CarMax Q4 Earnings Call Transcript

123jump.com Staff
15 Apr, 2009
New York City

CarMax fourth quarter sales dropped 28% to $1.47 billion but net income surged 71.9% to $37.52 million helped by lower expenses and an income at CAF. Earnings per share were 17 cents as compared to 10 cents a year ago.

CarMax, Inc. ((KMX))
Q4 2009 Earnings Call Transcript
April 2, 2009 9:00 a.m. ET

Executives

Katharine Kenny - Head of Investor Relations
Tom Folliard - President and Chief Executive Officer
Keith Browning - Executive Vice President and Chief Financial Officer

Analysts

Rex Henderson – Raymond James & Associates
Matthew Fassler – Goldman Sachs
Sharon Zackfia – William Blair & Co
Scot Ciccarelli – RBC Capital Markets
Matt Nemer – Thomas Weisel Partners
Bill Armstrong – CL King & Associates
Rich Kwas – Wachovia Capital Markets
Jordan Hymowitz -- Philadelphia Financials
Sam Yake – BGB Securities
Rod Lache – Deutsche Bank Securities
JT Wright – Crosscap
David Nuss – Sanford Capital

Presentation

Operator

Morning, my name is Rachelle and I’ll be your conference operator today. At this time I’d like to welcome everyone to the fourth quarter and fiscal year earnings call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. If you’d like to ask a question during this time simply press * then the number 1 on your telephone keypad. If you’d like to withdraw your question press the pound key. Thank you. I would now like to turn the call over to Ms. Kenny. Ma’am, you may begin.

Katharine Kenny – Head of Investor Relations

Thank you. Good morning. I am Katharine Kenny, head of Investor Relations at CarMax. We are completely fogged in this morning but I want to welcome all of you to our fiscal 2009 fourth quarter earnings conference call. As usual I have with me today Tom Folliard, our President and Chief Executive Officer and Keith Browning, our Executive Vice President and Chief Financial Officer. 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 could affect these expectations please see our Annual Report on Form 10K that we filed for the fiscal year ended February 29, 2008. Tom?

Tom Folliard – Chief Executive Officer

Thank you, Katharine. Good morning everyone. Thank you for joining us. In this morning’s fiscal 2009 fourth quarter press release we were pleased to report an increase in earnings per share to $0.17 compared with $0.10 per share in the fourth quarter of fiscal 2008. We continue to be negatively impacted by weak consumer demand. As we noted in our release our conversion rate fell slightly during the quarter but the primary driver of our negative 26% used unit comps was again the low level of store traffic. During the quarter we continued to make progress on the plans we discussed at the end of last quarter to suspend our store growth until market conditions improve and align our expense structure with our sales level in order to optimize our profitability.

Let me give you some specifics on how we have done this. First, year-over-year we have decreased used inventory by approximately 16,500 units or 28%. We reduced SG&A expense by $23 million or 10% in 2009 fourth quarter compared to last year. And this is despite a 12% increase in our store base during the year. We achieved this by reducing variable selling expenses as well as decreasing overhead costs such as advertising, pre-opening and relocation expenses. As of the end of the year our total employment fell by nearly 3,500 or 20% from its high point of over 16,000 in May of 2008, all this mainly through attrition. At the same time, in the fourth quarter we achieved an increase of $325 in gross profit per unit versus last year despite the decrease in sales. And lastly, let me highlight over the course of the year we reduced our borrowings net of cash by approximately $120 million.

On to sales, in the fourth quarter total sales decreased to $1.5 billion compared with $2 billion in the fourth quarter of fiscal ‘08. For the full fiscal year total sales decreased to approximately $7 billion from $8 billion in fiscal ‘08. We opened one store during the fourth quarter in our Washington D.C. market. During the fiscal year we opened a total of 11 stores and ended the year operating 100 used car super stores in 46 U.S. markets. Used vehicle revenues declined 27% for the quarter due to the combination of a 7% decrease in average selling price and a 21% decrease in unit sales. Due to the unprecedented rate of depreciation in wholesale prices that occurred during the third quarter and into December we decided not to build our inventory at our usual seasonal rate. As a result, we carried lower than normal inventory for most of the fourth quarter and we do believe this strategy may have contributed modestly to the decline in comp sales. Our data also indicates that while we experienced a small market share loss in the fourth quarter, we still achieved a market share gain for the full year. Over the last year the average CarMax store sold 335 used vehicles per month while the average of the six public new car dealers sold 46 used vehicles per month. We continue to believe that our superior consumer offer will allow us to gain share over the long-term.

In fiscal ‘09 we sold approximately 345,000 used vehicles, an 8% decrease over ‘08 when we sold 377,000. Fourth quarter wholesale revenues decreased by 39% including a decline in average selling price for wholesale vehicles of 17% combined with a decrease in wholesale units sold of approximately 27%. For the full year wholesale unit sales fell almost 13% to 194,000 compared to over 222,000 vehicles in fiscal ‘08. Wholesale units decreased more than retail sales primarily due to the sharp fall in wholesale prices over the course of ‘09 which continued to negatively impact both our appraisal traffic and our buy ratio. For gross profit our sizeable increase in fourth quarter gross profit per unit was partially a reflection of the unusually low gross profit in the previous year’s fourth quarter as well as the temporary benefit of buying inventory at the beginning of a period of appreciating wholesale prices.

