CarMax 1999 Annual Report Download - page 50

on allocated debt used to fund store expansion, working capital
and the investment in Divx.
Income Taxes
The Group’s effective income tax rate was 38.1 percent in fiscal
year 1999, 38.3 percent in fiscal year 1998 and 38.2 percent in fiscal
1997. The shifts in the tax rate reflect the state tax impact of varia-
tions in taxable income produced by the Group’s separate legal oper-
ating entities.
Earnings before the Inter-Group Interest in the
CarMax Group
Earnings before the Inter-Group Interest in the CarMax Group
increased 20 percent to $166.4 million in fiscal 1999. In fiscal 1998,
earnings before the Inter-Group Interest in the CarMax Group were
$138.5 million, a 5 percent decrease from $145.7 million in fiscal
1997. The results for all three years include the Company’s invest-
ment in Digital Video Express. Excluding the Company’s invest-
ment in Divx, earnings for the Circuit City Group before the
Inter-Group Interest in the CarMax Group increased 48 percent to
$235.0 million in fiscal 1999 compared with $159.2 million in fiscal
1998 and $153.6 million in fiscal 1997.
Net Loss Related to the Inter-Group Interest in the
CarMax Group
The CarMax Group has incurred losses since its startup in fiscal
1994. The net loss attributed to the Circuit City Group’s Inter-
Group Interest in the CarMax Group was $18.1 million in fiscal
1999, $26.5 million in fiscal 1998 and $9.1 million in fiscal 1997.
Net Earnings
Net earnings for the Circuit City Group were $148.4 million in fiscal
1999, $112.1 million in fiscal 1998 and $136.7 million in fiscal 1997.
Net earnings per share were $1.48 in fiscal 1999, $1.13 in fiscal 1998
and $1.39 in fiscal 1997. The improved results in fiscal 1999 primar-
ily reflect the renewed strength in the Company’s Circuit City busi-
ness, which was partly offset by the increased investment in Divx
and the losses incurred by the CarMax Group. The lower earnings in
fiscal year 1998 compared with fiscal year 1997 reflect the challeng-
ing industry environment faced by the Circuit City business at that
time, the Company’s higher investment in Digital Video Express and
increased losses incurred by the CarMax Group.
Operations Outlook
Management expects that industry growth will be the primary
contributor to sales and earnings growth for the Circuit City busi-
ness during the coming decade. Management anticipates that
growth in the household penetration of products such as
DIRECTV, wireless communications, digital camcorders, DVD
players and personal computers will be the major contributors to
this growth. Management also believes that the introductions of
digital and high-definition televisions and multi-functional set top
boxes will help drive industry sales to new levels. Management
expects to focus its attention on maximizing store volumes in the
existing Circuit City Superstores. These efforts will include the
remodeling of approximately 50 Superstores in fiscal 2000 to
include the Group’s new merchandising initiatives.
Circuit City has established its presence in virtually all of the
nation’s top 100 markets and will continue adding to the existing
store base as attractive market opportunities arise. Management
believes that the Group has the opportunity to operate approxi-
mately 800 Superstores within the United States. In fiscal 2000,
the Group will continue to expand its Superstore concept into
new trade areas, adding approximately 35 stores that are either
new-market entries or fill-in locations in existing Circuit City
markets, including approximately seven additional stores in the
New York metropolitan area. Management anticipates that the
industry’s growth, ongoing expansion and continued strong oper-
ating controls will enable the Circuit City business to generate
earnings growth of 20 percent to 25 percent in fiscal 2000.
Management continues to be encouraged by the long-term
profit potential of the Company’s investment in Digital Video
Express. The early sales results exceeded management’s expecta-
tions, as DVD players with the Divx feature captured a 20 percent
to 25 percent share of DVD player sales during the last quarter
of the fiscal year. Titles are available from major studios. Divx
expects eight player brands to be available in calendar 1999. At
February 28, 1999, approximately 370 titles were available on
Divx discs and Divx plans to add 30 to 40 titles each month in
fiscal 2000. Management remains in active discussions with
potential financing and distribution partners for Divx and is opti-
mistic that the Company will complete one or more transactions
in fiscal 2000. However, in the event that additional financing is
not obtained, management does not expect the costs associated
with Divx in fiscal 2000 to exceed those incurred in fiscal 1999.
Management expects that CarMax’s financial performance
will improve to a modest loss or to break-even in fiscal 2000. The
CarMax results will be partly reflected in the Circuit City Group’s
Inter-Group Interest.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the “Circuit City Stores, Inc. Management’s Discussion
and Analysis of Results of Operations and Financial Condition”
for a review of recent accounting pronouncements.
FINANCIAL CONDITION
In fiscal 1999, net cash provided by operating activities was
$336.2 million compared with $280.7 million provided by operat-
ing activities in fiscal 1998 and $39.7 million provided by oper-
ating activities in fiscal 1997. The fiscal 1999 increase primarily
reflects a decrease in net accounts receivable and the improve-
ment in net earnings for the Circuit City business, partly offset
by the higher investment in Digital Video Express. The fiscal
1998 increase reflects a reduction in inventory, a smaller increase
in net accounts receivable and a slight earnings increase for the
Circuit City business, partly offset by the investment in Digital
Video Express.
Most financial activities, including the investment of surplus
cash and the issuance and repayment of short-term and long-term
debt, are managed by the Company on a centralized basis.
Allocated debt of the Circuit City Group consists of (1) Company
debt, if any, that has been allocated in its entirety to the Circuit
City Group and (2) a portion of the Company’s debt that is allo-
cated between the Groups. This pooled debt bears interest at a
rate based on the average pooled debt balance. Expenses related
to increases in pooled debt are reflected in the weighted average
interest rate of the pooled debt.
48 CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT