CarMax 2005 Annual Report Download - page 4

WHERE WE ARE
Fiscal 2005 was the most challenging year we have experi-
enced since we curtailed growth in 1999 to concentrate
on improving our business operations after three years of
extremely rapid growth.Though total sales increased 14%,
comparable store used unit sales increased only 1%, and
net earnings declined 3%. In contrast to 1999, however,
our performance measures indicate that the sales volatility
and weakness that occurred from April through August
were caused by market factors — not by execution defi-
ciencies in our superstores or the pressures of growth.
Even during the second fiscal quarter, our most difficult of
the year, our analysis showed that we continued to gain
market share. All our superstores, both established and new,
experienced renewed sales and earnings strength begin-
ning in the third quarter.The fourth quarter was a terrific
finish for the year, with total sales up 25%, comparable
store used unit sales up 12%, and net earnings up 32%.
Our accomplishments in fiscal 2005 were many.
■Store Growth: Based on our confidence in our business
model, we did not waiver from our plan to grow our
store base 15% to 20% per year.We opened nine super-
stores in fiscal 2005, adding 18% to our store base.
■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-party finance
provider focused on subprime customers.Though DRIVE-
financed cars provide us only 40% to 50% of the net mar-
gin contribution per car that other car sales do, we know
that DRIVE-financed sales are truly incremental because
these customers have been turned down by all our other
finance providers.We estimate that DRIVE sales will be
roughly 3% to 5% of annual used unit sales in the future.
CarMax Auto Finance’s portfolio continued to be solidly
prime-rated, highly unusual for a used car portfolio.
Throughout fiscal 2005, CAF faced challenging income
comparisons in an environment where funding costs rose
more rapidly than consumer finance rates. Consequently,
CAF’s income was 3% below the fiscal 2004 level. CAF
continues to adhere to its stringent credit requirements.
As a result, the quality of its portfolio remains strong.
■Great Place to Work: Fortune magazine named CarMax to
its prestigious “100 Best Companies to Work For” list
for 2005.We are particularly pleased with this honor.
Our customers have long known that
CarMax is a great place to buy a car,
and now they also know that CarMax
is a great place to work.
■New Cars: We reached our goal to reduce our new car
franchises to a core group of seven franchises with four
major manufacturers:Toyota, DaimlerChrysler, Nissan,
and General Motors. For the foreseeable future, we
plan to operate these seven franchises to continue
developing our strategic understanding of the new
car business and to maintain our positive relationships
with major manufacturers.
OPERATIONAL GOALS
The three broad operational goals we outlined last year
continue to be areas of central focus for CarMax.We
made significant progress in each this year:
■Quality: Further systematize our efforts at continuous quality
improvement, with a particular emphasis on our reconditioning
process. During fiscal 2005, we developed and launched
the CarMax Quality Structure (CQS), a systematic
framework and philosophy for analyzing, developing,
and executing process improvement in our service and
reconditioning operations. CQS is based on extensive
analysis of the quality improvement processes of leading
quality-focused companies, including Toyota, Nissan,
Herman-Miller, and Viking.We have launched several
initiatives under this framework.
We also made significant ongoing process improve-
ments in other areas of the business, including a new
TO OUR
SHAREHOLDERS
Austin Ligon, President and Chief Executive Officer
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CARMAX 2005