Like in the third quarter and despite the reduction in sales we were able to modestly increase used vehicle inventory turns in the fourth quarter compared with the prior year. We believe turning our inventory quickly is the most important factor that allows us to pass on compelling prices to our consumers. Our wholesale profit per unit increased $73 to $882 per unit compared to the fourth quarter of last year. Once again we believe this is a positive reflection of our unique inventory management system and the continued success of our auctions including a record dealer-to-car ratio both for the year and the fourth quarter.

On the CAF, for the fourth quarter CAF reported earnings of $28 million compared with a loss of $1 million in the fourth quarter of fiscal ‘08. The gain on sales of loans originated and sold this quarter fell to approximately $16 million compared with $21 million in last year’s fourth quarter. This decrease was due to lower sales, the lower average selling price per vehicle and the decrease in CAF’s origination penetration. The gain percentage, however, increased from 3.6% last year to 4.3% this quarter due primarily to a decrease in the benchmark rate. We made minor offsetting adjustments to our loss and prepayment assumptions. Each totaled less than $0.01 per share. The cumulative loss expectation for our worst performing pool of loans edged up from 3.9% to 4.0%. In previous quarters the lack of financing opportunities in the asset backed securitization market and the uncertain future caused us to slow CAF’s loan originations in order to extend the utilization of our $1.4 billion warehouse facility. At the end of the fourth quarter we had over $1.2 billion outstanding in the warehouse facility.

As you may have seen this morning we announced a public securitization that will be eligible for TALF financing at the next subscription date which is Tuesday, April 7. When the deal closes, as always the details will be publicly available. We are pleased the government’s efforts appear to be improving liquidity in the asset backed market. Our third party lenders remain willing to dedicate capacity to CarMax customers. However, we like many dealers have seen signs of tightening the full magnitude of which remains uncertain. As for SG&A, as I noted earlier our SG&A expenses decreased from $220 million in the fourth quarter of last year to $197 million in this fourth quarter reflecting our successful efforts to reduce costs partially offset by the SG&A expenses related to the 11 new stores we opened this year. Our SG&A ratio increased to 13.4% of revenue from 10.8% in last year’s fourth quarter when both sales and our average selling price were significantly higher. Year-over-year, SG&A expenses increased 3% from $858 million or 10.5% of sales to $882 million or 12.7% of sales.

Looking forward, while we remain as confident as ever in the CarMax model and our long-term growth opportunity, we believe it is still too difficult to give meaningful guidance for the short-term. However, our sales trends did not improve from the fourth quarter levels and given the continued economic uncertainty we would anticipate a double digit decline in comp store used unit sales in fiscal 2010 particularly in the first half where we have tougher comparisons. Thank you once again for joining us today and thanks especially to all our CarMax associates for your understanding, your dedication and for all you do every day.

With that we will take questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this time ladies and gentlemen if you’d like to ask a question simply press * followed by the number 1 on your telephone keypad. That’s * followed by the number 1. Your first question comes from the line of Rex Henderson with Raymond James & associates.

Rex Henderson – Raymond James & Associates

Good morning. Thanks for taking my question. First of all, the announcement on the securitization I did not see that. Can you give me a little bit of color on how big it will be and any thoughts about pricing on that at this point?

Keith Browning

It is too early for pricing. We went out with a deal of a size of $735 million of which we will be offering $630 which means we will be retaining the balance in sub-bonds.

Rex Henderson – Raymond James & Associates

Okay and when you look at the deals that Nissan and Ford did what were the implications for you in terms of pricing and any thoughts or interpretation of those deals as it applies to you?

Keith Browning

They were out in the first wave. So quite honestly we don’t know whether that was an advantage or not. There was a very low subscription rate from investors. We think that by this deal there is a substantial increase in both the availability of receivables being financed as well as investors. It is just really hard to tell and use those as benchmarks. It is anyone’s guess. But we are optimistic.

Rex Henderson – Raymond James & Associates

Okay and finally I wanted to touch on gross profit per vehicle. I think Tom you said it benefited from the improvement in pricing through the quarter. Do you think it is sustainable at over $2,000 a vehicle? Would you expect that to revert to the mean over time?

Tom Folliard

I think that is probably a little bit high. What I really talked about is we had an unusually low gross profit in the fourth quarter so the $300 difference or $335 difference almost half of that was the difference between last year. The other dynamic was the record depreciation we saw in the third quarter that went into December if you look at all the external data. And as the market turned in January and February it didn’t make a lot of sense to lower our prices when to go out and repurchase those vehicles with the appreciation we saw in January and February would have just been more expensive. So as we always do, we managed our inventory the best we could with all the information that we have and we have a very analytical mark down model that we use. And we made a conscious effort to adjust to the changing prices in wholesale. But I believe that by turning our inventory so quickly in the third and fourth quarter where as I noted we improved our turns in both those quarters that we were able to continue to pass on compelling prices to the customers who bought cars.

