard, our President and Chief Executive Officer; and Tom Reedy, our Executive Vice President and CFO.

Before we begin, let me as usual 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, 2014, which is filed with the SEC.

Before I turn the call over to Tom, let me mention a new addition to CarMax’s Investor Relations website. As of today, we have added a significant amount of historical quarterly information to the Financial Report section of the website that we hope will assist you in your understanding of the company and in developing your models.

We will update that with also some information about cash on a quarterly basis sometime in the next two weeks. We would welcome any feedback on this additional information. Tom?

Tom Folliard

Thank you, Katharine. Good morning, everyone. Thanks for joining us today. The first quarter was a terrific one for CarMax. Total revenues grew 13% to nearly $4 billion, net earnings up 16% to $169 million and earnings per share up 19% to $0.76.

Key drivers for the quarter, used unit comps increased by a little over 3% and total used units rose by nearly 10%. Our ASP was a little over 20,000 for the first time ever, largely due to stronger prices we observed in the wholesale market and as evidenced by our relatively flat per unit margins.

Total wholesale units grew by 10% and gross profit per vehicle unit -- gross profit per Wholesale unit grew by 7% or $67. Other sales and revenues increased 13% year-over-year due to a $9 million improvement in third-party finance fees; CAF income up 9% to approximately $95 million.

I'll now turn the call over to Tom Reedy to talk about finance. Tom?

Tom Reedy

Thanks, Tom. Good morning, everybody. In the first quarter CAF income grew 9% compared to the first quarter of fiscal 2014 and average managed receivables grew 20% to $7.4 billion.

CAF weighted average contract rate, the rate charged to customers was 7.2% versus 7.0% in last year's first quarter. This rate continues to be relatively stable at around 7% for the past six quarters. The allowance for loan losses grew to $75 million. This represents 1% of managed receivables which is consistent with last year.

Credit losses for the quarter were moderately better than our expectations. And CAF net penetration at 41% was relatively flat compared to last year’s first quarter. Net loans originated in the quarter rose 10% to $1.2 billion in line with the growth in the total used unit sales.

Customers funded in the subprime space, those for which we have historically paid a discount, represented about 16% of our sales in the first quarter compared with 21% of our sales in last year’s first quarter and approximately one of this -- one point of this was related to CAF test. Tom?

Tom Folliard

Thank you. SG&A for the quarter increased approximately 8% to $313 million. On a per unit basis, SG&A declined $39 to $2,047 per unit compared to $2,086 in the first quarter of fiscal ‘14. SG&A on a per unit basis benefited from a decrease in stock-based compensation expense of $56.

During the first quarter, we opened up four new stores, three in new markets for CarMax in Rochester, Dothan, Alabama and Spokane, Washington, our first store in the Pacific North West and one in our Harrisburg, Pennsylvania market. After the first quarter ended, we also opened a store in Madison, Wisconsin, another new market for CarMax. It’s the first of four stores we plan to open in the second quarter of this year.

Our comps for the quarter were driven by our growth in store traffic. Our web traffic also continued to expand significantly for the quarter. Average monthly web visits grew to over 14 million, up 25% compared to the same period last year. Visits to our mobile site represented approximately 30% of total visits while visit utilizing our mobile app represented another 13% of the total.

And with that, operator, we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Nagel, Oppenheimer. Your line is now open.

Brian Nagel - Oppenheimer

Hi. It’s Brian Nagel from Oppenheimer. Good morning.

Tom Reedy

Hi Brian.

Brian Nagel - Oppenheimer

Congratulations on a real nice quarter.

Tom Folliard

Thank you.

Brian Nagel - Oppenheimer

So I thought, I want to start with a bigger picture question for Tom Folliard and then I had a couple of smaller kind of detailed questions. But the bigger picture question I have, Tom, is if you look at these results today and they were really good. If you look at the business and the environment you’re operating, did something shift positively here in the first quarter of fiscal ‘14 that maybe wasn’t in place through last year. And maybe the other way to ask the question is we think about our models and what we see here in the first quarter. How sustainable are the trends that we saw really throughout the P&L and throughout the divisions of this business?

