CarMax 2014 Annual Report Download - page 35

31
Fiscal 2013 Versus Fiscal 2012. Wholesale vehicle gross profit increased 2% in fiscal 2013, driven by the 3%
increase in wholesale unit sales. Wholesale gross profit per unit was relatively stable, declining only $4 per unit.
Other Gross Profit
Other gross profit includes profits related to ESP and GAP revenues, net third-party finance fees and service
department operations, including used vehicle reconditioning. We have no cost of sales related to ESP and GAP
revenues or net third-party finance fees, as these represent commissions paid to us by certain third-party providers.
Third-party finance fees are reported net of the fees we pay to third-party subprime finance providers. Accordingly,
changes in the relative mix of the other gross profit components can affect the composition and amount of other
gross profit.
Fiscal 2014 Versus Fiscal 2013. Other gross profit increased 4% in fiscal 2014, as higher service department gross
profits and a modest increase in ESP gross profit, was largely offset by the reduction in net third-party finance fees.
ESP gross profit was reduced by our correction in accounting related to cancellation reserves for ESP and GAP.
Service department gross profit rose $27.3 million in fiscal 2014, primarily due to increases in gross profit
associated with used vehicle reconditioning, which benefited from strong used unit sales growth and the resulting
leverage of service overhead costs.
Fiscal 2013 Versus Fiscal 2012. Other gross profit declined 1% in fiscal 2013, as improved service department and
ESP profits were more than offset by the lower net third-party finance fees.
Impact of Inflation
Historically, inflation has not had a significant impact on results. Profitability is primarily affected by our ability to
achieve targeted unit sales and gross profit dollars per vehicle rather than by changes in average retail prices.
However, increases in average vehicle selling prices benefit CAF income, to the extent the average amount financed
also increases.
In the years following the recession, we experienced a period of appreciation in used vehicle wholesale pricing. We
believe the appreciation resulted, in part, from a reduced supply of late-model used vehicles in the market. This
reduced supply was caused by the dramatic decline in new car industry sales and the associated slow down in used
vehicle trade-in activity, compared with pre-recession periods. The higher wholesale values increased both our
vehicle acquisition costs and our used vehicle average selling prices, which climbed from $16,291 in fiscal 2009 to
$19,408 in fiscal 2014. In fiscal 2013 and fiscal 2012, we also experienced inflationary increases in key
reconditioning costs.
Selling, General and Administrative Expenses
COMPONENTS OF SG&A EXPENSE
Years Ended February 28 or 29
(In millions except per unit data) 2014 Change 2013 Change 2012
Compensation and benefits (1) $656.7 12.9 %$581.9 11.7 % $521.0
Store occupancy costs 216.8 8.5 % 199.9 6.5 % 187.6
Advertising expense 112.2 5.6 %106.3 7.2 % 99.1
Other overhead costs (2)
169.5 18.6 % 142.9 7.5 % 133.1
Total SG&A expenses $1,155.2 12.0 %$1,031.0 9.6 % $940.8
SG&A per retail unit $ 2,161 $ (102) $ 2,263 $ ― $ 2,263
(1) Excludes compensation and benefits related to reconditioning and vehicle repair service, which is included in cost of sales.
(2) Includes IT expenses, insurance, bad debt, travel, preopening and relocation costs, charitable contributions and other
administrative expenses.
Fiscal 2014 Versus Fiscal 2013. SG&A expenses increased 12% in fiscal 2014. The increase reflected the 11%
increase in our store base during fiscal 2014 (representing the addition of 13 stores) and higher variable selling costs
resulting from the 12% increase in comparable store used unit sales. SG&A per retail unit declined $102 to $2,161
versus $2,263 in fiscal 2013, as our comparable store used unit sales growth generated overhead leverage.