CarMax 2009 Annual Report Download - page 14

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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
the vehicle transaction, including vehicle appraisal offers, financing rates, accessories, extended service plan pricing
and vehicle documentation fees.
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. Some superstores depend upon
nearby, typically larger, 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 28, 2009, wholesale auctions were conducted at 49 of
our 100 superstores and were generally held on a weekly or bi-weekly 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 CarMax 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 2009.
Dealers pay a fee to us 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 2009. 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 may be evaluated by other lenders. Having a wide array of financing sources not only increases discrete
approvals, but also expands the choices for our customers. To this end, we have tested, and will continue to test,
other third-party providers.
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 the loans
arranged by the third-party providers, we are paid a fixed, prenegotiated 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