Tom Folliard

First off, Brian, we didn’t do anything different in the quarter. We’re just trying to run a great business and execute better every day and control cost and provide a great customer experience. And I apologize that our business isn’t that predictable and it’s a little difficult to model because we have what I think is a terrific source of profit that are quite diversified. And you see our comps are only up three, four points but over two year, they are up 20.

Our wholesale has been a little behind retail for a while but that was up 10 in the quarter. CAF continues to deliver good results but there is nothing structurally different in what we did. Our stores continue to provide a great experience for our customers and they continue to grow. And then we’re opening up stores at a pace that is the fastest pace we’ve ever done before, opening 13 stores this year, another 13 -- I mean 13 last year and another 13 scheduled for this year. So I’d say we’re just doing the things that we said we’re going to do.

Brian Nagel - Oppenheimer

Got it. And then some of these more detailed question. We’ve looked at the subprime penetration which is something around 16% this year -- I'm sorry this quarter, down from over 20% same quarter last year. I know you don’t manage towards this but how should we think about subprime penetration going forward?

Tom Folliard

We don’t have to think about going forward. It’s largely the result of the credit flow through our stores. We’ve always talked about the fact that we want to make sure our customers have access to credit at all kinds of different scales of credit. And if you look at our applicant flow, we’re still at 90% of our applicants are getting approval of some kind.

We told you last year at this time that our subprime providers had got a little more aggressive. We told you in the third quarter that they had pulled back a little bit. And so it makes sense. It was 21% last year when we thought people would be a little bit more aggressive and we saw a little pull back. We were flat in the fourth quarter. We’re slightly down in this quarter. It’s not that surprising based on what we have told everybody. But in terms of where it comes out long term, it’s not really within our control.

Brian Nagel - Oppenheimer

Got it. And then the final question. On the wholesale, gross profit for wholesale vehicle, that popped up more and was there something funny there or was that somewhat reflective of the overall environment too?

Tom Folliard

I think that there has been, there is some -- if you look at all of the external data on appreciation, there was some slightly higher appreciation during the quarter. That’s always going to benefit our buy rate a little bit and it always going to benefit our margin. So that’s the one that -- I think it’s only the second time, we’ve been over $1000. I didn’t think it was sustainable before and I don’t think it is now.

Brian Nagel - Oppenheimer

Got it. Well, thanks and congrats.

Tom Folliard

Thank you, Brian.

Operator

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

Sharon Zackfia - William Blair

Hi. Good morning. So just two questions. I guess, first on the wholesale business because that was a really big surprise on the quarter how well that business did. I think it was the best quarter in a year or two in that business. Was it just external dynamics that really contributed to that or wasn’t anything different internally that you were doing that was helping kind of raise the traffic or that buy rate?

Tom Folliard

No, not a thing. You know, what I’ve been saying and I’m glad I’m finally right is that I believe over time wholesale and retail will grow at a similar pace. I don’t think there -- they seem to almost never be connected in a quarter. They happen to be this quarter. Both group total sales were -- total retail sales grew at 10%, total wholesale grew at 10%. But if you remember just two or three years ago, we had wholesales sales grow 30% in the first quarter on top of 50% in the first quarter prior.

So there is a lot of volatility in that business as well but I still believe over time that retail and wholesale will grow similarly over a long period of time. This quarter they happened to match up.

Sharon Zackfia - William Blair

Are you still seeing as the market ages the wholesale business pick up as people become more familiar with that option at CarMax. And I was wondering, I guess, if the national advertising that you do now, if you focus at all about we’ll buy your car and if that might help around the edges?

Tom Folliard

We’ve always had a piece of our advertising around we’ll buy your car, it wasn’t -- we did not change it in the quarter. So there was nothing different about the way we advertised or approached the business this quarter.

Sharon Zackfia - William Blair

Okay. Thank you.

Tom Folliard

So you know it came out the way it did.

Sharon Zackfia - William Blair

All right. Thanks.

