CarMax 2007 Annual Report Download - page 15

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We purchase, recondition, and sell used vehicles. All of the used vehicles we retail are thoroughly reconditioned to
meet high mechanical, electrical, safety, and cosmetic standards, and each vehicle must pass a comprehensive
inspection before being offered for sale. Approximately 85% of the used vehicles we retail are one to six years old
with fewer than 60,000 miles. We also offer a selection of used vehicles at each superstore that are more than six
years old or have more than 60,000 miles, but which meet similar quality standards.
We also sell new vehicles at seven locations under franchise agreements with four new car manufacturers. In fiscal
2007, new vehicles comprised 5% of our total retail vehicle unit sales. As planned, new car sales have become a
smaller part of our business mix over the past several fiscal years as we have divested 14 new car franchises while
aggressively growing our used car business. We may divest additional new car franchises in the future.
We provide our customers with a full range of related products and services, including the financing of vehicle
purchases through CarMax Auto Finance (“CAF”), our own finance operation, and third-party lenders; the sale of
extended service plans and accessories; the appraisal and purchase of vehicles directly from consumers; and vehicle
repair service.
The CarMax consumer offer enables customers to evaluate separately each component of the sales process and to
make informed decisions based on comprehensive information about the options, terms, and associated prices of
each component. The customer can accept or decline any individual element of the offer without affecting the price
or terms of any other component of the offer. Our “no-haggle” pricing and our commission structure, which is
based on a fixed dollars-per-unit standard, allow our sales consultants to focus solely on meeting customer needs.
We have separated the practice of trading in a used vehicle in conjunction with the purchase of another vehicle into
two distinct and independent transactions. We will appraise a consumer’ s vehicle and make an offer to buy that
vehicle regardless of whether the owner is purchasing a vehicle from us. We acquire the majority of our retail used
vehicle inventory through this unique in-store appraisal process. We also acquire a significant portion of our used
vehicle inventory through wholesale auctions and, to a lesser extent, directly from other sources, including
wholesalers, dealers, and fleet owners. Those vehicles purchased through our in-store appraisal process that do not
meet our retail standards are sold at on-site wholesale auctions.
Our inventory management and pricing system tracks each vehicle throughout the sales process. Using the
information provided by this system, and applying sophisticated statistical modeling techniques, we are able to
optimize our inventory mix, anticipate future inventory needs at each store, evaluate sales consultant and buyer
performance, and refine our vehicle pricing strategy. Because of the pricing discipline afforded by the inventory
management and pricing system, more than 99% of the entire used car inventory offered at retail is sold at retail.
Industry and Competition. With calendar year 2006 sales of approximately $340 billion, used vehicles comprise
nearly half of the U.S. auto retail market, the largest retail segment of the economy. In calendar 2006, there were an
estimated 42.6 million used vehicles sold in the U.S. compared with approximately 16.6 million new vehicles. Our
primary focus, late-model vehicles that are 1 to 6 years old, are estimated at approximately $290 billion in annual
sales and 20 million units per year.
The U.S. used car marketplace is highly fragmented and competitive and includes approximately 21,800 franchised
new car dealers and 44,000 independent dealers, as well as millions of private individuals. Our primary competitors
are the franchised new car dealers, who sell the majority of late-model used vehicles. Independent dealers
predominantly sell older, higher mileage cars than we do. In both the used and new vehicle markets, we seek to
distinguish ourselves from traditional dealerships through our consumer offer, sales approach, and other innovative
operating strategies.
We believe that our principal competitive factors in used vehicle retailing are our ability to provide a high degree of
customer satisfaction with the car-buying experience; our competitively low prices; our breadth of selection of the
most popular makes and models available both on site and via our website, carmax.com; the quality of our vehicles;
our proprietary information systems; and the location of our retail stores. Upon request by a customer, we will
transfer virtually any used vehicle in our nationwide inventory to a local superstore. Transfers are free within a
market; longer distance transfers include a charge to cover transportation costs. In fiscal 2007, more than 20% of
our vehicles sold were transferred at customer request. Our Certified Quality Inspection assures that every vehicle
we offer for sale meets stringent mechanical, electrical, and safety standards. We back every vehicle with a 5-day,
money-back guarantee, and at least a 30-day limited warranty. Other competitive factors include our ability to offer