CarMax 2015 Annual Report Download - page 11

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CarMax Auto Finance. CAF operates in the auto finance sector of the consumer finance market. This sector is
primarily comprised of banks, captive finance divisions of new car manufacturers, credit unions and independent
finance companies. According to industry sources, this sector represented nearly $900 billion in outstanding
receivables as of December 31, 2014. CAF’s primary competitors are banks and credit unions that offer direct
financing to customers purchasing used cars. For loans originated during the calendar quarter ended
December 31, 2014, industry sources ranked CAF 7th in market share for used vehicle loans and 14th in market share
for all vehicle loans.
We believe that CAF’s principal competitive advantage is its strategic position as the primary finance source in
CarMax stores and that CAF’s primary driver for growth is the growth in CarMax’s retail unit sales. We periodically
test different credit offers, and closely monitor acceptance rates and the effect on sales to assess market
competitiveness. We also monitor 3-day payoffs, as the percentage of customers exercising this option can be an
indication of the competitiveness of our rates.
Products and Services
Retail Merchandising. We offer customers a broad selection of makes and models of used vehicles, including both
domestic and imported vehicles, at competitive prices. Our focus is vehicles that are 0 to 10 years old and generally
range in price from $12,000 to $34,000. The mix of our used vehicle inventory by make, model and age will vary
from time to time, depending on consumer preferences.
Wholesale Auctions. The typical vehicle sold at our wholesale auctions is approximately 10 years old and has more
than 100,000 miles. We provide condition disclosures on each vehicle, including those for vehicles with major
mechanical issues, possible frame or flood damage, branded titles, salvage history and unknown true mileage.
Professional, licensed auctioneers conduct our auctions. Dealers pay a fee to us based on the sales price of the vehicles
they purchase. Our auctions are generally held on a weekly or bi-weekly basis.
Extended Protection Plans. At the time of sale, we offer customers EPP products. We sell these plans on behalf of
unrelated third parties, who are the primary obligors, and in return receive commission income. We have no
contractual liability to customers for claims under these agreements. The ESPs we currently offer on all used vehicles
provide coverage up to 60 months (subject to mileage limitations). GAP covers the customer for the term of their
finance contract. All EPPs that we sell (other than manufacturer programs on new car sales) have been designed to
our specifications and are administered by the third parties through private-label arrangements. Periodically, we may
receive additional commissions based upon the level of underwriting profits of the third parties who administer the products.
Reconditioning and Service. An integral part of our used car consumer offer is the reconditioning process designed
to make sure every car meets our standards before it can become a CarMax Quality Certified vehicle. This process
includes a comprehensive CarMax Quality Inspection of the engine and all major systems. Based on this inspection,
we determine the reconditioning necessary to bring the vehicle up to our quality standards. Many of our stores depend
upon nearby, typically larger, CarMax stores for reconditioning, which increases efficiency and reduces overhead.
We perform most routine mechanical and minor body repairs in-house; however, for some reconditioning services,
we engage third parties specializing in those services
In addition, all CarMax used car stores provide vehicle repair service, including repairs of vehicles covered by the
ESPs we sell.
Customer Credit. We offer financing alternatives for retail customers across a wide range of the credit spectrum
through CAF and arrangements with several financial institutions. Vehicles are financed using retail installment
contracts secured by the vehicle. As of February 28, 2015, our third-party finance providers included Santander
Consumer USA, Wells Fargo Dealer Services, Exeter Finance Corp, Capital One Auto Finance, Ally Financial Inc.,
American Credit Acceptance and Westlake Financial Services. We have no recourse liability for credit losses on retail
installment contracts arranged with third-party providers and periodically test additional third-party providers.
All credit applications submitted by customers at CarMax stores are initially reviewed by CAF. Applications that are
declined or conditionally approved by CAF are generally evaluated by other third-party finance providers. These
providers generally either pay us or are paid a fixed, pre-negotiated fee per contract. We refer to the providers who
pay us a fee as Tier 2 providers and we refer to providers to whom we pay a fee as Tier 3 providers. We are willing
to pay a fee to Tier 3 providers because we believe their participation provides us with incremental sales by enabling
customers to secure financing that they may not otherwise be able to obtain. All fees paid by Tier 2 providers and
paid to Tier 3 providers are pre-negotiated at a fixed amount and do not vary based on the amount financed, the interest