Tom Folliard

Thanks Sharon.

Operator

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

Liz Suzuki - Bank of America

Good morning. This is Liz Suzuki on for John. The $39 per vehicle reduction in SG&A this quarter was pretty impressive. What were the major components of that cost reduction and can we expect that kind of improvement going forward?

Tom Folliard

Well, $56 of the $39 came from stock-based compensation expense. So that’s not necessarily a good guy. And I think a 3-ish percent comps we wouldn’t expect to get leverage like this. So if not for stock-based compensation expense change, I mean, reduction of $56, we would not have leveraged.

Liz Suzuki - Bank of America

Got it. Okay.

Tom Folliard

We need mid-to-high single digits if we’re in a growth phase to leverage. And we still believe that.

Liz Suzuki - Bank of America

Got it. And would you categorize the lower subprime penetration rate this quarter as being driven more from the supply side or the demand side. I mean, in other words, are your lenders pulling back a little bit or are you seeing fewer subprime customers coming in?

Tom Reedy

It was a question on Tier 3 or on cap. I’m sorry.

Tom Folliard

It was on subprime.

Tom Reedy

No, I think it’s -- we need to take step back and think about it, subprime penetration is going to be a combination of factors driving it. One is the credit coming through the door and then another is the behavior of the other lenders in the system. And over time we worked to try to build, as Tom mentioned, a broad spectrum of lenders so that customers have access to credit and I think we are very happy with the partners we have today. We’ve got nothing but praise for them. You look at cash penetration, it was flat. Subprime was down a little bit. We did see a lift in sales that were funded by sources outside of our system. We did see a lift in sales funded by our Tier 2 partners which means they stepped up and took some customers that they may have declined in the past. So Tier 3 behavior is going to be a combination of what’s coming through the door and what makes it down to them, and finally their behavior and their credit appetite.

Tom Reedy

And then our stores ability to convert ones we have approvals to work with and the higher, the better the quality of approval, in other words lower the down payment, the better chance we have a conversion. So I would expect over time those things are going to be constantly moving as lenders continue to tweak their scorecard and make adjustments based on the performance of the portfolio that they have originated. Just like it’s been going on for the last the whole time we’ve got in business.

Liz Suzuki - Bank of America

Okay. Thanks, guys.

Operator

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

Scot Ciccarelli - RBC

So she got Ciccarelli but missed Nagel, interesting. Couple of questions, guys. First of all, Tom Reedy, can you give a little bit more color about your commentary regarding vehicles funded outside your system? Do you have any feel for kind of what kind of credit tiering that’s on? Or is that just, you just suspect that you’re still 90% plus that your subprime penetration was down?

Tom Reedy

No, Scot, we’ve historically said 20% to 25% of our business is going to get done outside of the system. That typically means credit unions or customers who have good access to financing elsewhere or cash. And then, we’ve said that cash is going to run somewhere in the low-40s and the remainder it would be split between our Tier 2 and Tier 3 partners. That’s moved around. This year Tier 2 -- this quarter Tier 2 was a bit higher than Tier 3. Last year Tier 3 was higher, but the year before Tier 2 was high. So it just depends what’s come through the door and what’s going on with the individual lenders and their credit appetite at the time.

Scot Ciccarelli - RBC

Okay. Understood. And then, since I have you on the line here, with the latest securitization, Tom, it looks like losses per receivable were up quite a bit in the last three months and it basically looks like recoveries had declined, but that seems odd given the fact that wholesale pricing was so strong. Do you have any more detail or reasoning as to why the numbers look shaking out the way they did?

Tom Reedy

Not, at this point, Scot. I mean, it’s early into that deal, so I think you need to let it incubate for a little while, but we can follow up with you afterwards on if you want more - need to dig in more detail.

Scot Ciccarelli - RBC

Understood. And the last question for Tom Folliard. Tom, why do you think wholesale pricing was so strong? I mean, should we be on more of a normal depreciation curve at this point as kind of that lack of supply has been filled in over the last couple of years? I just find it’s surprising that even at the Manheim level, we’ve seen prices rising, which just seems counterintuitive?

