UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended February 29,
2008
OR
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
File Number: 1-31420
CARMAX,
INC.
(Exact
name of registrant as specified in its charter)
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VIRGINIA
(State
or other jurisdiction of
incorporation
or organization)
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54-1821055
(I.R.S.
Employer
Identification
No.)
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12800
TUCKAHOE CREEK PARKWAY, RICHMOND, VIRGINIA
(Address
of principal executive offices)
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23238
(Zip
Code)
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Registrant’s
telephone number, including area code: (804) 747-0422
Securities
registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered |
| Common Stock, par value $0.50 | New York Stock Exchange |
| Rights to Purchase Series A Preferred Stock, | New York Stock Exchange |
| par value $20.00 |
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes x
No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. filer ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer x Accelerated
filer ¨
Non-accelerated
filer ¨ (do not
check if a smaller reporting
company) Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No x
The
aggregate market value of the registrant’s common stock held by non-affiliates
as of August 31, 2007, computed by reference to the closing price of the
registrant’s common stock on the New York Stock Exchange on that date, was $4.9
billion.
On March
31, 2008, there were 218,620,482 outstanding shares of CarMax, Inc. common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the CarMax, Inc. Notice of 2008 Annual Meeting of Shareholders and Proxy
Statement are incorporated by reference in Part III of this Form
10-K.
CARMAX,
INC.
FORM
10-K
FOR
FISCAL YEAR ENDED FEBRUARY 29, 2008
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No.
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Business
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4
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Risk
Factors
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11
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Unresolved
Staff Comments
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13
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Properties
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13
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Legal
Proceedings
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14
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Submission
of Matters to a Vote of Security Holders
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14
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Selected
Financial Data
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17
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Quantitative
and Qualitative Disclosures about Market Risk
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32
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Consolidated
Financial Statements and Supplementary Data
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34
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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61
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Controls
and Procedures
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61
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Other
Information
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61
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Directors,
Executive Officers and Corporate Governance
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62
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Executive
Compensation
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63
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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63
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Certain
Relationships and Related Transactions and Director
Independence
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63
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Principal
Accountant Fees and Services
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63
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Exhibits
and Financial Statement Schedules
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64
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65
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In this
document, “we,” “our,” “us,” “CarMax” and “the company” refer to CarMax, Inc.
and its wholly owned subsidiaries, unless the context requires
otherwise.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This
Annual Report on Form 10-K and, in particular, the description of our business
set forth in Item 1 and our Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 7 contain a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding:
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Our
projected future sales growth, comparable store unit sales growth,
earnings and earnings per share.
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Our
expectations of factors that could affect CarMax Auto Finance
income.
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Our
expected future expenditures, cash needs and financing
sources.
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The
projected number, timing and cost of new store
openings.
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Our
sales and marketing plans.
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Our
assessment of the potential outcome and financial impact of litigation and
the potential impact of unasserted
claims.
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Our
assessment of competitors and potential
competitors.
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Our
assessment of the effect of recent legislation and accounting
pronouncements.
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In
addition, any statements contained in or incorporated by reference into this
report that are not statements of historical fact should be considered
forward-looking statements. You can identify these forward-looking
statements by use of words such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “predict,” “should,” “will” and other similar
expressions, whether in the negative or affirmative. We cannot
guarantee that we will achieve the plans, intentions or expectations disclosed
in the forward-looking statements. There are a number of important
risks and uncertainties that could cause actual results to differ materially
from those indicated by our forward-looking statements. These risks
and uncertainties include, without limitation, those set forth in Item 1A under
the heading “Risk Factors.” We caution investors not to place undue
reliance on any forward-looking statements as these statements speak only as of
the date when made. We undertake no obligation to update any
forward-looking statements made in this report.
Item
1. Business.
BUSINESS
OVERVIEW
CarMax
Background. CarMax, Inc. was incorporated under the laws of
the Commonwealth of Virginia in 1996. CarMax, Inc. is a holding
company and our operations are conducted through our
subsidiaries. Our home office is located at 12800 Tuckahoe Creek
Parkway, Richmond, Virginia.
Under the
ownership of Circuit City Stores, Inc. (“Circuit City”), we began
operations in 1993 with the opening of our first CarMax superstore in Richmond,
Virginia. In 1997, Circuit City completed the initial public
offering of a tracking stock, Circuit City Stores, Inc.–CarMax Group common
stock, which was intended to track separately the performance of the CarMax
operations. On October 1, 2002, the CarMax business was separated
from Circuit City through a tax-free transaction, becoming an independent,
separately traded public company.
CarMax
Business. We are the nation’s largest retailer of used cars,
based on the 377,244 used vehicles we retailed during the fiscal year ended
February 29, 2008. As of the end of fiscal 2008, we operated 89
used car superstores in 41 metropolitan markets. In addition, we sold
222,406 wholesale vehicles in fiscal 2008 through on-site auctions.
We were
the first used vehicle retailer to offer a large selection of high quality used
vehicles at competitively low, “no-haggle” prices using a customer-friendly
sales process in an attractive, modern sales facility. The CarMax
consumer offer provides customers the opportunity to shop for vehicles the same
way they shop for items at other “big-box” retailers, and it is structured
around four customer benefits: low, no-haggle prices; a broad selection; high
quality vehicles and a customer-friendly sales process. Our strategy
is to better serve the auto retailing market by addressing the major sources of
customer dissatisfaction with traditional auto retailers and to maximize
operating efficiencies through the use of standardized operating procedures and
store formats enhanced by sophisticated, proprietary management information
systems.
