CarMax 2009 Annual Report Download - page 34

28
In fiscal 2009, the weakness in the economy and the stresses on consumer spending contributed to the industry-wide
slowdown in the sale of new and used vehicles and to the unprecedented decline in wholesale market prices for most
vehicle classes during the first three quarters of the year. These lower wholesale values reduced our vehicle
acquisition costs and contributed to the decline in our used and wholesale vehicle average selling price.
CarMax Auto Finance Income
CAF provides financing for a portion of our used and new car retail sales. Because the purchase of a vehicle is often
reliant on the consumer’ s ability to obtain on-the-spot financing, it is important to our business that financing be
available to creditworthy customers. While financing can also be obtained from third-party sources, we believe that
total reliance on third parties can create unacceptable volatility and business risk. Furthermore, we believe that our
processes and systems, the transparency of our pricing and our vehicle quality provide a unique and ideal
environment in which to procure high quality auto loans, both for CAF and for the third-party financing providers.
Generally, CAF has provided us the opportunity to capture additional profits and cash flows from auto loan
receivables while managing our reliance on third-party financing sources.
COMPONENTS OF CAF INCOME
Years Ended February 28 or 29
(In millions) 2009 % 2008 % 2007 %
Total (loss) gain (1) ........................................... $ (35.3) (1.7) $ 48.5 1.9 $ 99.7 4.3
Other CAF income: (2)
Servicing fee income.................................... 41.3 1.0 37.4 1.0 32.4 1.1
Interest income............................................. 48.3 1.2 33.3 0.9 26.6 0.9
Total other CAF income .................................. 89.6 2.2 70.7 2.0 59.0 1.9
Direct CAF expenses: (2)
CAF payroll and fringe benefit expense ...... 19.2 0.5 15.9 0.4 12.0 0.4
Other direct CAF expenses .......................... 19.9 0.5 17.4 0.5 14.0 0.5
Total direct CAF expenses............................... 39.1 1.0 33.3 0.9 26.0 0.9
CarMax Auto Finance income (3)..................... $ 15.3 0.2 $ 85.9 1.0 $ 132.6 1.8
Total loans sold................................................ $ 2,031.2 $ 2,534.4 $ 2,322.7
Average managed receivables ......................... $ 4,021.0 $ 3,608.4 $ 3,071.7
Ending managed receivables ........................... $ 3,986.7 $ 3,838.5 $ 3,311.0
Total net sales and operating revenues ............ $ 6,974.0 $ 8,199.6 $ 7,465.7
Percent columns indicate:
(1) Percent of total loans sold.
(2) Percent of average managed receivables.
(3) Percent of total net sales and operating revenues.
CAF income does not include any allocation of indirect costs or income. We present this information on a direct
basis to avoid making arbitrary decisions regarding the indirect benefits or costs that could be attributed to CAF.
Examples of indirect costs not included are retail store expenses and corporate expenses such as human resources,
administrative services, marketing, information systems, accounting, legal, treasury and executive payroll.
CAF originates auto loans to qualified customers at competitive market rates of interest. The majority of CAF
income has typically been generated by the spread between the interest rates charged to customers and the related
cost of funds. Substantially all of the loans originated by CAF are sold in securitization transactions. A gain,
recorded at the time of securitization, results from recording a receivable approximately equal to the present value of
the expected residual cash flows generated by the securitized receivables. Historically, the gain on loans originated
and sold as a percent of loans originated and sold (the “gain percentage”) has generally been in the range of 3.5% to
4.5%. However, the gain percentage was substantially below the low end of this range in fiscal 2009 and fiscal
2008, primarily as a result of the more challenging economic environment and the disruption in the global credit
markets. These factors caused us to increase the loss and discount rate assumptions that affect the gain recognized
on the sale of loans and increased our funding costs.