Tom Folliard

Well, in the spring, if this was what we would say a normal year, we would see some appreciation in the spring and then kind of a steady decline throughout the rest of the year. And this year, we saw more appreciation in the spring than we are used to. And lots of people attributed to weather and pent-up demand for inventory. So we will go with that.

Scot Ciccarelli - RBC

I understood. Thanks, guys.

Operator

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

Craig Kennison - Baird

Good morning. Thanks for taking my questions. I wanted to focus on your web traffic, I think you said it was up 25%. Would love to hear what is driving the strong growth in that metric?

Tom Folliard

That’s a measure of traffic, that’s continued to grow kind of around that pace for several years now. I think there’s a number of different factors. First and foremost, I think we have a great website. I think we have a great search engine. I think we’ve done a really nice job of making sure that when customers are on our site, whether it’s through mobile or desktop or touchscreen that they have a good experience. So I think there is that. Clearly, the Internet is becoming bigger and bigger every single year as a source of information. So I think customers just naturally are going to go to the web first. We continue to expand our geographic footprint. So we are in more markets. So we are going to get some growth there as well. Remember, that’s not comp, that’s just total traffic. So as we grow the company and we add more stores and we sell more cars and we get more -- kind of more CarMax sports people on the road, I would expect that number to continue to rise as well. So I don’t know if any one thing, I think it’s a number of different things.

Craig Kennison - Baird

I am curious whether you can analyze any of the traffic you’re getting to improve where you choose to locate stores, for example if you get a lot of traffic, it matters to Wisconsin. Is that a helpful metric as you decide in your next store?

Tom Folliard

Well, it hasn’t, I mean at this point we think the CarMax consumer offer works in just about any market in the U.S. and we are very excited to go to the places that we’re not, but we are also very excited to continue to add stores in the places where we are. And we haven’t seen that web traffic by a particular locale is an indicative of where we should build the next store. We really want to go build our stores where people are, because then they need cars and then they are buying from us.

Craig Kennison - Baird

Okay. Thank you.

Operator

Your next question comes from the line of Matt Fassler, Goldman Sachs. Your line is open.

Matt Fassler - Goldman Sachs

Thanks a lot and good morning. My first question, thinking about wholesale and the upside that you showed there. The pricing would explain the profitability, the units in the sense were really what took off most dramatically from the trend whether you compare to the prior couple of quarters, if you look at it as a percent relative to the sales of used cars. What kind of visibility do you think you have given the trends that we saw, the wholesale volume is going for? Do you think the volume piece of that could be sustainable?

Tom Folliard

Like I said, earlier, Matt, I think that wholesale volumes and retail volumes over a very long period of time will grow about the same. They seem to never be connected. They happen to be connected this time. If you think about the variables that go into that deliver a wholesale volume for us as how many customers show up at the store? Of those customers, how many get their car praised? Of the ones who get their car praised, who many sales a car? If all of those things were flat year-over-year, we should have gone up 10% because our sales went up 10%, so -- but they are never always flat. There is always movement in some of those variables. We had a strong buyer rate, a little over 30%, slightly up compared to the year prior and with total sales being up 10% and that been driven by foot traffic. It’s time to come out the way you would think it would come out. But as I said, it’s just on a quarter by quarter basis, these two things are never exactly connected.

Matt Fassler - Goldman Sachs

Got it. A quick follow-up. The stock-based comp piece, can you talk about how chunky that tends to be, in other words is that an item that is more typically for Q1 based on options timing or is this something that can be volatile as it was during Q1 and throughout the year?

Tom Reedy

Matt, it’s really going to be driven of stock price. So last year in Q1, we saw stock price appreciate, this year and do so well. There is a -- we have outstanding equity grants to folks that we have to account for based on changes in stock prices and that’s really who is going to drive it.

Matt Fassler - Goldman Sachs

But you would view this as sort of an outlier move in one direction or the other, it sounds like?