We
purchase, recondition and sell used vehicles. All of the used
vehicles we retail are thoroughly reconditioned to meet high mechanical,
electrical, safety and cosmetic standards, and each vehicle must pass a
comprehensive inspection before being offered for sale. Approximately
85% of the used vehicles we retail are 1 to 6 years old with fewer than 60,000
miles. We also offer a selection of used vehicles at each superstore
that are more than 6 years old or have more than 60,000 miles, if they meet
similar quality standards.
We also
sell new vehicles at five locations under franchise agreements with four new car
manufacturers (Chrysler, General Motors, Nissan and Toyota). In
fiscal 2008, new vehicles comprised 4% of our total retail vehicle unit
sales. As planned, new car sales have become an increasingly smaller
part of our business mix over the past several years as we have divested 15
new car franchises while we focused on growing our used car
business.
We
provide customers with a full range of related products and services, including
the financing of vehicle purchases through CarMax Auto Finance (“CAF”), our own
finance operation, and third-party financing providers; the sale of extended
service plans and accessories; the appraisal and purchase of vehicles directly
from consumers; and vehicle repair service.
The
CarMax consumer offer enables customers to evaluate separately each component of
the sales process and to make informed decisions based on comprehensive
information about the options, terms and associated prices of each
component. The customer can accept or decline any individual element
of the offer without affecting the price or terms of any other component of the
offer. Our no-haggle pricing and our commission structure, which is
generally based on a fixed dollars-per-unit standard, allow sales consultants to
focus solely on meeting customer needs.
We have
separated the practice of trading in a used vehicle in conjunction with the
purchase of another vehicle into two distinct and independent
transactions. We will appraise a consumer’s vehicle and make an offer
to buy that vehicle regardless of whether the owner is purchasing a vehicle from
us. We acquire the majority of our retail used vehicle inventory
through this unique in-store appraisal process. We also acquire a
significant portion of our used vehicle inventory through wholesale auctions
and, to a lesser extent, directly from other sources, including wholesalers,
dealers and fleet owners. Vehicles purchased through our in-store
appraisal process that do not meet our retail standards are sold to licensed
dealers through on-site wholesale auctions.
Our
inventory management and pricing system tracks each vehicle throughout the sales
process. Using the information provided by this system and applying
sophisticated statistical modeling techniques, we are able to optimize our
inventory mix, anticipate future inventory needs at each store, evaluate sales
consultant and buyer performance and refine our vehicle pricing
strategy. Because of the pricing discipline afforded by the inventory
management and pricing system, more than 99% of the entire used car inventory
offered at retail is sold at retail.
Industry and
Competition. With calendar year 2007 sales of approximately
$340 billion, used vehicles comprise nearly half of the U.S. auto retail market,
the largest retail segment of the economy. In calendar 2007, there
were an estimated 41.4 million used vehicles sold in the U.S. compared with
approximately 16.2 million new vehicles. Late-model vehicles that are
1 to 6 years old, our primary focus, are estimated at approximately $275 billion
in annual sales and 19 million units per year.
The U.S.
used car marketplace is highly fragmented and competitive, and includes
approximately 21,500 franchised new car dealers and 43,000 independent used
car dealers, as well as millions of private individuals. Our primary
competitors are the franchised new car dealers, who sell the majority of
late-model used vehicles. Independent used car dealers predominantly
sell older, higher mileage cars than we do. Competition has been
affected by the increasing use of Internet-based marketing for both used
vehicles and vehicle financing. In both the used and new vehicle
markets, we seek to distinguish ourselves from traditional dealerships through
our consumer offer, sales approach and other innovative operating
strategies.
We
believe that our principal competitive factors in used vehicle retailing are our
ability to provide a high degree of customer satisfaction with the car-buying
experience; our competitively low prices; our breadth of selection of the most
popular makes and models available both on site and via our website, carmax.com;
the quality of our vehicles; our proprietary information systems; and the
locations of our retail stores. Upon request by a customer, we will
transfer virtually any used vehicle in our nationwide inventory to a local
superstore. Transfers are free within a market; longer distance
transfers include a charge to cover transportation costs. In fiscal
2008, more than 20% of our vehicles sold were transferred at customer
request. Our Certified Quality Inspection assures that every vehicle
we offer for sale meets stringent mechanical, electrical and safety
standards. We back every vehicle with a 5-day,
money-back
guarantee
and at least a 30-day limited warranty. Other competitive factors
include our ability to offer or arrange customer financing with competitive
terms and the comprehensiveness and cost of the extended service plans we
offer. We believe that we are competitive in all of these areas and
that we enjoy advantages over competitors that employ traditional high-pressure,
negotiation-oriented sales techniques.
