CarMax Q3 2007 Earnings Call Transcript

CarMax Inc. (KMX)

Q3 2007 Earnings Call

December 19, 2007 9:00 am ET

Executives

Katharine Kenny - Assistant Vice President of Investor Relations

Tom Folliard - President and Chief Executive Officer

Keith Browning - Executive Vice President and Chief Financial Officer

Analysts

Seth Basham - Credit Suisse

Sharon Zackfia - William Blair

Scot Ciccarelli - RBC Capital Markets

Rex Henderson - Raymond James

Matthew Fassler - Goldman Sachs

Brad Thomas - Lehman Brothers

Edward Yruma - J. P. Morgan

Bill Armstrong - CL King & Associates

Hardy Bowen - Arnhold Bleichroeder

Matt Nemer - Thomas Weisel

Brian Nagel - UBS

Rich Kwas - Wachovia Capital Markets

Ildiko Hildreth - Waterstone Capital

Scott Johnson - Forest Capital

Presentation

Operator

Good morning. My name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to the Third Quarter Earnings 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. Ms. Kenny, you may begin your conference.

Katharine Kenny

Good morning. Thanks for joining us. I am Katharine Kenny. I am the Assistant Vice President of Investor Relations at CarMax and I am here on the call today with Tom Folliard, our President and Chief Executive Officer, and Keith Browning, our Executive Vice President and Chief Financial Officer.

Before we get started, I would like to do a little commercial for our Analyst Day in January. The weather is a lot nicer in Richmond than it is where you are and we have an Analyst Day on the 9th and the 24th of January. So we would urge you if you have questions about this quarter's results to come to one of those days.

Before we begin, please let me remind you that our statements today regarding the company's future business plans, prospects and financial performances are forward-looking statements that we made 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. They 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, 2007, filed with the SEC and our other subsequent filings.

After the call today Celeste and I will be available, as usual, to take your calls. Tom?

Tom Folliard

Thank you, Katharine. Good morning everyone, and thank you for joining us. This morning we reported our results for the third quarter. As we projected during our last conference call, weak economic conditions continue to impact our sales, especially given the difficult comparisons with last year's third quarter. However, our sales and gross profit for the quarter were consistent with our revised expectations and our comp sales were stronger than many of our competitors, from whom our data shows we continue to take market share.

Total sales increased 7% to $1.89 billion, compared with $1.77 billion in the third quarter of fiscal '07. Used unit comps were flat compared with third quarter of fiscal '07, and we recorded a 13% increase in used unit comps.

Total used unit sales grew by 9%, compared to an 18% increase in the prior year. The contribution from our new stores, not yet included in our comp base, increased this quarter because new stores represented a slightly higher percentage of our total store base.

Our net earnings decreased 34% to $29.8 million or $0.14 per share, compared with $45.4 million or $0.21 per share earned in the third quarter of last year. A weaker than expected third quarter net earnings were primarily the result of higher funding costs for CarMax Auto Finance in our short-term warehouse facility, due to the well publicized and unprecedented disruption in the asset-backed securities market.

On the sales, total used vehicle revenue grew by 10% in the third quarter. Customer traffic continued to grow during the quarter, but sales conversion rates remained below the third quarter of last year. While credit remained available at previous levels for our customers, we are hesitant to commit to big-ticket purchases in the current and more uncertain economic environment.

Wholesale vehicle revenues increased by 4% in the third quarter, due to slight expansion in both our average per-year unit selling price and units sold at our auctions.

Over the long term, we expect our wholesale unit sales to increase, consistent with our used retail sales. Year-to-date retail used unit sales have grown approximately 11%, while wholesale unit sales have grown by about 8%.

We opened five superstores in the third quarter, including a production store in Charlotte and four non-production stores in Atlanta, Newport News, Los Angeles and San Diego, which is a new market for us.

Our inventories increased by somewhat more than the requirements of newly opened stores. During the third quarter, we enlarged our inventory expansion test, which we have been running through the summer, which proved promising in our initial trials. We increased inventories in some of our stores by about 50 to 100 vehicles. We'll continue to monitor the impact of higher levels of inventory on our sales, which will have a slightly negative impact on our returns.

As far as gross profit, the third quarter is normally our weakest quarter in terms of sales and gross profits, due to the usual seasonal slow down in traffic and high vehicle depreciation. Our last two third quarters as we've talked about before have been exceptional for reasons we discussed at that time. This year's third quarter represents a return to more normal seasonal patterns.

On the CarMax Auto Finance, I'll give you a few more details to start. CAF income fell $16 million in the quarter. CAF income includes the previously announced charge of $8 million related to wider spreads and higher swap unwind costs related to our September public securitization '07-3. Higher funding costs in our warehouse facility reduced CAF income by an additional $4.6 million related to loans remaining in the conduit that were originated in previous quarters.

The higher warehouse facility costs also negatively affected the gain recognized on loans originated in the current quarter, reducing our third quarter gain percentage to 3.6%, compared with 4.3% in prior year's quarter. In addition, this quarter's CAF income reflected an immaterial net charge of $1.5 million for several favorable and unfavorable adjustments to our loss assumptions on previous securitizations. Included in this charge was the effect of increasing the cumulative loss assumption on the '07-1 deal, the highest of our securitizations from 2.7 to 2.8%.

As far as SG&A, our SG&A ratio of 11.2% reflected the expected de-leverage that resulted from flat comps. In our last conference call, we discussed the fact that short-term industry conditions would not impact our planned investment in our long-term growth plan, or curtail our ongoing operational strategic and internet growth initiatives. It is our intention, however, to continue to monitor changes in the marketplace conditions and manage our overall level of spending appropriately.

For store growth, we now expect to open 12 stores this fiscal year as our Modesto, California opening has been delayed for a month due to normal construction delays. As of the end of the third quarter, we had opened nine stores. We opened Omaha, Nebraska last week and we opened up our Jackson, Mississippi store today. In February, we will open a new store in Ellicott City, our sixth store in the Baltimore, Washington market.

In our press release we also included a list of the 10 stores we are currently planning on opening in the first three quarters of fiscal '09, with the usual caution that opening dates are always subject to change.

On to our expectations, looking forward, we now project full year comparable store used unit sales growth of approximately 2%. However, the volatile conditions in the financial marketplace for asset-backed securities have convinced us to lower our earnings expectations for the full year to a range of $0.87 to $0.93 per share from our previously reduced range of $0.92 to $0.98. We reported $0.92 in fiscal '07. Our CFO, Keith Browning will provide you with more color on our earnings expectation, including the changes in our projections for funding costs in CAF in a moment, and then we will be happy to take your questions.

Let me tell you once again, we believe our superior consumer offer is unique in the industry and should allow us to outperform many of our competitors in both the short and long-terms. It still remains unclear how severe and long-lasting this current economic slowdown will be, but we will outline our expectations for fiscal '09 in our fourth quarter press release and earnings call. We continue to project long-term comps between 4% and 8%, and store growth between 15% and 20%. We also remain confident that CarMax Auto Finance, even in a difficult environment, is critical to our ongoing operations and overall profitability. I also would like thank our 15,000 CarMax associates for all that they do every day. We couldn't do it without them.

And now, I'll ask Keith to add his comments. Keith?

