Good morning. My name is Denise, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the CarMax FY2018 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. Thank you. I would now like to turn the call over to Katharine Kenny, Vice President, Investor Relations.

Thank you, and good morning, everyone. Thank you for joining our fiscal 2018 third quarter earnings conference call. On the call today as usual are Bill Nash, our President and Chief Executive Officer; and Tom Reedy, our Executive Vice President and CFO. Before we begin as usual let me remind you that our statements today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that can affect these expectations, please see the company’s annual report on Form 10-K for the fiscal year ended February 28, 2017 filed with the SEC. I know you all remember to ask only one question and a follow-up before getting back in queue. We appreciate it. Bill?

Thank you, Katharine, and good morning, everyone. As usual, I’ll start-off by talking about our quarterly results, then I’ll turn the call over to Tom to review financing, then I’ll update you on our initiatives. Our used unit comps for the third quarter increased by 2.7% and total used units grew by 8.2%. Used unit comps were driven by the effects of hurricane Harvey and Irma, along with higher conversion in our stores, partially offset by lower traffic. Excluding the hurricane impact, comps this quarter would have been essentially flat. Our website traffic grew in the third quarter by 19%. This is a result of the continued investment in our online customer experience, including SCO and additional functionality. Gross profit per used unit once again remained consistent at $2,148 compared to $2,155 in the third quarter of last year. Our wholesale units grew more than 9% year-over-year in the third quarter. In addition to the expansion of our store base, this growth was supported by the favorable depreciation environment we saw through most of the quarter. As a result, we were able to provide seasonally strong appraisal offers, which we believe led to a higher overall buy rate. Gross profit for wholesale unit also increased this quarter to $933, compared to $900 in last year’s third quarter. Again, we believe this was largely due to the more favorable depreciation environment. Before I turn the call over to Tom, let me cover our sales mix, SG&A and store openings. As a percentage of our sales mix, zero to four-year old vehicles increased to 81% versus 78% in last year’s third quarter. As a percent of sales, large and medium SUVs and trucks was 26%, which is down somewhat from the second quarter, but similar to last year’s third quarter. On SG&A, expenses for the quarter increased about 12% to $400 million. This represents a year-over-year increase of $81 per unit in SG&A. Several factors impacted SG&A growth, including the opening of 21 stores since the beginning of the third quarter of last year, which represents a 13% growth in our base and an increase of $8 million or $42 per unit, approximately half due to higher share-based compensation expense and half related to our accrual for incentive pay. Remember last year there was no accrual in the third quarter. As we previously discussed, we continued to invest heavily in technology and digital initiatives to improve the customer and associated experience. Lastly, during the third quarter we opened five stores, one in a new market in Tyler, Texas and four others in existing markets, including Philadelphia, Las Vegas, San Francisco and Seattle. In the fourth quarter, we will open four stores, two are in new markets for us, Myrtle Beach, South Carolina, which opened earlier this month and Portland, Maine. The other two will be in our existing markets of Boston and Denver. Now, I’ll turn the call over to Tom.

Thanks, Bill. Good morning, everyone. With regards to sales mix by finance channel, CAF net penetration decreased modestly to 44.2%, compared to 45% in last year’s third quarter, Tier 2 represented 15.4% of sales compared to 17% in last year’s third quarter, Tier 3 from third parties grew to 10.8% of used unit sales compared to 9.7% last year and similar to prior periods this year, sales where customers paid cash or brought their own financing also increased relative to last year’s third quarter. The allocation of sales across our lending channels was for the most part driven by the mix of credit applications. We continued to see growth in applications across the credit spectrum. It was more pronounced at the higher and the lower ends. Also, we did observe some weakness from one of our lenders in the Tier 2 space. For CAF, net loans originated in the quarter rose 8.6% year-over-year to $1.5 billion. This was due to CarMax’s sales growth and an increase in the average amount financed, partially offset by the lower penetration. CAF income increased 15% to $102.8 million, driven by a 10.4% growth in average managed receivables and a lower loss provision, which was partially offset by slight compression in the portfolio interest margin. Total portfolio interest margin was 5.7% of average managed receivables, compared to 5.8% in both the third quarter of last year and the second quarter of this year. For loans originated during the quarter, the weighted average contract rate charged to customers was 7.7%, compared to 7.3% a year ago and 7.6% in the second quarter. The ending allowance for loan losses was $128 million or 1.11% of ending manage receivables, up slightly from 1.10% in the third quarter of last year, but down sequentially from 1.15% in Q2 of…

