CarMax 2003 Annual Report Download - page 5

CARMAX 2003 3
completely from Circuit City in a tax-free distribution
of shares. In our first partial year as an independent
company, we’re off to a good start.
Sales. Strong sales and earnings growth characterized
fiscal 2003 through the first nine months of the year.
This was interrupted in the fourth quarter when Mother
Nature delivered a tough winter, particularly in our
mid-Atlantic and Southeastern markets. Nonetheless, we
finished the year having grown comp store used unit sales
8% and total sales 12% to nearly $4 billion.
Earnings. Fiscal 2003 was a transition year for SG&A
expenses and, therefore, for earnings growth. First, we
experienced the stepped-up expenses related to ramping
up our geographic growth.These expenses include pre-
opening, recruiting, training, relocation and the continued
development of our management bench in anticipation
of the store openings planned for the next three years.
During the latter half of the year, we also began to
experience the incremental costs associated with being
an independent company.These totaled approximately
$9 million for the second half of the year and included
higher costs for health and welfare benefits (more than
half the increase), as well as added expenses for fully
assuming such functions as legal, treasury and media buy-
ing. Consequently, the expense leverage that we would
otherwise have expected from strong comp store used
unit growth was offset.We also had non-tax-deductible,
separation expenses of $7.8 million, or 7 cents per share.
Net earnings for the year were $95 million, or 91 cents
per share. Excluding the separation costs, net earnings
were $103 million or 98 cents per share.
Productivity. We continued to enhance our opera-
tional capabilities. One major undertaking in fiscal 2003
was the rollout of a new electronic repair order system.This
further automated our reconditioning processes by comput-
erizing the reconditioning flow sequence.We also added
new systems to significantly improve our appraisal process,
new tools to increase the effectiveness of our sales manage-
ment, and continued enhancements to carmax.com. All of
these improvements will further increase our efficiency and
our lead over existing and potential competitors.
WHERE WE’RE GOING
Our original goal was to create value for Circuit City
shareholders in the 21st century.We’ve made a good start
there, as well. As of our separation on October 1, 2002,
we have created more than $1 billion in market value for
our original Circuit City shareholders on no net equity
investment…we repaid the original Circuit City venture
loan in full, with interest, at the time of our tracking stock
IPO in 1997. More importantly, we believe the opportu-
nity before us is now to create one of America’s great
retail success stories on behalf of our CarMax customers,
associates and shareholders.
Growth Plan. Our plan to grow the CarMax con-
cept nationwide will be key to our value creation.We’ve
gotten off to a strong start by opening eight stores from
February 2002 through March 2003.These new stores
have also significantly exceeded our expectations in both
sales and profitability.We expect to open seven or eight
additional stores during the balance of fiscal 2004. Going
forward, we expect to open used car superstores equal to
15% to 20% of our store base each year.
Of equal importance in creating value will be continu-
ing to grow our used car market share and improve our
operating productivity in all stores.Through a combination
of these efforts, we believe we should be able to generate
comp store used unit sales growth in the 5% to 9% range
for the next several years.
After our separation anniversary in October, we should
also begin realizing significant overhead leverage on our cor-
porate SG&A expenses as we continue our growth.We have
estimated the annual impact of the incremental costs of sepa-
ration to be $20–22 million, approximately $9 million of
which we experienced in fiscal 2003.We expect an additional
$11–13 million in incremental separation costs in fiscal 2004.
We also expect CarMax Auto Finance to continue to be
a contributor to our success. It is important to remember,
however, that its share of total profit contribution is expected
to decline as the unusually high interest rate spreads of the
last several years diminish.While CarMax Auto Finance
provided approximately 15% of pre-SG&A profit margin in
fiscal 2003, we expect that its contribution will return to a
more normal 10-11% over the next two years.
THANKS
We owe a debt of gratitude to many who’ve helped
CarMax get off to a great start over the last decade.
Alan McCollough, Circuit City’s CEO, and the entire
Circuit City team were great parents and advisors.The
many Circuit City board members through the years
also offered consistent support. I especially want to thank
Walter Salmon,Ted Nierenberg and Alan Wurtzel, three
experienced retail leaders who were particularly enthusi-
astic supporters in our early days.
Rick Sharp, our co-founder and now chairman, and
the new CarMax board have worked hard to help us put
in place a world-class corporate governance process.
And most importantly, our 8,000-plus CarMax associates
have stayed focused on doing what really matters: buying,
reconditioning and selling great quality used cars and
providing a superior customer service experience every
day, no matter the challenges. My thanks to all of you.
AUSTIN LIGON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MARCH 31, 2003