CarMax 2006 Annual Report Download - page 20

18 CARMAX 2006
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is intended to help the reader understand the financial performance of CarMax, Inc. MD&A is
presented in eight sections: Business Overview; Critical Accounting Policies; Results of Operations;
Operations Outlook; Recent Accounting Pronouncements; Financial Condition; Market Risk; and
Cautionary Information About Forward-Looking Statements. MD&A is provided as a supplement to, and
should be read in conjunction with, our consolidated financial statements and the accompanying notes
contained elsewhere in this annual report.
In MD&A, “we,” “our,” “us,” “CarMax,” “CarMax, Inc.,” and “the company” refer to CarMax, Inc. and its
wholly owned subsidiaries, unless the context requires otherwise. Amounts and percentages in tables may not
total due to rounding.
BUSINESS OVERVIEW
General
CarMax is the nation’s largest retailer of 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 improvement, we resumed opening new stores at the end of fiscal 2002. At February 28, 2006,
we had 67 used car superstores in 31 markets, including 23 mid-sized markets and 8 large markets. We initially
defined mid-sized markets as those with television viewing populations generally between 1 million and
2.5 million people. As we have refined our operations and market data, we now believe a more appropriate
definition of a mid-sized market is one with a television viewing population generally between 600,000 and
2.5 million people. During fiscal 2006, we also operated seven new car franchises, all of which were integrated
or co-located with our used car superstores. In fiscal 2006, we sold 289,888 used cars, representing 93% of the
total 310,789 vehicles the company sold at retail.
We believe the CarMax consumer offer is unique in the automobile retailing marketplace. Our offer gives
consumers a way to shop for cars in the same manner that they shop for items at other “big box” retailers. Our
consumer offer is structured around four core equities: low, no-haggle prices; a broad selection; high quality;
and customer-friendly service. Our website, carmax.com, is a valuable tool for communicating the CarMax
consumer offer, a sophisticated search engine, and an efficient sales channel for customers who prefer to
complete part of the shopping and sales process online. We generate revenues, income, and cash flows
primarily by retailing used vehicles and associated items including vehicle financing, extended service plans,
and vehicle repair service. A majority of the used vehicles we sell at retail are purchased directly from
consumers. Vehicles purchased through our appraisal process that do not meet our retail standards are sold at
on-site wholesale auctions.
Wholesale auctions are conducted at the majority of our superstores and are held on a weekly, bi-weekly, or
monthly basis. On average, the vehicles we wholesale are approximately 10 years old and have more than
100,000 miles. Participation in our wholesale auctions is restricted to licensed automobile dealers, the majority
of whom are independent dealers.
CarMax provides prime-rated financing to qualified customers through CarMax Auto Finance (“CAF”),
the company’s finance operation, and Bank of America. Nonprime financing is provided through several third-
party lenders, and subprime financing is provided through a third-party lender under a program rolled out
near the end of the second quarter of fiscal 2005. We periodically test additional third-party lenders. CarMax
has no recourse liability for loans provided by third-party lenders. Having our own finance operation allows us
to limit the risk of relying on third-party finance sources, while also allowing us to capture additional profit and
cash flows. The majority of CAF’s profit contribution is generated by the spread between the interest rates
charged to customers and our cost of funds. We collect fixed, prenegotiated fees from the third parties that
finance prime- and nonprime-rated customers. As is customary in the subprime finance industry, the subprime
lender purchases the loans at a discount.