Tom Folliard

It’s just something we are going to adjust on a regular basis based on the stock price. Street, it’s pretty much street, Matt.

Matt Fassler - Goldman Sachs

Understood. But, is this one of the bigger moves you’ve seen in that number that you called that up?

Tom Folliard

No, I mean, we’ve seen it go the other direction as well.

Tom Reedy

Yes. Matt, we called it out mostly because it was a little distortive of our ability to leverage SG&A.

Matt Fassler - Goldman Sachs

Got it.

Tom Reedy

We really want to talk that. We want to get credit for leverage on SG&A on something that’s not really under our control.

Matt Fassler - Goldman Sachs

Understood. And then finally if you think about the supply of vehicles at auction and the sources thereof, are you seeing the new vehicle hit in a way that you can get access to them?

Tom Folliard

We’ve seen a few movements in our percent of sales in the first quarter by a few points over to 0 to 4 from 5 to 10 but only by 2 or 3 points, so wasn’t significant. I have been saying all along I expect that supply to come back. We have historically done really well in that segment of inventory and I expect us to do well again. But overall, there wasn’t a ton of movement.

Matt Fassler - Goldman Sachs

Is that the biggest move you’ve seen in this cycle so far, that incremental creep?

Tom Folliard

Yeah, two or three points, yeah, I think over the last several quarters it’s been pretty flat, so yes.

Matt Fassler - Goldman Sachs

Got it. Thank you so much guys.

Operator

Your next question comes from the line of Seth Basham, Wedbush Securities. Your line is open.

Seth Basham - Wedbush Securities

Good morning. It’s Seth Basham. First question for you is on third-party subprime penetration. You guys have talked about one lender pulling back in the past. Have you seen any of your other lending partners start to pull back?

Tom Folliard

No, I don’t recall talking about one lender specific in the past. And I will say that we’ve observed across the board in our portfolio, a bit of a tightening in terms from our lenders. We look at the sales applications rate of ourselves of all of our partners and we’ve seen that dial back a little bit for the quarter.

Seth Basham - Wedbush Securities

Got you. Okay. And as it relates to your own subprime test, it seems to be ramping a little bit more quickly than I anticipated. You guys still planning to complete that at the end of the year or is that ahead of schedule?

Tom Reedy

I say it’s on track. We said we’ve done about $30 million to date and really nothing specific to report yet. Yes, it is going to take us getting a critical mass of receivables and watching those incubate for a while before we have anything to start reporting on it. But I wouldn’t read anything into the volume today.

Seth Basham - Wedbush Securities

And was there any impact at all on your CAF results from the additional subprime loans that you guys issued?

Tom Reedy

Not on the results. I mean, at this point it’s little early in the process with the subprime and the expected losses are still high. It’s actually a little bit of a drag on CAF earnings but it’s nothing material. We have to reserve 12 months of losses out the gate as we originate those loans. And with those loans having a higher expected loss rate than our regular portfolio until we start building up a critical mass, it’s actually going to be a little bit of a drag on our earnings but it’s very minimal and nothing to report.

And as we go forward, it may have some impact on the loss provision, our average contract rate and the overall allowance. And to the extent, it does become something that merits calling out. We’ll give you that color.

Seth Basham - Wedbush Securities

Are you being extra conservative in terms to your loss provisions on the new subprime loans without the history yet?

Tom Reedy

We’re being -- we believe appropriately conservative.

Seth Basham - Wedbush Securities

Okay. And then on the wholesale, buy rate being up, that’s good. But what about the mix of cars that you guys are buying? Have you seen the mix shift back towards older cars or you still seeing that mix shift towards new or late model cars?

Tom Folliard

Well, wholesale is all stuff that doesn’t meet our retail standard. So the mix of that product has been pretty much the same and the mix of retail, I talked about earlier, couple of points of movement but not really too much.

Seth Basham - Wedbush Securities

No, I’m just thinking about the cars you’re buying from the appraisal lanes. Are you seeing a mix shift between newer used cars and older used cars?

