CarMax 2006 Annual Report Download

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Fiscal Year 2006
CarMax, Inc. Annual Report

Table of contents

  • Page 1
    CarMax, Inc. Annual Report Fiscal Year 2006

  • Page 2
    ... Training and Development Above & Beyond Award Program See page 6 Low, No-Haggle Prices Broad Selection Great Quality Customer-Friendly Service carmax.com® See page 8 Information Systems Purchasing and Inventory Management Reconditioning Finance Originations See page 10 Revenues Earnings Return...

  • Page 3
    ... Kansas City (2) Wichita Kentucky Louisville Nevada Las Vegas (2) New Mexico Albuquerque North Carolina Charlotte (2) Greensboro (2) Raleigh (2) South Carolina Columbia Greenville Tennessee Knoxville Memphis Nashville (2) Texas Austin Dallas/Fort Worth (4) Houston (4) San Antonio Utah Salt Lake City...

  • Page 4
    ... support both our new store growth and continued operational improvement. During the year, we successfully developed more than 200 new managers to support growth, and we opened nine superstores, which employ more than 800 associates. We also enhanced our continuing training and development programs...

  • Page 5
    ... We also are opening the CarMax Car Buying Center, our first appraisal-only location. This center is on a one-half acre site where we will conduct appraisals and purchase vehicles using the same processes and systems utilized in our used car superstores. This test is part of our long-term program to...

  • Page 6
    ...change in new car units sold. 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 cars are replaced by buyers who move from older, higher mileage cars to later model used cars. This...

  • Page 7
    .... Superstore display lot The customer experience NON-COMMODITY â- FRAGMENTED COMPETITION â- Unlike new cars, every used car is unique, reflecting differences in mileage, condition, and age. This uniqueness provides CarMax the opportunity to add value. We carefully select the vehicles we offer...

  • Page 8
    ... areas - sales, operations, buying, and business office. The programs include classroom and online training as well as formal mentoring assignments. Standardized training, procedures, and processes facilitate transfers between stores and regions. â- In 2003, we created the Above & Beyond Award...

  • Page 9
    ... (D.C./Baltimore) Miguel Cossyleon Sales Oak Lawn (Chicago) Nick Fulton Service Greenville Franklin Jackson, Jr. Sales Rockville (D.C./Baltimore) Trevor Moss Inventory Houston North Jennifer Spencer Customer Service Independence (Kansas City) Angel Cruz Technician Greenville Kevin Hagedon...

  • Page 10
    ... is buying from us. The offer is good for 7 days or 300 miles. â- An average CarMax superstore has between 300 and 400 vehicles for sale, compared with approximately 90 used vehicles at the average new car dealer. Our primary focus is vehicles that are 1 to 6 years old, with fewer than 60,000...

  • Page 11
    ... 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 or sales manager. The sales consultant helps the customer through the entire sales process. â- â- â- â- â- 9 CARMAX 2006 CARMAX...

  • Page 12
    ... Sales consultant/customer engagements. Test drives. Appraisals and appraisal purchases. Financings. Extended service plan sales. Consumer Offer Purchasing/ Inventory Management â- â- Reconditioning Finance Originations Every retail vehicle is electronically tracked throughout its CarMax...

  • Page 13
    ... 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 to: â- The majority of our service operation resources are used in vehicle reconditioning...

  • Page 14
    ... customer benefits and competitive advantages. â- This financing process reduces or eliminates two of the three risks inherent in used car lending. â- The sales consultant collects the customer's credit information and electronically submits the credit application to CarMax Auto Finance...

  • Page 15
    ... Results Since opening our first store in September 1993, we have grown to more than $6 billion in annual sales in the short span of 12 years. Our economic returns are similar to many industry-leading, big-box retailers and significantly better than the publicly traded new car dealer groups. 5 10...

  • Page 16
    ... our first appraisal-only "CarMax Car Buying Center." Located in the Atlanta market, the center is staffed with CarMax buyers who conduct appraisals and purchase vehicles using the same processes and systems utilized in our used car superstores. This test store is part of our long-term program to...

