CarMax 2008 Annual Report Download - page 20

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Reconditioning and Service. An integral part of our used car consumer offer is the reconditioning process. This
process includes a comprehensive Certified Quality Inspection of the engine and all major systems, including
cooling, fuel, drivetrain, transmission, electronics, suspension, brakes, steering, air conditioning and other
equipment, as well as the interior and exterior of the vehicle. Based on this quality inspection, we determine the
reconditioning necessary to bring the vehicle up to our high quality standards. Our service technicians complete
vehicle inspections. We perform most routine mechanical and minor body repairs in-house; however, for some
reconditioning services, we engage third parties specializing in those services. Over the past several years, we have
performed an increasing percentage of reconditioning services in-house and, based on the cost savings realized, we
expect this trend to continue. Non-production (formerly referred to as satellite) superstores depend upon nearby
production (formerly referred to as mega and standard) superstores for reconditioning, which increases efficiency
and reduces overhead.
All CarMax used car superstores provide vehicle repair service including repairs of vehicles covered by our
extended service plans. We also provide factory-authorized service at all new car franchises. We have developed
systems and procedures that are intended to ensure that our retail repair service is conducted in the same customer-
friendly and efficient manner as our other operations.
We believe that the efficiency of our reconditioning and service operations is enhanced by our modern facilities, a
technician mentoring process and our information systems. The mentoring process and our compensation programs
are designed to increase the productivity of technicians, identify opportunities for cost reduction and achieve high-
quality repairs. Our information systems provide the ability to track repair history and enable trend analysis, which
serves as guidance for our continuous improvement efforts.
Wholesale Auctions. Vehicles purchased through our in-store appraisal process that do not meet our retail standards
are sold through on-site wholesale auctions. As of February 29, 2008, wholesale auctions were conducted at 49 of
our 89 superstores. Auctions are generally held at production superstores on a weekly, bi-weekly or monthly basis.
Auction frequency at a given superstore is determined by the number of vehicles to be auctioned, which depends on
the number of stores and the market awareness of the company and our in-store appraisal offer in that market. The
typical wholesale vehicle is approximately 10 years old and has more than 100,000 miles. Participation in our
wholesale auctions is restricted to licensed automobile dealers, the majority of whom are independent dealers. To
participate in a CarMax auction, dealers must register with our centralized auction support group, at which time we
determine the purchase limit available to each dealer. We make conditional announcements on each vehicle,
including those for vehicles with major mechanical issues, possible frame or flood damage, branded titles, salvage
history and unknown true mileage. Professional, licensed auctioneers conduct our auctions. The average auction
sales rate was 97% in fiscal 2008. Dealers pay a fee to the company based on the sales price of the vehicles they
purchase.
Customer Credit. We offer customers a wide range of financing alternatives, which we believe enhances the
CarMax consumer offer. Before the effect of 3-day payoffs and vehicle returns, CAF financed more than 40% of
our retail vehicle unit sales in fiscal 2008. Customer credit applications are initially reviewed by CAF and may also
be reviewed by a third-party provider. Customers who are not approved by either CAF or the initial third-party
provider are evaluated by other lenders. Having a wide array of financing sources not only expands the choices for
our customers, but also increases discrete approvals. To this end, we have tested, and will continue to test, other
third-party lenders.
Customers applying for financing provide credit information that is electronically submitted by sales consultants
through our proprietary information system. A majority of applicants receive a response within five minutes. The
vehicle financings are retail installment contracts secured by the vehicles financed. For the majority of loans
arranged by the third-party providers, we are paid a fee per vehicle financed. We have no recourse liability on retail
installment contracts arranged with third-party providers. Customers are permitted to refinance or pay off their
loans within three business days of a purchase without incurring any finance or related charges.
Extended Service Plans. At the time of the sale, we offer the customer an extended service plan. We sell these
plans on behalf of unrelated third parties that are the primary obligors. Under the third-party service plan programs,
we have no contractual liability to the customer. The extended service plans have terms of coverage from 12 to 72
months, depending on the vehicle mileage, make and age. We offer extended service plans at low, fixed prices,
which are based primarily on the repair record of the vehicle make and model and the length of coverage selected.
All extended service plans that we sell (other than manufacturers’ warranties) have been designed to our
specifications and are administered by the third parties through private-label arrangements under which we receive a