Rex Henderson – Raymond James & Associates

You bought some cars very cheaply at the end of the third quarter and then were able to price them at retail at a little better pricing early in the fourth quarter. Is that it?

Tom Folliard

It was really we were able to hold the margin a little better. Normally we would make more aggressive mark downs but in light of the external information and the external purchases that we were making it didn’t really make sense to get aggressive with mark downs when again to go out and repurchase the same car got more expensive in the fourth quarter.

Rex Henderson – Raymond James & Associates

And finally, yesterday on the manufacturer call they said that their sales of fleet vehicles had ticked up in the last month after being very, very low from the early part of the year. Part of the improvement in the used car pricing has been a constraint on supply. Do you think more fleet vehicles, coming into the used market, is going to have an impact on pricing going forward?

Tom Folliard

Usually the fleet vehicle turn is at least a year. Even if there is an up tick you won’t see anything in the supply chain until at least 12 months from now. Just generally the way the fleet stuff turns. I don’t know how big the up tick was but we are talking about levels here that are unprecedentedly low and I don’t know that a few percentage points up is going to make much of a difference in the supply long-term, nor do I know what the mix of those fleet cars were and whether or not that fits with what we sell. As we have said in the past if you are referring to rental type stuff that is not a big percentage of our inventory anyway.

Rex Henderson – Raymond James & Associates

Okay thank you very much.

Tom Folliard

Thank you, Rex.

Operator

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

Tom Folliard

Matt?

Matthew Fassler – Goldman Sachs

Can you hear me?

Tom Folliard

Hello.

Matthew Fassler – Goldman Sachs

Can you hear me?

Operator

We can hear you.
Matthew Fassler – Goldman Sachs

Good sorry about that. Question is, first on the credit side, you booked a 4.3% gain on sale this past quarter. What kind of gain I guess this next fiscal year is implied by the guidance that you gave for up $50 million to $85 million adjustment when you actually securitized those receivables in the warehouse?

Keith Browning

It is difficult to quantify that because what we have don’t know is we have a warehouse renewal coming up as well. That is coming up in July. We don’t know what the cost of that structure is going to be and it is obviously going to be different than our current structure. And obviously we don’t know what is going to happen to benchmark rates. I really can’t answer that. All we really did was put a range on the overhang that is our best estimate for what is in the pool now and it is a fairly wide range as you saw and it is our best estimate. I really can’t give you a number or answer on that directly.

Matthew Fassler – Goldman Sachs

Could you tell us what that range maps to from a gain on sale perspective?

Keith Browning

Meaning for the fourth quarter?

Matthew Fassler – Goldman Sachs

Presumably.

Keith Browning

Let’s put it this way. It obviously would have a significant impact on CAF’s overall profitability. I haven’t gone back and said gee if I applied what I believe the current market rates are to CAF in the ABS market to the originations obviously the gain would be substantially smaller. But I think given the range of what we have there on $1.2 billion you can get pretty close yourself.

Matthew Fassler – Goldman Sachs

Fair enough. A follow-up question on CAF as well, can you tell us precisely what the percentage of sales was that were directed to loans sold through CAF?

Keith Browning

I don’t have that. I can tell you our origination volume is down 20% to 25%. Obviously that was all intentional as a result of routing and trying to conserve CAF capacity.

Matthew Fassler – Goldman Sachs

Okay thank you and then on the gross margin question, essentially a follow-up from Rex’s question your gross margin rate on used cars was something like 100 basis points higher than any gross margin rate you have ever booked. So clearly the arbitrage between the weak market conditions early in the quarter and the very strong auction pricing later was a huge help to you. If you look at the Manheim trend that you see right now, which it seems have continued, would that arbitrage remain intact enabling you to maintain the kind of margin rates that you saw or do you think the margins start to normalize closer to historical levels relatively soon?

Tom Folliard

The market has been so volatile the last year and a half and things are changing so quickly it is really hard to speculate going forward what is going to happen. We have seen just in the last six months we saw a period of depreciation like one we have never seen before and in the last two months we have seen a period of appreciation like we haven’t seen before. If you go back to last spring we saw an entire segment depreciate faster than we have ever seen in the spring. I’m just not going to speculate going forward about what is going to happen with the market. What I will tell you is we watch it every single day. We adjust our inventory and our pricing accordingly and we try to do the best job we can managing our inventory regardless of what happens externally.

Matthew Fassler – Goldman Sachs

Got you, thanks a lot, good quarter.

Operator

Your next question comes from the line of Sharon Zackfia with William Blair.

Sharon Zackfia – William Blair & Co

Hi good morning.

Keith Browning

Hi Sharon.

Sharon Zackfia – William Blair & Co

I have a couple of questions. Once you get the securitization done is the idea to pick up that 20% to 25% of origination volume again? How quickly do you get share back? Will you?

