CarMax, Inc. (KMX) Q4 2007 Earnings Report, Transcript and Summary

At this time, I would like to welcome everyone to the CarMax fourth quarter conference call. (Operator Instructions) I would now like to turn the call over to our host, Ms. Katharine Kenny, Assistant Vice President of Investor Relations. Ms. Kenny, you may begin your conference. Katharine Kenny: Good morning, thank you. Thank you all for joining us this morning. On the call today with me are Tom Folliard, our President and Chief Executive Officer; and Keith Browning, our Executive Vice President and Chief Financial Officer. Before we begin, as always, please let me remind you that our statements today about the company's future business plans, prospects, and financial performance are forward-looking statements that we make relying on 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 events to differ materially from our expectations. 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 26, 2006, and our quarterly and current reports on file with the SEC. Now I will turn the call over to Tom. Tom Folliard: Thank you, Katharine. Good morning, everyone and thank you for joining us. As you saw from our press release, fiscal 2007 was an exceptional year for CarMax. We closed the year with our second consecutive quarter of double-digit comps. Fourth quarter used unit comps were 12%. For the full year comps of 9% were slightly above our long-term guidance of 4% to 8%. As a result of these strong comps and our 15% new store growth, total sales increased 16% for the quarter and 19% for the year. For the fiscal year, we reported earnings and EPS near the high end of our most recent guidance. I will remind you that all share and per-share data has been adjusted for our first stock split, which was distributed this past Monday. For the fourth quarter, net income increased 15% to $42.1 million, and EPS increased 12% to $0.19 compared with last year's quarter. Note that earnings for the fourth quarter include an asset impairment charge of $4.9 million or $0.01 per share related to one of our new car franchises. For the year, net income increased 48% to $198.6 million, and EPS increased 46% to $0.92 per share. On to sales. Used vehicles revenues increased 21% for the quarter due to 18% higher unit sales and a 3% increase in our average selling price. Our fourth quarter increase in average selling price moderated from previous fiscal '07 quarters due to the rebound in SUVs and truck sales in last year's fourth quarter, which had been adversely affected by the earlier spike in gas prices. For the year, our average selling price grew 6%, primarily reflecting the higher mix of SUVs, trucks, and luxury vehicles compared with last year. In fiscal '07, we sold approximately 337,000 used vehicles, a 16% increase over '06. We continue to see increased customer traffic in our stores and on the Internet. This, coupled with continued improvements in execution at our stores, positively impacted sales. We are aware of the recent concerns in the investment community about the potential impact on retail auto financing of credit issues in the sub-prime mortgage market. To date, we have seen no change in the origination behavior of our non-prime lenders. In addition, sub-prime loans financed by Drive made up less than 1% our fiscal '07 sales. As we have said before, the decline in Drive-financed sales last year was offset by increased originations from our new non-prime lenders. Wholesale revenues remained flat in the fourth quarter. A 7% increase in unit sales was effectively offset by a 7% lower average selling price. This price decline reflects the challenging comparison with the unusually strong wholesale industry pricing in the second half of '06, right after Hurricane Katrina. For the fiscal year, we sold almost 209,000 vehicles through our auctions, an increase of 16% compared with last year. For gross profit, in the fourth quarter our gross profit per unit increased in every category with the exception of wholesale. Wholesale profit per unit declined by $60, again reflecting the difficult comparison with last year's quarter. We did, however, see an increase in per-unit profits in the fourth quarter compared to this year's third quarter, which reflects our normal seasonality. We are very pleased with the overall trend in wholesale gross margins, which have steadily increased over the past five years. This evolutionary improvement reflects our continued focus on refining the analytics and execution that support our buying, as well as perfecting our auction processes. Total gross profit per unit for the full year grew by 7% with increases in every category. Again, we believe that most of our margin growth is a result of the continued refinements we have made to our vehicle buying, reconditioning and selling systems. We continue to get execution improvements every year. In addition, as we stated before, we believe the relatively benign external environment reflected in general economic conditions, interest rates and the new car incentive environment benefited our sales and profits last year. On to CAF, CarMax Auto Finance also had a very good year. CAF income rose by 25% in the fourth quarter and 27% for the full year. CAF continued to benefit from our sales growth, higher amounts financed, higher loan penetration and an increase in the gain on loans originated and sold. The gain percentage increased to 4% this fourth quarter compared with 3.6% in the fourth quarter of last year. For the year, our gain percentage increased to 3.9% compared with 3.5% last year. This quarter, we increased our loss assumptions slightly on our most recent securitizations, while at the same time reducing our loss assumptions on some older securitizations. The net effect in the quarter was less than a $0.01 per share. We have continued to refine CAF's origination strategy, targeting cumulative net losses in the range of 2% to 2.5%, which we believe is consistent with prime rate financing. We remain comfortable with our decision in 2005 to allow CAF to increase its loan penetration in an effort to optimize our profitability and sales. We continually monitor our delinquencies and losses and fine-tune our originations accordingly. While the impact of CAF's credit expansion contributed to the increase in CAF income, we estimate it contributed slightly less than 1 percentage point of our overall comp used unit increase in fiscal '07. On to SG&A. Our SG&A ratio increased 10 basis points to 10.7% in the fourth quarter. If you exclude higher pre-opening expenses compared with last year and the $4.9 million impairment charge, we estimate that our SG&A percentage would have declined by 30 basis points in the quarter. For the year, SG&A ratio declined 40 basis points reflecting the leverage provided by our comp sales growth. One note on the tax rate. You may have noticed the effective tax rate for the year increased slightly to 38.6%. The adjustment to get to this higher annual rate flowed through our fourth quarter results, giving us a rate of 39.8% for the quarter. On to next year. Fiscal 2008 we expect to grow our store base by 17% with the opening of 13 new superstores. We currently project we will open four stores in the first half of the year, including one standard and three satellites; and nine stores in the second half of the year, including four standard and five satellites. We also plan to expand our car buying center test which we started last year by opening three additional car buying centers, one each in Raleigh, Tampa, and Dallas. This will bring us to a total of four car buying centers by the end of the year, including the one we opened last year in Atlanta. CapEx. Our capital spending is expected to total approximately $300 million for the coming year. This spending level reflects both the natural increase in planned store openings each year as our store base gets larger, and our anticipation of more real estate purchases to support future development in larger markets. In addition, our fiscal '07 spending was lower than projected due in part to the acquisition of some store sites pursuant to ground leases. Our fiscal '08 expectations, we expect used unit growth in the range of 3% to 9%. For the long-term, we still believe used unit comp growth will average between 4% and 8%. Total revenue growth is expected to be between 14% and 20% in fiscal '08. This incorporates our expectations for used unit comp growth, new store openings, a modest increase in our used car average selling price, and a continued decline in our new car sales. We project continued modest improvements in gross profits per unit for both retail and wholesale vehicles. We also expect CAF income to increase, but at a slower rate than our sales growth, reflecting the $13 million of favorable CAF adjustments recorded in fiscal 2007. Provided there are no significant changes in interest rates, we anticipate a CAF gain percentage slightly above the midpoint of our long-term projection of 3.5% to 4.5%. We also expect to begin generating SG&A leverage with the comp used unit sales growth at the midpoint of our comp expectation range. Our SG&A leverage will be affected by planned spending increases to support strategic, operational, and Internet initiatives along with higher pre-opening costs. Our fiscal '08 EPS is projected to be between $1.03 and $1.14 per share, representing an increase of 12% to 24% compared with fiscal '07. Our EPS estimate includes the effect of an expected 3% increase in our weighted average diluted share count, resulting in part from the recent increase in our stock price and option exercises. Also note that weighted average diluted shares outstanding for the fourth quarter of 219.8 million compared to weighted average diluted shares outstanding of 216.7 million for the fiscal year, already reflects nearly half of the anticipated 3% increase. Overall, we had an extraordinarily strong year in fiscal '07, with substantial improvement in almost all major elements of our business. While we don't expect to replicate the 48% increase in net earnings, we do expect continued healthy growth in sales, profits and earnings in fiscal '08 as we continue to execute our long-term growth plan. At this time, I will open the line up for questions.