  • Page 17
    ..., developing specialized processes and systems, refining execution...all take time. CarMax intends to stay ahead of any potential competition through relentless attention to people, processes, and execution. â- â- â- â- S TO R E E X PA N S I O N (Number of used car superstores at...

  • Page 18
    ... analytical tools used by store associates, developing and executing our marketing programs, or planning and coordinating future store expansion. Pictured on this page are members of our store, region, and corporate management teams, and they represent the approximately 12,000 CarMax associates who...

  • Page 19
    ... portion...Used vehicle units sold...New vehicle units sold...Wholesale vehicle units sold ...Percent changes in: Comparable store used vehicle unit sales...Total used vehicle unit sales...Total net sales and operating revenues ...Diluted net earnings (loss) per share...Used car superstores at...

  • Page 20
    ... used vehicles. We pioneered the used car superstore concept, opening our first store in 1993. Over the next six years, we opened an additional 32 used car superstores before suspending new store development to focus on improving sales and profits. After a period of concept refinement and execution...

  • Page 21
    ..., purchasing manager, and business office manager, as well as a number of experienced sales managers and buyers. We must therefore continually recruit, train, and develop managers and associates to fill the pipeline necessary to support future store openings. If at any time we believed that the rate...

  • Page 22
    .... We recognize vehicle revenue when a sales contract has been executed and the vehicle has been delivered, net of a reserve for returns under our 5-day, money-back guarantee. A reserve for vehicle returns is recorded based on historical experience and trends. We also sell extended service plans on...

  • Page 23
    ...% 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 net sales and operating revenues...

  • Page 24
    ...our profitability. A CarMax store is included in comparable store sales beginning in the store's fourteenth full month of operation. C O M PA R A B L E S T O R E R E TA I L V E H I C L E S A L E S C H A N G E S 2006 Years Ended February 28 or 29 2005 2004 Vehicle units: Used vehicles...New vehicles...

  • Page 25
    ... by offering high-quality vehicles. Fewer than half of the vehicles acquired from consumers through the appraisal purchase process meet our standards for reconditioning and subsequent retail sale. Those vehicles that do not meet our standards are sold at our on-site wholesale auctions. CARMAX 2006...

  • Page 26
    ... wholesale operations. Under the revised appraisal offer strategy, instead of charging the customer the appraisal purchase processing fee, we adjust the price of our purchase offer to allow for full recovery of our costs, thereby reducing the in-store acquisition costs of used and wholesale vehicles...

  • Page 27
    ...spring and summer fiscal quarters. Sales are typically lowest in the fall quarter, which coincides with the new vehicle model-year-changeover period. In the fall quarter, the new model year introductions and discounts on model year closeouts generally can cause rapid depreciation in used car pricing...

  • Page 28
    ... options in the new and used car marketplace. A strong wholesale market pricing environment increases our cost of acquiring vehicles both in our in-store purchases and at auction. We were able to offset some of the resulting profit pressure through successful refinements in our in-store appraisal...

  • Page 29
    ... of appraisal purchase processing fees as part of the new in-store appraisal strategy. Service profits declined in fiscal 2005, reflecting, in part, the slower used vehicle sales pace and the associated deleveraging of service and reconditioning overhead costs. Third-party finance fees also...

  • Page 30
    ..., and corporate expenses such as human resources, administrative services, marketing, information systems, accounting, legal, treasury, and executive payroll. CAF originates automobile loans to qualified customers at competitive market rates of interest. The majority of the profit contribution from...

  • Page 31
    ... of receivables from the warehouse facility into three new public securitizations. The company's public securitizations typically contain an option to repurchase the securitized receivables when the outstanding balance in a pool of automobile loan receivables falls below 10% of the original pool...

  • Page 32
    ... balance CarMax receives when a vehicle is repossessed or surrendered by the customer and sold at wholesale auction. We believe the improvements in the recovery rate reflect the effects of the strengthening wholesale market pricing environment through fiscal 2005 and fiscal 2006. Selling, General...

