CarMax 2006 Annual Report Download - page 4

Letter to Shareholders
2CARMAX 2006
WHERE WE ARE
Sales and Earnings. In fiscal 2006 we experienced many of the
market challenges we had seen in fiscal 2005. Unexpected spikes
in gas prices, rising wholesale vehicle prices, rising interest rates,
Iraq war anxiety — all were key factors we noted last year that we
thought might come into play this year, and indeed they did.
Nonetheless, our sales and earnings growth was much stronger
this year than last. Net earnings increased 31% on a sales increase
of 19%, including 4% growth in comparable store used units. Key
drivers of our performance included:
■We learned how to optimize our appraisal approach in the
rising wholesale price environment, offsetting margin pressure
on our retail business.
■We benefited this year from the summer incentive environment.
New car manufacturer employee pricing programs drove traffic
into the marketplace, providing the consumer greater pricing
clarity — an environment where the transparent CarMax offer
produced strong results.
■CarMax Auto Finance continued to provide a strong
earnings contribution.
Additional Accomplishments. Our store growth stayed on target.
We added nine stores, increasing our superstores 16%, in line with
our plan to grow our store base 15% to 20% per year. We also con-
tinued to balance our store growth by market size and type of store,
adding five standard superstores and four satellite superstores.
OPERATIONAL GOALS
We continue to focus on the three broad operational goals that
we’ve discussed in our last two annual reports, and we’ve added
carmax.com to this list because of its increasingly central role in
our marketing program:
■Quality/Waste Elimination: —Further systematize our efforts at
continuous quality improvement, combined with a relentless focus on
waste elimination. During fiscal 2005, we launched a systematic
framework for achieving process improvement in our recondi-
tioning and service operations. During fiscal 2006, we extended
it to our cosmetic process. We also launched a ground-zero
redesign of our reconditioning process at our newly opened
Virginia Beach superstore based on a single-piece flow system
that eliminates waste, insures quality, and provides superior
diagnostics at each step of the process. We will continue to
develop and refine this process over the coming year.
Waste elimination is a key to the continuous improvement
process. By identifying and eliminating wasted motion, materials,
and labor we can improve efficiency and quality while reducing
cost. We plan to extend this waste elimination focus to key
opportunity areas of our store operations over the coming year.
■Associate Development:—Systematically identify, hire, train, and
continuously develop a broadly diverse group of talented associates
to 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 pro-
grams for existing managers. Finally, we launched an on-line
job application and screening system that significantly improved
the quantity and quality of our applicants.
■Company Culture:—Maintain an enthusiastic, down-to-earth,
non-hierarchical business culture that treats every associate and
every customer with the respect and personal attention they deserve,
and lets us all have fun doing it. CarMax was named to the
Fortune “100 Best Companies to Work For” list for the second
consecutive year and we were named the nation’s “Most
Admired” auto retail/service company in a Fortune industry
survey. We’re proud of this recognition of what we’ve achieved
with our culture; we’re also aware that there are many opportu-
nities for further improvement.
We surveyed all our associates in fiscal 2006 to define the core
elements of our culture. We have also begun an annual associate
engagement benchmarking process with the Gallup organization
that helps us understand where we’re good and where we need
to be better. The process allows us to focus on tangible incre-
mental improvements in our daily working relationships at the
individual work team level. It also allows us to benchmark our-
selves against other world-class organizations to keep our sights
on an ever higher goal.
■carmax.com: —Assure that carmax.com is both the single best
place on the internet to shop for a used car, and is a comfortable,
user-friendly home where the automotive shopper can find all the
tools and information needed. Over the last five years, carmax.com
has become a central feature of our sales and marketing program.
There were more than 40 million visits to carmax.com this
year, and approximately 70% of in-store customers indicate they
visited our site before coming to the store. During fiscal 2006,
we undertook extensive consumer research to identify those
improvements that were most important to shoppers and cus-
tomers. We launched a significant rewrite of the site providing
improved “power search” functionality, improved quantity and
quality of vehicle photos, and improved overall graphic quality.
We also significantly expanded our use of key-word search
advertising. During the coming year, we will continue to shift
advertising dollars from newspaper to online search, online
classified advertising, and other innovative ways of using the
web to drive customers to carmax.com. We will also undertake
additional significant investment in carmax.com usability,
functionality, and information resource connections.