Keith Browning

The answer is again we still have the uncertainty of the overall market. This gets us breathing room until July when we have a warehouse renewal and we don’t know what that renewal is going to be. We don’t know what the capacity is going to be. And so at this point in time I think it will be premature to say we are going to go back and try to adjust our strategy right now. We will adjust it as we get more visibility into the future and more visibility into what the market is going to do from a capital need and from a funding CAF perspective.

Sharon Zackfia – William Blair & Co

When you go to the warehouse facility at what point to you enter renegotiations for that?

Keith Browning

We will be starting very shortly. Obviously it is a unique environment and it used to be that Tom could start a couple of weeks in advance and a year ago, Tom Reedy who is our Treasurer, and last year he started a couple of months in advance. And he will probably be starting as soon as this deal closes.

Sharon Zackfia – William Blair & Co

Okay. A question on the gross profit per car, I know there are a lot of moving parts there but Tom I think you are also buying more from auction right now than you have historically given the lower traffic in the stores. Can you maybe update us on where you are on kind of the percent of cars that are bought at auction versus customers? And that is obviously a negative I think on the gross profit per car.

Tom Folliard

Yeah it is a negative. But remember too that our total sales are down ¼. So although we are buying as a percentage more cars at auction we are buying significantly less cars at auction than we bought last year. So still everything has kind of moved down. In terms of percent of retail sales represented from the appraisal lane we had historically said it had been above 50% and I think last quarter we noted that it dropped below 50% and we saw that trend continue into the fourth quarter. The other point on the margin percentage that Matt asked earlier one thing to note is we have always told everybody that we don’t manage our margins based on price. So part of the percentage increase is that our average retails went down significantly.

Sharon Zackfia – William Blair & Co

When you are talking and I appreciate what you are saying about the depreciation and car prices, wholesale prices and a lag there and you saw firming in retail prices but I think you had the easy comparisons as you mentioned in the February quarter. Don’t you have an easy comparison as well in the May quarter on gross profit per car if I’m not mistaken?

Tom Folliard

Well I know we had a low starting point last year because of the end of the fourth quarter so relatively speaking yes. As you know we haven’t made any comment about this year’s first quarter or this year’s.

Sharon Zackfia – William Blair & Co

Okay. Are you seeing anything from a traffic perspective at this point that would…I know it is hard to be optimistic in the car market right now but are you seeing anything that would make you feel somewhat better about consumer confidence going forward or is it pretty much still catch as catch can?

Tom Folliard

As you saw with our traffic number we didn’t see any substantive change in the fourth quarter. Down a little bit if anything.

Sharon Zackfia – William Blair & Co

Okay. So it was pretty consistent throughout the quarter?

Tom Folliard

Are you going to try to get me to give cadence again?

Sharon Zackfia – William Blair & Co

You are not going to answer, right?

Tom Folliard

I am not going to.

Sharon Zackfia – William Blair & Co

All right.

Tom Folliard

It was negative 26.

Operator

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

Scot Ciccarelli – RBC Capital Markets

How are you gentlemen?

Keith Browning

Hi Scott.

Scot Ciccarelli – RBC Capital Markets

Couple of things, can you talk about the magnitude of the difference between pricing in terms of what you are booking into the warehouse and what rates you are expecting the market to bear? Are you guys just not allowed to make inter-quarter adjustments on that?

Keith Browning

The structure is really that in the warehouse facility it is a true gain on sale. It is a presumed ending transaction. And so until we actually take them out and refinance them in a new transaction we don’t have any discretion there. The one thing I will point out on the overhang number, the $50 million to $85 million number, is that it is largely a timing issue that is related to the amount of sub-bonds we are anticipating we are going to have to hold. And so basically 10% to 15% of that might be real economics. The balance is all timing. It is revenue that we expect to get over the next several years but it is the accounting requirement that we have to follow.

Scot Ciccarelli – RBC Capital Markets

Okay. Any other adjustments in SG&A? Is what we are looking at a good run rate or were there other things, whether it was a reduction in advertising or reversal in accruals that might have impacted the SG&A in the quarter?

Tom Folliard

There are no other adjustments for the quarter if that is what you are asking for the fourth quarter. I mean it is what you saw.

Scot Ciccarelli – RBC Capital Markets

Okay. So, obviously adjusting for sales and some of the variable stuff that should be a good run rate going forward on the SG&A side? You are not really building stores, etc.

Tom Folliard

Yes but we didn’t really break out exactly how much was variable. We said it was primarily variable selling expenses and I absolutely believe that the piece of SG&A that is associated with that is totally controllable on our behalf and I feel like we did a pretty good job of managing it. And we should be able to do that for the upcoming year just like we always do.

Scot Ciccarelli – RBC Capital Markets

Okay that’s helpful and then the last question is regarding the warehouse renewal. It looks like there have been some pretty big changes in the market. Can you remind us of what your current terms are and as you assess the magnitude of adjustments others are experiencing, AmeriCredit for example, can you just give us an idea of where you think things might go or it might end up?

