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Edited Transcript of KMX earnings conference call or presentation 20-Dec-19 2:00pm GMT

Q3 2020 Carmax Inc Earnings Call

Richmond Jan 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Carmax Inc earnings conference call or presentation Friday, December 20, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Enrique N. Mayor-Mora

CarMax, Inc. - Senior VP & CFO

* Stacy Frole

CarMax, Inc. - VP of IR

* Thomas W. Reedy

CarMax, Inc. - EVP of Finance

* William D. Nash

CarMax, Inc. - President, CEO & Director

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Brian William Nagel

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* David Whiston

Morningstar Inc., Research Division - Strategist

* Derek J. Glynn

Consumer Edge Research, LLC - Analyst

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Scot Ciccarelli

RBC Capital Markets, Research Division - MD & Consumer Discretionary Sector Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - MD Of Equity Research

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

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Presentation

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Operator [1]

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Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the CarMax Fiscal 2020 Third Quarter Earnings Conference Call. (Operator Instructions) Thank you.

I would now like to turn the call over to Stacy Frole, Vice President, Investor Relations.

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Stacy Frole, CarMax, Inc. - VP of IR [2]

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Thank you, Carol. Good morning. Thank you for joining our Fiscal 2020 Third Quarter Earnings Conference Call. I'm here today with Bill Nash, our President and CEO; Tom Reedy, our Executive Vice President of Finance; and Enrique Mayor-Mora, our Senior Vice President and CFO.

Let me remind you, our statements today regarding the company's future business plans, prospects and financial performance are forward-looking statements 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 risk 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 or -- on important factors that could affect these expectations, please see the company's annual report on Form 10-K for the fiscal year ended February 28, 2019, filed with the SEC.

Should you have any follow-up questions after the call, please feel free to contact our Investor Relations Department at 804-747-0422, extension 7865.

Lastly, let thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill?

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William D. Nash, CarMax, Inc. - President, CEO & Director [3]

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Thank you, Stacy, and good morning, everyone. Before we get started, I want to take a moment to personally congratulate Enrique on his recent promotion to CFO. Enrique and I have worked together for many years, and he has made a lot of great contributions during this time. I also want to thank Tom for serving as our CFO for the past 9 years. I look forward to continuing to work with him as he shifts his focus to our strategic initiatives in addition to continuing to oversee all of finance.

For today, I'll start with our third quarter highlights before turning the call over to Enrique, who will discuss our financials in more detail. Tom will then provide additional color around customer financing, and I will wrap up with an update on our omnichannel experience before opening it up for your questions.

As you read in our earnings release, we delivered a strong sales performance this quarter, with revenues up 11.5% on a 7.5% increase in used unit comps and an 11% increase in total used units sold.

Net income and EPS for the quarter were down 9% and 4.6%, respectively. This is largely the result of significantly higher stock-based compensation due to an increasing share price during the quarter combined with a planned increase in third quarter expense due to the timing of advertising. As a reminder, volatility in stock-based compensation expense is driven by restricted stock units that are awarded broadly to our nonexecutive associates. Enrique will provide additional details on these items shortly.

Keep in mind, despite these third quarter cost headwinds, year-to-date comps are up 6.7%, EPS is up 10.1%, earnings are up 3.6% and while we have delevered SG&A by $37 per unit, this includes $42 per unit of stock-based compensation.

We attribute our sales growth to a variety of factors, including solid execution in operations, finance, customer progression and marketing in addition to an overall favorable used car sales environment. Web traffic increased 15% year-over-year as we continue to benefit from our various marketing efforts.

During the third quarter, our markets offering an omnichannel experience had slightly stronger comp sales than our non-omni markets. The strong performance in both was supported by many of our omni-related digital initiatives that have been rolled out nationally. This includes improved customer lead management tools, finance, self-service tools and digital merchandising. And we believe all stores benefited from our national marketing campaign launched in October, which reinforces the strength of our brand.

For the quarter, gross profit per used unit was $2,145, up slightly when compared with the prior year. Our teams have done an exceptional job in continuing to drive efficiencies, allowing us to maintain margins while offering competitive prices.

Wholesale unit sales were also higher this quarter, with volume up 3.3% year-over-year. The increase in wholesale volume was slightly offset by a small decrease in gross profit per wholesale unit due to heavier depreciation at auction since the beginning of the third quarter.