Thanks, Tom. Now, I want to take a moment to provide you with an update on a few strategic initiatives around our innovation efforts, specifically developments in technology and online digital capabilities. The focus with technology is making it easier, faster and more efficient for our associates to provide an exceptional customer experience. While our legacy systems have served us well over the past 24 years, we’re focused on leveraging new technology with a mobile first mindset. On the technology side, we are implementing a new enterprise-wide customer relationship management or CRM platform to develop a more seamless and personalized car-buying experience. The CRM platform provides sales consultants with a unified view of our customer shopping and selling history right at their fingertips. As we continue to evolve the platform, it will provide our sales consultants with even more visibility, including the customer’s online research activities. The platform is currently in 100 stores and we plan to complete the rollout to all stores by the end of the fiscal year. The rollout has been a success so far and we’ve received great feedback and support from our sales consultants. Another example of new technology is our mobile appraisal platform for buyers to use when preparing an offer for a customers’ car. Historically, our buyers write down all the information they need to assess a vehicle and prepare the appraisal offer. With a new mobile appraisal platform, buyers use a handheld device to upload all the information in real-time at the vehicle. This makes the process easier and faster, and it should improve accuracy. The new technology has been well-received by our buyers. We have already rolled out the capability to more than 100 stores and planned to roll it out to our remaining stores over the next several months. Regarding…

[Operator Instructions] Your first question comes from Sharon Zackfia with William Blair. Your line is open.

I guess question on the non-hurricane related markets in the quarter, when you think about the slowdown in the comps that you saw, I mean, is there anything that you would attribute that to? And then, kind of as a corollary, now that subprime is getting a little bit better as a percent of the mix, do you expect that to be a bigger driver as we get into the higher subprime seasons in the fourth quarter and first quarter?

Yeah. So, Sharon, on the first part of the question, the slowdown in the comps in the non-impacted hurricane markets, I tell you, I would point to something that I talked about that was a benefit for the wholesale business, which was the depreciation environment. This was the first quarter this year where acquisition price actually went up year-over-year, because we did not see the normal depreciation. And I think part of the reason we didn’t see the normal depreciation for this time of year is because of the boost of the hurricane replenishment of those vehicles, which caused the overall values to hold up stronger than what they normally did. So, I think, that obviously, with continued pressure from new car incentives, I think, it’s probably a combination of those things. And then, I’m sorry, what was your second question?

The…

The subprime, Sharon?

Yeah. So subprime looks like, I mean, it’s the second quarter that’s it’s been improving on a year-over-year basis as a percent of the mix, and seasonally, that’s just a more important business as you get into tax refund season. So just kind of looking for some perspective on how excited you might be that that could be more of a driver of comps going forward?

I don’t know if excited is the right word, because we are obviously more concerned about the denominator and overall growth would be best for us. But I can give you a little bit of color on the subprime. As I mentioned in the prepared remarks, we saw the volume of customer applications being strongest at the highest and lowest ends. So, I think, at least in our system that says that more customers at that low end are applying for credit than we have seen in the past. And another piece of puzzle from the perspective of the subprime penetration is, we have seen this quarter and in some last quarter as well an uptick in their conversion of the applications that they see, meaning conversion to sale. So there’s been a modest uptick in the performance of those subprime lenders. I don’t know how that persists, but obviously, after a period where we saw them declining several quarters ago, it’s encouraging.

Thank you.

Your next question comes from Matt Fassler with Goldman Sachs. Your line is open.