  • Page 33
    ... retail center not currently served by CarMax. The store is staffed with CarMax buyers, who conduct appraisals and purchase vehicles on site using the same processes and systems utilized in our used car superstores. We do not sell cars at this store. This test store is part of our long-term program...

  • Page 34
    ... comparable store used unit sales, we expect a modest amount of SG&A leverage in fiscal 2007, including an expected increase in costs of approximately $5 million associated with moving our data center, and excluding expenses related to stockbased compensation. We expect our effective tax rate for...

  • Page 35
    ...At February 28, 2006, we owned ten superstores currently in operation, as well as the company's home office in Richmond, Virginia. In addition, six store facilities were accounted for as capital leases. Financing Activities Net cash used in financing activities was $1.6 million in fiscal 2006, while...

  • Page 36
    ... prime automobile financing for our used and new car sales. We use a securitization program to fund substantially all of the automobile loan receivables originated by CAF. We sell the automobile loan receivables to a wholly owned, bankruptcy-remote, special purpose entity that transfers an undivided...

  • Page 37
    ...in retail prices for used and new vehicles; a reduction in the availability or the company's access to sources of inventory; the significant loss of key employees from the company's store, regional, and corporate management teams; the efficient operation of the company's information systems; changes...

  • Page 38
    ...75.5 11.2 9.6 3.7 100.0 87.6 12.4 1.8 10.2 0.1 - - 4.1 1.6 2.5 Cost of sales ...GROSS PROFIT ... ...Selling, general, and administrative expenses...Gain on franchise dispositions, net ...Interest expense ...Interest income ...CARMAX AUTO FINANCE INCOME Earnings before income taxes...Provision for...

  • Page 39
    ... liabilities SHAREHOLDERS' EQUITY: Common stock, $0.50 par value; 350,000,000 shares authorized; 104,954,983 and 104,303,375 shares issued and outstanding at February 28, 2006 and 2005, respectively ...Capital in excess of par value ...Retained earnings ...TOTAL SHAREHOLDERS' EQUITY ...TOTAL...

  • Page 40
    ...) increase in short-term debt, net ...Issuance of long-term debt ...Payments on long-term debt ...Issuances of equity through stock incentive plans ...Purchases of shares for employee stock purchase plan ...NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ... (64,734) 174,929 (116,993) 6,035...

  • Page 41
    ... Value Retained Earnings Total BALANCE AT FEBRUARY 28, 2003 ... Net earnings ...Exercise of common stock options ...Shares purchased for employee stock purchase plan...Shares issued under stock incentive plans...Shares cancelled upon reacquisition by the company ...Tax benefit from stock issued...

  • Page 42
    ...quality used vehicles at low, "no-haggle" prices using a customer-friendly sales process in an attractive, modern sales facility. CarMax also sells new vehicles under various franchise agreements. CarMax provides its customers with a full range of related services, including the financing of vehicle...

  • Page 43
    ...defined benefit retirement plan obligations are determined by independent actuaries using a number of assumptions provided by the company. Key assumptions used in measuring the plan obligations include the discount rate, the estimated rate of salary increases, and the estimated future return on plan...

  • Page 44
    ... when the earnings process is complete, generally either at the time of sale to a customer or upon delivery to a customer. As part of its customer service strategy, the company guarantees the vehicles it sells with a 5-day, money-back guarantee. If a customer returns the vehicle purchased within the...

  • Page 45
    ... 29, 2004, as discussed in Note 2(H). 3 CARMAX AUTO FINANCE INCOME The company's finance operation, CAF, originates prime-rated financing for qualified customers at competitive market rates of interest. Throughout each month, the company sells substantially all of the loans originated by CAF in...

  • Page 46
    ... human resources, administrative services, marketing, information systems, accounting, legal, treasury, and executive payroll. 4 S E C U R I T I Z AT I O N S The company uses a securitization program to fund substantially all of the automobile loan receivables originated by CAF. The company sells...

  • Page 47
    .... Assumptions Used Impact on Fair Value of 10% Adverse Change Impact on Fair Value of 20% Adverse Change (In millions) Prepayment rate ...Cumulative default rate...Annual discount rate ... 1.43% -1.50% 1.40% -2.15% 12.0% $5.5 $4.7 $2.3 $10.8 $ 9.4 $ 4.5 Prepayment Rate. The company uses the...