Keith Browning

I really have no idea where they are going to go. I can tell you that we are currently paying 205 over the two-year LIBOR and it is going to go up. I just can’t tell you how much and I think enhancements might go up. I can’t tell you how much and it would be speculative to really tell you any more. We are still three months away. A lot can happen between now and then.

Scot Ciccarelli – RBC Capital Markets

All right, thanks a lot guys.

Keith Browning

Thanks.

Operator

Your next question comes from the line of Matt Nemer with Thomas Weisel Partners.

Matt Nemer – Thomas Weisel Partners

Hey good morning guys. My first question is on the inventory right now. How are you feeling about your current inventory mix? Do you think it is value oriented enough? I guess there has been a mix shift away from small cars now recently. So, can you just give us an update on your current inventory?

Tom Folliard

You mean current as of the fourth quarter right?

Matt Nemer – Thomas Weisel Partners

Exactly yeah.

Tom Folliard

Yeah, we saw some pretty big swings in the percentage of sport utilities, medium and large sport utilities throughout the year but when the year ended things were kind of like back where they were before. And I feel like throughout the year we managed our inventory accordingly, so, either through margin or through mix, we have moved our inventory along with consumer demand and at the end of the fourth quarter I felt like on a percentage basis we were pretty well aligned. We noted in the release that we didn’t have as much total inventory as we would like to have had, due to some strategic decision making we had in the third quarter about choosing not to build as much inventory as we normally do seasonally. But in terms of the mix on our lots we feel very good about it.

Matt Nemer – Thomas Weisel Partners

Okay and then we have been hearing reports that auction prices are sort of high and in some cases maybe even close to blue book or close to a limit where lenders would be less comfortable financing some cars. Are you worried at all about sourcing at the traditional wholesale auctions in terms of the pricing?

Tom Folliard

I also haven’t been to the auctions that much and seen this awhile so I think this is short-term. We have seen a big appreciation here in the first couple of months. My expectation is over the course of the year we will get back to a depreciation schedule and maybe even you will see somewhat of a correction because I think maybe there was a little bit of, just like we saw a bit of correction into the beginning of this calendar year from the huge depreciation we saw at the end of the fourth quarter. You might see a correction here in the spring and try to get to a little bit more of a normal curve. So, I don’t expect this to continue throughout the year.

Matt Nemer – Thomas Weisel Partners

Okay and then I may have missed this but can you give your finance penetration and then maybe the sort of different buckets in terms of where the loans are going?

Tom Folliard

We didn’t give a total number. We did give that CAF was down about 20% to 25% in terms of its penetration.

Keith Browning

We can give you specifics later if you would like. You can call Katharine or Celeste.

Tom Folliard

But generally the 20% to 25% that we didn’t originate was spread across the other lenders.

Keith Browning

All the other lenders, absolutely.

Matt Nemer – Thomas Weisel Partners

If that is going, if you are routing those loans to a third party I presume you are getting some sort of a commission for that which would hit in your other line but I’m not necessarily seeing it in the numbers. I’m just wondering if there has been any change in the economics of routing loans to someone else.

Keith Browning

Part of that is the reason you are not seeing it is the same reason you are not seeing it in the third quarter. If you will recall, Santander acquired RoadLoans who was paying us a commission. Upon acquisition they started charging us a discount for that same segment of business and that is masking the incremental income we would be getting by routing more.

Matt Nemer – Thomas Weisel Partners

So the unit economics for routing a loan to one of your other prime lenders hasn’t changed?

Keith Browning

Then the other element is if you think just for the fourth quarter following up is that they always have the seasonal spike in the true sub-prime business as tax refunds come in so they actually do hit the spike in January and February that also masks that even more.

Matt Nemer – Thomas Weisel Partners

Got it okay great. Its all I’ve got, thank you.

Operator

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

Bill Armstrong – CL King & Associates

Good morning. Just getting back to the wholesale pricing, you clearly had a bit of a windfall early in the quarter with lower prices. You started paying more in January and February. Were you able to increase your retail price and maintain that gross margin spread or are you seeing that narrowing?

Tom Folliard

You saw the result at the end of the quarter and that was through February and that’s all we are going to discuss. That is how it came out for the quarter.

Bill Armstrong – CL King & Associates

I also did not see any announcement on the securitization. I don’t know if it is in any of the news wires. I think you said $735 million total?

Tom Folliard

It is on Bloomberg and it is $735 million total, $630 million offered.

Bill Armstrong – CL King & Associates

Okay. You have got $1.2 billion outstanding on your warehouse and your warehouse matures in July. Why not do a bigger deal or alternatively are you hoping to do a follow-on deal?

Keith Browning

The answer is it depends on what demand is. If there is sufficient demand might we upsize? Yes. We will wait and see what the current situation brings.

Bill Armstrong – CL King & Associates

Can you discuss the risks of the warehouse not getting renewed or not being able to renew this on acceptable terms?

Keith Browning

The answer is we don’t know. I believe that there is a market and a price and obviously if it is unfavorable terms we will have to adjust our origination strategy through CAF. The great news is that in trying to curtail our monthly volume we have learned a lot of tools and developed a lot of methods to actually do that without sacrificing sales and so we have already ramped up the learning curve and I think we can go further if necessary.