Thanks so much and good morning. Two questions, first of all, the follow-up on the answer that you gave to Sharon’s, the sales momentum in non-hurricane markets. You spoke about the rising wholesale price environment and the change in depreciation dynamic. Are you suggesting that perhaps you held back as prices rose and would that suggest that you deliberately walked from some share for a moment in time that you thought wouldn’t be profitable or do you think that the market more broadly slowed down because the new used value equation clanged this quarter?

Yeah. Matt, I think, it’s more of the market dynamics have just slowed down because of the depreciation environment. So it’s the -- that’s the second part of your question?

Thanks. That’s helpful. And then my follow-up, on wholesale volumes, you talked about your buy rate moving up given pricing dynamics. Do you think that you have adopted or adapted, I should say, to the pricing environment from a wholesale purchasing perspective differently than the market in this case as well, did you read it differently, was there some that you saw that enabled you to be more aggressive or similarly, was this kind of a market-wide dynamic in your view?

No. I think, what you have to do is you have to think about it kind of over a year-over-year basis. And so last year, if we saw the normal seasonal depreciation for this time of year, that we are not speculating on where the market is going, we kind of trail the market and adjust as it goes down, we follow it down and so it puts more pressure on the margin, and when your offers are going down, it impacts your buy rate. In this quarter, where you don’t have the depreciation, any time you have more of a flat depreciation market or an appreciating market, it makes a little bit easier to maintain your buy percent, because you are giving offers -- higher offers to consumers.

Understood. Thank you so much, guys.

You’re welcome.

Your next question comes from Michael Montani with MN Retail. Your line is open.

Hey, guys. Good morning. Thanks for taking the question.

Good morning.

Good morning.

Just wanted to ask first off on a more philosophical level, but when you think about the tax reform impacts, can you share any thinking around the potential to reinvest into either sharper pricing or even further enhance store level service versus increasing buybacks or dividends, just trying to think about how you guys might spend that potential windfall?

Yeah. Michael, well, we don’t give guidance. We can say that as this capital materializes, we will carefully consider all of our opportunities and utilize the capital in ways that we believe will be in the best interest of the business, our associates, our customers and our shareholders. And like I said, so once it materializes, we will be evaluating that and I think there’s a lot of different opportunities we could look at.

Yeah. Mike, we can add a little color to that also. If you look back at our growth plans and our history, capital availability has not been a gaining factor for us in our decisions regarding growth and investing in our strategic initiatives. We are at the pace that we are at because we want to make sure that we can execute successfully on the growth and that we have the bandwidth to focus on innovation. So that’s always going to play into our thinking with regard to our pace of growth and how fast we move on things as well.

That’s great. And if I could just follow-up on the innovation comment, there’s a lot of work that you all have been doing with online financing, search engine optimization and then also home delivery tests. So, I guess, I am wondering if you can just give us an update on kind of the latest learnings across the Board and just what you are seeing out there to continue to win share?

Yeah. Again, I think, we’re approaching this from trying to make sure that we meet the customer on their terms. So whether they want to come to the store, not come to the store, do a combination of them in between the two, we want to make sure that we’re prepared and you hit on some of the -- when I think about online financing, that’s a capability that we are allowing the customers to do. SCO is, I think, about the growth, like our web traffic growth, a big percent of that growth, a large percentage of that growth is coming from non-brand SCO. And SCO is something that we look at every single day and it’s something that continues to be some -- we’ll continue to focus on every day, because the search engine algorithms are changing. We made a lot of progress there, everything from helping the search engines, find our pages, making sure that they can see the content on the pages, optimizing the content, adding thousands of new pages on there. SCO is going to be -- into the future is going to continue to, I think, provide benefits, I think there’s a lot of opportunities still there. So, I would say that we’re going to continue to invest in all of these things. The home delivery, when I think about home delivery, it’s really the capability that we have been building, even though we haven’t expanded the home delivery test beyond the Charlotte market, we absolutely are progressing that forward with things like online financing, with online appraisals, driving more traffic to the website. So, I feel good about the pace with which we are making the change and we’ll continue to invest in those digital experiences.

