CarMax 2006 Annual Report Download - page 26

24 CARMAX 2006
Fiscal 2006 Versus Fiscal 2005. The 32% increase in wholesale vehicle dollar sales in fiscal 2006 reflected
a 16% increase in wholesale unit sales and a 14% increase in average wholesale selling price. Our wholesale
unit sales growth benefited from a strong increase in appraisal traffic combined with the expansion of our
store base. Appraisal traffic was up throughout fiscal 2006, but it was particularly strong in the second
quarter. We believe this increase was due, in part, to the domestic new car manufacturers’ employee pricing
programs. In these programs, franchised dealers lost some ability to negotiate on trade-ins due to their
inability to negotiate on the published employee discount price on new cars. In addition, the employee
pricing program coincided with a period of rapid decline in wholesale values for SUVs and large trucks,
making some dealers reluctant to accept these vehicles in trade. These factors created an influx of appraisal
traffic at CarMax as we continued to make appraisal purchase offers on all vehicles presented for appraisal.
Appraisal traffic also benefited from our focused “We Buy Cars” advertising during fiscal 2006.
Our on-site wholesale auctions exhibited unusual aggregate price strength in fiscal 2006, reflecting
trends in the general wholesale market. We believe some of the factors that may have contributed to the
unusually strong wholesale market pricing environment during various portions of the year included
reduced supplies of off-lease and off-rental cars; the strong demand for smaller, fuel-efficient cars in the face
of rising gasoline prices; and hurricanes Katrina, Rita, and Wilma, which destroyed an estimated 400,000
to 600,000 vehicles and created a short-term demand/supply imbalance. Wholesale price increases were
especially strong in older, higher mileage cars that make up the majority of the vehicles we sell at wholesale.
Our wholesale prices also benefited from a record level of dealer attendance at our auctions and a record
dealer-to-car ratio in fiscal 2006. We believe the high dealer attendance at our auctions reflected the
shortage of older vehicles as well as our continuing efforts to attract dealers to our auctions.
Fiscal 2005 Versus Fiscal 2004. The 34% increase in wholesale vehicle dollar sales in fiscal 2005 reflected a
22% increase in wholesale unit sales and a 10% increase in average wholesale selling price. The increase in
wholesale vehicle unit sales reflected the expansion of our retail store base as well as, we believe, enhancements
to the processes that our sales consultants use to deliver appraisals to customers and our systems support for
buyers. We believe that these enhancements contributed to the increase in our rate of appraisal purchases
completed per appraisal offers made. We believe reduced supply of off-lease vehicles contributed to the pricing
strength in the wholesale market.
Other Sales and Revenues
Other sales and revenues include commissions on the sale of extended service plans, service department sales,
third-party finance fees, and, through the second quarter of fiscal 2004, appraisal purchase processing fees
collected from customers on the purchase of their vehicles.
Fiscal 2006 Versus Fiscal 2005. Other sales and revenues increased 14% in fiscal 2006, as all components
benefited from the increase in retail vehicle sales and the expansion of our superstore base.
Fiscal 2005 Versus Fiscal 2004. Other sales and revenues increased 6% in fiscal 2005, which was
significantly slower than the growth in retail vehicle sales. Growth in extended service plan and service
department revenues was partially offset by the decline in third-party finance fees related to the rollout of the
subprime finance lender and by the elimination of appraisal purchase processing fees. The subprime finance
lender purchases the automobile loans at a discount, which is reflected as an offset to third-party finance
fees. During the second quarter of fiscal 2004, the appraisal purchase processing fees were replaced with an
alternative method for recovering the costs of our appraisal and 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.