Tom Folliard

No. And remember the cars we buy in the appraisal lane, a whole bunch of them we sell at retail and then the rest go to wholesale so.

Seth Basham - Wedbush Securities

Okay. And then lastly on the ASPs, obviously very strong this quarter. Were you guys anticipating the strength in the ASPs wholesale car prices this quarter to be a strong as they were? If not, how did that benefit your retail business?

Tom Folliard

No. And I never like prices going up. I rather have prices go down, although I don’t think they will. So it’s a first time we have been over $20,000 average retail, since we started the business. But our margins per car were flat. So it was clearly a reflection of what the market was doing. And we talked about wholesale pricing being up during the quarter and it was simply that. And really, the only benefit from higher ASP is we get a little more on the spread when we do a CAF loan but other than that I rather see us provide lower prices to customers.

Seth Basham - Wedbush Securities

All right. Okay. If I could sneak one last one in, the recovery rate on…

Tom Folliard

We have got to move on there, Seth.

Seth Basham - Wedbush Securities

Okay. No problem. Thank you.

Tom Folliard

Thank you.

Operator

Your next question comes from the line of James Albertine, Stifel. Your line is open.

James Albertine - Stifel

Great. Thanks for taking the question. Congratulations on the solid quarter. So really quickly on just the small store formats, just a quick update there. Are there any plans within the store count openings that you suggested to incrementally add some small store formats? And then separately, I guess related, anything that you’re learning from those initiative that you maybe help glean to more efficient super store model?

Tom Folliard

So we have three small formats stores open, only one has been open for than a year, so there’s very little of anything to report. Other than we have some processes that needed to take place in order for those stores to work just from an operational standpoint and they’re working very well. They have very small inventory. We have to move cars a little bit quicker. We have cross train lots of our employees in those stores to be able to do multiple tasks and that stuffs all working really great.

We don’t really have any results to report, because we just don’t have enough time under our belt with only three stores open. In this year’s growth plan, we have two more those planned, one in Lynchburg, Virginia and one in Tupelo, Mississippi. We’ve said we’re going to get five of these open and read the results for a little while. So that’s kind of where we stand. I think there will be some learnings over time with some of the stuff I just mentioned, cross-training of people and maybe the ability to run a store little bit more efficiently, but we’re long ways away from that.

James Albertine - Stifel

Great. Thank you very much. And then a quick clarification on the website, the benefits of the increase in web traffic over time, are there any transactional benefits or you precluded from transacting still online to a degree based on state by state regulations?

Tom Folliard

We don’t fully transact online. There isn’t really a preclusion. If we wanted to really press down that path, we could. We found that customers want to test drive cars. They want to -- particularly, our average cars is almost four years old, with almost 40,000 miles on it. We’ve been adding more and more capabilities for customers to do from home and they’ve been taking advantage of that and we’re very pleased with that so far.

But in the last six months we now allow our customers to put cars on hold and make appointments online without speaking to anybody. We still have the capability in the number of stores for customers to transfer cars, even a pay transfer by giving their credit card online without speaking to anybody and having that car delivered. They can actually start their paper work online, making appointment for the sales consultant and show up a lot of the work already done. But in terms of fully consummating the deal online, we’re not doing that yet.

James Albertine - Stifel

Great. Thanks and good luck.

Tom Folliard

Thank you.

Operator

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

Rick Nelson - Stephens

Thanks. Good morning. It’s Stephens. Can you -- comps store traffic, could you see a meaningful acceleration there this quarter?

Tom Folliard

Well, we said our comps were due to store traffic. Our comps were a little over three. I think of traffic and conversion, like I’ve mentioned wholesale earlier. I think over time that our comps will be driven partly by traffic and partly by execution increases or conversion increases. What happened over the last several years is we’ve had few quarters where all of our sales increase was driven by conversion and we’ve had sometimes where all of it has been driven by traffic. There were times when it was about a 50-50 split and I think over a long period of time, that’s kind of what we expect. It’s just so happened this quarter that our conversion was relatively flat and our comps were driven by traffic.

