CarMax 2007 Annual Report Download - page 17

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to increase appraisal traffic and generate incremental vehicle purchases from individual consumers. We plan to
expand this test by opening three additional car buying centers in fiscal 2008.
We have replaced the traditional “trade-in” transaction with a process in which a CarMax-trained buyer appraises
the vehicle and provides the vehicle’ s owner with a written, guaranteed offer that is good for 7 days. An appraisal is
available to every customer free of charge, whether or not the individual purchases a vehicle from us. Based on
their age, mileage, or condition, fewer than half of the vehicles acquired through this in-store appraisal process meet
our high quality retail standards. Those vehicles that do not meet our retail standards are sold at our on-site
wholesale auctions.
The inventory purchasing function is primarily performed at the store level and is the responsibility of the buyers,
who handle both on-site appraisals and off-site auction purchases. Our buyers evaluate all used vehicles on the basis
of their estimated wholesale value and reconditioning costs, and, for off-site purchases, cost of delivery to the store
where they will be reconditioned. To decide which inventory to purchase at off-site auctions, our buyers, in
collaboration with our home office staff, rely on the extensive inventory and sales trend data available through the
CarMax information system. Our inventory and pricing models help the buyers tailor inventories to the buying
preferences at each superstore, recommend pricing adjustments, and optimize inventory turnover to help maintain
gross margin dollars per unit.
Based on consumer acceptance of the in-store appraisal process at existing CarMax stores, our experience and
success to date in acquiring vehicles from auctions and other sources, and the large size of the U.S. auction market
relative to our needs, we believe that our sources of used vehicles will continue to be sufficient to meet current needs
and to support planned expansion.
Suppliers for New Vehicles. Our new car operations are governed by the terms of the sales, service, and dealer
agreements with DaimlerChrysler, General Motors, Nissan, and Toyota. Among other things, these agreements
generally impose operating requirements and restrictions, including inventory levels, working capital, monthly
financial reporting, signage, and cooperation with marketing strategies. A manufacturer may terminate a dealer
agreement under certain circumstances, including a change in ownership without prior manufacturer approval,
failure to maintain adequate customer satisfaction ratings, or a material breach of other provisions of the agreement.
In addition to selling new vehicles using our low, no-haggle price strategy, the franchise and dealer agreements
generally allow us to perform warranty work on these vehicles and sell related parts and services within a specified
market area. Designation of specified market areas generally does not guarantee exclusivity within a specified
territory.
Seasonality. Our business is seasonal. Most of our superstores experience their strongest traffic and sales in the
spring and summer quarters. Sales are typically lowest in the fall quarter, which coincides with the new vehicle
model-year-changeover period. In the fall, the new model year introductions and discounts on model year closeouts
generally can cause rapid depreciation in used car pricing, particularly for late-model used cars. Customer traffic
also tends to slow in the fall as the weather gets colder and as customers shift their spending priorities toward
holiday-related expenditures. Seasonal patterns for car buying and selling may vary in different parts of the country
and, as we expand geographically, these differences could have an effect on the overall seasonal pattern of our
results.
Products and Services
Merchandising. We offer our customers a broad selection of makes and models of used vehicles, including both
domestic and imported vehicles, at competitive prices. Our used car selection covers popular brands from
manufacturers such as DaimlerChrysler, Ford, General Motors, Honda, Hyundai, Mazda, Mitsubishi, Nissan,
Subaru, Toyota, and Volkswagen and luxury brands such as Acura, BMW, Infiniti, Lexus, and Mercedes. Our
primary focus is vehicles that are 1 to 6 years old, have fewer than 60,000 miles, and generally range in price from
$11,500 to $30,000. For the more cost-conscious consumer, we also offer used cars that are more than 6 years old
or have 60,000 miles or more and that generally range in price from $8,000 to $22,000.
We have implemented an everyday low-price strategy under which we set no-haggle prices on both our used and
new vehicles. We believe that our pricing is competitive with the best-negotiated prices in the market. Prices on all
vehicles are clearly displayed on each vehicle’ s information sticker; on carmax.com, AutoTrader.com, and cars.com;
and, where applicable, in our newspaper advertising. We extend our no-haggle philosophy to every component of