CarMax 2010 Annual Report Download - page 29

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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. All references to net earnings per
share are to diluted net earnings per share. 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.
As of March 1, 2009, we adopted new accounting rules related to the treatment of participating securities in the
calculation of net earnings per share. As a result, certain prior year amounts have been restated to reflect the
adoption. See Note 12 for additional information.
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 revolutionize 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 28, 2010, we operated 100 used car superstores in 46 markets, comprised of 34
mid-sized markets, 11 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.
In fiscal 2010, we sold 357,129 used cars, representing 98% of the total 364,980 vehicles we sold at retail.
We believe the CarMax consumer offer is distinctive within the auto retailing marketplace. Our offer provides
customers the opportunity to shop for vehicles the same way they shop for 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.
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 generally held on a weekly or bi-weekly basis, and as of February 28, 2010, we conducted auctions at
50 used car superstores. During fiscal 2010, we sold 197,382 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 retail customers through CarMax Auto Finance (“CAF”), our finance
operation, and a number of third-party financing providers. As of February 28, 2010, these third parties included
Bank of America Dealer Financial Services, Capital One Auto Finance, CitiFinancial Auto, Santander Consumer
USA and Wachovia Dealer Services (which changed its name to Wells Fargo Dealer Services in March 2010). The
third-party provider who purchases subprime financings purchases these loans at a discount, and we collect fixed,
prenegotiated fees from the majority of the other providers. 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. As of February 28, 2010, the used
vehicle third-party ESP providers were CNA National Warranty Corporation and The Warranty Group. We have no
contractual liability to the customer under these third-party service plans. ESP revenue represents commissions
from the unrelated third parties.
In fiscal 2010, we introduced a guaranteed asset protection product (“GAP”) that will pay the difference between the
customer’s insurance settlement and the finance contract payoff amount on their vehicle in the case of a total loss or