CarMax 2005 Annual Report Download

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FISCAL
YEAR 2005
CARMAX, INC. ANNUAL REPORT

Table of contents

  • Page 1
    FISCAL YEAR 2005 CARMAX, INC. ANNUAL REPORT

  • Page 2
    .... The company has opened three superstores in Los Angeles in the last 12 months, bringing to five the total number of superstores currently operated in this large market. Indianapolis K A N SA S Austin Dallas/Fort Worth (4) Houston (4) San Antonio VIRGINIA Kansas City KENTUCKY Richmond (2) WA...

  • Page 3
    ... in the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2005. The consolidated financial statements and related information contained in this annual report are presented as if CarMax existed as a separate entity during all periods presented. STORE MANAGEMENT TEAMS

  • Page 4
    ... waiver from our plan to grow our store base 15% to 20% per year.We opened nine superstores in fiscal 2005, adding 18% to our store base. â- Consumer Finance: In August, after nine months of testing in a limited group of stores, we rolled out DRIVE Financial Services company-wide. DRIVE is a third...

  • Page 5
    ... help sales consultants deliver more information consistently during the appraisal presentation to customers and a new sales management support system that helps sales managers monitor the most significant measures of customer service and sales performance on a real-time basis. Associate Development...

  • Page 6
    ... office products market ($199 billion in estimated annual sales) and the home improvement market ($271 billion in annual sales). â- â- The market for late-model used cars is generally resistant to typical economic cycles. As the economy improves, buyers who move from late-model used cars to new...

  • Page 7
    ... annually. *Total used vehicle sales divided by total vehicles in operation Source: Manheim Auctions and ADESA, Inc. â- NON-COMMODITY â- CONSUMER NEED â- â- â- Unlike new cars, every used car is unique, reflecting differences in mileage, condition, and age.This uniqueness provides CarMax...

  • Page 8
    ... Houston North Amy Deleonardis Business Office Greenville Angel Gibson Operations Kansas City Jamell Love Customer Service Fayetteville Renae Angeloro Customer Service South Boulevard (Charlotte) Larry Fuller Service San Antonio Ryan Gill Service Columbia Alina Henry Sales Naperville (Chicago...

  • Page 9
    ...(Chicago) Juan Perez Service Orlando Tim Saj Service South Boulevard (Charlotte) Ken Sexton Service Nashville Joe Williams Sales Nashville Nehad Nageeb Sales Plano (Dallas/Fort Worth) Dale Proctor Service Greenville Rafael Sanabria Sales Charlotte Erik Shatzer Sales Kenosha (Chicago) CARMAX...

  • Page 10
    ... the car, in the store, and on carmax.com. The price of the extended service plan is competitive and fixed, based primarily on the repair record of similar vehicles and the length of coverage. The price of the financing is competitive and no-haggle and is based on the finance company's assessment of...

  • Page 11
    ...30-day limited warranty. We also offer extended service plans on every vehicle we retail that provide up to 6 years of coverage. â- Our computerized inventory system makes it easy to search our vehicle inventory at each store or company-wide. There is no hand-off of customers to a finance manager...

  • Page 12
    .... • Sales consultant/customer engagements. • Appraisals. • Extended service plan sales. • Financings. Every retail vehicle is electronically tracked through its CarMax life from purchase through reconditioning and test drives to ultimate sale.We also capture data on vehicles we wholesale...

  • Page 13
    ...wholesale industry information. Our high volume of in-store appraisals and outside auction purchases provides a great training ground that gives us an advantage compared with other used car retailers. Our inventory and pricing models help us: • Buy the mix of makes, models, age, mileage, and price...

  • Page 14
    ... of our cars, the large percentage of vehicles covered by extended service plans, and the consistency of the relationship between wholesale and retail values for CarMax vehicles. CAF and our third-party finance companies have found they can rely on CarMax information to determine true vehicle worth...

  • Page 15
    ...$116.5 $90.8 $94.8 EARNINGS (In millions) $45.6 $112.9 RETURN ON SHAREHOLDERS' EQUITY 20.7% 18.2% (5.3)% 3.5% $1.1 FY95 FY96 FY97 FY98 FY99... FY01 FY02 FY03 FY04 FY05 ROE calculations not meaningful for periods prior to fiscal 1997. REGION MANAGEMENT TEAMS 0.3% 12.4% 8.5% CARMAX 2005 13

  • Page 16
    ... focused on improving sales and profits. At the end of fiscal 2005, we had opened 25 superstores since resuming growth. These newer stores represent more than 40% of our total superstore base. We plan to open stores at an annual rate of approximately 15% - 20% of our used car superstore base. In the...

  • Page 17
    ... in Los Angeles, bringing our total store count in this large market to five and reaching, we believe, sufficient critical mass to support a full L.A. television advertising program. We estimate that we have an 8%-10% market share of late model, 1- to 6-year-old used cars within the trade areas of...