Our sales
consultants play a significant role in ensuring a customer-friendly sales
process. A sales consultant is paid a commission based on a fixed
dollars-per-unit standard, thereby earning the same dollar sales commission
regardless of the gross margin on the vehicle being sold. The sales
consultant normally receives no commission on the finance
process. This ensures that the sales consultant’s primary objective
is helping customers find the right vehicles for their needs at prices they can
afford. In contrast, sales and finance personnel at traditional
dealerships typically receive higher commissions for negotiating higher prices
and interest rates, and for steering customers toward vehicles with higher gross
margins.
In the
new vehicle market, we compete with other franchised
dealers. Historically, the new vehicle market has been served
primarily by dealerships employing traditional automotive selling
methods. We believe our customer-friendly, low-pressure sales methods
are points of competitive differentiation.
Marketing and
Advertising. Our marketing strategies are focused on
developing awareness of the advantages of shopping at our stores and on
attracting customers who are already considering buying or selling a
vehicle. We use market awareness and customer satisfaction surveys to
help tailor our marketing efforts to the purchasing habits and preferences of
customers in each market area. Our marketing strategies are
implemented primarily through television and radio broadcasts, carmax.com, the
Internet and newspaper advertising. Television and radio broadcast
advertisements are designed to build consumer awareness of the CarMax name,
carmax.com and key components of the CarMax offer. Newspaper
advertisements promote our broad selection of vehicles and price
competitiveness, targeting consumers with immediate purchase
intentions. Broadcast, Internet and newspaper advertisements are
designed to drive customers to our stores and to carmax.com.
We have
changed our marketing programs in response to the rapidly changing media
landscape. We have customized our marketing program based on
awareness levels in each market. In many markets, we have expanded
the use of Internet-based advertising while curtailing the use of newspaper
advertising. We are building awareness and driving traffic to our
stores and carmax.com by listing every retail vehicle on both AutoTrader.com and
cars.com. Through their syndicated networks, AutoTrader.com and
cars.com vehicle listings appear on sites that we believe are visited by a
majority of buyers of late-model used vehicles who use the Internet in their
shopping process. Our advertising on the Internet also includes
banner and keyword advertisements on search engines, such as Google and
Yahoo!
Our
website, carmax.com, is a marketing tool for communicating the CarMax consumer
offer in detail, a sophisticated search engine for finding the right vehicle and
a sales channel for customers who prefer to complete a part of the shopping and
sales process online. The website offers complete inventory and
pricing search capabilities. Information on the more than 25,000 cars
available in our nationwide inventory is updated daily. Carmax.com
includes detailed information, such as vehicle photos, prices, features,
specifications and store locations, as well as advanced feature-based search
capabilities, and sorting and comparison tools that allow consumers to easily
compare vehicles. The site also includes features such as detailed
vehicle reviews, payment calculators and an option to estimate trade-in values
via a link to Kelley Blue Book. Customers can contact sales
consultants online via carmax.com, by telephone or by fax. Customers
can work with these sales consultants from the comfort of home, including
applying for financing, and need to visit the store only to sign the paperwork
and pay for and pick up their vehicle. Our survey data indicates that
during fiscal 2008, more than 60% of customers who purchased a vehicle from us
had visited our website first.
Suppliers for
Used Vehicles. We acquire used vehicle inventory directly from
consumers through our in-store appraisal process and through other sources,
including local and regional auctions, wholesalers, franchised and independent
dealers and fleet owners, such as leasing companies and rental
companies. In calendar 2007, approximately 21 million used vehicles
were remarketed in the U.S., of which nearly 10 million were sold at wholesale
auction.
The
majority of our used vehicle inventory is acquired directly from consumers
through our appraisal process. The most popular makes and models are
more readily available directly from consumers than from other
sources. This buying strategy also helps provide an inventory of
makes and models that reflects the tastes of each market. In fiscal
2007, we began testing a stand-alone car-buying center in Atlanta,
Georgia. Our goal for the car-buying center was to increase appraisal
traffic and generate incremental vehicle purchases from
individual
consumers. We expanded this test in fiscal 2008, opening two
additional car-buying centers, in Raleigh, North Carolina, and Tampa, Florida,
and we plan to open two more centers during fiscal 2009.
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 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 on
the basis of their estimated wholesale market value, 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 to date 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
needs and to support planned expansion.
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. A manufacturer may terminate a
dealer agreement under certain circumstances, including a change in ownership
without prior manufacturer approval, failure to maintain adequate customer
satisfaction ratings or a material breach of other provisions of the
agreement. In addition to selling new vehicles using our low,
no-haggle price strategy, the franchise and dealer agreements generally allow us
to perform warranty work on these vehicles and sell related parts and services
within a specified market area. Designation of specified market areas
generally does not guarantee exclusivity within a specified
territory.
Seasonality. Our
business is seasonal. Most of our superstores experience their
strongest traffic and sales in the spring and summer quarters. Sales
are typically lowest in the fall quarter, which coincides with the new vehicle
model-year-changeover period. In the fall, the new model year
introductions and discounts on model year closeouts generally can cause rapid
depreciation in used car pricing, particularly for late-model used
cars. Customer traffic also tends to slow in the fall as the weather
changes and as customers shift their spending priorities toward holiday-related
expenditures. Seasonal patterns for car buying and selling may vary
in different parts of the country and, as we expand geographically, these
differences could have an effect on the overall seasonal pattern of our
results.