As a percentage of sales, 0- to 4-year-old vehicles was 77%, similar to last year. Total SUVs and trucks accounted for about 49% of sales, up from 45% last year.

At this point, I'll turn the call over to Enrique to provide more information on the third quarter financial performance.

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Enrique N. Mayor-Mora, CarMax, Inc. - Senior VP & CFO [4]

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Thanks, Bill, and good morning, everyone. For the quarter, other gross profit decreased slightly. EPP profits grew by $11 million or 13.3% due to the combined effects of strong use volume growth and increased margin.

Like the prior year, we did not recognize any additional EPP profit-sharing revenue. This increase was offset by an $11 million decline in service department profits for the quarter versus a year ago. The decrease in service profits was largely due to 3 factors: First, we increased our post-sale warranty period from 30 to 90 days back in May. We view this as an investment in providing a better customer experience. Second, we experienced near-term inefficiencies due to a sharp ramp in technician hiring to support future sales growth. And finally, a portion of stock-based compensation runs through the service department.

On the SG&A front, expenses for the quarter increased $75 million to $485 million. SG&A deleveraged by $157 per unit. A material component of this growth and the resulting deleverage was driven by stock-based compensation. $11 million or 25% of the overall year-over-year growth in SG&A on the quarter was due to the 17% increase in our share price for the quarter versus a 15% decrease in the prior year period. This resulted in a $94 per unit deleverage to SG&A and represents $0.09 of EPS.

We also had a planned increase of $14 million or 39% in advertising costs for the new ad campaign and the rollout of our omnichannel experience that Bill mentioned earlier. This spend on the quarter brings our year-to-date advertising expense per unit to $225. On a year-to-date basis, this is slightly higher than last year and consistent with our earlier communications that our intention is to spend slightly more per unit for the full year.

Other notable expense drivers included the opening of 19 stores since the beginning of the third quarter last year, which represents a 10% growth in our store base; higher variable costs associated with our strong sales growth; and continued spending to advance our technology platforms, digital initiatives and our omnichannel rollout.

During this period of investment, we continue to believe comps in the range of 5% to 8% will be needed to leverage SG&A on an annual basis.

As part of our expansion strategy, we opened 4 stores in the third quarter: 2 in new markets, Palm Springs, California, and Gulfport, Mississippi; and 2 in existing markets, Dallas and Atlanta. Over the next 12 months, we anticipate opening 11 more stores. Earlier this month, we also opened our Phoenix Customer Experience Center, or CEC.

We continue to enhance shareholder returns through our repurchase program. During the quarter, we repurchased approximately 1.3 million shares for $115 million. This program has contributed to our 10% year-to-date EPS growth that Bill mentioned earlier. We have $1.67 billion remaining in our current authorizations.

Now I'll turn the call over to Tom to discuss customer financing.

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Thomas W. Reedy, CarMax, Inc. - EVP of Finance [5]

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Thank you, Enrique, and good morning, everybody. CarMax Auto Finance and our partner lenders continue to deliver solid results, with CAF income growth and strong conversion in Tier 2 and Tier 3.

During the quarter, we saw a modest growth in application volume and strong performance across all credit tiers. Tier 2 accounted for 20.4% of used unit sales compared with 18.3% last year. Tier 3 was up slightly to 9.5% compared with 9.3% a year ago. And CAF penetration, net of 3-day payoffs, was 43.3% versus 44.1% in last year's third quarter. Year-over-year, CAF's net loans originated grew by 13% to $1.7 billion as the increase in used cars sold and the average amount financed was somewhat offset by the decrease in CAF's net penetration rate.

For loans originated during the quarter, the weighted average contract rate charged to customers was 8.1%, down from 8.5% a year ago and 8.6% in the second quarter. Portfolio interest margin increased to 5.7% versus 5.6% in Q3 last year. CAF income was up 3.9% to $114 million, primarily driven by the 7.5% growth in average managed receivables and a small increase in interest margin, offset by an increase in the loss provision as presented -- percent of average receivables.

The provision for loan losses was $49 million in Q3 versus $40.8 million in the prior year period. The increase arises from portfolio growth and a modestly higher allowance based on loss experience we began to see earlier this year. At $153.6 million, the allowance represents 1.15% of ending managed receivables, up slightly from 1.12% a year ago and comparable to the second quarter. This remains well within our range of expectations, given our origination strategy and portfolio mix.

