CarMax 1999 Annual Report Download - page 6

the fourth quarter of the calendar year, consumers bought almost
90,000 Divx-enabled DVD players and more than a half million Divx
movie discs. During December alone, the seven primary Divx retailers
sold more than 62,000 Divx-enhanced DVD players.
Our outlook for Divx is positive. Four manufacturers have
announced plans to add the Divx feature to their DVD product line,
giving us a total of eight brands in 1999. We are steadily increasing our
title selection, adding 30 to 40 titles per month.
Through the end of the fiscal year, Circuit City had invested $207
million in Divx. As the year ended, we remained in active discussions
with potential financing and distribution alternatives for Divx, and we
are optimistic that we will complete one or more of those transactions
this year. In the event that we do not obtain additional financing, we
believe the costs associated with Divx will not exceed the costs
incurred in this past fiscal year.
CARMAX REVIEW
For CarMax, fiscal 1999 was a year of continued development. The
financial results reflect only a modest reduction in losses and lower-
than-anticipated sales, especially in some of our multi-store markets.
Our comparable store sales declined throughout most of the year. All
of our stores felt the impact of an intensely promotional new-car
sales environment.
Nonetheless, consumers continue to show strong enthusiasm for
the CarMax concept. At the end of fiscal 1999, we operated the num-
ber one used-car retail location in the nation, and nine of our locations
ranked in the top 10. In addition, in surveys conducted over the past
year, more than 96 percent of customers indicate that they will likely
purchase their next car from CarMax and more than 96 percent rate
their CarMax experience as good to excellent.
Despite this consumer approval, we have not met our sales and
profit expectations. At the end of fiscal 1998, we initiated a profit
improvement plan designed primarily to improve our gross profit mar-
gin through the elimination of centralized reconditioning, the addition
of accessory sales, better inventory management, especially during the
fall model changeover, and adjustments in pricing on extended service
plans and financing. We successfully implemented this plan and
exceeded our gross margin targets.
Unfortunately, we continued to see disappointing results from a
number of the major metropolitan markets we entered in late fiscal
1998 and early fiscal 1999. Because of the lower store volumes in these
markets, we have developed a hub/satellite storing plan that we believe
will help reduce our rent and operating costs and allow us to more
densely store major metropolitan markets. Austin Ligon, president of
CarMax, discusses this hub/satellite strategy in more detail in his letter.
We also continue to refine our advertising programs in an effort to
drive increased awareness and store traffic.
In fiscal 2000, we are adjusting our expansion plan by delaying our
entry into Los Angeles until the next fiscal year. We will focus on the
addition of satellite stores and new-car franchises with the objective of
improving profitability in the existing multi-store markets. The single-
store Nashville market will likely be our only new market.
All our CarMax Associates are working hard to achieve the goals
we set forth when we began our national rollout and first issued shares
to the public. We continue to see enormous opportunity for improving
the consumer experience in this $650 billion retail segment and believe
that our disciplined approach to the business will allow us to recognize
that opportunity and produce improved results for our shareholders.
For more than 50 years, we have developed consumer concepts
that revolve around exceptional consumer benefits and customer ser-
vice. We believe that these concepts, delivered by an outstanding team
of Associates, are the best way to generate growth and high returns for
our shareholders. I thank our Associates, our investors, our customers
and our suppliers for their continued support in helping us achieve
these objectives.
Sincerely,
Richard L. Sharp
Chairman and Chief Executive Officer, Circuit City Stores, Inc.
April 6, 1999
4CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT