CarMax 2013 Annual Report Download - page 25

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 audited 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. Certain prior year amounts have
been reclassified to conform to the current year’s presentation. All references to net earnings per share are to diluted
net earnings per share. Amounts and percentages may not total due to rounding.
BUSINESS OVERVIEW
General
CarMax is the nation’s largest retailer of used vehicles. We operate in two reportable segments: CarMax Sales
Operations and CarMax Auto Finance (“CAF”). Our CarMax Sales Operations segment consists of all aspects of
our auto merchandising and service operations, excluding financing provided by CAF. Our CAF segment consists
solely of our own finance operation that provides vehicle financing through CarMax superstores.
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, 2013, we operated 118 used car
superstores in 58 markets, comprising 45 mid-sized markets, 12 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 four new car franchises. During fiscal 2013, we sold 447,728 used cars, representing 98% of the total
455,583 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 features low, no-haggle prices; a broad selection of CarMax Quality Certified used vehicles; and
superior customer service. Our website, carmax.com, is a valuable tool for communicating the CarMax consumer
offer, as well as a sophisticated search engine and efficient channel for customers who prefer to commence their
shopping online. Our financial results are driven by retailing used vehicles and associated items including vehicle
financing, extended service plans (“ESPs”), a guaranteed asset protection (“GAP”) product and vehicle repair
service. GAP is designed to cover the unpaid balance on an auto loan in the event of a total loss of the vehicle or
unrecovered theft.
Our financial results also reflect 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, 2013, we conducted auctions at 57 used car superstores.
During fiscal 2013, we sold 324,779 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.
We sell ESPs and GAP on behalf of unrelated third parties who are the primary obligors. As of February 28, 2013,
the used vehicle third-party ESP providers were CNA National Warranty Corporation and The Warranty Group, and
the third-party GAP provider was Safe-Guard Products International, LLC. We have no contractual liability to the
customer under these third-party plans. ESP revenue represents commissions earned on the sale of ESPs and GAP
from the unrelated third parties.
We provide financing to qualified retail customers through CAF, our finance operation, and our arrangements with
several industry-leading financial institutions. As of February 28, 2013, these third parties included Capital One
Auto Finance, Santander Consumer USA, Wells Fargo Dealer Services and American Credit Acceptance.
Depending on the credit profile of the customer, the third-party finance providers generally either pay us or are paid
a fixed, pre-negotiated fee per contract. The fee amount is independent of any finance term offered to the customer;
it does not vary based on the amount financed, the term of the loan, the interest rate or the loan-to-value ratio. We
refer to the providers who pay us a fee as prime and nonprime providers, and we refer to the providers to whom we
pay a fee as subprime providers. We periodically test additional third-party providers. We have no recourse
liability on retail installment contracts arranged with third-party providers.
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