Keith Browning

Thank you Tom, and good morning. Our previous updated range of $0.92 to $0.98 included the $8 million additional costs related to our 2007-3 securitization. In addition, it included higher costs for our next public securitization, which we anticipated would occur in the fourth fiscal quarter. Unfortunately, we haven't yet experienced the increase in spreads on asset-backed commercial paper to support our warehouse conduit, nor did we anticipate that spreads would widen further in the public asset-backed securities market. So, our revised forecast for the year includes higher spreads to fund our conduit.

As Tom reviewed in the third quarter, we incurred a charge of $4.6 million for loans originated prior to the third quarter. In addition, our new forecast includes the impact of the higher funding cost on third quarter originations and contemplates that those costs will remain at similar levels for the remainder of the fiscal year. Despite lighter spreads, we expect the gain percentage on originations will remain within our normalized range of 3.5% to 4.5%, although probably well below the mid-point of that range. We also now expect the $5 million to $6 million in higher costs being projected on our next public securitization, assuming the spreads stay fairly consistent with the recent ABS deals completed by GMAC and Chrysler. However, because we believe there is a significant backlog of ABS deals waiting to go to market and since we would like to have as much flexibility as possible, we've arranged a temporary increase in our conduit capacity of $300 million to $1.3 billion.

Now, we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Seth Basham with Credit Suisse.

Seth Basham - Credit Suisse

Good morning. Thank you for taking my question.

Tom Folliard

Good morning, Seth.

Seth Basham - Credit Suisse

If we could focus a little bit more on the CAF side, and Keith, thank you for your comments outlining the ins and outs of the CAF income, but if you could be a little bit more specific related to Q4 and what the actual CAF income number is that you are expecting.

Keith Browning

CAF income is obviously -- I think I've given you the detail that we expect a similar challenge on the conduit costs being a little bit higher than what we had been running or a higher spread, which means the gain spread will be below 4% for CAF based on originations. But telling you the specific numbers kind of a level of detail, we haven’t actually gone to historically in -- that’s why we give a range around it anyway, because there are some uncertainties.

Seth Basham - Credit Suisse

Okay. So, the lower gain on sales spread coupled with increased sort of valuation adjustments so to speak, associated with doing an ABS deal would bring your CAF income below 20 million. Is that the right way to think about it?

Keith Browning

That's the way to look at it.

Seth Basham - Credit Suisse

Okay. Thank you. And then as we go forward into 2008, how do you expect, and it's a very tough question to answer, but how do you expect the ABS markets to perform and how do you think about your options for the CAF business?

Tom Folliard

Quite honestly, I can't forecast what's going to happen. I think that we'll watch very carefully. We're cautiously optimistic that the markets will stabilize over time, it's just a matter of how fast will they stabilize. I think we're also very confident, however, that there is a market at a price.

So, while funding costs could remain higher and CAF spreads could actually remain somewhat challenged, we are viewing this business as critical to our ongoing operations. And we're very confident that we'll be able to continue to contribute to the business to the extent the market lets us.

Seth Basham - Credit Suisse

Okay. And just lastly on CAF, can you give us some more details, which other pools did you raise the loss rates assumptions on, besides 2007-1?

Tom Folliard

Well, we raised the loss assumptions on the more recent pools and had offsetting adjustments in the other pools.

Seth Basham - Credit Suisse

Okay. So, 2007-2 and 3 would be including those more recent ones that you're referring to?

Tom Folliard

Yes.

Seth Basham - Credit Suisse

Okay. I'll let others ask. Thank you.

Tom Folliard

And one thing on that, Seth, in terms of our loss rate assumption changes, we've now gone five consecutive quarters without a material adjustment as it relates to the loss rate assumption change. So, all the volatility we are seeing here is from the cost of the asset-backed securitizations.

Seth Basham - Credit Suisse

Understood. Thank you, Tom.

Tom Folliard

Okay, Seth. Thanks.

Operator

Your next question comes from Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair

Hi, good morning.

Tom Folliard

Hi, Sharon.

Sharon Zackfia - William Blair

I have a few questions on CAF, and then I'll move to retail. But the 5 to 6 million in additional cost in the February quarter, that if the securitization occurs or -- can you clarify that?

Keith Browning

Yeah, correct. That's assuming the securitization does occur. I mean, so, if it doesn't, then that's a cost that would move into the next fiscal year.

Sharon Zackfia - William Blair

Okay. And is that just kind of truing up then the warehouse facility with the public asset-backed spreads out there?

Keith Browning

Well, it's just a real differential in the cost between those two particular facilities. The conduit is such a short-term facility that the spreads of the markets commanding are significantly lower than the warehouse -- the public markets.

Sharon Zackfia - William Blair

Okay. And then have you switched to LIBOR swap now, rather than asset-backed or commercial paper swap?

Keith Browning

Yes, we have.

Sharon Zackfia - William Blair

Okay. And then kind of moving on to sales, Tom, can you comment on your sales trends in the quarter? It sounds like they were relatively consistent, is that a fair assumption? And did you see any kind of major regional disparities?

Tom Folliard

No, I think one of things that I didn't probably talk about enough is, we set our expectations at the end of the second quarter for the rest of the year and really for the third quarter. You saw we put a range out of one to three, for the year.

We've now tightened it to two. So, we are pretty much right on track for the third quarter with what we expected. It's really all these additional unexpected funding costs that are the thing that's changed our earnings.

Sharon Zackfia - William Blair

Okay. And then, when you implemented the beta of carmax.com, or I guess it's not a beta anymore and I know it's been relatively recent. Can you give us any kind of first look on what that is doing here traffic in the stores?

Tom Folliard

It's hard to translate that directly into traffic. One thing we can look at is, what's the impact of the customers who come to carmax.com and they go through news search and ultimately end up with a lead, and we feel like we'll get an increase there. It is awfully early. We've only rolled it, I think, over the last two weeks.

So, I think we'd probably give you a little bit more color on that at the end of the fourth quarter. We're pretty confident that that along with other ongoing changes we made to carmax.com continued to enhance the consumer experience on the website and make it look more likely that they'll contact us and ultimately more likely that they'll show up at the store.

Sharon Zackfia - William Blair

Okay. And then lastly, can you remind me, what is the inventory expansion test?

Tom Folliard

I am not sure that we had mentioned that before, but what we have been trying to do, and as we've talked about many times, we are always running tests to try to spur sales. And one thing we've tried to do on occasion, and done it for over 10 years, is move inventory levels around to see if it has an impact on sales in those stores.

We started with about 20% of our stores. It wasn't really big enough for us to talk about. It didn't really have much impact on us financially. We are pretty encouraged with some of those results. And so, I think it's about a 2% inventory difference in our total dollar amount, but I figured we talk about and tell you that we're going to continue to run that through the fourth quarter and see if it has a difference, and like any other tests we do, we'll keep a control group stable or raise inventory levels in subset of stores and see if it impact sales.

Sharon Zackfia - William Blair

Are you moving the inventory in some particular way or is it going lower ticket, higher ticket, foreign, domestic?

Tom Folliard

No. How we do our inventory management is basically based on segments, and pricing, and mileage and different types of cars, and it will be consistent with whatever the store -- if we raise the store to 50 to 100 cars, it will be consistent with what that store is already selling best. So, it will be very controlled and very analytical how we raise the inventory, but it will be store-specific based on that store's trends.