Before I turn the call over, I will touch on the impending current expected credit loss accounting standard, which is commonly referred to as CECL. CECL will be effective for us at the start of our fiscal 2021, and a number of you have inquired about it. This is a noncash accounting change, and won't impact our previously disclosed cumulative net loss expectations. The most significant element of the new standard is that it requires companies to reserve for the expected lifetime losses, whereas currently, we reserve for the following 12 months.

As a result of the adoption, we will increase our allowance for loan losses by $200 million to $250 million. This is based on information as of November 30, 2019, and the adjustment will flow through retained earnings. Post adoption, CECL could also create more volatility in the quarterly provision for loan losses as any true-ups will be projected over the life of the portfolio versus the 12 months we're currently estimating.

Now I'll turn the call back over to Bill.

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William D. Nash, CarMax, Inc. - President, CEO & Director [6]

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Thanks, Tom and Enrique. Now I'll provide an update on the rollout of our omnichannel experience and how we are continuing to innovate and improve the business for the future.

First, the numbers. We now have 4 CECs that we continue to staff: Raleigh, Atlanta, Kansas City and our newest in Phoenix, which opened earlier this month. Approximately 40% of our customer base currently has access to our omnichannel experience, and we are on track to reach the majority of our customers by the end of this fiscal year in February. We plan to complete the rollout in the next fiscal year.

ESP penetration in our omni markets is slightly lower than our overall penetration, which is a little above 60%. We've not seen a material change in finance penetration or mix with the rollout of omni.

We are pleased to achieve 7.5% comps, while at the same time, implementing the largest transformation in the company's history. While we continue to run some inefficiencies in both our CECs and stores, we are confident we will be able to improve productivity as we rollout and mature the new experience. We also still believe our unique omnichannel experience will be more cost efficient than our current model. We've already begun to drive cost efficiencies in our Atlanta CEC quarter-over-quarter.

We are also excited about the opportunities ahead as we continue to improve our customer offerings. Two key areas where we see opportunity are our customer relationship management, or CRM, platform, and our new delivery options. Our CRM platform enhances the experience for both our customers and our associates. It provides associates with valuable insights and data about our customers that allow us to better personalize their experience. It provides customers with the access to our customer hub. This hub makes it easier for customers and our sales associates to have full visibility to the status of their journey and to continue to progress further while either online or in-store.

We also see tremendous opportunity with our express pickup and home delivery offerings. Our conversion rate on these sales is very high, and the customer experience of these delivery options is extremely well received. While combined they still represent less than 10% of sales in eligible market, these offerings steadily increased throughout the quarter. Going forward, we expect more customers will take advantage of these delivery offers -- options as we expand our omnichannel experience into new markets and increase customer awareness through various marketing channels.

Our associates are doing an amazing job in structuring and delivering a systematic yet aggressive rollout of the new omni experience, an experience that personalizes each customer's journey, whether in person, online, by phone or a seamless combination of channels.

Our ability to leverage the infrastructure, analytics and processes we've built over the last 26 years and continue to improve with state-of-the-art technologies and new digital capabilities is a significant competitive advantage, an advantage that, when combined with our ongoing store expansion, positions us well to continue to lead the industry, profitably grow sales and gain market share.

I'm extremely proud of our associates and all of their accomplishments, and we're all excited about the future.

With that, we'll be glad to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Scot Ciccarelli from RBC Capital Markets.

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Scot Ciccarelli, RBC Capital Markets, Research Division - MD & Consumer Discretionary Sector Analyst [2]

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Can you guys talk about the change that you had in your service policy, specifically what caused you to make that change, the 30 to 90 days? And was there any financial catch up in the quarter or is this more of a reset that'll continue for the next few quarters?

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William D. Nash, CarMax, Inc. - President, CEO & Director [3]

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Sure, Scot. So for the longest time, we had a 30-day limited warranty program. And as Enrique said, we changed that over in May to 90 days, and we feel like that's best for the customer experience. So what you're seeing is it's -- now that it's everywhere, it's been in place since May, it's this -- from an expense standpoint, it's a couple of dollars per unit that's a little bit of additional headwind.

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Scot Ciccarelli, RBC Capital Markets, Research Division - MD & Consumer Discretionary Sector Analyst [4]

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And so we should expect, let's call it similar effects to that service department revenue for the next 3 quarters, let's call it?