  • Page 48
    ... covenants and performance triggers. These agreements require the company to meet financial covenants related to maintaining minimum tangible net worth, maximum total liabilities to tangible net worth ratio, minimum tangible net worth to managed assets ratio, minimum current ratio, minimum cash...

  • Page 49
    ... $406,301 Land held for development represents land owned for future sites that are scheduled to open more than one year beyond the fiscal year reported. Leased property meeting capital lease criteria is capitalized and the present value of the related lease payments is recorded as long-term debt...

  • Page 50
    ... of full-time employees. The company also has an unfunded nonqualified plan (the "restoration plan") that restores retirement benefits for certain senior executives who are affected by Internal Revenue Code limitations on benefits provided under the pension plan. The company uses a fiscal year...

  • Page 51
    ...company sets investment policies and strategies for the pension plan. Long-term strategic investment objectives include preserving the assets of the trust and balancing risk and return. The company oversees the investment allocation process, which includes selecting investment managers, setting long...

  • Page 52
    ... plan's liability. These calculations use participant-specific information such as salary, age, and years of service, as well as certain assumptions, the most significant being the discount rate, expected rate of return on plan assets, rate of compensation increase, and mortality rate. The company...

  • Page 53
    ...secured by vehicle inventory and contains customary representations and warranties, conditions, and covenants. Borrowings accrue interest at variable rates based on LIBOR, the federal funds rate, or the prime rate, depending on the type of borrowing. The company pays a commitment fee on the used and...

  • Page 54
    ... Plans The company maintains long-term incentive plans for management, key employees, and the non-employee members of the board of directors. The plans allow for the grant of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights...

  • Page 55
    ...00 contributed by employees to the plan, the company matches $0.15. CarMax has authorized up to 1,000,000 shares of common stock for the employee stock purchase plan. The source of the shares available for purchase by employees may, at the company's option, be open market purchases or newly issued...

  • Page 56
    ... 68,976 69,665 70,371 70,687 633,944 $982,240 Future minimum fixed lease obligations exclude taxes, insurance, and other costs payable directly by the company. The company entered into sale-leaseback transactions involving five superstores valued at approximately $72.7 million in fiscal 2006, and...

  • Page 57
    ..., the company guarantees the used 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, each vehicle sold has an implied liability associated with it. Accordingly, the company records...

  • Page 58
    ... LLP, the company's independent registered public accounting firm, has issued a report on our management's assessment of our internal control over financial reporting. Their report is included herein. AUSTIN LIGON PRESIDENT AND CHIEF EXECUTIVE OFFICER KEITH D. BROWNING EXECUTIVE VICE PRESIDENT AND...

  • Page 59
    ...the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 12, 2006, expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. RICHMOND, VIRGINIA MAY 12, 2006 CARMAX 2006 57

  • Page 60
    ...on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan...

  • Page 61
    ...Region Vice President Service Development DANDY BARRETT Region Vice President Service Operations Florida Region JASON DAY Assistant Vice President Assistant Controller DAN JOHNSTON Region Vice President General Manager Los Angeles Region LISA VAN RIPER Assistant Vice President Investor Relations...

  • Page 62
    ... Stores, Inc. (a consumer electronics specialty retailer) Richmond, Virginia KEITH BROWNING Chairman and Chief Executive Officer Global Building Systems, Inc. (a low- and moderate-income housing construction firm) Dallas, Texas THOMAS G. STEMBERG Executive Vice President Chief Financial Officer...

  • Page 63
    ... STORE PHOTOGRAPHY : CARMAX, CARMAX THE AUTO SUPERSTORE, THE CARMAX ADVANTAGE, 5 DAY MONEY BACK GUARANTEE (and design), VALUMAX, and CARMAX.COM are all registered trademarks or service marks of CarMax. Other company, product, and service names may be trademarks or service marks of their respective...

  • Page 64
    CarMax, Inc. 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238 804.747.0422 www.carmax.com