CarMax 2014 Annual Report Download - page 12

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Suppliers for Used Vehicles. We acquire used vehicle inventory directly from consumers through our appraisal
process, as well as through other sources, including local, regional and online auctions, wholesalers, franchised and
independent dealers and fleet owners, such as leasing companies and rental companies. The supply of late-model
used vehicles is influenced by a variety of factors, including the total number of vehicles in operation; the rate of
new vehicle sales, which in turn generate used-car trade-ins; and the number of used vehicles sold or remarketed
through retail channels, wholesale transactions and at automotive auctions.
During the recession, retail vehicle sales dropped sharply, with new car sales falling from between 16 million and 17
million vehicles to 10 million vehicles and used car sales falling from between 40 million to 45 million vehicles to
35 million vehicles in 2009. This decline in new car sales, combined with a decrease in lease originations and a
reduction in trade-in activity, resulted in a tighter supply of late-model used vehicles in recent years. The number of
vehicles in operation that were 0 to 6 years old fell from approximately 100 million vehicles prior to the recession to
approximately 77 million vehicles as of December 31, 2013. New vehicle industry sales and leasing activity have
improved in recent years, and we anticipate these improvements will gradually increase the supply of late-model
used vehicles.
Our used vehicle inventory acquired directly from consumers through our appraisal process helps provide an
inventory of makes and models that reflects the consumer preferences in each market. 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 our 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 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.
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. We typically experience an increase in subprime traffic and sales in February and March,
coincident with tax refund season.
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 primary focus is vehicles that are 0 to 6 years old and
generally range in price from $12,000 to $34,000. For the more cost-conscious consumer, we also offer used cars
that are generally between 7 and 11 years old. The mix of our used vehicle inventory by make, model and age will
vary from time to time, depending on consumer preferences.
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. Prices on all vehicles are clearly displayed on each