Bill Armstrong – CL King & Associates

If you are unable to renew the warehouse facility what happens to the receivable balance whatever that may be at that point?

Keith Browning

It amortizes. We don’t have any obligation to repurchase.

Bill Armstrong – CL King & Associates

Okay.

Tom Folliard

It is a non-recourse facility.

Bill Armstrong – CL King & Associates

Okay, okay I get it, thank you.

Operator

Your next question comes from the line of Rich Kwas with Wachovia.

Rich Kwas – Wachovia Capital Markets

Hi good morning. Can you hear me?

Operator

Yes Rich, go ahead.

Rich Kwas – Wachovia Capital Markets

Okay Tom on the SG&A, going back to the SG&A, are there any big chunks of SG&A that are coming out going forward? I know you did some initiatives later last year. Is there anything we should be thinking about that is going to be coming out that is going to affect that line?

Tom Folliard

As you know we didn’t give any guidance going forward. I would tell you that each and every quarter we are evaluating where we stand as a company and what we think our sales might be and we are making the decisions we think are in the best long-term interest of the company and we will manage our SG&A accordingly. I don’t have anything to tell you about this year one way or the other. Other than what I said earlier which is I think there are a lot of variable expenses in the business. I think we did a pretty good job of managing those and I feel that we will continue to do so going forward. But we are doing what we think is again in the best long-term interest of the company.

Rich Kwas – Wachovia Capital Markets

In terms of new stores you are not going to be doing anything this year so there shouldn’t really be much coming out?

Tom Folliard

All the growth expenses that we saved we will save this year once again. We have always talked about there being a lot of expenses around growth and starting half way through this year we began to curtail those and at the beginning of the third quarter we cut it completely. And so the year-over-year benefit of that you will definitely see.

Rich Kwas – Wachovia Capital Markets

Right okay but you got a fair amount of that in the fourth quarter it sounds like?

Tom Folliard

We got a fair amount of what we would have spent in the fourth quarter but then you get the year-over-year impact as well. We spent a lot in the first half last year.

Rich Kwas – Wachovia Capital Markets

I understand, I understand. The big picture, if any of these scrappage programs go through what are your thoughts on how that impacts your business?

Tom Folliard

There have been a lot of different programs that have been proposed and until something actually goes through it is really difficult to figure out what the impact will be on our business. My deal on it is I don’t understand why these incentives would only be out there for new cars. Everybody keeps talking about how consumers have been spending more money than they can afford and when you put an incentive that is solely for new cars it forces the customer to spend possibly more money than they can afford. We are all for the incentives on higher mileage per gallon cars. We have over 10,000 cars at CarMax that get more than 24 miles per gallon. We just think the incentives should be for the consumer to decide whatever they want to buy. If they want to buy a used car then they should be allowed to buy one. The average new car is still around $23,000. Our average retail is around $16,000. So there is a big spread in price between new and used and we are trying to do everything we can to see if these incentives can be included so they are really and truly in the consumer’s best interest.

Rich Kwas – Wachovia Capital Markets

Right okay all right. And then in terms of Chrysler inventory how much do you have of that in the scenario where there is a Chapter 7 where they liquidate? I assume you have been pretty careful on taking that type of inventory. But can you quantify what the inventory is right now for that?

Tom Folliard

I don’t think we have given the exact number but as of right now and like always we manage our inventory based on how quickly we sell it once it hits the lots. We turn our inventories very quickly. We are adjusting our inventory as consumer demand tells us to adjust it. So if people are still buying Chrysler’s we will still buy them and sell them. If the values go down that will be quickly reflected in the wholesale world and we believe we will still be able to work through that. The other big piece of news that came out this week was the government guaranteeing the warrantees on both Chrysler and GM and I think that takes away a lot of the consumer fear about whether or not to buy the car. I’m not saying there still won’t be some devaluation but I think hopefully a big chunk of that was taken off the table. But I feel very confident in our ability to manage our inventory very quickly with changes no matter what they are. Whether the scrappage thing has some dramatic change in sales or if there is a bankruptcy or a change with any of the big three we will be able to adjust quickly. I have never thought it was a good idea to anticipate what impact some change is going to have on us and try to in advance move our inventory for that because more often than not you will be wrong.

Rich Kwas – Wachovia Capital Markets

Okay all right and then final question, CapEx you are going to cut that to 20 this year. Keith I know a lot of that is because of your lack of new store openings but I mean going forward if you are not going to be opening many new stores or any new stores over the next say two years is that $20 million a pretty good number to use going forward?

Keith Browning

Yes I think that is. I mean we have a relatively young store base and we have a scheduled program that we actually go and do what is required to make sure our stores stay good. And that is the capital portion of what we spend every year. We spend a similar amount in actual expenses of painting and repaving that doesn’t get capitalized.

Tom Folliard

But I can tell you that in this environment we have made no changes to that schedule. Our plan is to keep our stores as fresh as always, make sure the consumer is getting the best possible experience they can get at CarMax and we have not changed that schedule one bit.

Rich Kwas – Wachovia Capital Markets

Okay thank you.

Operator

Your next question comes from the line of Jordan Hymowitz with Philadelphia Financials.

Jordan Hymowitz -- Philadelphia Financials

Hi guys my questions have been answered. Thank you very much.

Tom Folliard

All right.

Operator

Your next question comes form the line of Sam Yake with BGB Securities.

Sam Yake – BGB Securities

Good morning.

Tom Folliard

Morning.

Sam Yake – BGB Securities

Yeah I wanted to take a step back maybe and take a look at a little bit of the longer term. You made a comment that you are as confident as ever in CarMax’s model and ultimate growth potential. I am wondering, sometimes I feel we all get a little bit too caught up in the short-term and the immediate future. Maybe you could give an overview of how you see the business maybe 5 or 10 years from now and if you think that your growth potential is still fully intact?

Tom Folliard

We have changed our definition of long-term here at CarMax to be one month. If I was to try and look out five years I think whenever this recession bottoms out and things turn around and consumer demand comes back and people get back to spending money I think there will be significantly less dealers out there. Right now we are consumers’ first choice in every single market that we operate in. I gave you some numbers earlier. Our average store, even after our big decline, still sells 335 used cars a month. At the end of the year you don’t see anybody else putting up those kinds of volume. I think the consumer has shown time after time that we are their first choice and I think that when it does turn we will be well poised to take advantage of it and I think we will gain even more share. We are only in 46 U.S. markets. We have significant amount of growth still in front of us. I fully expect to get back to growing as we did before. I don’t know if it will be exactly the same percentage. But we have lots of markets that we would like to bring the CarMax consumer offer to and I fully expect to do that over the long haul.

Sam Yake – BGB Securities

Okay and obviously the signs you are looking for a turn in the economy to resume store growth, what specifically are you looking for that would tip you off that maybe now is the time to resume store growth?

Tom Folliard

When we see customers start coming back to the store in the numbers that they did before. I mean for us it is pretty simple. There are a lot of factors that go into consumer confidence and a consumer’s ability to spend. When they start showing up at the door then we will know they are back to spend.

Sam Yake – BGB Securities

Okay thank you very much.

Operator

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

Rod Lache – Deutsche Bank Securities

Good morning. I apologize if I missed this. I was briefly disconnected. The $50 million to $85 million of CAF impact on the refinancing of the receivables in the warehouse looks like it is around 5% of the $1.2 billion warehouse. Does that mean that you guys are thinking that the weighted average cost on the refinancing would be close to like L plus 700 instead of the L plus 205? Am I misinterpreting that comment?

Keith Browning

The answer is that is true. Part of that weighted average cost is anticipated carrying a larger portion of sub-bonds and the implied cost of those and as I mentioned earlier while that is an accounting charge we will have to take the majority of that is really timing because of the sub-bonds and we expect to get that income over time.

Rod Lache – Deutsche Bank Securities

Okay. Can you just help me then understand how do you think about the weighted average cost of borrowing then in that business at the moment given that there is like 15% in deficiency because of these retained tranches? How do you factor in all those when you look at what your borrowing cost is versus what your pricing is?

Keith Browning

That is absolutely one of the challenges that we have right now. We have made a conscious decision that because we believe this is temporary and that CAF brings so much to our overall sales levels we are willing to accept a lower return. So we factor that into our view on CAF. If that doesn’t turn out to be temporary and if the market becomes permanently changed we are going to have to work on a strategy that allows us to maximize CAF contributions but at a much lower level of sales and we are prepared to respond to that if the market makes us do that.

Rod Lache – Deutsche Bank Securities

Okay. At the moment is there based on what you are looking at, is there a contribution margin on this when you factor in loan losses and all these other things and retail versus your costs?

Keith Browning

Absolutely. Again a large portion of that overhang is really the mark that we have to take up front on the bonds. We are going to get that income. So there is absolutely positive cash flow coming in and positive earnings. It is just a matter of because we do gain on sale accounting and the factor that is very unusual for the last year and a half requiring us to hold those sub-bonds at extraordinary rates that makes it optically look a lot worse than the true economics.

Rod Lache – Deutsche Bank Securities

Okay and I know you are not giving guidance on comps but obviously there are franchise dealers that are talking about somewhat better used volumes now. Can you just talk a little bit about how would your numbers or why would your numbers going forward look different from what the other public retailers, the franchise dealers are talking about when they just give color on how the used market is progressing?

Tom Folliard

We haven’t seen anybody report a positive comp. I mean we haven’t seen much of a difference there. I don’t know what people gave for estimates going forward but there is just way too much volatility out there in every aspect of our business for us to give any guidance that we would be comfortable with right now whether it is on sales or earnings. I don’t know how other people looked forward but our view of looking forward is that it is way too uncertain for us to really give any guidance that would make sense.