Rick Nelson - Stephens

Okay. And do you think you are getting any kind of benefits from the snowstorms that the business shifting from the fourth quarter to that March and May timeframe?

Tom Folliard

That’s a really difficult thing for us to measure. We’ve never really made a big deal out of weather. I think because we are an in infrequent purchase that we don’t view that we lose. We’re not like a grocery business where if you don’t sell milk, then you never get to sell that milk. We sell a car. People buy it once every five years and what we’ve seen in our history is, if we miss some sales then we kind of get them back overtime. But it’s really hard to measure. So, I wouldn’t attribute anything. We didn’t attribute anything in the fourth quarter to it and we don’t attribute anything in this quarter to it.

Rick Nelson - Stephens

Yeah. And I know you don’t like to discuss weather as an issue, but thanks very much and good luck.

Tom Folliard

Thank you.

Operator

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

David Whiston - Morningstar

Thanks. Good morning. I just wanted to, I guess, two longer term questions. Can you give any color on what -- with your cash continuing to grow so well and you are doing the share buybacks? Can you disclose a minimum cash levels to run the business either in dollar terms or as a percentage of revenue?

Tom Reedy

We are not -- I don’t think we are going to talk about it in dollar terms as a percent of revenue. But we look at it more as minimum amount of liquidity to make sure that we have ample liquidity to keep inventory in our stores to keep CAF funded in the short-term period between securitization, et cetera. We are very comfortable with our levels today.

Tom Folliard

And to build stores.

Tom Reedy

And obviously to build stores and I don’t think there is anything we can really talk about as far as minimum. I would say that we are comfortable moving to a position of more leverage than we have today in the current capital structure.

When you see we are doing stock buyback program and I want to extrapolate from there, but that, you have seen us before having significantly more depth than we have today and we are not uncomfortable with the level that’s higher than today.

David Whiston - Morningstar

Okay. And then what, hopefully, the very long-term question is what are you doing over the next year or so and today strategically in your planning to protect profits for the inevitable next recession?

Tom Folliard

I mean, we are just running the business and trying to get more and more efficient each and everyday. I think, we learned a lot during the last recession. We significantly improved our profitability and our execution and because of those learnings, we have been hyper focused on not losing that momentum.

So I think, our store teams are doing a fantastic job of controlling cost and trying to be more and more efficient with the customer, where we have proven to be pretty good at managing inventory across a very short timeframe and I feel very confident that we were not just sitting still in that regard, we are actually better at it than we were couple a year ago. So I feel like working on what we do everyday and trying to get better at each of those things is the best defense against the recession.

David Whiston - Morningstar

Okay. It’s very helpful. Thank you.

Tom Folliard

Thank you.

Operator

Your next question comes from the line of Alex Knight, Tiger Management. Your line is open.

Alex Knight - Tiger Management

Hey, guys. Thank you for taking my questions and congratulations on a great quarter. You’ve said in the past that one of the main limitations on your expansion is the number of associates you can train? Can you give us some color on ease of finding and training associates for the new stores and any progress you are making there?

Tom Folliard

Sure. We feel pretty good about where we are right now. We are, as I mentioned, although, our pace of store growth, 13 stores last year and 13 stores this year, is the most number of stores we have opened. As a percentage of our total store base, we have been much more aggressive at two different periods in the past.

And I think we learned that those were little bit too fast in terms of being able to higher train, develop and have people ready to not just open new stores but to replace people in stores that they vacated.

So at this pace right now we are very analytical about how we do it. We look at each position in the store. We factor in turnover levels. We try to hire people in advance. We try to hire people regionally, if we know we have store openings coming for example in California, we are going to try to staff up in stores that are closed and I feel like we have a great group of people working on that and a pretty good training program.

But again, it’s something we are not satisfied with and we want to get better at everyday and we are focused on that. But right now we feel in very good shape to open up the stores that we have planned.

Alex Knight - Tiger Management

All right. Thank you very much.

Tom Folliard

Thank you.