(Operator Instructions) Your first question comes from Matthew Fassler - Goldman Sachs. Matthew Fassler - Goldman Sachs: Good morning. I would like to first focus on credit, and particularly on your recent delinquency experience with some of your more recent securitizations. Can you give us a little more color on how those are comparing with your expectations, and how that has evolved? How should we think about gains on sale or adjustments that you need to make to prior assumptions as some of the older securitizations start to roll off and these become a greater share of the overall CAF mix? Tom Folliard: As you know, the CAF expansion, our plan was to move our loss ratio a little bit higher to maximize profits at the point of origination and throughout the whole profit stream of CAF. So what you see at the end of this quarter is we didn't have anything to announce. We didn't have any adjustment to announce. So that tells you that what we have seen so far is in line with our expectations. Matthew Fassler - Goldman Sachs: I'm just kind of seizing on the point you made about having adjusted assumptions for the more recent securitizations, a little bit higher, while booking some offsetting gains, it sounds like, on some of the older securitizations. So if you are to focus on the more recent ones, then is the deviation from your expectation meaningful or modest, if you could put it in some context? Tom Folliard: It was very slight and that is why we didn't really have anything to announce. The offset was roughly probably about the same between the two. It was less than a $0.01 per share, so it wasn't anything to report. Matthew Fassler - Goldman Sachs: On the wholesale business, obviously, last year looked like a bit of an aberration. You were pretty candid about that at that point in time. I guess we are reverting to more typical activity here. How should we think about volatility in this business going forward? Do you feel that it was really just a post-Katrina bubble, if you will, in the wholesale business that contributed to that volatility? Or do you think on an ongoing basis this could be a bit unpredictable? Tom Folliard: Well, I think that the ripple effect from Katrina was somewhat unprecedented in the wholesale business; and we talked about that last year. That is one of the reasons why we thought this year might not compare as favorably. We are pretty pleased with the results that we achieved this year. But I would just tell you that the wholesale business is pretty volatile. It's pretty volatile in and of itself, but then it's also impacted by anything that happens in new car and the used car environment. What I think is unique about us, and the thing that gives us what I believe to be a huge competitive advantage is how quickly we dispose of all of our wholesale cars. We turn all of our inventory either on a weekly or biweekly basis in every single store, selling almost every single car, collecting all of that data, and then making rapid adjustments in the appraisal lane with that new set of data. So we are adjusting our estimates of the wholesale environment literally on a weekly basis. So although I think there is some volatility, I think we are better positioned than just about anybody else to manage through that. Matthew Fassler - Goldman Sachs: To the extent that there was a bit of a bulge in wholesale business clearly in Q4, it also looks like that was the case in Q1, at what point do you feel like the post-Katrina effect kind of wears off and we can start thinking about an apples-to-apples world again? Tom Folliard: I feel like now. I feel like going forward from here we probably won't have to mention anything for this year compared to last year that had anything to do with Katrina. Matthew Fassler - Goldman Sachs: Thank you so much.

