CarMax 2002 Annual Report Download - page 83

81 CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002
CARMAX GROUP
In a public offering completed during the second quarter of
fiscal 2002, the Company sold 9,516,800 shares of CarMax
Group Common Stock that previously had been reserved for
the Circuit City Group or for issuance to holders of Circuit
City Group Common Stock. With the impact of the offering,
69.2 percent of the CarMax Group’s earnings were attributed to
the Circuit City Group’s reserved CarMax Group shares in fiscal
2002. In fiscal 2001, 74.6 percent of the CarMax Group’s earn-
ings were attributed to the Circuit City Group’s reserved
CarMax Group shares, and in fiscal 2000, 77.1 percent of the
CarMax Group’s earnings were attributed to the Circuit City
Group’s reserved CarMax Group shares. The net proceeds of
$139.5 million from the offering were allocated to the Circuit
City Group to be used for general purposes of the Circuit City
business, including remodeling of Circuit City Superstores.
Operations Outlook
Over the past two years, CarMax has demonstrated that its con-
sumer offer and business model can produce strong sales and
earnings growth. Given its solid financial performance, we
believe CarMax is able to support its growth independently.
In fiscal 2003, CarMax’s geographic expansion will continue
to focus on entries into mid-sized markets and satellite store
opportunities in existing markets. We have identified more than
30 additional markets that could support a standard superstore,
the principal CarMax store size going forward. We also believe
that we can add approximately 10 satellite stores in our existing
markets. In fiscal 2003, CarMax plans to open four to six
stores, approximately one half of which are expected to be satel-
lite stores.
We believe comparable store used-car unit sales growth,
which drives our profitability, will be in the low- to mid-teens
in the first half of fiscal 2003, moderating to high-single to
low-double digits in the second half. Fiscal 2003 will be a year
of transition for CarMax as it ramps up its growth pace. Addi-
tional growth-related costs such as training, recruiting and
employee relocation for our new stores will moderate earnings
growth. In addition, we anticipate a reduction in yield spreads
from the CarMax finance operation as interest rates rise above
the low levels experienced in fiscal 2002. Our earnings expecta-
tions for CarMax also include preliminary estimates of
expenses expected to be incurred in the second half of fiscal
2003 if the planned separation is approved. We expect the
expense leverage improvement achieved from total and compa-
rable store sales growth to be substantially offset by these three
factors. Refer to the “Circuit City Stores, Inc. Management’s
Discussion and Analysis of Results of Operations and Financial
Condition” for the estimated contribution of the CarMax busi-
ness earnings attributed to the outstanding CarMax Group
Common Stock in fiscal 2003.
We plan to open six to eight stores per year in fiscal 2004
through fiscal 2006, including openings in mid-sized markets
and satellite stores in existing markets.
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
Liquidity and Capital Resources
CASH FLOW HIGHLIGHTS
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
Net earnings .................................................. $ 90.8 $ 45.6 $ 1.1
Depreciation and amortization...................... $ 16.3 $ 18.1 $ 15.2
Provision for deferred income taxes ............... $ 3.2 $ 8.8 $ 1.2
Cash used for working capital, net................. $ (71.0) $(63.7) $(49.0)
Cash provided by (used in)
operating activities ................................... $ 42.6 $ 18.0 $(23.6)
Purchases of property and equipment............ $ (41.4) $(10.8) $(45.4)
Proceeds from sales of property
and equipment, net.................................. $ 99.0 $ 15.5 $ 25.3
Net (decrease) increase in allocated
short-term and long-term debt................. $(103.7) $(22.2) $ 68.8
CASH PROVIDED BY OR USED IN OPERATIONS. CarMax generated
net cash from operating activities of $42.6 million in fiscal 2002
and $18.0 million in fiscal 2001. Net cash used in operating
activities was $23.6 million in fiscal 2000. The fiscal 2002
improvement primarily resulted from a $45.2 million increase in
net earnings, partly offset by an increase in accounts receivable,
which resulted from increased sales generating increased auto-
mobile loans and increased yield spreads from the finance opera-
tion. The fiscal 2001 increase reflects a $44.4 million increase in
net earnings, partly offset by an increase in working capital.
INVESTING ACTIVITIES. Net cash provided by investing activities
was $57.5 million in fiscal 2002 and $3.3 million in fiscal
2001. Net cash used in investing activities was $54.9 million in
fiscal 2000. CarMax’s capital expenditures were $41.4 million
in fiscal 2002, $10.8 million in fiscal 2001 and $45.4 million in
fiscal 2000. Fiscal 2002 capital expenditures included spending
for the construction of two standard-sized used-car superstores,
one of which opened during the first quarter of fiscal 2003, and
one satellite used-car superstore. In fiscal 2001, capital expendi-
tures were related to equipment purchases. Fiscal 2000 capital
expenditures included spending for the construction of four
used-car superstores.
Capital expenditures have been funded primarily through
sale-leaseback transactions, allocated short- and long-term debt
and internally generated funds. Net proceeds from sales of
property and equipment, including sale-leasebacks, totaled
$99.0 million in fiscal 2002, $15.5 million in fiscal 2001 and
$25.3 million in fiscal 2000. In August 2001, CarMax entered
into a sale-leaseback transaction covering nine superstore prop-
erties for an aggregate sale price of $102.4 million. This trans-
action, which represented the first sale-leaseback entered into
by CarMax without a Circuit City Stores, Inc. guarantee, was
structured at competitive rates with an initial lease term of 15
years and two 10-year renewal options.