Operator

Your next question comes from the line of Bill Armstrong, CL King & Associates. Your line is open.

Bill Armstrong - CL King & Associates

Good morning. Just getting back to the average selling price, I know you talked about higher overall levels of pricing? But also to what extent might that have been influenced by mix, particularly since you had a lower sub-prime penetration in the sales mix during the quarter?

Tom Reedy

Yeah. I never think about mix of inventory based on levels of credit. I think mix of inventory based on the actual cars that we sold and there was, I mentioned, there was a slight movement towards, we said, zero to four-year old cars for a while now have been 70% of sales and five to 10-year old cars have been 30% of sales, and remember that number of, I am sorry, of five to 10-year old cars used to be 15% a long time ago and it doubled.

And then we have seen that stay relatively flat for a number of years and then this quarter we saw couple of points movement. So I would say that had a little impact on the ASP but I am not sure to what extent. And I don’t know what our ASP was the quarter before, was it 19.5, somebody know.

Katharine Kenny

Yes.

Tom Reedy

19.4, 5, so it’s up a few hundred bucks.

Bill Armstrong - CL King & Associates

Yeah. And at the auctions, we hearing a lot of off-lease vehicles coming to the auctions that obviously relatively new cars three years old on average? Are you seeing more availability of those types of cars when you are looking for inventory at auctions, whether it’s Manheim, Odessa, et cetera?

Tom Folliard

Yeah. We are always, depending on what the lease rate was, two years ago and three years ago, we have very high lease rate right now, then you see those cars back at the auction. The truth is, you always see those cars back at the auction in shape or form, but if they were leased then they come back in more of an organized lane.

But it is largely driven by consumer behavior not just people who lease cars, but people who buy cars and how quickly do they then trade those cars in and we have seen this -- we have kind of seen this act before with leases as a percent of total retail sales.

I would say being as low as 12% or 13% and as high as 30%. But that’s a cycle, that happen, that goes up and down over the last 20 years multiple times and we have never had a problem accessing inventory.

Bill Armstrong - CL King & Associates

Got it. Okay. And then just finally, you mentioned a modest reduction ESP penetration rate, anything to call out there?

Tom Folliard

No. Nothing really, we mentioned last quarter that our partners were making some pricing adjustments. We make pricing adjustments on that product all the time based on the performance of their portfolio. Remember that’s two different third parties that do our extended service plans and they manage their business to be profitable. So we had some price changes. We saw a little decline in penetration.

Bill Armstrong - CL King & Associates

Okay. Great. Thank you.

Tom Folliard

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Matt Fassler, Goldman Sachs. Your line is open.

Matt Fassler - Goldman Sachs

Thanks. I am back.

Tom Folliard

Hi, Matt.

Tom Reedy

Okay.

Matt Fassler - Goldman Sachs

Two very quick follow-ups, first of all, could you talk about your self-sufficiency ratio just year-on-year how it looked?

Tom Folliard

I didn’t, but it was around 46%, 47%, it was flattish year-over-year.

Matt Fassler - Goldman Sachs

46%, 47%. Thank you. And then secondly, obviously, we recently saw an IPO from the company called TrueCar, is that, I know has focused on price transparency to the new dealer, to the new car channel, working hand-in-hand with dealers it seems, but also has a product for used cars, interested on your perspective on some of these tools? I guess, this one in particular, because of its profile, whether you see this is an emerging trend and what your best sense is of how to deal with that?

Tom Folliard

Nobody is more transparent than us with pricing and we have never really had to use the third-party to show customers what a great offer we have at CarMax.

Matt Fassler - Goldman Sachs

And is it putting any pressure on the market that you see or really no impact?

Tom Folliard

Nothing that we have seen.

Matt Fassler - Goldman Sachs

Thank you.

Tom Folliard

Thank you, Matt.

Operator

There are no further questions at this time. We turn the call back to our presenters.

Tom Folliard

All right. Thank you very much. Thanks everyone for joining us and most of all thanks to all of our associates for all you do everyday and we will see you again next quarter. Thank you.

Operator

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

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