CarMax 2004 Annual Report Download - page 4

2 CARMAX 2004
TO OUR SHAREHOLDERS
WHERE WE’VE BEEN
During the past year, we’ve celebrated some important mile-
stones that reflect just how far we’ve come since we began.
Last July, we sold our 1 millionth car. In late September, we
celebrated our 10th anniversary since opening, and on
October 1, our first anniversary as an independent public
company. As we finished the fiscal year, we hit a few other
impressive milestones:
■Over 11 million customers greeted with a smile.
■Over 4.5 million free appraisals and cash offers
to customers.
■Over 1 million used cars sold.
■Over $20 billion in cumulative sales.
■Our 3rd consecutive PricewaterhouseCoopers/
Automotive News award for top 3-year shareholder
return among auto retailers.
All in all, a pretty good first decade for an organic growth
start-up in the retail industry — all thanks to the extraordinary
efforts of the 9,500-plus CarMax associates who’ve joined us
along the way and made it all happen. Twenty-six of the
original 100 associates that were with CarMax the day we
opened the Richmond store on September 29, 1993, are still
a part of our team today. They now play a wide variety of
roles throughout our organization, and their stories are the
story of CarMax’s growth and development.
WHERE WE ARE
In fiscal 2004 we delivered strong earnings growth, up 14%
excluding the non-deductible separation costs we paid for in
fiscal 2003, and up 23% on a net earnings basis. Our earnings
growth resulted from an 18% increase in used vehicle unit
sales, driven both by our new store openings and 6% compa-
rable store used unit sales growth. With our unique consumer
offer and strong store execution, we continued to take market
share. We hit our gross margin dollars per used unit target for
the year despite a particularly challenging model year
changeover period in the third quarter. Our proprietary buy-
ing and inventory processes and systems continue to help us
“buy right” and “price right.”
This earnings growth was achieved while we absorbed
both the penalty that comes with ramping up our store
growth and the expected decline in CarMax Auto Finance
spreads. As planned, we opened nine used car superstores,
compared with five the previous year. Consequently, SG&A
expense reflected appreciably higher preopening expense, as
well as the significantly higher SG&A ratio of new stores
compared with stores at mature sales levels. We also absorbed
approximately $13.5 million in incremental costs related to
being a stand-alone company compared with fiscal 2003.
Also as expected, CAF income grew a modest 3% for the
year. For more than two years — through the first half of fiscal
2004 — we benefited from much higher than normal spreads
at CAF because market rates for consumer auto loans did not
fall as fast as our cost of funds. During the second half, spreads
returned to more normal ranges. We expect CAF income com-
parisons in fiscal 2005 to be challenging for the first two quar-
ters, and then they should be on a more comparable basis.
WHERE WE’RE GOING
We are pleased that CarMax has built a strong foundation
for consistent and profitable growth. We have adjusted our
longer-term used unit comp store growth expectation to a
range of 4% to 8%. We continue to expect to deliver average
annual earnings growth of approximately 20%, once our CAF
income comparisons have cycled around to reflect spreads in
the normal range for each period. Our operating cash flow
Founding Associates, September 1993
Austin Ligon
President and Chief Executive Officer