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 used car selection covers popular brands from
manufacturers such as Chrysler, Ford, General Motors, Honda, Hyundai, Mazda,
Mitsubishi, Nissan, Subaru, Toyota and Volkswagen and luxury brands such as
Acura, BMW, Infiniti, Lexus and Mercedes. Our primary focus is
vehicles that are 1 to 6 years old, have fewer than 60,000 miles and generally
range in price from $11,000 to $30,000. For the more cost-conscious
consumer, we also offer used cars that are more than 6 years old or have 60,000
miles or more and that generally range in price from $7,500 to
$21,000.
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 with the best-negotiated prices in the market. Prices on
all vehicles are clearly displayed on each vehicle’s information sticker; on
carmax.com, AutoTrader.com and cars.com; and, where applicable, in our newspaper
advertising. We extend our no-haggle philosophy to every component of
the vehicle transaction, including vehicle appraisal offers, financing rates,
accessories, extended service plan pricing and vehicle documentation
fees.
Reconditioning
and Service. An
integral part of our used car consumer offer is the reconditioning
process. This process includes a comprehensive Certified Quality
Inspection of the engine and all major systems, including cooling, fuel,
drivetrain, transmission, electronics, suspension, brakes, steering, air
conditioning and other
equipment, as well as the interior and exterior of the vehicle. Based
on this quality inspection, we determine the reconditioning necessary to bring
the vehicle up to our high quality standards. Our service technicians
complete vehicle inspections. We perform most routine mechanical and
minor body repairs in-house; however, for some reconditioning services, we
engage third parties specializing in those services. Over the past
several years, we have performed an increasing percentage of reconditioning
services in-house and,
based on the cost savings realized, we expect this trend to
continue. Non-production (formerly referred to as satellite)
superstores depend upon nearby production (formerly referred to as mega and
standard) superstores for reconditioning, which increases efficiency and reduces
overhead.
All
CarMax used car superstores provide vehicle repair service including repairs of
vehicles covered by our extended service plans. We also provide
factory-authorized service at all new car franchises. We have
developed systems and procedures that are intended to ensure that our retail
repair service is conducted in the same customer-friendly and efficient manner
as our other operations.
We
believe that the efficiency of our reconditioning and service operations is
enhanced by our modern facilities, a technician mentoring process and our
information systems. The mentoring process and our compensation
programs are designed to increase the productivity of technicians, identify
opportunities for cost reduction and achieve high-quality
repairs. Our information systems provide the ability to track repair
history and enable trend analysis, which serves as guidance for our continuous
improvement efforts.
Wholesale
Auctions. Vehicles purchased through our in-store appraisal process
that do not meet our retail standards are sold through on-site wholesale
auctions. As of February 29, 2008, wholesale auctions were
conducted at 49 of our 89 superstores. Auctions are generally held at
production superstores on a weekly, bi-weekly or monthly
basis. Auction frequency at a given superstore is determined by the
number of vehicles to be auctioned, which depends on the number of stores and
the market awareness of the company and our in-store appraisal offer in that
market. The typical wholesale vehicle is approximately 10 years old
and has more than 100,000 miles. Participation in our wholesale
auctions is restricted to licensed automobile dealers, the majority of whom are
independent dealers. To participate in a CarMax auction, dealers must
register with our centralized auction support group, at which time we determine
the purchase limit available to each dealer. We make conditional
announcements 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. The average auction sales rate was 97% in
fiscal 2008. Dealers pay a fee to the company based on the sales
price of the vehicles they purchase.
Customer Credit.
We
offer customers a wide range of financing alternatives, which we believe
enhances the CarMax consumer offer. Before the effect of 3-day
payoffs and vehicle returns, CAF financed more than 40% of our retail vehicle
unit sales in fiscal 2008. Customer credit applications are initially
reviewed by CAF and may also be reviewed by a third-party
provider. Customers who are not approved by either CAF or the initial
third-party provider are evaluated by other lenders. Having a wide array
of financing sources not only expands the choices for our customers, but also
increases discrete approvals. To this end, we have tested, and will
continue to test, other third-party lenders.
Customers
applying for financing provide credit information that is electronically
submitted by sales consultants through our proprietary information
system. A majority of applicants receive a response within five
minutes. The vehicle financings are retail installment contracts
secured by the vehicles financed. For the majority of loans arranged
by the third-party providers, we are paid a fee per vehicle
financed. We have no recourse liability on retail installment
contracts arranged with third-party providers. Customers are
permitted to refinance or pay off their loans within three business days of a
purchase without incurring any finance or related
charges.
Extended Service
Plans. At the time of the sale, we offer the customer an
extended service plan. We sell these plans on behalf of unrelated
third parties that are the primary obligors. Under the third-party
service plan programs, we have no contractual liability to the
customer. The extended service plans have terms of coverage from 12
to 72 months, depending on the vehicle mileage, make and age. We
offer extended service plans at low, fixed prices, which are based primarily on
the repair record of the vehicle make and model and the length of coverage
selected. All extended service plans that we sell (other than
manufacturers’ warranties) have been designed to our specifications and are
administered by the third parties through private-label arrangements under which
we receive a commission from the administrator at the time the extended service
plan is sold. In fiscal 2008, more than
half of
the customers purchasing a used vehicle from CarMax also purchased an extended
service plan.