  • Page 18
    ...) per share: Basic Diluted Total assets Long-term debt, excluding current installments Used units sold New units sold Comparable store used unit growth (%) Comparable store vehicle dollar growth (%) Total used unit growth (%) Total net sales and operating revenues growth (%) Used car superstores at...

  • Page 19
    ... manager, operations manager, purchasing manager, and business office manager, as well as a number of experienced sales managers and buyers. We must therefore be continually recruiting, training, and developing managers and associates to fill the pipeline necessary to support future store openings...

  • Page 20
    ... convert stronger customer traffic levels into renewed sales and earnings growth. In addition, we benefited from the mid-year rollout of a third-party finance provider focused on subprime-rated customers, a segment that previously could not be financed at CarMax. Our total gross profit margin was 12...

  • Page 21
    ...2005 % Years Ended February 28 or 29 2004 % 2003 % Used vehicle sales New vehicle sales Wholesale vehicle sales Other sales and revenues: Extended service plan revenues Service department sales Third-party finance fees, net Appraisal purchase processing fees Total other sales and revenues Total...

  • Page 22
    ... our sales consultants use to deliver appraisals to customers and our systems support for buyers.We believe that these enhancements have contributed to the continuing increase in our rate of appraisal purchases completed per appraisal offers made. Additionally, higher average wholesale prices added...

  • Page 23
    ... in extended service plan revenues, service department sales, and third-party nonprime finance fees. In fiscal 2005, the cost of providing subprime financing offset some of these increases. As is customary in the industry, subprime finance contracts are purchased from the company at a discount. We...

  • Page 24
    ... fiscal 2005 service profits, the fiscal 2005 rollout of a subprime lender, and the fiscal 2004 elimination of appraisal purchase processing fees as part of the new ACR methodology. Service department sales is the only category within other sales and revenues that has an associated cost of sales. In...

  • Page 25
    ... of average managed receivables in fiscal 2005 was due to a combination of factors, including improved general economic conditions, the implementation of a new credit scorecard in the third quarter of fiscal 2003, and operational efficiencies resulting from system enhancements. The recovery rate was...

  • Page 26
    ....; Salt Lake City, Utah; and Virginia Beach, Va. Satellite superstore additions are planned for Miami, Fla.; Kansas City, Mo.; and Nashville, Tenn. In early fiscal 2006, we added a standard superstore and a satellite superstore in the Los Angeles market. Fiscal 2006 Expectations In February 2005...

  • Page 27
    ... also reflect the cost to roll out marketwide advertising in Los Angeles for the first time as we open our fifth L.A. store. Finally, we expect between $2 million and $3 million in incremental costs related to separating our data center operation from Circuit City-the last cost expected to be...

  • Page 28
    ... by dealing with highly rated bank counterparties. The market and credit risks associated with financial derivatives are similar to those relating to other types of financial instruments. Refer to Note 5 to the company's consolidated financial statements for a description of these items. The total...

  • Page 29
    ... disrupt the company's business, impact sales and profitability, or expose us to customer or thirdparty claims. Changes in the availability or cost of capital and working capital financing, including the availability of long-term financing to support development of the company and the availability...

  • Page 30
    ... N I N G S (In thousands except per share data) 2005 %(1) Years Ended February 28 or 29 2004 %(1) 2003 %(1) SALES AND OPERATING REVENUES: Used vehicle sales New vehicle sales Wholesale vehicle sales Other sales and revenues NET SALES AND OPERATING REVENUES $3,997,218 492,054 589,704 181,286...

  • Page 31
    ... 28 or 29 (In thousands except share data) 2005 2004 ASSETS CURRENT ASSETS: Cash and cash equivalents (NOTE 2) Accounts receivable, net Automobile loan receivables held for sale (NOTE 4) Retained interest in securitized receivables (NOTE 4) Inventory Prepaid expenses and other current assets...

  • Page 32
    ... 14,873 77 30 8,880 (6,008) (1,435) (14,333) (67,366) (10,571) (845) 51,375 2,488 71,967 Purchases of property and equipment Proceeds from sales of assets NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES: (230,080) 88,999 (141,081) (181,338) 107,493 (73,845) (122,032) 41,621 (80,411...

  • Page 33
    ... employee stock purchase plan Shares issued under stock incentive plans Shares cancelled upon reacquisition by the company Tax benefit from stock issued Unearned compensation-restricted stock BALANCE AT FEBRUARY 28, 2005 $52,152 $489,164 $259,660 See accompanying notes to consolidated financial...

  • Page 34
    ... sells new vehicles under various franchise agreements. CarMax provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation, CarMax Auto Finance ("CAF"), and thirdparty lenders; the sale of extended service plans; and...