Thank you.

Your next question comes from Craig Kennison with Baird. Your line is open.

Good morning and thanks for taking my question. I am curious if you’ve mapped your consumer income profile, if you will against the revised tax brackets and the bill that the President may sign soon and just whether you see tax reform as a catalyst for the typical CarMax consumer?

Yeah. No. We haven’t looked at that, Craig. And truthfully with the bill just signing and it hasn’t even been signed, actually it hasn’t even been signed by the President, but just passing. That’s something that we can certainly look at going forward. But we haven’t looked at that up to this point.

Thanks. And as a follow-up, in the hurricane markets, are you seeing any excess traffic still or is that all subsided?

Look, I am not going to talk specifically about traffic patterns in any one market. But I will tell you is the further you get away from the actual event, the benefits vain and we have certainly seen that since the actual hurricanes.

Thanks for taking my questions.

Sure.

Your next question comes from Brian Nagel with Oppenheimer. Your line is open.

Hi. Good morning. Thanks for taking my question.

Good morning, Brian.

Hi, Brian.

So, first question, again just a follow-up on the used car sales and recognizing that you don’t give guidance, but as we look into fourth quarter and the issue you articulated, the depreciation or pricing that seemed to be a headwind ex-hurricanes here in fiscal third quarter. Should -- as we look into the fourth quarter, will that remain a headwind or do you see some type of abating -- would it start to fade? And then my follow-up question, I guess, bigger picture, we talked a lot about the digital initiative, you guys are obviously very focused there, but is -- could we -- given now that these initiatives have been placed for a while, is there a way to quantify what impact they started to have on sales? Thanks.

Okay. So, Brian, on your first question, you got it right, we don’t give guidance, so -- for the fourth quarter. But what I will tell you about the depreciation environment, at the end of the third quarter we did start to see some depreciation at the end of the third quarter. As far as the digital initiatives, I am not going to speak specifically about any one initiative and what we think it’s bringing to the bottomline. If I think about our comps, I think it is the product of a lot of things that we are working on, both the digital initiatives, but also execution in the store. And I can’t point to one specific digital initiative that is leading to the bulk of the comps. It’s just not that way and it’s -- I think it’s a combination of all the different things that we are working on that has produced the result.

All right. Okay. Thank you.

Thank you, Brian.

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

Hey, guys. Scot Ciccarelli. Bill, I know you have been asked a number of times about some of the sales cadence and sales results, but one more I wanted to throw in there. Is there a way for you to estimate the magnitude of a negative impact from the rising vehicle values, maybe by tracking your monthly or even weekly cadence against the changing wholesale price environment?

Yeah. There’s no way to really to pinpoint that down. As I talked about in the opening remarks, I mean, I believe that that’s absolutely having an impact, but to a degree it’s really hard to pinpoint.

Okay. Then just a quick follow-up then, you did mention a negative impact from one of your Tier 2 providers, any chance you can help size that impact and then is that expected to remain a drag into the following quarter?

I -- hey, Scot. I am -- I can’t really talk about what we are going to see in the following quarter, because it hasn’t happened yet. But I can give you a little color, Tier 2 and Tier 3 overall, there’s a number of things that have been going on here. The volume that Tier 2 you are seeing has been much more flattish, as I said, since the growth of applications has been more pronounced at the high and low end. So that’s planning it a little bit on the Tier 2. And then, as I did mentioned, we have a lender that has -- had a significant pullback. In the Tier 2 space we expected that every lender we are partnering with is going to bring some incremental value to the table. So if we see some weakness in one of the lenders, the incremental value that that lender is -- has been providing is likely to trickle down to Tier 3 and see them, and probably, have a little bit less conversion there. So we would expect that we are feeling some impact on sales. And it -- it’s an issue that has been percolating for the last several quarters. I can’t really say how long it’s going to be. But the conversion in Tier 2 is down a little bit, because of that and then so for a combination of the volume, the conversion and that one particular lender, I think, Tier 2 is a little bit is weaker than it has been historically. And conversely, we are seeing Tier 3 up a bit, because their performance has been a little bit stronger, and I think, we are seeing some trickle down from Tier 2 into that space, that we wouldn’t have otherwise seen.

