CarMax 2009 Annual Report Download - page 13

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Suppliers for Used Vehicles. We acquire used vehicle inventory directly from consumers through our in-store
appraisal process and through other sources, including local, regional and online auctions, wholesalers, franchised
and independent dealers and fleet owners, such as leasing companies and rental companies. In calendar 2008, more
than 36 million used vehicles were remarketed in the U.S., of which approximately 9 million had been sourced at
wholesale auction.
Our used vehicle inventory acquired directly from consumers through our appraisal process helps provide an
inventory of makes and models that reflects the tastes of each market. In fiscal 2007, we began testing a stand-alone
car-buying center in Atlanta, Georgia. Our goal for the car-buying center was to increase appraisal traffic and
generate incremental vehicle purchases from individual consumers. We expanded this test in fiscal 2008 and fiscal
2009, and we operated a total of five car-buying centers as of February 28, 2009.
We have replaced the traditional “trade-in” transaction with a process in which a CarMax-trained buyer appraises a
customer’ s vehicle and provides the owner with a written, guaranteed offer that is good for seven days. An appraisal
is available to every customer free of charge, whether or not the customer 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 to licensed dealers
through 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 based on
internal and external auction data and market sales, as well as estimated reconditioning costs and, for off-site
purchases, transportation costs. Our buyers, in collaboration with our home office staff, utilize the extensive
inventory and sales trend data available through the CarMax information system to decide which inventory to
purchase at off-site auctions. 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 profit per unit.
Based on consumer acceptance of the in-store appraisal process, 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 sources of used vehicles will continue to be sufficient to meet our current and future needs.
Suppliers for New Vehicles. Our new car operations are governed by the terms of the sales, service and dealer
agreements. 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. Historically, our business has been seasonal. Typically, our superstores experience their strongest
traffic and sales in the spring and summer quarters. Sales are typically slowest in the fall quarter, when used
vehicles generally experience proportionately more of their annual depreciation. We believe this is partly the result
of a decline in customer traffic, as well as discounts on model year closeouts that can pressure pricing for late-model
used vehicles. Customer traffic generally tends to slow in the fall as the weather changes and as customers shift
their spending priorities toward holiday-related expenditures. In fiscal 2009, the traditional seasonal sales patterns
were masked by the weakness in the economy and the stresses on consumer spending, which adversely affected
industry-wide auto sales.
Products and Services
Merchandising. We offer 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 Chrysler, 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 $11,000 to
$28,000. 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 $7,700 to $20,000.