CarMax 2002 Annual Report Download - page 26

CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002 24
Common Stock reserved for the holders of Circuit City Group
Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group
Common Stock would receive one share of CarMax, Inc. com-
mon stock for each share of stock redeemed by the Company.
We anticipate that the holders of Circuit City Group Common
Stock would receive a fraction of a share of CarMax, Inc. com-
mon stock for each share of Circuit City Group Common
Stock they hold. The exact fraction would be determined on
the record date for the distribution. The separation is expected
to be completed by late summer, subject to shareholder approval
and final approval from the board of directors. CarMax, Inc.
has filed a registration statement regarding this transaction with
the Securities and Exchange Commission. This registration
statement contains pro forma financial information that is
intended to reflect the potential effects of the separation of the
two businesses.
Holders of Circuit City Group Common Stock and holders
of CarMax Group Common Stock are shareholders of the
Company and as such are subject to all of the risks associated
with an investment in the Company and all of its businesses,
assets and liabilities. The results of operations or financial condi-
tion of one Group could affect the results of operations or finan-
cial condition of the other Group. The discussion and analysis
for Circuit City Stores, Inc. presented below should be read in
conjunction with the discussion and analysis presented for each
Group and in conjunction with all the Company’s SEC filings.
CRITICAL ACCOUNTING POLICIES
In Management’s Discussion and Analysis, we discuss the
results of operations and financial condition as reflected in the
Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America. Preparation of finan-
cial statements requires us to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues and
expenses and the disclosures of contingent assets and liabilities.
We use our historical experience and other relevant factors when
developing our estimates and assumptions. We continually eval-
uate these estimates and assumptions. Note 2 to the Company’s
consolidated financial statements includes a discussion of our
significant accounting policies. The accounting policies dis-
cussed below are those we consider critical to an understanding
of the Company’s consolidated financial statements because their
application places the most significant demands on our judg-
ment. Our financial results might have been different if different
assumptions had been used or other conditions had prevailed.
Calculation of the Value of Retained Interests in
Securitization Transactions
The Company securitizes credit card and automobile loan receiv-
ables. The fair value of retained interests from securitization activi-
ties is based on the present value of expected future cash flows. The
present value is determined by using management’s projections of
key factors, such as finance charge income, default rates, payment
rates, forward interest rate curves and discount rates appropriate
for the type of asset and risk. These projections are derived from
historical experience, projected economic trends and anticipated
interest rates. Adjustments to one or more of these projections
may have a material impact on the fair value of the retained
interests. These projections may be affected by external factors,
such as changes in the behavior patterns of our customers,
changes in the strength of the economy and developments in the
interest rate markets. Note 2(C) to the Company’s consolidated
financial statements includes a discussion of our accounting
policies related to securitizations. Note 11 to the Company’s
consolidated financial statements includes a discussion of our
credit card and automobile loan securitizations.
Calculation of the Liability for Lease Termination Costs
The Company accounts for lease termination costs in accordance
with Emerging Issues Task Force No. 88-10, “Costs Associated
with Lease Modification or Termination.” The Company records
a liability for remaining costs related to leased properties that are
no longer used for operating purposes, reduced by any estimated
sublease income. Inherent in the calculation are certain significant
management estimates including, among others, vacancy periods
and future sublease revenues. Fluctuations in the economy and in
marketplace demand for commercial properties can result in
material changes in the liability for lease termination costs. Note
2(H) to the Company’s consolidated financial statements includes
a discussion of our accounting policies related to leased properties
that are no longer used for operating purposes.
RESULTS OF OPERATIONS
Net Sales and Operating Revenues
Total sales for Circuit City Stores, Inc. decreased 1 percent in
fiscal 2002 to $12.79 billion. In fiscal 2001, total sales increased
3 percent to $12.96 billion from $12.61 billion in fiscal 2000.
PERCENT SALES CHANGE FROM PRIOR YEAR
Circuit City Circuit City CarMax
Stores, Inc. Group Group
Fiscal Total Total Comparable Total Comparable
2002................ (1)% (8)% (10)% 28% 28)%
2001................ 3)% (1)% (4)% 24% 17)%
2000................ 17)%13)%8)% 37% 2)%
1999................ 22)%17)%8)% 68% (2)%
1998................ 16)%12)% (1)% 71% 6)%
THE CIRCUIT CITY GROUP. Total sales for the Circuit City Group
decreased 8 percent in fiscal 2002 to $9.59 billion. In fiscal
2001, total sales decreased 1 percent to $10.46 billion from
$10.60 billion in fiscal 2000. The fiscal 2002 total sales decline
primarily reflects a 10 percent decline in comparable store sales,
partly offset by the net addition of 10 Circuit City Superstores.
In fiscal 2002, we opened 11 Superstores in existing markets,
closed one Superstore and relocated eight Superstores. We also
closed 15 mall-based Express stores. Excluding the major appli-
ance category, from which we completed our exit in November
2000, comparable store sales declined 4 percent in fiscal 2002.
Fiscal 2002 was marked by significant variation in sales per-
formance between the first half and the second half of the year.
As expected, the sales slowdown experienced in the latter part of
fiscal 2001 continued in the first half of fiscal 2002, with com-
parable store sales declining 23 percent. The slowing economy,