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William D. Nash, CarMax, Inc. - President, CEO & Director [5]

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Well, keep in mind, when Enrique was talking about the service profits, there's really 3 different buckets that are going in there. Part of it was the shift from 30 days to 90 days. And of that, I would say that's about 1/3 of the overall change, another 1/3 was stock-based compensation and the other 1/3 of the staffing inefficiencies that we see because we're ramping up our technicians and as we ramp up technicians until we get a critical mass, it's hard to turn on new shifts. So each one of them make up about 1/3. And on the 30- to 90-day warranty of that 1/3, about half of it is the little step-up on a per unit basis of the expense. We also had, in that 1/3, a mix shift where we did more 90-day warranty work than retail service work.

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Scot Ciccarelli, RBC Capital Markets, Research Division - MD & Consumer Discretionary Sector Analyst [6]

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Got it. And just for clarification purposes, the 90 days, does that basically put you at par with the CPO -- most CPO programs that are out there?

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William D. Nash, CarMax, Inc. - President, CEO & Director [7]

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I'm not sure about the CPO program, Scot. I would have to go and look at that. I think that we feel like 90 days is certainly best-in-class for used cars.

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Enrique N. Mayor-Mora, CarMax, Inc. - Senior VP & CFO [8]

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That's a program that will anniversary itself in the first quarter of fiscal year '21, as we rolled it out in May of this past year.

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Operator [9]

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Our next question comes from Brian Nagel from Oppenheimer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [10]

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So first off, Enrique and Tom, congratulations on your new roles.

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Enrique N. Mayor-Mora, CarMax, Inc. - Senior VP & CFO [11]

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Thank you.

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Thomas W. Reedy, CarMax, Inc. - EVP of Finance [12]

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Thanks.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [13]

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So the question I want to ask, and I guess my first question, really just from a bigger picture perspective. But clearly the business has turned much healthier here lately with used car unit comps in this quarter tracking at over 7%. So Bill, as we look at this, as we look at the improved trajectory in used car unit comps, how should we think about -- and maybe you could help us understand better the split sort of, say, between the data we're looking at suggests the overall environment has gotten better, maybe with some help from used car pricing and other factors, but you also clearly have a number of initiatives taking place at CarMax, a lot of these tied to the omnichannel. So how much of this strengthening in used car unit comps is internal versus external? And if you look at maybe the internal side, which do we think is the kind of the bigger drivers with all that you're doing?

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William D. Nash, CarMax, Inc. - President, CEO & Director [14]

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Yes, that's a great question, Brian. As I noted earlier, it is part of great execution, it's also some favorable environment. When I think about the favorable environment, obviously, favorable access to credit. New car prices at an absolute level are still high, although in the quarter, we seem to see a little bit of narrowing of the new to used car gap, but the absolute prices of new cars is still high. You've got low unemployment. You've got good consumer confidence, inventory availability, I said that. You've got those external factors.

But I also salute a lot of the internal factors, especially from an execution standpoint, when you look at buying -- acquiring the right car at the right price, especially in a time where we saw depreciation that we would normally see in this time of year. Our operations teams continue to find efficiencies in waste that we can pass along to the customers. The customer progression, both in-store and on online, we've made great strides there, moving customers along online in our CECs. We've got new tools that we've started to rollout to help our new associates there. CAF executed well, supporting sales, driving CAF margins and still offering great customer offers. We've got the marketing campaign that launched. And as we look at it, there is no one factor that's the majority of that comp growth. I really do feel -- we really believe that it's a combination of all those factors.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [15]

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Got it. That's very, very helpful. And then my follow-up -- my related follow-up question, just with regard to the marketing expense you called out here in Q3, which was somewhat of a headwind to earnings. How is the new marketing campaign? Or how should we look at the new marketing campaign as an enhancement to what the changes you've already made to marketing over the past few quarters?

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William D. Nash, CarMax, Inc. - President, CEO & Director [16]

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Yes. I think periodically we rework our marketing. This was a big change. We have a new outside agency. And between the outside agency, our internal team, I think they've done a great job really bringing to life not only our brand, but also the omnichannel experience in those markets. So as you've seen in the past, we go with the new marketing campaign. If you look at the last one with Andy Daly, we run that for a while, we built off that. I would think that this marketing campaign, the same type of thing, we'll continue to build off the strength of this. And as we go forward, you'll just continue to see this new campaign versus running ads on old campaigns.