Okay. Got it. All right. Thanks guys.

Your next question comes from Seth Basham with Wedbush Securities. Sir your line is open.

Thanks a lot and good morning.

Good morning, Seth.

Hi, Seth.

My first question is on web traffic, growth accelerated there, your comps decelerated a bit. Can you speak to what you are seeing in terms of the quality of that traffic growth and how online lead generation is trending?

Yeah. So, we are pleased once again with our website growth, if we look at individual leads, different lead types, so for example, appointments or holds, online financing, prequalifications, different lead types convert differently. So as the growth of those -- the traffic growth that we have seen, it’s producing similar lead types we saw before, but on any given quarter, the mix of which ones are coming in can change, which will -- any given quarter can change the actual conversion, the overall conversion of those. I would tell you, I would much rather have that traffic coming in, have that lead coming in, because that’s an area that we can or an opportunity that we can continue to execute better on. So I am pleased with the growth. We haven’t seen a real decline by lead type in conversion, but it just depends on the mix of leads that are coming in.

Got it. So the biggest thing to clarify this quarter is that you had a shift in the mix of leads coming in as opposed to conversion on each individual type of lead?

That’s exactly right. That’s exactly right.

Thank you.

Sure.

Your next question comes from John Healy with Northcoast Research. Your line is open.

Thank you. I wanted to ask just a bigger picture question on store traffic. It’s clear you guys are doing well with innovating the business from a technology and a customer, what I say a conversion standpoint. But is there way or any initiatives underway to kind of maybe drive the older model of just getting people into your stores and driving the awareness of the CarMax brand? Is there anything we should expect in calendar 2018 to maybe try to reinvigorate that kind of store level traffic, people coming to you, because they know you in the community and know you provide a good value, those types of shoppers?

Yeah. John, I’ve talked about this before. I am really trying to get people to think about the business a little bit differently. Historically, we have always focused on store traffic. But nine out of 10 of the customers that buy from us, they start by hitting one of our digital properties. So the way we think about is not just store traffic, but web traffic, leads, quality of leads. It’s really how many opportunities do you have to turn a customer or turn someone into a customer. There may be some things that we do digitally, for example, online finance prequalification that may prevent people from coming into the stores. So, for example, somebody goes on and gets prequalified and they realize they can’t get financing, and therefore, they don’t come in the store. That’s actually a good thing. Now that would drive store traffic down, but it keeps that person from coming in the store and utilizing a sales consultant’s time. So we’re really looking at how many engagement touch points do we have and how are we doing with that. So as far as specifically driving just store traffic, I think, about it more holistically and think about, okay, let’s start at the upper end of the funnel.

Okay. Fair enough.

Yeah. And, John, the other thing is, I would tell you, we still haven’t, if you think about our digital spending, think about advertising as a whole, we still spend the bulk of our advertising on traditional like broadcast TV, radio, which is really an awareness brand building. So we will continue to do that, about 30% of our ad spend, I’m sorry, it’s probably more in the high upper 30%’s of our advertising spend is more digital. And I would think that we’re going to kind of maintain that mix for a while.

Fair enough. And then just a follow-up question either for you, Bill or Tom, when you think about tax reform, one of the things I have been thinking about is highly competitive industries and I am not sure necessarily where to place the used auto business in that kind of spectrum. But do you think this is an industry that holds on to that absolute profit benefit associated with tax reform or do you think it’s likely that maybe over a multiyear timeframe that the gross margins or the operating margins in the business kind of adjust and you don’t necessarily hold on to that that savings?