Sharon Zackfia - William Blair

Okay. It's a weird time of the year to be testing this, isn't it?

Tom Folliard

Well, I think it's actually a pretty decent time of the year because if you're going to run something like this and it's going to work, it's going to work all year.

Sharon Zackfia - William Blair

Okay.

Tom Folliard

So, we think it's all relative. If it works in the spring in high sales time, it should work in the fall, when our sales are a little bit lower. And remember the inventory levels will be relative too. The base inventory level will be lower in the fall, so the place from where you start is a little lower. In the spring, the base inventory level will go up and the increment above would be similar.

Sharon Zackfia - William Blair

And I guess, I am trying to --

Keith Browning

And we've already gone through our fall depreciation cycle.

Sharon Zackfia - William Blair

Yeah. I am just trying to reconcile my head, I thought one of the advantages of the Internet becoming more prominent in your business was maybe that you were transferring inventory, more a customer request in between stores, so maybe eventually you would have less inventory on the loss, but it sounds like that was the wrong conclusion.

Tom Folliard

Well, I think it's too early to determine that, Sharon. I think as our brand gets stronger, I believe that what you just said is actually true and I feel like we'll be able to leverage it more. But if in short increments we can -- 50 or 100 cars doesn't cost us very much money, and if we can get more sales out of it then it’s worth it, and it's that many more cars that are available to consumers and other stores as well. And again, this is only a subset of stores and it's not a big percentage of our total inventory.

Sharon Zackfia - William Blair

Okay. Thanks.

Tom Folliard

Thank you.

Operator

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

Scot Ciccarelli - RBC Capital Markets

Hey guys, how are you?

Tom Folliard

Good, how are you Scot?

Scot Ciccarelli - RBC Capital Markets

Alrighty. Couple of questions related particularly to the CAF situation. We're still seeing pretty big spread between the delinquency rates, trends in there, the Wall Street trends. How do you guys think about these trends going forward, given the concerns that we're seeing in the broader credit market?

Tom Folliard

As we've indicated before, a lot of this, the difference in delinquencies was anticipated. We actually bought a set of customers in the new scorecard that we actually tested before we put in the new scorecard. That actually we knew had delinquency patterns and payment patterns that weren't as consistent.

However, we also know that based on our test results anyway, that those customers are still likely to pay a car loan because it's a very high priority payment. So we do believe that if you looked at our prior originations and the losses associated with delinquencies, that those are kind of apples-and-oranges comparisons. In that, we do expect that delinquencies at a higher level won't translate into losses at the similar levels that you would have seen historically on our pools.

Keith Browning

It's not a direct correlation from delinquencies down to the loss rate and aggressive follow-up and aggressive servicing of the loans is something I think we're very good at. And as I mentioned earlier, we've now gone five consecutive quarters without a material adjustment as it relates to the loss rate assumption.

Scot Ciccarelli - RBC Capital Markets

Yeah, but I mean --

Keith Browning

We feel pretty good about the performance of our portfolios in that regard.

Scot Ciccarelli - RBC Capital Markets

Right. No, I understand that, but I guess to be fair, I mean, we've now seen two quarters in a row where we've had an increase in loss assumptions for the one particular securitization. And that's the one of the ones, the 2007-1 that has obviously materially higher delinquency rates. Is there something unique about that pool that it's causing you to make changes to those assumptions but shouldn't imply to others?

Keith Browning

I mean, I'll remind you that when we talked about 2001 last time, it was the earliest [in light] we'd ever made an adjustment, and so with the three more months data we feel very confident that we are actually now at a point where there is enough maturity in seasoning that there won't be any more material adjustments for that particular pool.

So, we are making adjustments given the economic environment, a little earlier than historically or than we would have normally made. So we feel as confident as anyone can in predicting the future based on the underlying mix of the portfolio and looking at them relative to last time in curves and…

Tom Folliard

And if you go back to those first couple of deals, we have done some tightening in our originations, with the more recent loans that we have originated in the store and remember too that once another three months has gone by in that pool, there is less balance left there, so a 10 basis point move is going to be less impactful going forward because there is not that much left in it.

Scot Ciccarelli - RBC Capital Markets

Great, thanks. That's helpful and then the other question is, you've talked about, you guys really haven't seen any tightening from your third-party lenders, but I can tell you that out in the marketplace some of the people in the auto lending sector are were kind of -- it seems like we are kind of at the front end of the beginning of the tightening and AmeriCredit and Capital One Auto Finance, for example, boast in public talking about tightening standards. Have you guys started to see any of that yet?

Keith Browning

Not yet. I mean we were actually calling them proactively because we recognized that they may have to do something because of the broader macro economic conditions and asking them to let us know before they do it, so that we can understand what they are doing and why they are doing it.

And obviously we are taking the opportunity to remind them during those conversations that our portfolio outperforms our other books of business from their other lending channels. So, so far, there hasn't been any changes; so far there has been positive feedback that they don't intend any changes, again because our portfolio outperforms our other books of business. It doesn't mean that it won't happen, but I can tell you that we are in constant communication with them and they really do appreciate the origination channel that CarMax provides and the consistency of performance.

Scot Ciccarelli - RBC Capital Markets

Okay. That's helpful. And then the last question is shifting gears to the wholesale operations. We saw another pretty nice increase in terms of gross profit dollars per unit. We are nearing that $800 level. Tom, is there anything going on in the market or within CarMax's wholesale operation that can help you continue to drive that forward, because that’s obviously been a pretty important profit lever for the company over the last couple of years?

Tom Folliard

Yeah. It has, and I'll tell you we are reluctant to push too hard there because of the reasons I mentioned in the past, the impact it could have on our sales. So, you saw our rate actually go down. I mean our rate of growth is down a little bit this year. I think the impact that we have seen on conversion on the sales side, we see that same impact where there's some hesitancy from consumers to sell us their car.

Our offers are lower now than they were in the spring and summer as they usually are in the fall and maybe even a little bit more impacted by the trends we see in the industry. So, our buy rate is down a little bit. It was down a little bit in the third quarter. So, I think some of that is reflected there.

Scot Ciccarelli - RBC Capital Markets

Okay. So you are starting to see some hesitancy on part of consumers?

Tom Folliard

I just talked about it on the conversion side of -- when they are ready to pull the trigger to buy a car, but we also see when they are about to sell their car.

Scot Ciccarelli - RBC Capital Markets

Okay, great. That's very helpful. Thanks a lot guys.

Tom Folliard

Thank you, Scot.

Operator

Your next question comes from Rex Henderson with Raymond James.

Rex Henderson - Raymond James

Good morning. And thanks for taking my question, again. Just a couple of clean-up questions on the CAF portfolio, can you give us a number -- the amount of loans originated and sold in the quarter?

Keith Browning

Sure. That’s 574 million.

Rex Henderson - Raymond James

574 million originated and sold?

Keith Browning

Correct.

Rex Henderson - Raymond James

Okay. And is - just a follow-up on that, have your lending standards remained consistent? Have you made any changes or tweaks to those lending standards in the last couple of quarters in light of what's going on with consumer credit?

Tom Folliard

We actually made very minor tweaks at the end of the third quarter. So we don't think you'll see it in sales and obviously we made those with that in mind that our lending partners would pick up those loans and that there's just a level of risk where we're constantly trying to do the analysis of what are we buying that we shouldn't be and what are we not buying that we should be. And that was just a result of that but very minor.

Rex Henderson - Raymond James

So, you are taking a little bit less risk than you work. Can you give us any color on how that's changed? I mean what the change was?

Tom Folliard

We basically at the lower credit tiers, we are actually asking customers for a little more equity.

Rex Henderson - Raymond James

Okay.

Tom Folliard

You know, one thing I would like to add is, everybody -- I think the big concern is when a customer walks in the door of CarMax, there's credit available to them. And if we look at 100 loan applications and some percentage of those only get approved by CarMax Auto Finance or BoA which are kind of our prime lenders and then the rest go on to our non-prime partners. The percentage of total applications that are getting an approval for finance has hardly moved at all. I think people think that number would be dropping dramatically. And I can tell you that, that number has not moved hardly at all this year, even into the third quarter.

So, when a customer walks in the door, there's credit available to him at the same level that it was before. In terms of percentages, the answer is absolutely yes. And are there rate changes? There are. But there -- this isn't the worst rate change environment we've seen in terms of the effective APR rates to the consumer. It's actually not even close. The impact is that the funding costs on the back-end. But even after you factor that in, it's clearly more profitable for us to have CarMax Auto Finance as one of the partners not just from the additional profitability that it adds but also from our ability to learn and our ability to add incremental sales.

Rex Henderson - Raymond James

Okay. Moving on to the retail business, I'm worrying about what you are seeing in the wholesale market for used cars. The information I have suggests that wholesale prices have been relatively firm, while the retail demand has actually been awesome. I'm wondering if you are seeing that same thing and what impact that may have on gross margins going forward?

Katharine Kenny

Last month.

Tom Folliard

Last month only, yeah. Rex, wholesale prices have been, I think relatively firm for the year, but in the last month if you look at demand [helm] index, it's declined somewhat and that's actually kind of what we expect seasonally. The last couple of years, I think we've had a little bit of a prop-up in the wholesale market, two years ago related to Katrina, last year, I am not sure, we really understand.

This year, it looks a little bit more normal for us in terms of depreciation into the fourth quarter, on the wholesale side of the business. So -- and that index is across all vehicles sold. We are not a buyer for all of those cars. So, when we're in the market buying cars right now, things are above what we expected them to be.

Rex Henderson - Raymond James

Okay. So, you're not seeing any pressure on the gross margin line then, that's how I can translate that answer?

Tom Folliard

Well, I think we were 12 bucks off our gross margin this year's third quarter compared to last year's third quarter. So, it hasn't impacted our results in terms of margin per car.

Rex Henderson - Raymond James

Okay. Thank you.

Tom Folliard

Thank you.

Operator

Your next question comes from Matthew Fassler with Goldman Sachs.

Matthew Fassler - Goldman Sachs

Thanks a lot, and good morning.

Tom Folliard

Hi, Matt.

Matthew Fassler - Goldman Sachs

Couple of follow-up questions. The tests that you conducted on this new group of customers that had higher expected delinquencies, what point in time did you run it?

Keith Browning

Well, that was back in 2005.

Matthew Fassler - Goldman Sachs

So, I guess I am curious, if this is a group of customers that was more inclined in a pretty robust environment to come under payment pressure. Given that clearly the credit -- consumer credit environment has changed notably, particularly since September, I guess, is when the broader market really started to see it. Does that change your thinking about that customer's likelihood to make good on their obligations?

Keith Browning

Yeah. I'll go on and say we've been originating those customers in 2006-2007. And some of the pools where we made favorable adjustments were on those very customers for the 2006 origination pools, for example. And so, the answer is, we -- based on combination of mix and timing curves and everything we know, we believe we take the losses as accurate as anyone can forecast.

Matthew Fassler - Goldman Sachs

Okay. Thank you. And then secondly, in the retail business, you spoke about traffic and lower conversion. From a selling process perspective, what are the things that you're able to do to combat that customer reluctant in terms of selling tactics or follow-up or anything like that?

Tom Folliard

Matt, you know how our business model works, and as usual, there is never a silver bullet to change an execution trend. It's generally our normal blocking and tackling and how we overcome objections with the consumer.

I just think, we've seen a level of reluctancy from the consumer that we're not used to and we haven't seen before. So, since we don't negotiate on the price, we don't negotiate on the trade, and we don't negotiate on the financing, there certainly isn't any manipulation we can do with the numbers to get the consumer to behave differently.

Matthew Fassler - Goldman Sachs

Sure.

Tom Folliard

So, for us really it's just more of the same and trying to figure out if we can just get more consistent with those different aspects of how we manage the process.

Matthew Fassler - Goldman Sachs

And I guess --

Tom Folliard

It is no different for us than it is any other time of year. We're just running into a slightly more difficult environment.

Matthew Fassler - Goldman Sachs

Understood. And then, finally, if you could give us some sense of what you are seeing from your competition, I mean, to the extent that not everyone is experiencing the same credit flexibility that you are, maybe sources of funding or drying up that elsewhere, I guess, that can certainly be feasible? Are you seeing your competitors pull back, if you think about the looks the customers are getting away and is that helping you competitively?

Tom Folliard

Well, that's very difficult to ascertain because of the fragmentation that we see from our competition, I mean, it's just so fragmented, it is so different in every market. If we look at how we are projecting to finish out the year now, it will be – we are now expecting a 2% positive comp for the business. And if you take out all of the funding, unexpected funding costs, we would have grown our earnings slightly.

And in this environment I actually feel like that's pretty good compared to our competition. If you look at our used car comp unit spreads, they have continued to be pretty significant between us and our competition. You know, our quarters don't match up. But if you look at our first three quarters this year, which are now finished, we had a 3% positive comp. If you match up against the competition, it's about a negative 3. So there is a spread there that has remained fairly consistent, and we feel like we continue to gain share.

Matthew Fassler - Goldman Sachs

Got you. Thank you so much.

Operator

Your next question comes from Brad Thomas with Lehman Brothers.

Brad Thomas - Lehman Brothers

Thank you. I wanted to follow-up quickly on some of the questions about your loss assumptions and how you have changed those. I know at the end of the last quarter, the upper end of your assumptions have been around 2.7%, could you just quantify what that upper end has gone up to now?

Tom Folliard

It's 2.8.

Brad Thomas - Lehman Brothers

Okay.

Tom Folliard

The only pool we changed up was the one, the 2007-1 from 2.7 to 2.8.

Brad Thomas - Lehman Brothers

Okay. Okay. And are you still feeling comfortable that 3% is about the max level that you all would ever target, and so it is used…

Tom Folliard

One of the things we have said is that, we are targeting a prime portfolio and the public markets view 3% or less as prime. So that's clearly one of the reasons why we targeted 2 to 2.5, is that it did give us room for economic fluctuations that may come and go, and stay prime.