Rod Lache – Deutsche Bank Securities

Right. Very few companies have reported activity in the first calendar quarter but the auction houses have certainly been talking about improving volumes and there has been some indication that things are moderating there.

Tom Folliard

Well it is improving prices and improving volumes off of an unbelievably low starting point. The comps for the year-over-year are still terrible, even at the auctions. Although prices are up on a per unit basis, auction volumes are down year-over-year.

Rod Lache – Deutsche Bank Securities

Year-over-year, are you seeing any indication of sequential month-to-month improvement or no?

Tom Folliard

We talked about that as much as we are going to.

Rod Lache – Deutsche Bank Securities

Okay. One last thing, if you were to assume some volume recovery, how should we be thinking going forward? You said SG&A there is a lot of variable expense there. How should we be thinking about how the SG&A comes back in on the incremental growth?

Tom Folliard

On the incremental growth, you mean if we had a pick up?

Rod Lache – Deutsche Bank Securities

If there was a pick up, exactly.

Tom Folliard

If we have a pick up in sales you won’t be asking about the pick up in SG&A because the profit will more than pay for it.

Rod Lache – Deutsche Bank Securities

I understand that but is there any color that you can give us on of your SG&A? What is the percentage that is variable within that cost? So when we look at that decline right now what was the variable part of that decline as volumes change going forward? How would SG&A be affected?

Keith Browning

We haven’t historically quantified that but what I would tell you is that we have said we are a largely fixed cost company and so when sales go down the bad news is that the loss of leverage is painful and you have seen that impact on last year’s results. When sales go the opposite direction that leverage is very strong and we will see a benefit and SG&A as a percent of sales will go way down and get back to more normalized levels when we recover back to two year ago sales levels.

Rod Lache – Deutsche Bank Securities

Okay all right, thank you.

Operator

Your next question comes from the line of JT Wright with Crosscap.

JT Wright – Crosscap

Hi there, two quick questions. The first one is will you have an opportunity to participate in a second TALF backed auction before you refinance or before you will have to renegotiate the warehouse line?

Keith Browning

Maybe we could if we chose to.

JT Wright – Crosscap

Okay, so there is one being offered. And then what is the accuracy of carmax.com like right now it says there is about 23,000 vehicles that you have in inventory. Is that accurate?

Tom Folliard

It is totally accurate on vehicles that are sellable and ready to sell. It doesn’t list any work in process.

JT Wright – Crosscap

It makes sense, okay. And then finally the question is of the traffic that you do have coming in do you have any color on the credit quality of those customers? Are they about equal to the relative credit quality of people you had in the past? Are they less financeable or more financeable depending on…?

Keith Browning

The credit quality has deteriorated basically since the first quarter and has been down year-over-year every quarter since.

JT Wright – Crosscap

Okay sounds good, thanks guys.

Keith Browning

Thanks.

Operator

Once again ladies and gentlemen if you’d like to ask a question please press * followed by the number 1 on your telephone keypad. Your next question comes from the line of David Nuss – Sanford Capital.

David Nuss – Sanford Capital

Hi good morning. Do you have an opinion on some of the unemployment assurance programs out there? Is there potential for similar programs in the used market? I understand some insurers are offering for a $75 premium they will take the risk of repurchasing a vehicle within a year. It has been helping new car sales for companies like Hyundai.

Keith Browning

Yeah we are aware of those and we are currently evaluating them. It is challenging because you also have to look at the truth is that adds actually additional spread to the consumer and it is a delicate balance. It may be something that we at least explore enough to launch a test on. It also could be a very temporary program and depending on the efforts when people believe the economy is turned. It is a product we spent a lot of time on that doesn’t have a lot of value. But we are well aware of it and we are certainly looking at it.

David Nuss – Sanford Capital

Thank you.

Operator

Your next question is a follow-up from the line of Rich Kwas with Wachovia.

Rich Kwas – Wachovia Capital Markets

Hi Keith, just a follow-up on the $50 million to $85 million is there some assumption regarding the warehouse facility cost embedded in that?

Keith Browning

That is basically taking the entire year balance of $1.2 billion and saying that is what is going to have to be refinanced at our best estimate of a range of what market rates will be when they get refinanced. So our warehouse facility is what is going to be left after the securitization for what was at year end and then obviously we haven’t given guidance for next year because as Tom said many times it is very volatile out there.

Rich Kwas – Wachovia Capital Markets

Okay but it would include what your estimate is for the public cost as well as what you expect the warehouse facility is going to come in at?

Keith Browning

It was all in the warehouse at the end of the year and it is really related to that balance as of the end of the year; $1.2 billion.

Rich Kwas – Wachovia Capital Markets

Okay great, thank you.

Keith Browning

Thank you, Rich.

Operator

There are no further questions at this time. I would now like to turn the call back to management.

Tom Folliard

I would just like to thank everybody for joining us. Most importantly I would like to thank our more than 13,000 CarMax associates. We did a good job managing our business in the fourth quarter but the dedication of our employees is what continues to separate us from the competition and I believe it will carry us forward from here. So, thank you once again for joining us and we will talk to you next quarter.

Operator

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