Our
extended service plan customers have access to vehicle repair service at each
CarMax store and to the third-party administrators’ nationwide network of
approximately 14,000 independent service providers. We believe that
the quality of the services provided by this network, as well as the broad scope
of our extended service plans, helps promote customer satisfaction and loyalty,
and thus increases the likelihood of repeat and referral business.
Systems
Our
stores are supported by an advanced information system that improves the
customer experience while providing tightly integrated automation of all
operating functions. Using in-store information kiosks, customers can
search each store’s vehicle inventory and print a detailed listing for any
vehicle, which includes the vehicle’s features and specifications and a map
showing its specific location on the display lot. Our inventory
management system tracks every vehicle through its life from purchase through
reconditioning and test-drives to ultimate sale. Bar codes are placed
on each vehicle and on each parking space on the display lot, and all vehicle
bar codes are scanned daily as a loss prevention measure. Test-drive
information is captured on every vehicle using radio frequency identification
devices, linking the specific vehicle and the sales consultant. We
also capture data on vehicles we wholesale, which helps us track market
pricing. An online finance application process and computer-assisted
document preparation ensure rapid completion of the sales
transaction. Behind the scenes, our proprietary store technology
provides our management with real-time information about every aspect of store
operations, such as inventory management, pricing, vehicle transfers, wholesale
auctions and sales consultant productivity. In addition, our store system
provides a direct link to our proprietary credit processing information system
to facilitate the credit review and approval process.
Our
inventory management and pricing system allows us to buy the mix of makes,
models, age, mileage and price points tailored to customer buying preferences at
each superstore. This system also generates recommended retail price
markdowns for specific vehicles based on complex algorithms that take into
account factors including sales history, consumer interest and seasonal
patterns. We believe this systematic approach to vehicle pricing
allows us to optimize inventory turns, which minimizes the depreciation risk
inherent in used cars and helps us to achieve our targeted gross profit dollars
per unit.
In
addition to inventory management, our Electronic Repair Order system (“ERO”) is
used by the service department to sequence reconditioning
procedures. ERO provides information that helps increase quality and
reduce costs, which further enhances our customer service and
profitability.
Through
our centralized systems, we are able to immediately integrate new stores into
our store network, allowing the new stores to rapidly achieve operating
efficiency. We continue to enhance and refine our information
systems, which we believe to be a core competitive advantage. The
design of our information systems incorporates off-site backups, redundant
processing and other measures to reduce the risk of significant data loss in the
event of an emergency or disaster.
Associates
On
February 29, 2008, we had a total of 15,637 associates, including 11,780
hourly and salaried associates and 3,857 sales associates, who worked on a
commission basis. Sales consultants include both full-time and
part-time employees. We employ additional associates during peak
selling seasons. As of February 29, 2008, our location general
managers averaged more than eight years of CarMax experience, in addition to
prior retail management experience. We open new stores with
experienced management teams drawn from existing stores.
We
believe we have created a unique corporate culture and maintain good employee
relations. No associate is subject to a collective bargaining agreement. We
focus on providing our associates with the information and resources they need
to offer exceptional customer service. We reward associates whose
behavior exemplifies our culture, and we believe that our favorable working
conditions and compensation programs allow us to attract and retain highly
qualified individuals in each market that we enter. We have been
recognized for the success of our efforts by a number of external
organizations.
Training. To
further support our emphasis on attracting, developing and retaining qualified
associates, we have made a commitment to providing exceptional training
programs. On average, each store associate completed at least 15
online or classroom courses, totaling more than 75 hours of training per
associate in fiscal 2008. Store associates receive structured,
self-paced training that introduces them to company policies and their specific
job responsibilities through KMX University – our proprietary
intranet-based testing and tracking
system. KMX University
is comprised of customized applications hosted within a learning management
system that allow us to author, deliver and track training events and to measure
associate competency before and after training. In fiscal 2008, more
than one million hours of training were delivered through
KMX University. Most new store associates are also assigned
mentors who provide on-the-job guidance and support.
We also
provide comprehensive, facilitator-led classroom training courses to sales
consultants, buyers, automotive technicians and managers. All sales
consultants receive extensive customer service training both initially and on an
ongoing basis. Buyers-in-training undergo a 6- to 18-month
apprenticeship under the supervision of experienced buyers, and they generally
will assist with the appraisal of more than 1,000 cars before making their first
independent purchase. We utilize a mix of internal and external
technical training programs in an effort to provide a stable future supply of
qualified technicians. Reconditioning and mechanical technicians
attend in-house and vendor-sponsored training programs designed to develop their
skills in performing repairs on the diverse makes and models of vehicles we
sell. Technicians at our new car franchises also attend
manufacturer-sponsored training programs to stay abreast of current diagnostic,
repair and maintenance techniques for those manufacturers’
vehicles. Additionally, our management training program includes
rotations through each functional area.