In the third quarter, I've talked about this on previous calls, in the first and second, we knew that we were going to be heavy on the backside of the year. We ran light on advertising as a matter of fact. Through the second quarter year-to-date, on a per unit basis, we were spending less than what we spent last year on an annual basis. And I've said all along, we're going to spend a little bit more to also help market our omnichannel experience.

And I think as you look at where we are now year-to-date, Enrique cited earlier, we're about $225 per unit, slightly above last year. And I think that's a good proxy. We'll be slightly above where we finished the year last year. We still expect that's where we'll come in on a per unit basis.

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Operator [17]

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Our next question comes from Sharon Zackfia from William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [18]

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A question on SG&A. There's obviously a lot of moving parts on there this quarter, and I appreciate the commentary on the 5% to 8% to leverage comps I guess going forward. Can you talk about whether that 5% to 8% would be applicable for the fourth quarter? And then as we go into fiscal '21, I know there's still continued investments in omnichannel, but does that start to abate somewhat in terms of the incremental spending and inefficiencies that you're seeing?

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William D. Nash, CarMax, Inc. - President, CEO & Director [19]

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Yes. I'm going to let Enrique -- he will take the first part, I'll take the second part.

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Enrique N. Mayor-Mora, CarMax, Inc. - Senior VP & CFO [20]

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Yes. On a quarterly basis, there's so much -- there can be so much variability that when we refer to the 5% to 8%, it's on a longer annual basis. If you take a look at this quarter, between stock-based comp and between the advertising timing, that alone caused us to deleverage. So within any particular quarter, it's difficult to say. But certainly, on an annual basis, that is our expectation.

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William D. Nash, CarMax, Inc. - President, CEO & Director [21]

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Yes. And Sharon, on the second part of your question about what you should expect to see in the new year, I've said earlier in previous calls, last year was a step-up year. We expected this year to be another step-up here. Next year, we expect it to be a continued step-up year, but less to a degree than what you've seen from a growth percent, less so than what you saw this year or last year. And of course, we'll provide some more direction in our fourth quarter call when we're back here then.

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Operator [22]

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Our next question comes from John Murphy from Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [23]

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I just wanted to follow up on one of the comments you made on the call, the development of the CRM system and making it more advanced, so there's more data available to your sales team. And I'm just curious, is there an intention to maybe go more proactively in market sales directly to individual consumers to drive same-store sales as you're developing that CRM system? Or is this more just as people come in and inquire about vehicles, you just have more information to help out the process? It just seems like there may be an opportunity here to get more directed advertising going.

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William D. Nash, CarMax, Inc. - President, CEO & Director [24]

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Yes. I think when I think about the CRM, the CRM is more of a tool to help our associates, whether they're in the customer experience center or in the store. I think the beauty of the CRM, as we collect data and we can analyze data, we can do what we call smart routing to make sure that we handle those leads, how we handle those leads and who handles those leads. We're becoming much more savvy at that, which is one of the areas that I'm excited about as we go forward, continuing to pick up efficiencies.

As far as being able to directly target more customers, we've already shifted that way. When you think about our total advertising spend, probably half of it is more on a digital advertising, which is much more pinpointed than what I would call traditional advertising, which is more of the broadcast TV, radio type of stuff. I do think that the data that we're collecting from the CRM can assist us in helping to target future customers. But I kind of think about them in different buckets, if that makes sense.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [25]

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Okay. And then just one follow-up on the express pickup and in-home delivery, you said it's a little bit less than 10% in the eligible market, so it sounds like it's somewhere between 5% to 10%. I mean would you call those folks that are doing the express pickup and in-home delivery, incremental consumers or buyers in your stores? Or is there some kind of cannibalization? Just trying to understand what's incremental and what's cannibalized.

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William D. Nash, CarMax, Inc. - President, CEO & Director [26]

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Yes. At this point, I would say it's probably both. And when I look at those 2, we're doing more express pickups than we are home deliveries at this point. It's interesting because sometimes we'll have customers that think that they want to be home delivery, and then they start working through the process and they realize, "You know, I'd like to come in and test drive a couple of cars," and so they convert over to in-store. The express pickup, just as a reminder, that allows the customer to really do everything online and still come into the store, get their keys, if they want to take the car for a test drive, maybe learn about the options, but we can have them out in less than 30 minutes. So I see both of those -- as I said earlier, I see both of those as continuing to grow as we mature the experience and also as we highlight the experience in our marketing efforts.