Yeah. John, I don’t know to be able to speak to the whole industry and what they’re going to do with that available capital. Like I said earlier, we’re going to evaluate it at the time it starts to materialize, and, certainly, one of the things that we will be looking at is from a competitive standpoint, how are we looking. But, again, that’s just one of the factors that will be considering as this money materializes.

Fair enough. Thank you, guys.

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

Good morning, guys. I just had a question sort of about the short-term and long-term and thinking about the used price versus the resids on lease agreements and it does seem like in the third quarter with the relative increase in used vehicle pricing, relative to expectations, that may have floated closer to resids or maybe even above resids, but as we go forward and we see the increasing supply, used vehicle pricing might come under pressure and those might go back below resids. So I am just curious, I mean, there’s this thesis out there that dealers will hold on to these vehicles coming back off of lease, which is what appears to happen in the third quarter to some degree, on your third quarter anyway. How you think about that going forward and is this temporary impact that you sort of saw in the third quarter sort a result of this? I am just trying to figure this stuff out?

Yeah. John, I’ll say, I think, the wholesale market is very effective and very efficient. And when you see something like the dynamics of the third and the demand goes down, it will quickly write itself. If dealers aren’t selling vehicles, they are not going to be coming and buy those cars. Dealers can only hold out so long not selling cars and not bringing cars to the auction. So, what I can say is from past experience is, when we’ve seen things like this, it eventually, because the market is efficient, it eventually turns around.

And that should ultimately result in better same-store sales comps for you, at least that’s my opinion, I won’t put words in your mouth?

It should -- it should absolutely result in more attractive used car pricing and drive the pricing down and of course, when we have more attractive pricing from the acquisition standpoint, we can pass that to the customers and that becomes even that much more of an attractive deal versus a new car.

Yeah. And what we are hearing from the auction is that there’s a lot of institutional cars waiting in the wings that were sort of skittish. Just -- and just sort of one follow-up, when we think about the SG&A factors, it inflated to, I think, up $81 per unit, you didn’t cite technology spend as a sort of inflationary factor there. Are we at the point where your tech spending is sort of run rating similar year-over-year and there’s no anticipation of a significant step up that would on a like-for-like basis inflate SG&A going forward and if anything it may tail off over time?

Well, over time, I think, the growth will -- the growth of that spend will absolutely tail off. If I think about SG&A, we had a fairly sizable increase in compensation and benefits, part of that, we highlighted stock-based comp and the bonus accrual, but part of that is also the folks that are working on our strategic initiative. They are embedded in there and the other overhead costs, that’s where some of the costs are showing up. And like I said all along this year, this is a heavy investment for us. This is millions of dollars. But what we try to do is not make it all incremental and we -- I think we have done a good job of reprioritizing, stopping things, repurposing people. So, what I would tell you is, the investment is baked in here. It’s just within a couple of the different breakout lines on SG&A and I think it’s offset by some of the things we decided not to do that aren’t surrounding our initiatives. The other thing I’ll tell you is, this year is going to be a heavy investment and depending on how this year ends, I would expect next year we’ll continue to invest. I talked briefly about the technology changes. We have made a lot of improvement on the customer experience side and added functionality, and now we are really doubling down on the technology that gives our associates a world-class experience. And as I think about those two things, I cited both the CRM and the mobile appraisal app for our buyers. I am pleased, I mean, those are two things that pretty much have, we started the rollout this year and we’ll get one of them completely rolled out by end of the year and the other one will be soon after the end of the year, and that’s couple of facets of our business and we still have other facets to the business that we want to tackle as well. So we are on a little bit of a journey here.

Okay. Thank you very much.

You’re welcome.

Your next question comes from Rick Nelson with Stephens. Your line is open.

I’d like to get your view on third-party lead generators. What proportion of sales come through these lead generators and it’s had an opportunity?