Brad Thomas - Lehman Brothers

Got it. Okay. And so…

Keith Browning

We are actually -- we are still targeting less than 2.5 on the stuff that we are originating now. And remember that we are always applying whatever it is we have learned after the performance of the additional pools, and we apply that going forward. So, we've learned a lot in the last year, and every quarter or every month that we see more performance and we look at delinquencies and how they translate into loss rate. We are applying that learning into our origination strategy.

Brad Thomas - Lehman Brothers

Okay. And some of the – the moderate tightening that you had mentioned is in order to maybe get those loss rates down on some of the newer loans, is that correct?

Tom Folliard

Yeah. And it's just our normal -- our normal, the way we are going to operate the business, so I think what gets lost in this is what Keith mentioned earlier as, all of our movement up into the 2.3-2.5 loss rate range is on purpose. We were running 1.3-1.5. We were running at rates less than what we had booked the deals at. We were taking positive adjustments. We took $25 million of positive adjustments over the last two years, and our goal was to get back up into that range because we were giving up both sales and profitability on the front end at the time to book the deals. I mean, in terms of the loss rate performance, I feel great that we have gone five quarters without a material adjustment.

Brad Thomas - Lehman Brothers

Okay. Great. Then just a follow-up on the gross profit for the other line, it seemed to be down year-over-year. I was wondering if you could just talk about some of the drivers behind that.

Tom Folliard

(inaudible).

Katharine Kenny

Yeah.

Keith Browning

Yeah, I mean, in that quarter, the -- I think, our year-over-year was only down $12, right? I think, we are down sequentially from the second quarter to the third quarter.

Tom Folliard

Is that the line you are asking about?

Brad Thomas - Lehman Brothers

I wasn't sure if you were seeing a lower attachment rate from extended warranties or lower third-party finance revenues?

Tom Folliard

No, we have not seen a lower attachment rate on warranties. I think, some of that's service.

Katharine Kenny

Service…

Brad Thomas - Lehman Brothers

Okay, okay.

Katharine Kenny

-- and finance fees.

Keith Browning

Yeah. Some of it's like leverage on service due to the flat comps and then in addition, [drive] actually increased their overall buying versus a year ago. So, that actually -- because we pay a discount to them offset some of the income we're getting from the other third party providers.

Tom Folliard

And that's not a big number, but that impacts our total finance fee income. That’s a little bit of an odd dynamic there, where if we get a little bit more drive income, it actually decreases the fee income.

Brad Thomas - Lehman Brothers

Okay, okay. And then just one last question, in terms of your car buying pattern, are you seeing any change in the traffic level in your stores of the customers that come in to get an appraisal?

Tom Folliard

Well, since it's really our -- I talked earlier about our buy rate going down. So, that other ones that we appraise, if we look at that year-over-year we're down some, and I would attribute that to the same hesitancy that we've seen from the consumer on the pulling the trigger on buying a car.

Brad Thomas - Lehman Brothers

Okay, great. Thanks so much.

Operator

Your next question comes from Edward Yruma with J.P. Morgan.

Tom Folliard

Hi, Eddie.

Edward Yruma - J. P. Morgan

Hi, guys. Thanks for taking my question. You've made some changes to the website recently. Can you talk about some of the metrics that you've looked at in terms of whether customers are using it more and how that may be helping offset some of this macro weakness?

Tom Folliard

Well, the metrics we're looking at are the same metrics we always look at. How many people come on the website? Out of those people, how many do a vehicle search? Out of the ones who do a vehicle search, how many get down to a specific fact sheet? When they get to a specific fact sheet, how many of those contact the store, whether it's from phone or email? So, the metrics that we're looking at are the same. And then of the ones who contact us, if we can track it specifically, how many of those actually shop at the store and then we take them through the waterfall metrics we do in our store right now, to see if they actually buy a car.

So, the metrics haven't really changed very much, but what we're -- if you look at each aspect of that business, I mean of the website, we're trying to increase each of those areas. We'd like more people to visit the website, which we have done a little bit. We're starting to do a little bit more advertising about our website probably to advertise our new search. Once they get on the website, is it more appealing to them, because we have more photos, because we've redesigned the landing page, we've redesigned the fact sheet.

And I think right now, our early indications are that that all of those things are going pretty well. But again, it's an ongoing process for us. We're not satisfied with where website is. We want to be the best website in the industry. We want people to be able to come on our website, not have to go to any other sites. We want them to be able to do their research, their shopping. We want them to be able to compare cars. We have consumer reviews that we've added to the website. So, for us, it's a big strategic investment that we're going to continue to try to make improvements on.

Edward Yruma - J. P. Morgan

Got you. And should the credit markets remain volatile, what is your ability to ratchet up the warehouse facility once again?

Tom Folliard

At this point, we think that we've really tapped the short-term limits. I mean, what we'll do if the markets remain volatile, is we'll consider other alternatives which might include the whole loan sale.

Edward Yruma - J. P. Morgan

Got you. And my final question, has this changed then the percentage of prime financing that goes to CAF versus BoA?

Tom Folliard

No, not at all.

Edward Yruma - J. P. Morgan

Very good. Thank you.

Tom Folliard

And one additional thing to remember is any alternative strategy for funding would mean less profit. If we get -- CAF provides a more profit on a per unit basis than if a car goes to another vendor, and going to a straight commission and just originating those loans for somebody else going to a whole loan strategy, any of these strategies compared to the way we are doing it, even in this environment, would mean less profit.

Edward Yruma - J. P. Morgan

Great. Thank you very much.

Operator

Your next question comes from Bill Armstrong with CL King & Associates.

Bill Armstrong - CL King & Associates

Good morning. I think my first question was answered. So, your warehouse capacity now is pretty much tapped out is this what you are saying? So, what would your other options be if securitizations really are not in the cards in the near term?

Keith Browning

Well, the answer -- I mean, the warehouse facility maybe expandable but at a price. I mean, it's just like that I believe the ABS markets they are at a price I think that the warehouse facility we could probably expand it more, if we wanted to pay a price and we'll just have to weigh those alternatives.

Bill Armstrong - CL King & Associates

And did you mention whole loan strategies as a…

Keith Browning

Whole loan is the same thing and I think that that's probably even more expensive than anything we could currently anticipate from the ABS market.

Bill Armstrong - CL King & Associates

Whole loan meaning you would keep those loans on your balance sheet and just service them?

Keith Browning

No. We would absolutely sell them and we would either service them or actually get the results from if the purchaser wanted to service them.

Bill Armstrong - CL King & Associates

Okay. So, who would you be selling them to, if you can't securitize them?

Keith Browning

Banks.

Bill Armstrong - CL King & Associates

Okay. Are you able to get higher interest rates from consumers now to reflect the higher funding costs to the CAF?

Keith Browning

Well that's what a little bit unusual, is that historically what we've told you is that when funding goes down consumer expectations lag, so we get a higher spread and then when funding goes up the offset occurs, and we get squeezed. The consumer today is actually seeing costs going down, so they are seeing the [debt] decreasing rates, and yet, our real costs actually have moderated up, because of the spread issue.

And so, there is a little bit of squeeze there and I think what will happen is, if it stays, you will see that the market moves upward and we will move with the market as we can, but there could be a little bit of a squeeze given the fact that we have an unusual dynamic here with consumer seeing rates going down, and yet, our actual funding costs are going in the opposite direction.