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Operator [27]

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Our next question comes from Armintas Sinkevicius from Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [28]

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7.5% same-store sales growth year-over-year, that's quite a strong number. How do we think about how much of that comes from a favorable used car sales environment versus how much of that comes from the omnichannel rollout? Any way you can help us contextualize that, that would be very much helpful.

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William D. Nash, CarMax, Inc. - President, CEO & Director [29]

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Yes. As I said earlier, there's a lot of different factors. I don't think any one of those factors is the majority. So I don't think necessarily that the favorable environment is a majority when you add all those things I talked about earlier. I think a lot of these execution things that we highlighted, I think the -- especially the digital initiative improvements that we've made as part of omni and rolled that out to the other locations that don't have omni, I don't think -- we don't believe any one of them lines up and has the majority of that lift. It's really a combination of all of them.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [30]

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Okay. And when you talk about lift, does that mean versus the comp a year ago or just the 7.5% number itself?

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William D. Nash, CarMax, Inc. - President, CEO & Director [31]

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The 7 -- when I think about that 7.5% number and what contributes to that performance, that's where I'm saying, I don't think -- we don't believe that any one of those items is the majority of that 7.5%.

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Operator [32]

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Our next question comes from Craig Kennison from Robert W. Baird.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [33]

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I guess first, I want to tell you that my daughter contributed to your comp this quarter. We had a great experience. So thank you for that.

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William D. Nash, CarMax, Inc. - President, CEO & Director [34]

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Oh, that's great. Thank you, Craig.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [35]

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Yes, it was a good experience. We didn't get to do the Internet omnichannel experience yet, but I'm sure that'll come. The question I had was on your recon business or your recon work. You always seem to drive cost out of the reconditioning process. Has that trend continued? And as a follow-up, is it still your policy mostly to return that to the consumer rather than trap some of that in the gross profit line?

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William D. Nash, CarMax, Inc. - President, CEO & Director [36]

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Yes, Craig. To answer your question on giving it back to customer, yes, at this point, we like passing that along to the customer. It helps make the prices as competitive as possible. The reconditioning, we continue to look for efficiencies there. I would say the area that we're seeing a little bit more improvement on is more of the procurement. So think about parts, that kind of thing, we've equipped our associates in the field with certain tools that allow them to buy the right part at the right time at the right expense. I would also tell you, picking up some efficiencies in our transportation as we move more vehicles with our internal and dedicated fleets, that helps as well.

And then, of course, I always put an emphasis on our buying because that's really -- when you think about price competitiveness, it really starts with where you purchase the cars. And I think the buyers have helped to make sure that we're buying them at the right price at the right time.

The other thing I would just say is that not only does it help us be competitive on prices all those savings, but it also helps us manage our margin and keep that stable as well.

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Operator [37]

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Our next question comes from Rick Nelson from Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [38]

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So the New York Fed this week pointed to a higher rejection rate for auto loans. I'm curious if you see any need for tightening of CAF? I did notice a shift toward the Tier 2 and Tier 3 finance providers away from CAF.

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William D. Nash, CarMax, Inc. - President, CEO & Director [39]

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Rick, could you just repeat the first part of your question, please?

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Nels Richard Nelson, Stephens Inc., Research Division - MD [40]

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So the New York Fed this week, they had a report out that pointed to a higher rejection rate on auto loans. And curious if you need to tighten the CAF?

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Thomas W. Reedy, CarMax, Inc. - EVP of Finance [41]

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No, I think as I mentioned, we've seen real strong performance from both our partner lenders, who are originating in our system which is, as Bill mentioned, providing a little bit of a lift year-over-year. And in CAF, we saw losses tick up a little bit earlier in the year, and our increased provision this quarter kind of reflects us just going at that run rate that we've been experiencing all year versus a little bit more favorable environment last year. But we see no need to adjust our credit appetite. We're still generating a portfolio that we're very comfortable with and happy with the business.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [42]

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Also on the GPU front, another solid quarter. You talked about gaining leverage from omnichannel. Is your intent, Bill, to pass those -- that leverage on to the customer to drive more volume or would -- does that spend...

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William D. Nash, CarMax, Inc. - President, CEO & Director [43]

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Yes. Right now, the leverage that I referred to on the call was, we started to see one of our -- the oldest customer experience, Atlanta customer experience, we started to see some cost leverage there. And that would really show up more in the SG&A line versus the GPU or passing along to the customer in the form of the price. So you'll see that show up in SG&A savings.