Yeah. So, first of all, our primary focus is on our website. We’re trying to get the customers come to our website. There’s probably 16 million to 17 million hits coming through there. Having said that, we want to continue to use third-party generators, in the third quarter we had vehicles on CarGurus, Edmunds, KBB, to name a few. And the way we think about those is they are complementary to our website. We also look at them constantly to make sure that it’s good economic decision and what we are paying for those leads is way more than offset by the sales that we are actually getting. If we talk about the digital spend, as I talked earlier, as part of our overall advertising, third-party lead generators or search engine marketing that is a majority of our digital spend. And we’ll continue to put dollars there. It will fluctuate from quarter-to-quarter, depending on how productive those third-party generators are.

Thanks for that, Bill. Also I’d like to get an update on your home delivery tests and how that’s progressing?

Yeah. So, Rick, like I said earlier, we still got the home delivery in the Charlotte market at this point. What we have been focused on is continuing to build out the capabilities that will not only enable home delivery but other ways to deliver customers. And like I said, the progress I think we’re making on home delivery is by adding all of this functionality, whether it be the mobile appraisals, whether it be the consumer prequalification on the financing. You build the capabilities, that enables not only home delivery to scale very quickly, but it enables maybe other ways to deliver cars to customers, like expedited delivery, that kind of thing. So I feel really good about the progress that we are making.

Okay. Thanks and good luck.

Thanks, Rick.

Your next question comes from James Albertine with Consumer Edge. Your line is open.

Great. Thank you and good morning. And if I may just very quickly say thank you and we’re going to miss Cliff, but want to wish him the best in his retirement and congratulations to Ed, Darren and Joe on their promotions as well.

Thanks, Jamie.

Thanks.

On a -- from a long-term sort of strategic perspective, I think, we are all sort of working off of this idea of sort of 300 to 400 stores at maturity and sort of this comp leverage points in the mid-single digits. I am just wondering, as you are learning more and seeing more success from your digital initiatives, if you could provide sort of an update on your brick and mortar growth strategy, and whether or not sort of you are pivoting to a lower store count over time and would hope to fill in more markets with sort of digital initiatives and if that has an impact theoretically on bringing the comp leverage point down as well?

Yeah. That’s a great question, Jamie. So, historically, we’ve talked in the range of 200 to 300 and, I think, on one of the recent calls I said, you can pretty much take off the 200, because we are essentially there. I really want people to stop necessarily focusing on some certain target end range, because we’re continuing to learn about the business. I want people to think more about, how can we continue to grow our market share. If you look at zero to 10-year old vehicles nationwide, we are only capturing about 3% and in our more mature markets it’s a little bit higher than 10%, and I don’t know where that can eventually grow. I want to make sure we are capturing that market share. So how we do that, whether it be continuing to add brick and mortar stores or leveraging digital, that’s what we will continue to evolve over the next few years. We are opening up 15 this year. We have already committed to 13 to 16. I feel very comfortable with that pace. But as far as an ending store number, I am not really comfortable putting that out there at this point, because the business is changing, consumer expectations and behaviors are changing and look, to be honest with you, the more we can do and grab market share with our existing infrastructure I think is a huge win.

Understood. Well, thanks for taking the questions. Merry Christmas, happy holidays and we’ll talk to you next quarter.

Thanks, Jamie.

Your next question comes from are Chris Bottiglieri with Wolfe Research. Your line is open.

Hi. Thanks for taking the question. So it looks like you were able to tactically drive volumes at wholesale. I was wondering if you could talk more broadly stepping back about the air pocket you saw in ‘09 through ‘11. As you are cycling through that like what’s your view on that, when do we lap that, like what’s you are going to experience in this cohort then? And just lastly, if you’re able to could you maybe tell us what the average age of typical vehicle in wholesale? Thank you.

Sure. So, Chris, the average age of our vehicles in wholesale is still right around 10 years. As far as the impacts of SAR kind of that bubble working through, really it’s still in that seven-year to nine-year old vehicles. When you think about the SAR being reduced, seven years to nine years ago, those cars are still funneling through or lack of those cars are still having an impact and I think we are probably at least another year and a half or two years out before I think that really returns to normal.

Got you. That’s helpful. Okay. I am going to give Katharine an early year end gift and limit myself to one question. So thank you.