Bill Armstrong - CL King & Associates

Presumably, all your competitors are seeing funding costs rising too so.

Keith Browning

Well that's correct, that's why I am thinking that we'll all being moving as we can afford to move.

Bill Armstrong - CL King & Associates

Right, okay. And did I hear you say earlier that CAF income would be less than $20 million for Q4?

Keith Browning

No, I was basically agreeing to his logic. I wasn't agreeing to the numbers because that's not a number that I would endorse. His logic was that when we take the higher stretch in the quarter and then the 5 to 6 million on top of that and I said that's correct. I wasn't endorsing the actual earnings number that he quoted.

Bill Armstrong - CL King & Associates

Okay, thanks for the clarification. And finally, your implied Q4 earnings of $0.14 to $0.20 obviously a wide range tightened your same-store sales outlook, so I assume that the variability really is just, I just want to clarify, just focused on CAF really rather than the retail or wholesale side?

Keith Browning

Exactly.

Bill Armstrong - CL King & Associates

Okay.

Keith Browning

There is always a little bit of variability. There is always some variability in sales and gross margin, but when you look at the range, the majority of the range that we put out there is for the volatility in the markets.

Bill Armstrong - CL King & Associates

Understood, okay. Thanks.

Tom Folliard

Thank you.

Operator

Your next question comes from Hardy Bowen with Arnhold Bleichroeder.

Hardy Bowen - Arnhold Bleichroeder

Tom, I guess we are going into Phoenix, which is a major market. Are we going to advertise at a high rate like we did in Los Angeles starting up in Phoenix?

Keith Browning

The difference with Phoenix compared to Los Angeles is if we can get -- we could go into a Phoenix with two stores and spend at a full level. So, Phoenix is nowhere near the size of LA, so when we have two stores in LA, we couldn't spend at our full advertising level, just didn't make economic sense for us in Phoenix.

We think Phoenix is somewhere between a two- and five-store market, so at two stores it works economically for us to advertise at our full level of advertising. That same amount of point to TV that we always run, same amount of points to radio, same on internet advertising and things of that nature.

Hardy Bowen - Arnhold Bleichroeder

What kind of locations do we have in Phoenix? Are we next to auto-malls or what are we doing there?

Tom Folliard

I think we have very good locations. You know what our criteria, our real estate criteria have been, which is we want to have highway visibility, we want to be near other car dealers, we want to be near high growth retail. And I am not sure which of those sites we already have under construction.

I know, one is right in an auto-mall, and right off the highway, and the other one is pretty much in an auto-mall also. We have an additional site that we are working on in Scottsdale, which would be part of the Phoenix market for us and it's also meets that similar criteria.

Hardy Bowen - Arnhold Bleichroeder

Okay. I was talking to one owner of automobile dealers, substantial amount of them. He said we haven’t had a good quarter in the last 18 months, are you worried about environment?

Tom Folliard

You were here last year, if you go back 18 months, for us it's been pretty good. And again, I actually feel really good about where our sales are for this year. I just -- I feel like we are 2% used unit comps, and we have built, we have opened up all of our stores on time.

Again if you take out all the unusual funding costs, we would have grown our earnings for this year. And I just don't see a lot of other people performing like that. I feel like the evidence that CarMax outperforms the competition is as strong now as it has ever been, if not stronger.

Hardy Bowen - Arnhold Bleichroeder

I guess as far as building the brand, it still doesn't seem to be a brand very fast in very many places in terms of the whole United States. I guess maybe we have 2% market share or something like that?

Tom Folliard

Well, yes, if you look at our growth strategy, which we are committed to, we are -- of the 15 to 20% stores we are opening in a year, about half are going into existing markets and half are going into new markets. So the pace at which we go into new markets is not the 15 to 20% because we are filling in existing stores, growing market share, growing our brand, and becoming more defensible against competition in each of those markets.

So, and that's the pace that we think we should continue to grow at and we are committed to it. So, you are right. We are not going to be national as fast as some people might think when you look at our growth rate, but it’s part of the strategy.

Hardy Bowen - Arnhold Bleichroeder

Okay, Sounds good.

Tom Folliard

Thank you, Hardy.

Operator

Your next question comes from Matt Nemer with Thomas Weisel.

Matt Nemer - Thomas Weisel

Good morning, everyone.

Tom Folliard

Hi, Matt.

Matt Nemer - Thomas Weisel

My first question is, if you look at the third-party web traffic data, it suggests that carmax.com traffic was up 40% plus in October, 25 in November. Is there something wrong with that data, or can you explain why the conversion from web to retail might be as low as it is?

Tom Folliard

You know what, we have never been able -- that data has never matched up with what our data shows, so – and so as we think our traffic is up, we don't think it's up that much.

Matt Nemer - Thomas Weisel

Okay. And then secondly, just a follow-up on the inventory test, is that -- are the vehicles that you are adding, are they the same -- is it the same mix? Is it you are just going deeper with existing models or change in years? Can you give a little more detail on that?

Tom Folliard

Yeah, I kind of talked about it a little bit earlier, Matt, it's very store specific, and it's not like we go into a store -- I am just trying to pick a random example, I don't even know if we are running the test here, but if we were in the Clearwater Florida, we are not going to go stack up with a bunch of high dollar Mercedes and things like that.

We are more likely to just to ramp up. And again, it's only 50 to 100 cars in a lot -- in any particular lot, it's going to be matched up with what that store is already selling, but it will be different in every store. If we are in Dallas or Irvine, California, you would see a higher-end mix because they have a higher-end sales mix.

Matt Nemer - Thomas Weisel

Right, I am just trying to figure out, is that because you are running out of key models or you are actually expanding the breadth of the assortment?

Tom Folliard

I think, it’s the breadth of assortment. But when you get into breadth, sometimes you end up into some different configurations of cars that actually add quite a bit to your variety.

Matt Nemer - Thomas Weisel

Got it. And then turning to the wholesale business, beyond the general aggregated Manheim Index, what’s happening in the wholesale lanes both on the buy side for you in sort of the one- to three-year old segment, and then on the sell side for older, higher mileage vehicles. I mean obviously, we see the numbers, but can you give us an update on kind of what you are seeing in those lanes?

Tom Folliard

Most of our older, higher mileage vehicles we buy through the appraisal lane. We don’t buy a ton as a percentage of older higher mileage stuff out at offsite auctions. Again, most of that comes from the appraisal lane. In terms of the stuff that we buy at auction, honestly this is just not very -- it’s not a very unusual environment. I think the last two years were more unusual than this year.

And remember too when we are out buying in the wholesale environment, we are bidding against all of our competition. So everybody is buying in the same environment, and a lot of people say you buy an investment, you buy a mutual fund, you buy it all the time throughout the year. You buy when it’s up, you buy when it’s down, that's kind of how we are in the marketplace with wholesale.

We are pretty much always out there buying. It's just -- it depends on what time of year it is and what level we are buying at. And I just think this a fairly -- I don't want to say normal, because I’m not sure what normal is anymore, but it has been a pretty consistent year for us in terms of what we expect to do in the fall. We always talk about depreciation coming out of the summer into the fall, and we are seeing that at the auction right now.

