CarMax 2016 Annual Report Download - page 32
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the pace of our inventory turns reduce our exposure to the inherent continual fluctuation in used vehicle values and contribute to
our ability to manage gross profit dollars per unit.
We systematically mark down individual vehicle prices based on proprietary pricing algorithms in order to appropriately balance
sales trends, inventory turns and gross profit achievement. Other factors that may influence gross profit include changes in our
vehicle reconditioning costs, changes in the percentage of vehicles sourced directly from consumers through our appraisal process
and changes in the wholesale pricing environment. Vehicles purchased directly from consumers typically generate more gross
profit per unit compared with vehicles purchased at auction or through other channels.
Fiscal 2016 Versus Fiscal 2015. The 5.5% increase in used vehicle gross profit in fiscal 2016 was primarily driven by the 6.5%
growth in total used unit sales, partially offset by a modest decline in used gross profit per unit.
Fiscal 2015 Versus Fiscal 2014. The 10.9% increase in used vehicle gross profit in fiscal 2015 was driven by the corresponding
increase in used unit sales. Used vehicle gross profit per unit remained consistent.
Wholesale Vehicle Gross Profit
Our wholesale gross profit per unit reflects the demand for older, higher mileage vehicles, which are the mainstay of our auctions,
as well as the continued strong dealer attendance and resulting high dealer-to-car ratios at our auctions. The frequency of our
auctions, which are generally held weekly or bi-weekly, minimizes the depreciation risk on these vehicles. Our ability to adjust
appraisal offers in response to the wholesale pricing environment is a key factor that influences wholesale gross profit.
Fiscal 2016 Versus Fiscal 2015. The 6.4% increase in wholesale vehicle gross profit in fiscal 2016 reflected the combination of
the 4.9% increase in wholesale unit sales with a $14 increase in wholesale gross profit per unit.
Fiscal 2015 Versus Fiscal 2014. The 16.3% increase in wholesale vehicle gross profit in fiscal 2015 reflected the combination
of the 9.8% increase in wholesale unit sales with a $54 increase in wholesale gross profit per unit.
Other Gross Profit
Other gross profit includes profits related to EPP revenues, net third-party finance fees and other revenues, which are comprised
of new car sales and service department operations, including used vehicle reconditioning. We have no cost of sales related to
EPP revenues or net third-party finance fees, as these represent revenues paid to us by certain third-party providers. Third-party
finance fees are reported net of the fees we pay to third-party Tier 3 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 2016 Versus Fiscal 2015. Other gross profit rose 14.9% in fiscal 2016, primarily reflecting the improvement in EPP
revenues and net third-party finance fees discussed above, as well as an increase in service department gross profits due to a change
in the timing of our recognition of reconditioning overhead costs, which increased other gross profit in fiscal 2016 by $10.4 million.
These costs, which previously had been expensed as incurred, are now allocated to the carrying cost of inventory.
Fiscal 2015 Versus Fiscal 2014. Other gross profit increased 33.1% primarily due to the EPP cancellation reserve correction that
reduced fiscal 2014 gross profit. Excluding this correction, gross profit increased consistent with the changes in other sales and
revenues discussed above.
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, changes in average vehicle
selling prices impact CAF income, to the extent the average amount financed also changes.
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 $19,917 in fiscal 2016.