Thank you, Chris.

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

Hi. This is a follow-up question on finance, as we look at the quarter I think one of the clear positives here was a better trend in finance. So the question I have and I guess, stepping back is, maybe what’s -- how do you think what’s happening in your finance businesses? The better trends we are seeing now are function of a true better performance or is it more a function of, should I say, a change in expectations from what we saw last year? And I guess that, as a follow-up, the question on that too is, if you look elsewhere, there’s been more signs of, I guess, some stress in the finance markets, but CarMax is performing well here, so to a certain extent you guys -- you are bucking the trend?

Yeah. I’ll speak to that, Brian. I mean, if you look at the CAF income picture from kind of a big picture perspective, receivables are up 10.4% in the portfolio, that’s the combination of what we are originating, what’s -- and what is rolling off. Our interest margin contributions are only up 8.8%. So we are still seeing a bit of compression in that. But as we are growing the portfolio, the loss provision is lower by $4.4 million this year and that’s really reflection of last year we were in an environment of escalating losses. So, not only were we missing our booked expectations, but we were building the provisions for expectation of higher losses. And this year in all three quarters we have been generally in line with our expectations. So that -- I think it’s pretty straightforward how the environment has evolved, like, where it goes from here, I am not sure. With regard to us versus others, I can only speak to what we are seeing in our system and the performance of our partner lenders, and as I mentioned in the Tier 3 space, we’ve seen some improvement in conversion of the applications that they see. And I could also remind you that back when we saw the subprime part of our business start to decline, we were -- we -- other people were not seeing the same thing at that time either. But I don’t know if we’re bellwether or we just run a little bit differently than what you’re hearing elsewhere.

Okay. That’s helpful. Thank you.

Your next question comes from Matt Fassler with Goldman Sachs. You line is open.

Thanks again. Also a quick follow-up, a question about the relationship between the cadence of the wholesale market and your used car GPU, one of the questions we have gotten as we have approached the quarter is whether the fact that you were able to sell through vehicles, particularly early to midway through the quarter that you had purchased in a more benign wholesale and depreciation environment would have helped GPUs. So I am curious whether that did play out for a part of the quarter or whether the market adjusted such that the arbitrage that might -- that we might have expected wasn’t there?

Matt, are you talking about wholesale GPUs?

I am talking about retail, to the extent that the market moved higher, the cost of goods moved higher through the quarter if you turn your inventory every 50 days or 60 days, whether the cars you were selling through early would have come at a more advantageous price or whether frankly you just managed two GPUs, so that you would reign in the potential profit to move the units?

Yeah. I mean, Matt, you have been following us long enough now, I think, Katharine, this is the 27th quarter we have pretty much been consistent on our GPUs. And so as far as having a benefit in the early part or the latter part, I think, we have been able to prove that during different depreciation times, whether it’s rising, whether it’s declining, we have been able to manage our inventory. I think it’s one of the strengths that we have as an organization, and I would say, this quarter really didn’t present any other abnormal challenge. I will tell you, the only thing that’s a little bit abnormal this time of around was -- from a GPU standpoint was the decision to help the customers in Houston with free transfers in. So that was probably the only kind of abnormal thing that we saw this quarter.

Was there any -- and just following up on that, this is my last one, any measurable cost impact from that or the aggregate of the hurricanes that weighed on your EPS, I don’t think you have given us a number that might have held you back a bit this quarter?

Yeah. I would tell you, I would probably, it was -- it’s pretty much non-material.

Got it. Understood. Thank you.

All right. Thank you.

There are no further questions queued up at this time. I’ll turn the call back over to Bill Nash.

Great. Thank you, Denise. I want to thank all of you for joining the call today. I want to thank you for your continued support, providing exceptional customer service and continuing to improve our business is part of our DNA and I am really grateful took more than 24,000 associates that we have and for everything that they do each day to make this possible. I want to wish all of them and all of you all a happy holiday and we will talk again next quarter. Thank you.

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