CarMax 2007 Annual Report Download - page 28

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The following Management’ s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the
accompanying notes presented in Item 8, Consolidated Financial Statements and Supplementary Data. Note
references are to the notes to consolidated financial statements included in Item 8. Amounts and percentages in
tables may not total due to rounding. Certain prior year amounts have been reclassified to conform to the current
year’ s presentation.
We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), effective March 1, 2006, applying the modified retrospective method. As a result, prior
period amounts have been restated to reflect the adoption of this standard.
On February 22, 2007, the board of directors declared a 2-for-1 stock split in the form of a common stock dividend
for shareholders of record on March 19, 2007, which was distributed on March 26, 2007. All share and per share
data included in MD&A have been adjusted to reflect this stock split.
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. At February 28, 2007, we operated 77 used car superstores in 36 markets, including 26 mid-sized
markets, 9 large markets, and 1 small market. We define mid-sized markets as those with television viewing
populations generally between 600,000 and 2.5 million people. We also operated seven new car franchises, all of
which are integrated or co-located with our used car superstores. In fiscal 2007, we sold 337,021 used cars,
representing 95% of the total 355,584 vehicles we 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 our 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 channel for customers who prefer to conduct their
shopping online. We generate revenues, income, and cash flows primarily by retailing used vehicles and associated
items including vehicle financing, extended service plans (“ESP”), and retail service. A majority of the used
vehicles we sell at retail are purchased directly from consumers.
We also generate revenues, income, and cash flows from the sale of vehicles purchased through our appraisal
process that do not meet our retail standards. These vehicles are sold at our 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. In
fiscal 2007, we sold 208,959 vehicles at our wholesale auctions. 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 and licensed wholesalers.
CarMax provides financing to qualified customers through CarMax Auto Finance (“CAF”), the company’ s finance
operation, and Bank of America, and through several other third-party lenders. We collect fixed, prenegotiated fees
from the majority of our third-party lenders, and we periodically test additional lenders. CarMax has no recourse
liability for the loans provided by third-party lenders.
We sell ESPs on behalf of unrelated third parties who are the primary obligors. We have no contractual liability to
the customer under these third-party service plans. Extended service plan revenue represents commissions from the
unrelated third parties.
We are still at a relatively early stage in the national rollout of our retail concept. We believe the primary driver for
future earnings growth will be vehicle unit sales growth from comparable stores and from geographic expansion.