  • Page 35
    ...consolidated balance sheets. The company uses a combination of insurance and self-insurance for a number of risks including workers' compensation, general liability, and employee-related health care benefits, a portion of which is paid by associates. Estimated insurance liabilities are determined by...

  • Page 36
    ... benefit or costs that could be attributed to CAF. Examples of indirect costs not included are retail store expenses, retail financing commissions, and corporate expenses such as human resources, administrative services, marketing, information systems, accounting, legal, treasury, and executive...

  • Page 37
    ... The value of these receivables is determined by estimating the future cash flows using management's assumptions of key factors, such as finance charge income, default rates, prepayment rates, and discount rates appropriate for the type of asset and risk. The value of interest-only strip receivables...

  • Page 38
    ...losses on managed receivables $ 19.5 $ 21.1 $ 17.5 Annualized credit losses as a percentage of average managed receivables 0.82% 1.01% 1.03% S e l e c t e d C a s h F l ows f ro m S e c u r i t i z e d R e c e i va b l e s Prepayment Rate. The company uses the Absolute Prepayment Model or "ABS" to...

  • Page 39
    ...29, 2004. The market and credit risks associated with interest rate swaps are similar to those relating to other types of financial instruments. Market risk is the exposure created by potential Land held for development represents land owned for future sites that are scheduled to open more than one...

  • Page 40
    ... benefit pension plan (the "pension plan") covering the majority of full-time employees who are at least 21 years old and have completed one year of service. The cost of the program is being funded currently. Plan benefits generally are based on years of service and average compensation. The company...

  • Page 41
    ...226 $ 8,707 $7,410 $5,065 Assumptions. Assumptions used to determine benefit obligations were as follows: Years Ended February 28 or 29 2005 Pension Plan 2004 2003 2005 Restoration Plan 2004 2003 Weighted average discount rate Rate of increase in compensation levels 5.75% 5.00% 6.00% 5.00% 6.50...

  • Page 42
    ... with the company's shareholder rights plan, shareholders received preferred stock purchase rights as a dividend at the rate of one right for each share of CarMax, Inc. common stock owned. The rights are exercisable only upon the attainment of, or the commencement of a tender offer to attain...

  • Page 43
    ... the company's stock incentive plans, nonqualified stock options may be granted to management, key employees, and outside directors to purchase shares of common stock. The exercise price for nonqualified options is equal to, or greater than, the market value at the date of grant. Options generally...

  • Page 44
    ...10 $ 94,802 $ $ 0.92 0.91 The company conducts most of its business in leased premises. The company's lease obligations are based upon contractual minimum rates. CarMax operates 23 of its superstores pursuant to various leases under which its former parent Circuit City was the original tenant and...

  • Page 45
    ... indemnification issues arising from these arrangements. As part of its customer service strategy, the company guarantees the vehicles it retails with a 30-day limited warranty. A vehicle in need of repair within 30 days of the customer's purchase will be repaired free of charge. As a result of this...

  • Page 46
    ... public accounting firm, has issued a report on our management's assessment of our internal control over financial reporting. This report is included herein. AUSTIN LIGON PRESIDENT AND CHIEF EXECUTIVE OFFICER KEITH D. BROWNING EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 44 CARMAX 2005

  • Page 47
    ... the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 3, 2005, expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. RICHMOND, VIRGINIA MAY 3, 2005 CARMAX 2005 45

  • Page 48
    ...PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders CarMax, Inc.: We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting that CarMax, Inc. and subsidiaries (the "Company") maintained effective internal...

  • Page 49
    ... Vice President Chief Financial Officer TOM FOLLIARD Vice President CarMax Auto Finance BARBARA HARVILL Vice President Real Estate KIM D. ORCUTT Vice President Management Information Systems FRED WILSON Executive Vice President Store Operations MIKE DOLAN Vice President Management Information...

  • Page 50
    ... of the Board CarMax, Inc. Private Investor Retired Chairman and Chief Executive Officer President Chief Executive Officer CarMax, Inc. MAJOR GENERAL HUGH G. ROBINSON (U.S.A., RET.), P.E. Circuit City Stores, Inc. (a consumer electronics specialty retailer) Richmond, Virginia KEITH BROWNING...

  • Page 51
    ... Richmond,Virginia 23219-4023 Members of the media and others seeking general information about CarMax should contact: Lisa Van Riper, Assistant Vice President, Public Affairs Telephone: (804) 935-4594 DESIGN: CARMAX, CARMAX THE AUTO SUPERSTORE, THE CARMAX ADVANTAGE, 5 DAY MONEY BACK GUARANTEE...

  • Page 52
    CARMAX, INC. 4900 COX ROAD GLEN ALLEN VIRGINIA 23060-6295 804.747.0422 WWW.CARMAX.COM