Your next question comes from Scot Ciccarelli - RBC Capital Markets. Scot Ciccarelli - RBC Capital Markets: Tom, obviously you and the rest of CarMax have a lot of experience on the wholesale side of the business. What do you guys think of if you have a particular target in mind, in terms of a normalized wholesale profit on that side of the business? Tom Folliard: I'm not sure we have ever discussed that or that we really think about it in those terms. I think what we try to do is evaluate the performance of the wholesale business, but taken in the context of the other areas that we have to manage, because as I have talked about before, they are intertwined and inseparable. So it's very difficult to talk about wholesale and say, well, we are going to drive the profit up to a 22% gross profit; because that will have some impact on sales. So I feel like managing those three things in concert with each other is the challenge that we face every year. We tried to give some guidance last year about wholesale and said we didn't think we could comp the year last year. You know what we have said this year is we think we can achieve some slight improvements in wholesale. But I don't think we will see that big step function improvement in profits per car or gross profit percentage that we have seen over the last few years. Scot Ciccarelli - RBC Capital Markets: The volume was down, certainly versus what we have seen in recent quarters. Is that just a function of the natural volatility? Or is that kind of cycling through the Katrina? Is there any way to kind of measure that? Tom Folliard: Yes, that is a little difficult. I think the only way to look at wholesale is over the longer haul. I think it is very difficult to look at on a per-quarter basis because of the fluctuations. I would just say that wholesale, along with CAF, are both attached to the CarMax growth vehicle. As CarMax grows in sales and we continue to attract more consumers into the store they will buy more cars. I think that wholesale unit growth will pretty much track with CarMax unit growth. Scot Ciccarelli - RBC Capital Markets: Getting to the financing, as you guys have extended payments, which it seems like that is what happened in the 2007-1 securitizations, are there any major differences in terms of loss assumptions versus what you guys have experienced in the past or budgeted for in your gain on sale assumptions in the past? Tom Folliard: Well, first of all, in terms of extending terms, one of the things we have said in the past is a lot of the other lenders had already extended terms. We were probably actually just slightly behind the curve in terms of extending terms. But when we extend terms, we model that impact and then we book it into the securitization when we sell it. So whatever impact we think the longer term is going to have on the loss rate, we book it at the point-of-sale with the securitization. Scot Ciccarelli - RBC Capital Markets: So is it fair to assume you guys are budgeting for somewhat higher delinquency or loss rates on the most recent securitizations, because of not just moving down the FICO score range, if you will, but also because of the longer terms? Tom Folliard: I think the terms are one factor in the loss rate assumption planning process, but it is slight. Scot Ciccarelli - RBC Capital Markets: You had mentioned that you made some changes to your loss assumptions for the most recent securitization. Was there any particular one, or was it the most recent couple? Keith Browning: It was really the most recent one. Really it reflected the mix of customers that we booked in the fourth quarter. We had a lower proportion of what we call our A customers to others. So we moderated the most recent securitization, the 07-1 up to a higher loss rate assumption for that reason. Scot Ciccarelli - RBC Capital Markets: Okay, Keith, but no change to the 06-2? Keith Browning: The other adjustments were very minor, plus and minus through all the others. Like Tom said earlier, they largely offset each other.