Matt Nemer - Thomas Weisel

Are you surprised at how resilient the wholesale activity has been on the sell-side for you? I would have thought that some of the smaller dealers would be pulling back on inventory given some of the pressures they are facing?

Tom Folliard

Well, one thing to remember, and it doesn't necessarily show up in just our gross profit number is, we are always adjusting the offers to consumers on a weekly basis, because we are selling 98% of everything every time we run an auction. So we get real feedback on real values back to our buyers every day, and that helps us figure out what offers to put on it. We run a very good auction.

That 98, 99% sell rate, I think even in a difficult environment is going to draw more buyers to our sale than somewhere else. People don't want to go to an auction and spend all day looking at cars, bid and be the top bidder and buy the car 20% of the time. We are running at 98% sell rate 12 months out of the year. So I think customers show up at our auction, and I think even in a down environment we might actually benefit a little bit from attendance. Our attendance has been very strong in our auctions through this quarter.

Matt Nemer - Thomas Weisel

Okay.

Tom Folliard

So I think it's a combination of how we run the auction, the fact that we run such a high sell rate, and because we are able to adjust our offers to the consumer so quickly.

Matt Nemer - Thomas Weisel

Okay. And turning to CAF, have there been any changes in the fee structure such as late payment fees related to delinquencies?

Tom Folliard

No.

Matt Nemer - Thomas Weisel

Okay. And then, lastly…

Keith Browning

[You gave shorter answer than me].

Matt Nemer - Thomas Weisel

On the -- your comment in the press release about investment spending, is there -- can you give us a sense of how large those three buckets are relative to each other strategic, operational and Internet investment?

Tom Folliard

Yeah. I probably couldn't give you that detail off the top of my head. It's just in general for us, when we talk about strategic spending, it's kind of all strategic. The Internet is strategic, our growth plan is part of our long-term strategy. And I can just tell you that we are constantly evaluating the spend levels in each of those buckets.

And coming out of a year like this, we'll go through the next three months and we'll take a really good long hard look and try to do the best job we can at forecasting next year, and figure out what we have to spend. And then we'll go through our normal prioritization process and figure out where we need to allocate those dollars.

Matt Nemer - Thomas Weisel

So if the environment worsens, it sounds like you are willing to take some of those back a little bit?

Tom Folliard

Oh, absolutely.

Matt Nemer - Thomas Weisel

Okay. So…

Tom Folliard

I feel like the environment we're in right now doesn't give us – we're nervous about it. We're going to pay very close attention to it. We don't feel right now like we need to stop our growth strategy, which is, I think one of the big keys to everything else is that growth strategy and how it contributes to our ability to invest long-term.

Matt Nemer - Thomas Weisel

Okay, great. Thank you.

Operator

Your next question comes from Brian Nagel with UBS.

Brian Nagel - UBS

Hi. Good morning.

Tom Folliard

Hi, Brian.

Brian Nagel - UBS

Couple of questions. First off, I guess for Keith and with respect to your full year guidance, the new guidance you guys put out there. And this is a follow-up from some previous questions that we [cruise out] credit market deterioration Q2 to Q3. So, the guidance we have out there into the balance of the year, does that assume a credit market that's consistent with what we saw in Q3 or is that further deterioration?

Keith Browning

That's consistent with what we saw at the end of this quarter because it deteriorated during the third quarter. And so, it's kind of where we saw the most recent deals done.

Brian Nagel - UBS

Okay. It's helpful. And then the second question, I guess, this is more for Tom, if I am doing the calculation correctly, it looks like the new store productivity -- and I know this could be kind of a suspect calculation, but it may have continued to weaken here in the third quarter. So, I guess the two-part question.

One is, how have your new stores performed lately? And then the second part of the question would be, given that the challenges that you guys are seeing, I realized this is just a credit now, but is this all call you -- make you call on the questions may be your aggressive growth plans near-term?

Tom Folliard

Well, as I’ve said right now, no. We feel like we are going to continue to grow at the pace that we've said. Again, that's something we'll continue to evaluate, but right now we're kind of moving along with the same growth strategy. In terms of the performance of our new stores, we've always said that our -- I mean, we've continue to say that our new stores in aggregate are performing at roughly at our sales estimate.

But we also said at the end of the second quarter that they were immune to the environment that we are in, and our comp stores are down because of the environment and our new stores are down because of the environment, but the ratio of the two is about – is pretty similar.

Brian Nagel - UBS

Okay. Thank you.

Tom Folliard

We think we have lesser performance in the new stores, but it’s no difference than -- no different than what we are seeing in our comp stores. And it doesn’t give us any reason to believe that there is some flaw in that strategy.

Brian Nagel - UBS

Okay. Thanks a lot.

Tom Folliard

Thank you.

Operator

Your next question comes from Rich Kwas with Wachovia Capital Markets.

Rich Kwas - Wachovia Capital Markets

Hi. Good morning everyone. First question, just back to the conversion rate issue. Tom, could you -- I know, you’ve talked about capital availability still being principal in that the cost of funding to the consumer is not measurably different than it has been. What do you chalked up the lower conversion rate to? Is it stock market? Is it media coverage? Is there anything that you can point to that you can cite it as being a meaningful factor?

Tom Folliard

No. I don’t know what the actual stat is on consumer confidence. But I just attribute it to consumer confidence. I don’t think you can point to any one thing. It is just a different feeling out of people today and out of our customers today than there was a year ago. And I think it’s a combination of all the factors we’ve talked about. This credit environment we are in is very challenging.

And I think even to the consumer who actually isn’t even impacted by it, they are aware of it. There is a feeling there. There is a -- gas prices and oil prices continue to spike. Just heating your house is getting more expensive now. So I just think it’s the overall environment Rich.

Rich Kwas - Wachovia Capital Markets

Okay. Thanks.

Tom Folliard

Not any one thing.

Rich Kwas - Wachovia Capital Markets

Okay. And then, Keith, what was the recovery rate for the quarter?

Keith Browning

I don’t happen to have it, but it wasn’t materially changed.

Rich Kwas - Wachovia Capital Markets

Okay. And as you look at the wholesale market in 2008, I know you mentioned that -- really here in the last quarter it’s seasonally slow quarter for wholesale valuations and you usually see a decline, but it seems like it has been a little more of a greater magnitude relative to recent history. So what are your thoughts here over the next quarter or so on where the wholesale market goes?

Keith Browning

Yeah, I mean, as Tom indicated, it was really more in line with what we had seen not last year or the year before, but a kind of [fight] our history. So, while recovery rates may be impacted slightly, we don't think it will make a material difference on what our expected ultimate loss rates are on our portfolios.

Tom Folliard

And our recovery rates are over a long period of time, and there is normal seasonality in that, that's built into the projected recovery rates.

Rich Kwas - Wachovia Capital Markets

Sure. Okay. All right. Thank you.

Tom Folliard

Thank you.

Operator

Your next question comes from Ildiko Hildreth with Waterstone Capital.

Ildiko Hildreth - Waterstone Capital

Can you give us some idea with your type of portfolio, what the historical loss rates of that type of consumer is in car lending? And I'm thinking back to early '90s when you weren't in business, but I'm sure you have done some research?