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Operator [44]

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Our next question comes from Derek Glynn from Consumer Edge Research.

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Derek J. Glynn, Consumer Edge Research, LLC - Analyst [45]

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We had a follow-up on the home delivery attach rate at a little less than 10% of sales in omnichannel markets. Where do you think that steady state number is? What percent of your overall sales do you think home delivery can be in the long run?

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William D. Nash, CarMax, Inc. - President, CEO & Director [46]

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Well, just for clarification, Derek, the 10% that I cited is both home delivery and express pickup. And express pickup is home delivery, so -- is higher than home delivery. So both are still, if you take each one individually, a very small percent of our overall sales. But as far as where I think it can go, to be honest with you, I don't know. But to be honest, it doesn't really matter to us because we're there to support the customer and give them the experience they want. So if more want home delivery, great, we'll be able to satisfy that; if they want to come into the store, we'll be able to satisfy that. So I don't know where it's going to go. We did see throughout the quarter, we saw more people leveraging express pickup and home delivery, but I don't know what the top end of that could be.

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Derek J. Glynn, Consumer Edge Research, LLC - Analyst [47]

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Got it. Great. And then just as a follow-up, I mean as we think about your SUV and truck mix, I would think that follows a pattern unfolding in the new market where the mix of those vehicles is much higher. To what extent do you view that as a tailwind to your ASPs? And is there any opportunity or appetite to date to take more price to drive higher GPUs?

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William D. Nash, CarMax, Inc. - President, CEO & Director [48]

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Remember, when we look at GPUs, it's not driven by the expense of the car. That's not -- we don't make necessarily more money on a more expensive vehicle. As far as how do we see this going forward? The truck mix, I think -- and I'd have to go back and confirm for sure, but the truck mix has been ticking up a little bit, and that's more representative of what's coming into the marketplace either through our appraisal lane or through the off-site auctions. So I would continue to see that pattern exist in the upcoming quarters.

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Operator [49]

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Our next question comes from David Whiston from Morningstar.

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David Whiston, Morningstar Inc., Research Division - Strategist [50]

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My question is on new vehicle leasing as a substitute to buying a used car from CarMax. I think leasing has very much peaked for the cycle, but it's -- in the past, there's been some very attractive offers at the consumer. So do you see new vehicle leasing as less of a substitute threat than, say 12 months ago? Or is that about the same or...

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William D. Nash, CarMax, Inc. - President, CEO & Director [51]

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Well, I think the industry data would say that this year, probably the off-leasing vehicles will peak -- between this current year and last year, they'll be at a peak level. As far as where we think leases might go next year, again, it would be a shot in the dark. I'm certainly not a leasing expert. But wherever it goes, whether leases continue to persist in the next quarter or if they drop off a little bit in the next quarter, inventory availability for us will still be in good shape as far as acquiring inventory. And as leases -- the peak of off-leases come down, there'll be something else that fills in that spot. I mean we've seen this cycle run many times over the years that we've been in business.

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Operator [52]

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Our next question comes from Chris Bottiglieri from Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [53]

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First question is on advertising, the step up. Was most of this incremental spend distributed nationally? Or is it more targeted to where you have omnichannel markets? And then two, like -- sorry...

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William D. Nash, CarMax, Inc. - President, CEO & Director [54]

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I'm sorry, go ahead, finish the question.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [55]

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Oh, yes, then I would just like -- kind of related to that was kind of like as you push more online, have you rethought like what the right advertising budget is? Like maybe advertising more makes more sense? I'm just curious how you think about that.

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Enrique N. Mayor-Mora, CarMax, Inc. - Senior VP & CFO [56]

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Yes, the majority of the spend on the quarter was actually the national spend, the omni market spend.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [57]

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Got you. Okay. That's helpful. And then wanted to talk more about the wholesale business. You talked about like the web traffic looks great, you talked about lower -- like your unit growth was great, but then talked about lower appraisal traffic at wholesale. So, a, wanted a sense for what you think drove that? Is the competitive environment for trades getting more difficult, just given where we were in the cycle of competitive threats? And then two, can you talk about the supply of the 8- to 10-year-old vehicles that should be increasing. Has that manifested the way that you thought it would have earlier in the cycle?