Your next question comes from Sharon Zackfia - William Blair. Sharon Zackfia - William Blair: On Drive, I thought that they were expanding their credit parameters to you. Did that impact comps positively at all? It sounds like it wasn't even meaningful. Tom Folliard: Drive's impact for the year was around 1%. Keith Browning: And for the fourth quarter. Sharon Zackfia - William Blair: Then on the most recent securitization where you increased the loss assumptions, did you actually increase that above the 2% to 2.5% range? Tom Folliard: No. Sharon Zackfia - William Blair: On gross profit per used car, I guess I was surprised that it didn't tick up more seasonally from the November quarter given the comp. So can you talk about what you saw in gross profit per used car and why we didn't see a bigger tick up in the fourth quarter? Tom Folliard: You mean a tick up in quarter over quarter or third quarter to fourth quarter? Sharon Zackfia - William Blair: Yes, typically you see a bigger sequential pickup and obviously it was down. So just curious as to what happened there. Tom Folliard: I think we had such a strong performance in the first three quarters, margin like wholesale as I talked about earlier is something that we continuously manage on a very aggressive basis, almost weekly. It just ended up that way for the fourth quarter. There isn't any specific thing that I would point out. It was slightly below the increase that we saw in the third quarter, but not outside of what we had kind of planned for. Sharon Zackfia - William Blair: When you look at fiscal '08, do you think of that gross profit per used car up a percent or two with inflation? How do you think about that? Tom Folliard: I think we said it is going to be up slightly or modestly for fiscal '08. So we do expect to be able to drive a little bit of improvement out of there, although not at the same level we saw this year.

Your next question comes from Matt Nemer - Thomas Weisel Partners. Matt Nemer - Thomas Weisel Partners: Good morning. My first question is on inventory. It was up a little bit higher than sales growth. I'm just wondering if you could comment on the composition of your inventory right now in terms of mix or brand or age. Tom Folliard: One thing to note about inventory, the inventory is always a snapshot and it is very difficult to attribute a snapshot inventory for us in terms of what it actually means. Because at any given point in time, we will be building for our additional stores; we opened up our Tucson store today; we open up two stores in Milwaukee next week. So when we look at the percent increase of inventory year over year, part of it is our sales increase and part of it is how many cars are we building for stores that are about to open? Keith Browning: We also had three stores open very late in the fiscal year, which don't contributes sales but contribute to the overall inventory. Tom Folliard: That's right. We had three stores open in the fourth quarter as well. So when we look at our inventory increase year over year, it is about right in line, taking in all those factors. Matt Nemer - Thomas Weisel Partners: That's helpful. Then just to expand on Scot's question on the longer terms in CAF, obviously you are coming in line with where the rest of the industry has been over the last few years. But do you worry about kind of getting into the negative equity game like the domestic auto retailers? Do you worry about lower frequency of visits because you go from 60 to 72 months? Tom Folliard: We didn't go from 60 to 72. We went from 66 to 72. So we really only bumped it six months. If you look at the average life of a loan, that six months doesn't really move the average life very much. So I think that the impact on the repeat purchase or the cycle is slight at best. But the answer is, there is a lot of different factors that we expect from the longer terms, and we factor them all into our expectations. I don't really think that has much of an impact. In terms of additional risk, since CAF is a prime portfolio, then whatever risks are out there in the marketplace with lesser credit, I think CAF is a little bit more insulated because the portfolio is a prime portfolio. So I don't think we see that impact as dramatically as you might see it in some of the other ones. Matt Nemer - Thomas Weisel Partners: You are expanding your car buying test, so obviously I would think the first one worked. Can you comment at all on what happened in the Atlanta market after you opened the buying center? Tom Folliard: The car buying center in Atlanta is on six-tenths of an acre and it is one appraisal location compared with the enormous volumes that we do in Atlanta. So I would say that it worked good enough for us to go ahead and build three more; but I don't think we got a good enough read out of the one to make a long-term decision about the car buying centers, which is the reason why we are expanding the test. It's also the reason why we are still calling it a test. If you look at the other markets that we're going into, Raleigh, we only have one store in Raleigh, so it is a different type of market. Dallas, we have multiple stores, so it is similar to Atlanta. Tampa, we only have one store in Tampa and one in Clearwater. So we are also not only trying to expand the test but expand it into different markets for us as well, so we can get a read on how the car buying center works in different environments.

