CarMax 2008 Annual Report Download - page 30

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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. All share and per share amounts for prior periods have been adjusted to reflect our 2-for-1
common stock split in March 2007.
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. Our strategy is to better serve the auto retailing market by addressing the major sources of
customer dissatisfaction with traditional auto retailers and to maximize operating efficiencies through the use of
standardized operating procedures and store formats enhanced by sophisticated, proprietary management
information systems. As of February 29, 2008, we operated 89 used car superstores in 41 markets, comprised of 30
mid-sized markets, 10 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 six new car franchises, all
of which were integrated or co-located with our used car superstores. In fiscal 2008, we sold 377,244 used cars,
representing 96% of the total 392,729 vehicles we sold at retail.
We believe the CarMax consumer offer is distinctive within the automobile retailing marketplace. Our offer
provides customers the opportunity to shop for vehicles the same way they shop for other items at other big box
retailers. Our consumer offer is structured around our four customer benefits: low, no-haggle prices; a broad
selection; high quality vehicles; and a customer-friendly sales process. 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 (“ESPs”) and vehicle repair
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 through on-site wholesale auctions. Wholesale
auctions are held on a weekly, bi-weekly or monthly basis, and as of February 29, 2008, we conducted auctions at
49 used car superstores. During fiscal 2008, we sold 222,406 wholesale vehicles. 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”), our finance operation,
and a number of other third-party financing providers. We collect fixed, prenegotiated fees from the majority of the
third-party providers, and we periodically test additional providers. CarMax has no recourse liability for the
financing provided by these third parties.
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, and as of February 29, 2008, we
had used car superstores located in markets that comprised approximately 43% of the U.S. population. We currently
plan to open used car superstores at a rate of approximately 15% of our used car superstore base each year. Over the
long term, we expect comparable store used unit sales increases to average in the range of 4% to 8%, reflecting the
multi-year ramp in sales at newly opened stores as they mature, continued market share gains at stores that have
reached basic maturity sales levels, and underlying industry sales growth. We estimate that our stores generally
reach basic maturity sales levels in their fifth year of operation.