Laws
and Regulations
Vehicle Dealer
and Other Laws and Regulations. We operate in a highly
regulated industry. In every state in which we operate, we must
obtain various licenses and permits in order to conduct business, including
dealer, service, sales and finance licenses issued by state and certain local
regulatory authorities. A wide range of federal, state and local laws
and regulations govern the manner in which we conduct business,
including advertising, sales, financing and employment
practices. These laws include consumer protection laws, privacy laws,
anti-money laundering laws and state franchise laws, as well as other laws and
regulations applicable to new and used motor vehicle dealers. These
laws also include federal and state wage-hour, anti-discrimination and other
employment practices laws. Our financing activities with customers
are subject to federal truth-in-lending, consumer leasing and equal credit
opportunity laws and regulations, as well as state and local motor vehicle
finance and collection laws, installment finance laws and usury
laws.
Claims
arising out of actual or alleged violations of law may be asserted against us by
individuals or governmental authorities and may expose us to significant damages
or other penalties, including revocation or suspension of the licenses necessary to conduct business and
fines.
Environmental Laws and
Regulations. We are subject to a
variety of federal, state and local laws and regulations that pertain to the
environment. Our business involves the use, handling and disposal of
hazardous materials and wastes, including motor oil, gasoline, solvents,
lubricants, paints and other substances. We are subject to compliance
with regulations concerning the operation of underground and aboveground
gasoline storage tanks, aboveground oil tanks and automotive spray
booths.
AVAILABILITY OF REPORTS AND OTHER
INFORMATION
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy statements on Schedule 14A, as well as any amendments to
those reports, are available without charge through our website, carmax.com, as
soon as reasonably practicable after filing or furnishing the material to the
Securities and Exchange Commission. The contents of our website are
not, however, part of this report.
In
addition, our Corporate Governance Guidelines and Code of Business Conduct, as
well as the charters of the Audit Committee, Nominating and Governance Committee
and Compensation and Personnel Committee, are available to shareholders and the
public through the “Corporate Governance” link on our investor information home
page at investor.carmax.com. Printed copies of these documents are
available to any shareholder, without charge, upon written request to our
corporate secretary at the address set forth on the cover page of this
report. Any changes to these documents or reportable waivers of the
Code of Business Conduct are promptly disclosed on our website.
We are
subject to various risks, including the risks described below. Our
business, results of operations and financial condition could be materially and
adversely affected by any of these risks or additional risks not presently known
or that we currently deem immaterial.
Economic
Conditions. In the normal course
of business, we are subject to changes in general or regional U.S. economic
conditions, including, but not limited to, consumer credit availability,
consumer credit delinquency and loss rates, interest rates, gasoline prices,
inflation, personal discretionary spending levels and consumer sentiment about
the economy in general. Any significant changes in economic
conditions could adversely affect consumer demand and/or increase
costs.
Capital. Changes
in the availability or cost of capital and working capital financing, including
the availability and cost of long-term financing to support our geographic
expansion and the availability and cost of financing auto loan receivables,
could adversely affect growth and operating strategies. Further, our
current credit facility and certain securitization and sale-leaseback agreements
contain covenants and/or performance triggers. Any failure to comply
with these covenants and/or performance triggers could have a material adverse
effect on our business, results of operations and financial
condition.
We use
and have historically relied upon a securitization program to fund substantially
all of the auto loan receivables originated by CAF. Initially, we
sell these receivables into our warehouse facility. We periodically
refinance the receivables through public securitizations. If
there were a change in the condition of the asset-backed market, we could
incur higher costs to access funds in this market or we could be required to
seek alternative means to finance our loan originations. In the event
that this market ceased to exist and there were no immediate alternative funding
sources available, we might be forced to curtail our lending practices for some
period of time. The impact of reducing or curtailing CAF’s loan
originations could have a material adverse impact on our business, sales and
results of operations.
Competition. Automotive retailing is
a highly competitive business. Our competition includes publicly and
privately owned new and used car dealers, as well as millions of private
individuals. Competitors could sell the same or similar makes of
vehicles that we offer in the same or similar markets at competitive
prices. Further, new entrants to the market could result in increased
acquisition costs for used vehicles and lower-than-expected vehicle sales and
margins. Competition could be affected by the increasing use of
Internet-based marketing for both used vehicles and vehicle
financing. Customers are increasingly using the Internet to compare
pricing for cars and related financing, which could further reduce sales and
adversely affect our results of operations. In addition, CAF is
subject to competition from various financial institutions.
Retail
Prices. Any significant changes in retail prices for used and
new vehicles could reduce sales and profits. If any of our
competitors seek to gain or retain market share by reducing prices for used or
new vehicles, we would likely reduce our prices in order to remain competitive,
which could result in a decrease in our sales revenue and results of operations
and require a change in our operating strategies.
Inventory. A
reduction in the availability or access to sources of inventory would adversely
affect our business. A failure to adjust appraisal offers to stay in
line with broader market trade-in offer trends, or a failure to recognize those
trends, could negatively impact the ability to acquire
inventory. Should we develop excess inventory, the inability to
liquidate the excess inventory at prices that allow us to meet margin targets or
to recover our costs would adversely affect our results of
operations.
Regulatory
Environment. We are subject to a wide range of federal, state
and local laws and regulations, such as licensing requirements and laws
regarding advertising, vehicle sales, financing and employment
practices. Our facilities and business operations are also subject to
laws and regulations relating to environmental protection and human health and
safety. The violation of these laws or regulations could result in
administrative, civil or criminal penalties or in a cease and desist order
against business operations. As a result, we have incurred and will
continue to incur, capital and operating expenditures and other costs to comply
with these laws and regulations. Further, over the past several
years, private plaintiffs and federal, state and local regulatory and law
enforcement authorities have increased their scrutiny of advertising, sales,
financing and insurance activities in the sale and leasing of motor
vehicles. If, as a result, other automotive retailers adopt more
transparent, consumer-oriented business practices, our differentiation versus
those retailers could be reduced.