Your next question comes from Rex Henderson - Raymond James. Rex Henderson - Raymond James: I wanted to return to the wholesale business a little bit. In thinking about this year, I am wondering about the availability of credit for your customers in the sub-prime or in the wholesale business. In relation to that, have you seen any sensitivity of the wholesale business to the availability of sub-prime credit to finance the buyers at the buy-here pay-here dealers? Tom Folliard: Well, I would say that it is not reflected in our results, as you saw for the year. We thought we would not have the year that we had. We had a better year than we expected in wholesale. One thing to remember with our wholesale business, our average car is $4,400, the average miles are 110,000; and the average car we sell is ten years old. That is not a particularly great buy here pay here car, on average. So some of those cars that go through the buy here pay here; but some of the other ones are really just kind of the cash-and-carry car, people buying cars without financing because some of those cars are just too old and have too many miles. At a lot of the buy here pay here businesses, some of them would rather have a little bit better piece of collateral rolling down the road. So I think a portion of the business might have some potential impact, but there is a big chunk of that business that I don't think is impacted very much by it. Rex Henderson - Raymond James: Second question on the guidance. I know you don't give quarterly guidance but would you expect the normal seasonality to return in the coming fiscal year? It seems like the third quarter this year sort of broke the normal seasonal trends. Would you expect that to reassert itself in this year? Tom Folliard: I think you said it right at the beginning of your question, which is we don't give quarterly guidance.

Your next question comes from Bill Armstrong - C. L. King & Associates. Bill Armstrong - C.L. King & Associates: Tom, can you discuss the pricing environment currently, both on the wholesale side and what you're seeing from the new car incentive side, and how that may be impacting your thoughts on your '07 guidance? Tom Folliard: Well, on the wholesale side, I think we have covered that. It is such a dynamic environment, but we manage through it so quickly that we just try to set out best expectation based on the years of experience we have. On the retail side as it relates to new car incentives, it just hasn't been that volatile an environment this year on the new car incentive side of the house. Not like we saw with employee pricing or the 0/0/0 promotions that we have seen in the past. It is not that there aren't incentives out there; I just don't think they are causing the fluctuations in the marketplace that we have seen in the past. So as we have said throughout this year, it makes it a little bit easier for us to manage, but in terms of what do we think in FY '08, honestly it's very difficult to try to predict those things. So I have said this before, what we try to do is set ourselves up so that we can manage through whatever might come down the road. The expectations that we set for fiscal '08 reflect what we believe might happen this year. Bill Armstrong - C.L. King & Associates: Got it. With the wholesale auctions, I think in the past you guys talked about sell-through rates I think in the 95%. Has there been any change in the trend of sell-through rates at your auctions? Tom Folliard: No, our sell-through rate is actually higher than that, around 98%, and we haven't seen a change in that in years. The reason is because we don't allow it to happen. We sell at that rate, and we do it on purpose. We need the space, and we need to get rid of the cars. It creates a real market value on a full basket of cars. By selling them every time to the top bidder, pretty much every single car that we run through the auction, then we really kind of ascertain what the market is for those cars going forward. As I said, we then make those adjustments in the appraisal lane. So that number doesn't go down, but that is intentional. That is the way we run the business.

Your next question comes from Edward Yruma - JP Morgan. Edward Yruma - JP Morgan: Some of your competitors in the new car market have complained about geographic weakness, particularly in California. Have you seen dispersion in your performance based on geographies? Tom Folliard: You know, that kind of goes along with the quarterly guidance question. We don't talk about individual markets or individual stores. Edward Yruma - JP Morgan: Just to touch again on the Charlottesville concept, as I understand it, you are not rolling out any other small market stores in fiscal '08. Is that correct? Tom Folliard: That's correct. Edward Yruma - JP Morgan: Are you willing to provide any kind of initial color on whether it is ramping as you had expected? Tom Folliard: Yes, I will give a little color. We don't have any plans to do it in fiscal '08; but it's not because of anything that has happened with Charlottesville. Charlottesville has only been open for a few months. We are fairly pleased with the results and my expectation is we will build some more small market stores. It is a little bit of a lead time for us to get any store open. Car buying centers are a little bit easier to get open. It is smaller; the zoning is easier; generally we are finding a gas station on the corner that is up for sale and closed down. Whereas a small market store, we want to be the same type of high-class retail that we look for in one of our regular size stores. So I expect to open some more small market stores; we just didn't get any done for this year. I would look at that as the same way I look at the car buying centers; we would not make a long-term decision off of the results of just that one store.