Tom Folliard

Every portfolio is different, so it's really hard to say, there are another like portfolio to us plus we've always talked about our deals being different and cleaner. So it's very difficult to benchmark against somebody else, I would look more at our own performance than I would look externally.

Ildiko Hildreth - Waterstone Capital

Is there -- if you have any industry information?

Tom Folliard

We've never had a loss, we've never had a loss rate above 3%, and in fact often we've run a loss rate below 2% even though our expectation for that would be a little higher than that.

Ildiko Hildreth - Waterstone Capital

I'm sorry, in what period is that for you guys, or I missed that? You were saying 3%?

Tom Folliard

I'm saying the loss rate of our -- I don't know how many total securitizations we've done, I think, we are managing 9 or 10 right now. And the range of loss rate as you can see it in our reported numbers, the high end of the loss range is 2.8%, that's just one deal, the -- not the most recent but the third one back I think.

Keith Browning

Yeah.

Tom Folliard

So it's running out there.

Ildiko Hildreth - Waterstone Capital

And you've been doing these, how long have you been underwriting this stuff, since what year?

Keith Browning

Since it started.

Tom Folliard

15 years.

Keith Browning

Right.

Ildiko Hildreth - Waterstone Capital

I'm sorry, when?

Tom Folliard

15 years, since we opened our first store.

Ildiko Hildreth - Waterstone Capital

Okay. And is all that loss rate based on Master Trust data that has been out since then?

Keith Browning

I am sorry, I didn't hear it?

Tom Folliard

Can you say that again? We didn't get your question.

Ildiko Hildreth - Waterstone Capital

Is that loss data going way back that far too to the early '90s, you are implying 15 years?

Keith Browning

Well, we have loss data for all of those. Our first public securitization didn’t occur until 1999 because we just didn't have a large enough base of portfolio where we could actually go to the public markets. So, if you start with 1999 that actually aggregated the originations that were still on our books from '93, or actually in our warehouse facility from '93 until that point. So that was kind of mix mash and that loss rate was about 1.5, 1.6 if I remember correctly. And then it went up to 2% to 2.5% thereafter, which is really what we've been targeting.

Ildiko Hildreth - Waterstone Capital

And then, correct me if I am wrong. Haven't the rates, the general terms of car loans been extending, which would imply a different loan-to-value mix as these things age?

Keith Browning

Yeah, absolutely. One of the things that we've done over time is that we've actually run -- we talked a lot about testing different parameters and CarMax Auto Finance was actually the only one of our lenders until a year ago that didn't offer 72 months across the board. So, our non-prime lenders were actually giving 72 months terms or several years then. And we underwrote that test and got comfortable with the loss results and we are writing with everybody else now.

Ildiko Hildreth - Waterstone Capital

Thank you.

Tom Folliard

Okay.

Operator

Your next question comes from Scott Johnson with [Forest Capital].

Scott Johnson - Forest Capital

Hey. Good morning. A question with regards to the financing arm, as you guys have mentioned, this is a competitive advantage for your business. But what competitive advantage do you guys have with lenders. I mean (inaudible) like I am trying to understand, it make sense to do this when you could originate loans, flip them into an ABS structure and pull out four points. But that game going forward has changed dramatically. So, what competitive advantage do you guys have?

Keith Browning

We have a significant competitive advantage and that we only underwrite CarMax. And so, what we don’t have in our portfolio of loans and how we evaluate our scorecard is any of the challenges that other lenders have with third parties. So, because we know the actual value of the car, we actually know the actually equity of a consumer, because we don’t have any negotiation on whether -- on the trade end.

We actually know the quality of the data. No one in our store gets paid a commission for financing. Just having been -- we are going to focus still on the consumers' credit history and make decision solely on that. And in other lending environments, the other -- our third-party lenders don't have the ability to have their scorecard to really give the right attributes to predictability of losses given the various experience of its customers coming in.

And what that means is, we literally have roles in our scorecard that the industry would say you need to have something here and we don't have it, because it hasn't proved to be predicable. As a result we end up buying things that they turned out.

Tom Folliard

The other part is just by being available to our consumers and having all the other partners available, it creates a very competitive environment for the customer and they have access to all kinds of different options for lending. And I think the person who benefits the most is the consumer. We can help keep our lenders on us by moving our rates along with the market and then it makes our lenders as well be competitive also. So, I think the ultimate beneficiary is the consumer. We have just time for one more question.

Scott Johnson - Forest Capital

(inaudible) an adverse selection problem with regard -- I mean --

Tom Folliard

No. I think we demonstrate that we don't have an adverse selection problem based on our history of loss experience. I mean that I think that we clearly understand and test before we actually underwrite different levels of consumers on a large scale before we roll it out.

Scott Johnson - Forest Capital

I mean we've been in 10-year pool market for the consumer, so I don't know that, I mean if you have data going back to the late 90s, early 80s maybe I would say that, but going forward I would think that this is going to be huge drag on your business. You’ve get inventory levels, and sales associates and infrastructure you built on your ability to move loans -- move vehicles by being able to provide financing for you customers.

Keith Browning

I'll just go back to Tom's earlier comment. We haven't had a material adjustment in our retained interest or loss rates for five quarters. I think the evidence is that we have a good scorecard and a good history and a good basis for our originations.

Tom Folliard

And lastly, 80% of the customer -- more than 80% of customers who buy car from us get financing from some lender, and being able to get an automobile loan, I mean what you're really talking about is the customers can't get a loan anymore on a car, and we just don't think that's going to happen.

And whatever the environment that we're in, we think this gives us an advantage over not having it. So, even in a bad environment, it's better to have it than not have it. And you're right, the environment could move up, it could move down, but we feel like regardless of that it's better to have CarMax Auto Finance for all the reasons we talked about.

Katharine Kenny

Operator, we have time for just one more question.

Operator

Okay, ma'am. Your last question comes from Seth Basham with Credit Suisse.

Seth Basham - Credit Suisse

Hi. Just a quick follow up. Could you tell me what the warehouse facility balance was at the end of the quarter?

Keith Browning

Roughly 900 million, or 850 -- 900 million, I don't know the exact number, but 850 to 900.

Seth Basham - Credit Suisse

Okay. And the 300 million increase to that facility, would you care to share the cost of that increase?

Tom Folliard

No.

Seth Basham - Credit Suisse

Okay. And then lastly, taking the last question in a different light maybe Tom or Keith you could give us a sense. If the profitability on a car sold and financed your CAF is around $900 to a third-party lenders around $300, now what where the cost or the profit there, I should say, on a car sold and financed through the whole loan market?

Keith Browning

We don't know that yet, because we haven't done a whole loan transaction, but that's clearly one of the things we are trying to ascertain as to whether that's a viable alternative to the ABS market.

Tom Folliard

But it would definitely be less than 900?

Seth Basham - Credit Suisse

And hopefully more than three.

Tom Folliard

That's right, it'll be a little more than three.

Keith Browning

Yeah. It's clearly, more than three.

Seth Basham - Credit Suisse

Okay. All right, thank you gentlemen.

Tom Folliard

All right, listen everybody thank you very much for your support thanks for calling in. If you have any additional questions you can Katharine or Celeste directly. Thanks for you continued support and we will talk to you at the end of next quarter.

Operator

Thank you for participating in today's conference. You may now disconnect.

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