Management and
Workforce. Our success depends upon the continued
contributions of our store, region and corporate management
teams. Consequently, the loss of the services of key employees could
have a material adverse effect on our business. In addition, we will
need to hire additional personnel as we open new stores. The market
for qualified employees in the industry and in the regions in which we operate
is highly competitive and could result in increased labor costs during periods
of low unemployment.
Information
Systems. Our business is dependent upon the efficient
operation of our information systems. In particular, we rely on our information
systems to effectively manage sales, inventory, consumer financing and customer
information. The failure of these systems to perform as designed or
the failure to maintain and continually enhance or protect the integrity of
these systems could disrupt our business operations, impact sales and results of
operations, expose us to customer or third-party claims or result in adverse
publicity.
Accounting
Policies and Matters. We have identified several accounting policies
as being “critical” to the fair presentation of our financial condition and
results of operations because they involve major aspects of our business and
require management to make judgments about matters that are inherently
uncertain. Materially different amounts could be recorded under
different conditions or using different assumptions. The
implementation of new accounting requirements or changes to U.S. generally
accepted accounting principles could adversely affect our reported results of
operations or financial condition. Potential changes currently under
consideration by the Financial Accounting Standards Board include, but are not
limited to, proposed rule changes relating to the accounting for securitization
transactions and potential changes in accounting for leases and pension
expense.
Confidential
Customer Information. In the normal course of
business, we collect, process and retain sensitive and confidential customer
information. Despite the security measures we have in place, our facilities and
systems, and those of third-party service providers, could be vulnerable to
security breaches, acts of vandalism, computer viruses, misplaced or lost data,
programming or human errors or other similar events. Any security breach
involving the misappropriation, loss or other unauthorized disclosure of
confidential information, whether by us or by third-party service providers,
could damage our reputation, expose us to the risks of litigation and liability,
disrupt our business or otherwise harm our results of operations.
Litigation. We
are subject to various litigation matters, which, if the outcomes in any
significant matters are adverse, could adversely affect our
business. Claims arising out of actual or alleged violations of law
could be asserted against us by individuals, either individually or through
class actions, or by governmental entities in civil or criminal investigations
and proceedings. These actions could expose us to adverse publicity
and to substantial monetary damages and legal defense costs, injunctive relief
and criminal and civil fines and penalties, including suspension or revocation
of licenses to conduct business.
Real
Estate. The inability to acquire or lease suitable real estate
at favorable terms could limit the expansion of our store base and could have a
material adverse affect on our business and results of operations.
Weather. The
occurrence of severe weather events, such as rain, snow, wind, storms,
hurricanes or other natural disasters, could cause store closures, adversely
affecting consumer traffic, and could adversely affect our results of
operations.
Seasonal
Fluctuations. Our business is subject to seasonal
fluctuations. We generally realize a higher proportion of revenue and
operating profit during the first and second fiscal quarters. If
conditions arise that impair vehicle sales during the first or second fiscal
quarters, these conditions could have a disproportionately large adverse effect
on annual results of operations.
Geographic
Concentration. Our performance is subject
to local economic, competitive and other conditions prevailing in geographic
areas where we operate. Since a large number of our superstores are
located in the Southeastern U.S. and in the Chicago, Los Angeles and
Washington, D.C./Baltimore markets, our results of operations depend
substantially on general economic conditions and consumer spending habits in
these markets. In the event that any of these geographic areas
experienced a downturn in economic conditions, it could adversely affect our
business and results of operations.
Other Material
Events. The occurrence of certain material events including
natural disasters, acts of terrorism, the outbreak of war or other significant
national or international events could adversely affect our business, results of
operations or financial condition.
None.
We
conduct our used vehicle operations in two basic retail formats – production and
non-production superstores. Production superstores are
those locations at which vehicle reconditioning is performed, while
non-production superstores do not perform vehicle
reconditioning. Production superstores are generally 40,000 to 60,000
square feet on 10 to 25 acres, but a few (formerly referred to as mega
superstores) range from approximately 70,000 to 95,000 square feet on 20 to 35
acres. Non-production superstores are generally 10,000 to 20,000
square feet on 4 to 10 acres.