Your next question comes from Chris Struve - Deutsche Bank. Chris Struve - Deutsche Bank: You talked about raising the penetration in CAF. Do you guys have a long-term target? If I am not mistaken, you have been about 40% recently. Do you have a long-term target for that? Tom Folliard: That is about the target, right there, and that is our long-term target. I think we have run right around that number for a number of years. You know, that is 40% of sales. It is a big chunk of prime sales. I think it is roughly 80% of prime sales. We always want to have another option for our customers available on the prime side, so that we keep ourselves competitive in the marketplace. Chris Struve - Deutsche Bank: On the service business, it looks like over the last couple years the service business per store has declined fairly dramatically. Is that a function of the maturation of the store base or are there other factors involved? Tom Folliard: This last year, it is more of a function of 9% used unit comps and the growth in the existing stores. We have always talked about prioritization of our tech and operation resources in the stores. We have always said that used car sales come first. That is really just a little bit more of a capacity issue, which we need to continue to invest in operational efficiencies on the reconditioning side to create additional capacity, so that we can expand on the service business. But it is more a reflection of prioritization of what has been going on in each of the existing stores. Chris Struve - Deutsche Bank: It looks like your warranty per unit has basically been flatline for years. Are you guys seeing any impact from the new warranty programs out of the Big Three extending their warranties into what would be potentially CarMax's timeframe? The three to six-year time frame? Tom Folliard: I don't think we have seen any impact at all. We sell warranties the same way we sell cars, which is a flat, fixed price. So we're looking at the penetration rate of the amount of cars that we sell. So how many do we attach a warranty to? Then that flat commission kind of flows through there. We are right on plan, and we haven't seen any impact from anything that the Big Three have done.

Your next question comes from Jordan Hymowitz - Philadelphia Financial. Jordan Hymowitz - Philadelphia Financial: Congratulations on a good quarter. I have two questions. One, on the used vehicles sales line, when you calculate the margins it has been trending down usually throughout the year. Why is the fourth quarter weaker than the earlier part of the year? Tom Folliard: I think that probably just reflects our normal seasonality of the flowthrough throughout the year. When we come out of the spring and summer peak selling season, we manage our inventories down specifically into the third quarter. Then when we come into the fourth quarter, it is kind of like a tweener quarter for us. We roll into the first and second quarter; it is the rebound quarter coming out of the decline in sales that we see from seasonality in the third quarter. Then we usually see it strengthen in the first and second quarter. So I don't think that that is that unusual for us. Jordan Hymowitz - Philadelphia Financial: You say you changed some assumptions on the older pools; but yet it was only on the newer pools that you said you raised assumptions. So I am just a little confused. Do you specifically take any impairments on pools that have already been in existence or just on the more recent pool you raised the loss assumption? Tom Folliard: Every quarter, we look at every single pool and every securitization and we make the adjustments necessary based on the information that we have at that point, and then the predictability of all of those going forward. When you see us make an announcement in a quarter for an adjustment, it is the result of all of that. Then, this quarter, we just didn't really have anything to report. Because that generally means that things are about what we thought they would be. Your question about the specifics, a couple of the older ones, the assumptions went down just slightly and this last one, the assumption went up just slightly. But the offset was, as I said, less than a $0.01 per share and nothing really to report. But that is what we do every single quarter, is we reset every portfolio. Jordan Hymowitz - Philadelphia Financial: Can you give the gross numbers for both? So even if they net out to zero can you give like the gross write-ups and gross down, or will that be in the Q or K? Keith Browning: The range of our loss expectations is in the K. Tom Folliard: The range will be in there; but again, the amounts are insignificant.

