CarMax 2016 Annual Report Download - page 11
Download and view the complete annual report
Please find page 11 of the 2016 CarMax annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.7
Our wholesale auctions compete with other automotive auction houses. In contrast to the highly fragmented used vehicle retail
market, the automotive auction market has two primary competitors: Manheim, a subsidiary of Cox Enterprises, and KAR Auction
Services, Inc., which together represent an estimated 70% of the North American wholesale car auction market. These competitors
auction vehicles of all ages, while CarMax’s auctions predominantly sell older, higher mileage vehicles.
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 $1 trillion in outstanding receivables as of December 31, 2015. 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, 2015, industry sources ranked CAF 8th 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 used 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 offer.
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; these vehicles generally range in price
from $12,000 to $35,000. The mix of our used vehicle inventory by make, model and age will vary from time to time, depending
on consumer preferences, seasonality and market availability.
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 receive revenue for selling these plans on
behalf of unrelated third parties, who are the primary obligors. 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 revenue 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, including but not limited to services related to manufacturer’s warranties,
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 29, 2016, our third-party finance providers included Santander Consumer USA, Wells Fargo Dealer
Services, Ally Financial Inc., Exeter Finance Corp, American Credit Acceptance, Capital One Auto Finance 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 or to whom no fee is paid
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