CarMax 2004 Annual Report Download - page 5

CARMAX 2004 3
provides more than enough resources for our net capital
spending needs, and we have ready availability of attractively
priced debt financing through our inventory facility and real
estate financing relationships. We are now past the vast major-
ity of disruption and costs associated with separating from our
parent company. In fiscal 2005, we expect to incur another
$4 million in incremental stand-alone costs, largely related to
outsourcing our payroll systems, and the following year, we
expect to incur roughly another $3 million to $5 million as
we outsource our computer operations center. We expect this
to be the last major SG&A addition related to our separation.
■Growth Program. Our growth plan calls for a ramp up
to a 15%–20% annual growth rate of new stores. Our focus for
the first 4 to 5 years of the program is adding satellite fill-in
stores in established markets and standard stores in new mid-
sized markets. These represent the lowest risk, highest early
return opportunities, which help offset the penalties of a growth
program buildup. At year-end, we had opened 15 new stores
plus one replacement store at our LAX location since resuming
growth. Seven of these stores are satellite fill-in stores while the
other eight are standard stores in new mid-sized markets.
This year was the first we’ve grown at a 20% pace, and we
intend to do so again in fiscal 2005 by opening five standard
superstores and five satellite superstores, including a standard
and a satellite store in the Los Angeles market. We do not
expect the L.A. stores to initially perform as strongly as our
regular openings due to a current lack of enough stores to
support TV advertising in L.A. The L.A. stores are intended
to lay the groundwork for an eventual rollout of the entire
market. A satellite opening in Richmond is a continuation of
our efforts to understand how densely we can store an older,
higher-market-share market. In 4 to 5 years, we hope to better
understand what our ultimate market share potential might
be, and therefore how many stores we may eventually be able
to build nationwide.
■Operational Goals. During fiscal 2005, we have three
major internal goals.
•Quality: First, we want to continue our efforts at contin-
uous quality improvement throughout our operating processes
and particularly our reconditioning process. I believe we have
the best and most consistent inspection, reconditioning, and
certification process in the auto industry — indeed, several
manufacturers have studied our process as the basis for their
own certification programs. But we know there are still errors to
eliminate and efficiencies to be gained. This past year, our sen-
ior operating team studied the quality improvement processes
and cultures of top auto manufacturers like Toyota and Nissan.
Although I believe we’re among the better specialty retailers in
process improvement and significantly ahead of anyone else in
auto retail, our visits to the Toyota and Nissan factories have
helped us understand how much more can be achieved. We are
also taking advantage of data provided by our new electronic
repair order system to improve the quality of our recondition-
ing process while reducing the cost and cycle time involved.
•Associate Development: To open the 10 stores planned
for 2005, we need to generate approximately 140 managers
from our existing base of approximately 700 store-level
managers across the sales, purchasing, service operations,
and business office teams and replace them with internal
promotions and outside hires. It also means identifying,
interviewing, selecting, hiring, and training more than
1,000 additional talented associates in the various operating
departments. To do this smoothly, open the new stores suc-
cessfully, and continue to improve operational execution in
our existing stores is an enormous task. This is, as they say,
Job #1 for CarMax management.
We also believe the broad diversity that we’ve been able
to achieve in both our overall associate teams and our man-
agement teams has given us a significant competitive advan-
tage compared to other auto retailers. We intend to build on
this advantage.
•Company Culture: The entrepreneurial culture of
service and quality that our associates have built as a team
over the last decade has been critical to our success. We’ve
also realized how much fun both we and our customers can
have when you remove all the negatives from the car-buying
process. Yet our own success and growth can become the
enemy if we’re not careful. We want to sustain an enthusiastic,
down-to-earth, non-hierarchical business culture that treats
every associate and every customer with the respect and per-
sonal attention they deserve. A culture where our stores and
store associates come first. They serve our customers, they
create the value in the company, and our job is to support
them and help make their jobs easier in every way we can.
Ultimately, all truly great service and retail companies create a
culture built on similar principles, and they prosper only as
long as they sustain it.
■Board of Directors Additions. This past year we wel-
comed Fully Clingman and Tom Stemberg to our board of
directors. Fully is the retired president of the H.E. Butt
Grocery Company, named one of the top three supermarket
chains in the nation by the Grocery Manufacturers of
America. Tom is the founder and executive chairman of
Staples, Inc. Together they add enormous depth in big-box
retail experience to our board. We are delighted to have their
expertise as we grow.
Austin Ligon
President and Chief Executive Officer
March 30, 2004