Your next question comes from Hardy Bowen - Arnhold and Bleichroeder. Hardy Bowen - Arnhold and Bleichroeder: Tom, is the Internet traffic ticking up more off of what we have seen in the last six months, or not? Is there anything that we're doing that is new that is clicking, or not particularly? Tom Folliard: Well, we have talked about the continued enhancements we have made on our website and on the Internet. I mentioned that we would continue to invest in those initiatives this year. So that in terms of our focus, our investment, and our thoughts about the importance of the Internet going forward, none of that has changed. If anything, we have enhanced that a little bit. In terms of what we have seen from traffic and the impact of the changes that we made during the year, I think the biggest thing that we have talked about is going from one picture per car up to nine. That really didn't happen all at once. It flowed through throughout the entire year. I think in the next couple of months, we will start to lap that a little bit. But that is probably the piece that we have seen the most. Then in terms of what impact did that have on our sales, it really is a mix of Internet traffic, store traffic, and improved store execution. So it is a combination of all three of those things. It depends who you talk to. You could easily make the argument that our enhancements on the Internet are one of the reasons why we are driving incremental traffic. Then there is also an argument that if you handle the Internet and your enhancements properly, then not only will you get increased traffic, but you will get increased traffic of customers who are more likely to buy. So it's very difficult to measure those three things, and they really go together. As I said, we are pretty pleased with the results. We feel like continued investments and putting some additional resources on the Internet is the right thing to do. Hardy Bowen - Arnhold and Bleichroeder: I guess after what has happened in the business in the last year, it really looks like a terrific business as it always did, I guess. But is there some idea that we want to speed up the expansion rate, go into more big markets? I guess we are going into Minneapolis, as well as San Diego? Tom Folliard: On the first part, Hardy, we have always all thought this was a terrific business from going back 13 years, so thanks for recognizing it. In terms of our expansion, we don't have any plans to change that 15% to 20% store growth. I really and truly believe that a sustained growth plan of 15% to 20% is one of the reasons that we can continue to drive that 4% to 8% average comp sales growth number for a very long period of time. I think it would be a trade-off to go to 20% or 25% on store growth off of comp sales, because of basically pulling experience and talented people out of our stores. What you see now from us over the last four or five years is a very consistent delivery of that growth plan. What you see baked into our numbers now is continued investment in making sure that we have enough people to deliver on that growth plan. So in our SG&A we have lots of people working, lots of people on training, lots of people who are really doing jobs that, if we were not growing the company, we would not need those people. However, we continue to invest and we have built a base so that we can sustain that growth plan for a long period time. Hardy Bowen - Arnhold and Bleichroeder: Mix of stores, we're doing a lot more satellites this year, but as we go forward? Tom Folliard: We think that number is going to be about 50-50, because even when we go into a bigger market, you're going to see some of the stores are going to be satellite and some of the stores are going to be full-size stores. I will tell you, a great example is Milwaukee. We are going to Milwaukee, we are opening two stores next week. They're both satellites. The reason they're both satellites is because we have the capacity to do the production out of our Kenosha store. So the whole hub-satellite thing is largely driven by real estate availability in the markets that we go into. We are less concerned about which store is a hub and which store is a satellite. We're more concerned about modeling the proper sales estimate out of each of those stores and then making sure that we have the amount of capacity necessary in that market to support those sales. So you would never have thought we would go to Milwaukee with two stores and they would both be satellites. But because we have our reconditioning capacity in our Kenosha store, we're going to utilize up all of that capacity first. I think that is the best way to grow the business.

Your next question comes from Brad Thomas - Lehman Brothers. Brad Thomas - Lehman Brothers: A question on SG&A, if I may. Looking back to a point about a year ago, I remember some of the original thoughts for this past year had been that the business was reaching a point in its maturation where more leverage was going to be achievable. Certainly you achieved that in the past year, and it does sound like your expectations going forward are for some leverage in this coming year. I was wondering maybe if you could just talk a little bit about where the SG&A came in relative to your expectations, given that you did put up such a great comp over the last year; and how you are thinking about managing SG&A going forward. Tom Folliard: I think this year SG&A was about probably in line with what we would have predicted with the comp sales that we had for the year. As we talked about next year, we said we would see some SG&A leverage at the midpoint of the range that we set, which is 3% to 9%. So the slight SG&A leverage that we expect there is also taking into account the strategic investments we are going to make in the different areas that I mentioned earlier: the Internet, our continuing to improve our quality, and just continuing to make investments in the business strategically so that we are factoring in the health of the business over the long haul. Brad Thomas - Lehman Brothers: Then, as we maybe think out a little bit further over the next few years, is it fair to continue to believe that the model has reached that point where you could potentially continue to get more SG&A leverage going forward? Tom Folliard: Our estimate is if we can continue to grow the business with the ranges that we have set, the years when we have the comp sales number in the mid to upper level of the long-term range you will see some SG&A leverage. And if we have some years where it is below that and we can't cover the percent that inflation carries through SG&A, then I think you will see some years where that might not go quite as well. So it is largely driven by comp sales. Brad Thomas - Lehman Brothers: Just one more follow-up on the credit side of the business, if I may. Based on your conversations with some of your financial partners, should we happen to see some spreading of the weakness that we have seen among the sub-prime mortgage consumers, what is your initial thought on what the response could be from your partners? Do you have a sense that they could be proactive in trying to tighten some of their standards? How much negotiating leverage do you think you have in trying to keep standards where they are? Tom Folliard: Because we talk to our partners all the time, and we have said this a number of times and it is still true today, the slice of business that is CarMax for our partners, that portfolio of business continues to outperform other similar slices of business that they book from other car dealers. We haven't seen any behavioral change at all related to anything to do with sub-prime. In fact, most of our nonprime partners are trying to get more business from us. So their behavior is moving in the other direction that you might think.