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William D. Nash, CarMax, Inc. - President, CEO & Director [58]

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Yes. So Chris, I mean I think that it's been -- there's been robust competition for what we would consider A-line vehicles. I mean a lot of different dealers are focused on trying to buy more outside the auction, but that's nothing new. The comments I made earlier about wholesale was more around GPU. And with that, the GPU went down a little bit, but that's more of a function of what we saw in the marketplace from a depreciation standpoint. As the vehicles depreciate, we put less on the offer, which also has an impact on buy rate and volume. So we had a little bit of pressure on buy rate, still up around 30%, a little over 30%. So we're still pleased with that. But anytime you have a depreciating market, it puts a little headwind on your offers, which then puts a little headwind on your volume.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [59]

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Got you. That makes sense. And did the number of wholesale locations change this quarter? It looks like you closed a couple, but might just be the way I'm reading the schedule.

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William D. Nash, CarMax, Inc. - President, CEO & Director [60]

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No. We did not close any auctions.

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Operator [61]

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(Operator Instructions) Our next question comes from Seth Basham from Wedbush Securities.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [62]

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Stock-based comp was a big headwind this quarter. You mentioned some additional stock compensation to service lane associates which isn't captured in SG&A. But are you also giving more stock-based comp to associates that would be captured in that SG&A?

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Enrique N. Mayor-Mora, CarMax, Inc. - Senior VP & CFO [63]

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Yes. Stock-based compensation, the majority is going to be in SG&A, but there's also components in service profits, as we mentioned, related to service associates. There's also a component related to CAF as well. But by far, the largest component is within SG&A. I think it's also just important to emphasize, again, this is our broad-based equity program, it's targeted at nonexecutive management, settled in cash and runs through the P&L.

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Thomas W. Reedy, CarMax, Inc. - EVP of Finance [64]

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Yes. And Seth, just to also clarify, we didn't increase that program. It's not like there were more shares or anything out there. It's just the market volatility that changed from quarter-over-quarter.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [65]

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Got it. And then secondly, as it relates to the performance of your comparable store sales overall relative to your omnichannel markets, you mentioned the omnichannel is slightly better. That sounds a little bit different than what you're describing, the omnichannel outperformance in prior quarters. Is that, a, correct? And, b, is that surprising? And, c, is it still a good investment, if you're not getting a big lift on those omnichannel sales?

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William D. Nash, CarMax, Inc. - President, CEO & Director [66]

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Well, there's a lot of different questions in that one question, Seth. But I'll try to do my best to remember all of them, you have to keep me honest. But is it surprising where we are? Absolutely not. I mean if you're comparing it to what we have seen in the Atlanta market, it is different than that. But I said all along, look, every market is going to be a little bit different. We're going to have different levers that we pull. I actually feel really good about where we are with the omni rollout and the comp contribution to that because right now, we have a headwind in our omni markets as it relates to our customer experience centers. If you think about it, when a market rolls onto the omni, the omni experience, the day it rolls on, we turn the e-offices off in the stores. While the e-offices have been manned by associates that have been around a long time, they know what they're doing when it comes to progressing customers. We've now turned them on to the customer experience centers.

And I would just remind you that our customer experience centers, the most tenured associates that we have working with customers have only been doing it for about 6 months. So as we continue to rollout, and we continue to stand up and open these new customer experience centers, the Kansas City one, the Phoenix one, you have a lot less tenured associates that are handling the customer progression. I think it's a great opportunity for us, and it's one of the things that I think about when we think about efficiencies going forward in productivity gains. But I feel good about where we are, given that our omni markets actually have a headwind working against them.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [67]

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Understood. Happy holidays, guys.

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William D. Nash, CarMax, Inc. - President, CEO & Director [68]

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You too.

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Thomas W. Reedy, CarMax, Inc. - EVP of Finance [69]

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You too.

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Operator [70]

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This concludes our question-and-answer session. I will now turn the call back over to Bill Nash for closing remarks.

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William D. Nash, CarMax, Inc. - President, CEO & Director [71]

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Great. Thank you, Carol. I want to thank all of you for your interest in CarMax and for joining us today. As always, our success is because of our associates and the culture that they've created. I want to thank them for what they do every day, for driving what's possible for each other, for our customers and for our communities. I want to wish all of them and all of you all a happy holiday, and we will talk again next quarter. Thank you.

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Operator [72]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.