Your next question comes from Seth Basham - Credit Suisse. Seth Basham - Credit Suisse: Regarding your used vehicle acquisition, has the mix changed at all over the past quarter from auction versus buy at your locations? Tom Folliard: Not any different. We have some seasonality in that mix, so we have said that we get more than half of the cars that we retail we buy through the appraisal lanes. Other than some seasonality, we haven't really seen much of a change. Seth Basham - Credit Suisse: What about conversion rates at your appraisals? Tom Folliard: We don't generally talk about that much in terms of specifics. We said we buy roughly one out of every four cars that come through the appraisal lane. We have also talked about having improvements in that area over the last several years. Our expectation is we can continue to tick that up slightly over time. But there wasn't anything dramatic or anything to talk about in terms of that change. Seth Basham - Credit Suisse: Secondly, looking at 2008, you mentioned ASPs are expected to increase modestly. What is driving that modest expectation versus relatively high ASP increases in the last past two years? Tom Folliard: Well last year, this past year that just went by in particular, it was going on top of the year prior when we saw a dramatic mix shift away from SUV and luxury cars; really anything with a V8 in it. So we sold a lot more compacts last year. This year reflects a return to what I guess you would consider a more normal mix for us, which is a pretty heavy weighting of SUVs, because that is what sells in the marketplace. We saw that moderate some in the fourth quarter because I think we are not lapping quite the change in inventory that we saw the year prior. So when we look at this next year, we are not anticipating anything like that to impact us this year. We think 3% is roughly what we would see if we have a normalized mix throughout the year. That would be roughly what we would see in the change in ASP. Seth Basham - Credit Suisse: Finally, on CAF, could you maybe discuss a little bit more what you found from your tests when you're looking at the value stipulation? What has worked? What has not worked? Are you going to make any changes in 2008 that are significant? Tom Folliard: I think what we have found has worked, and what you have seen has worked, as CAF has done exceptionally well from a profit standpoint for the last two years, we continue to manage the entire business, again, as a prime portfolio so that the securitizations , we get great rates on those when we go and sell them. When we look at this next year coming up, we don't have anything to talk about of any significance in terms of a new scorecard, or a change dramatically, an expansion. I think what you will see out of us is just a continued refinement of the entire way that we run the CAF business. So that is how we do originations, what percentage of total cars that sell through CarMax do we book at CAF, how do we manage the interest rates so that we can get the gain percentage that we're targeting. But other than those normal things that we're doing all the time and continued refinements, there is nothing dramatic coming up this year.

Your next question comes from James Ellman - Seacliff. James Ellman - Seacliff Capital: Just drilling a little bit on some previous questions, could you give us a little bit more detail on the dollar amount of writedowns and in which pools those are taking place? Tom Folliard: We have given all the detail we are going to give on that. There is just nothing to talk about. It is not a large amount. It is not a significant amount. When we have something of significance, we will report it and we tell you where it came from. James Ellman - Seacliff Capital: Can you just tell us about trends or direction? I imagine that is probably significant, as we are trying to watch the pools. Tom Folliard: The net, it was less than $200,000 of all of that. I am sorry, I didn't hear your question. James Ellman - Seacliff Capital: Just the trends, have they been increasing? Tom Folliard: Which trends? James Ellman - Seacliff Capital: In terms of the writedowns that you're taking. Tom Folliard: Well, if you look at our history over the last couple of years, what we have taken is gain hits over the last couple years. So these last two quarters, not having anything to report means that we are performing along with our expectations. So the trend for the last two quarters is we haven't made an announcement in either direction.

At this time, there are no further questions. Tom Folliard: Thank you very much. We will talk to you after the first quarter.