Stores
as of February 29, 2008
|
Used
Car Superstores
|
Co-Located
New Car Stores (1)
|
Total
|
||
|
Production
|
Non-production
|
|||
|
Alabama
|
1
|
—
|
—
|
1
|
|
Arizona
|
1
|
—
|
—
|
1
|
|
California
|
5
|
6
|
1
|
12
|
|
Connecticut
|
1
|
1
|
—
|
2
|
|
Florida
|
7
|
3
|
—
|
10
|
|
Georgia
|
3
|
2
|
—
|
5
|
|
Illinois
|
4
|
2
|
—
|
6
|
|
Indiana
|
1
|
1
|
—
|
2
|
|
Kansas
|
2
|
—
|
—
|
2
|
|
Kentucky
|
1
|
—
|
—
|
1
|
|
Maryland
|
2
|
2
|
1
|
5
|
|
Mississippi
|
1
|
—
|
—
|
1
|
|
Missouri
|
—
|
1
|
—
|
1
|
|
Nebraska
|
1
|
—
|
—
|
1
|
|
Nevada
|
1
|
1
|
—
|
2
|
|
New
Mexico
|
1
|
—
|
—
|
1
|
|
North
Carolina
|
4
|
3
|
—
|
7
|
|
Ohio
|
1
|
1
|
—
|
2
|
|
Oklahoma
|
1
|
—
|
—
|
1
|
|
South
Carolina
|
2
|
—
|
—
|
2
|
|
Tennessee
|
3
|
1
|
—
|
4
|
|
Texas
|
8
|
3
|
—
|
11
|
|
Utah
|
1
|
—
|
—
|
1
|
|
Virginia
|
4
|
3
|
—
|
7
|
|
Wisconsin
|
1
|
2
|
1
|
4
|
|
Total
|
57
|
32
|
3
|
92
|
|
(1)
|
We
currently operate six new car franchises. Two franchises are
integrated within used car superstores and do not operate as separate
stores. The remaining four franchises are operated from three
new car stores that are co-located with used car
superstores.
|
We have
financed the majority of our stores through sale-leaseback
transactions. As of February 29, 2008, we leased 60 of our 92
retail stores and owned the remaining 32 stores. We also own our home
office building in Richmond, Virginia, and land associated with planned future
store openings.
Expansion
We
believe that we are well positioned to succeed in the highly competitive
automotive retail industry. We have built a strong foundation for
future growth based upon our unique knowledge of the used car market,
established presence in key locations and ability to execute our business plan
in a market subject to continuous change. We continue to refine our
operating strategies and have grown to be the nation’s largest retailer of used
cars.
Specifically,
we have enhanced our ability to identify profitable markets and determine the
appropriate store formats to fit those markets.
We plan
to open superstores at an annual rate of approximately 15% of our used car
superstore base. In fiscal 2009, we plan to open approximately 14
superstores, including 7 production superstores and 7 non-production
superstores, expanding our store base by 16%. Our fiscal 2009
expansion plans are largely focused on opening production superstores in new
mid-sized markets and non-production superstores in existing
markets. We generally define mid-sized markets as those with
television viewing populations of between 600,000 and 2.5 million
people. Historically, mid-sized markets have been the easiest to
enter from a real estate and an advertising/awareness building perspective and
they are where we have generally experienced the fastest ramp-up in store sales
and profitability. We also have resumed store growth in new large
markets.
For
additional details on fiscal 2009 planned store openings, see “Operations
Outlook,” included in Part II, Item 7, of this Form 10-K.
On June
12, 2007, Ms. Regina Hankins filed a putative class action lawsuit against
CarMax, Inc., in Baltimore County Circuit Court, Maryland. We operate
five stores in the state of Maryland. The plaintiff alleges that,
since May 25, 2004, CarMax has not properly disclosed its vehicles’ prior rental
history, if any. The plaintiff seeks compensatory damages, punitive damages,
injunctive relief and the recovery of attorneys’ fees. At this time,
we continue to evaluate the allegations and our defenses. We are
unable to make a reasonable estimate of the amount or range of loss that could
result from an unfavorable outcome in this matter.
We are
involved in various other legal proceedings in the normal course of
business. Based upon our evaluation of information currently available, we
believe that the ultimate resolution of any such proceedings will not have a
material adverse effect, either individually or in the aggregate, on our
financial condition or results of operations.
No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2008.
Our
common stock is listed and traded on the New York Stock Exchange under the
ticker symbol KMX.
As of
February 29, 2008, there were approximately 7,000 CarMax shareholders of
record.
The
following table sets forth for the fiscal periods indicated, the high and low
sales prices per share for our common stock, as reported on the New York Stock
Exchange composite tape and adjusted for the effect of the 2-for-1
stock split in March 2007.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Fiscal
2008
|
||||||||||||||||
|
High
|
$ | 27.75 | $ | 27.42 | $ | 25.38 | $ | 23.47 | ||||||||
|
Low
|
$ | 22.63 | $ | 20.33 | $ | 18.67 | $ | 15.81 | ||||||||
|
Fiscal
2007
|
||||||||||||||||
|
High
|
$ | 18.20 | $ | 18.95 | $ | 23.99 | $ | 29.44 | ||||||||
|
Low
|
$ | 15.14 | $ | 14.85 | $ | 18.59 | $ | 23.10 | ||||||||
To date, we have not paid a cash dividend on CarMax common stock. We presently intend to retain our net earnings for use in our operations and for geographic expansion and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.
During
the fourth quarter of fiscal 2008, we sold no CarMax equity securities that were
not registered under the Securities Act of 1933, as amended. In
addition, we did not repurchase any CarMax equity securities during this
period.
Performance
Graph
The
following graph compares the five-year cumulative total return among CarMax
common stock, the S&P 500 Index and the S&P 500 Retailing
Index. The graph assumes an original investment of $100 in our common
stock and in each index on February 28, 2003, and the reinvestment of dividends,
if applicable.
|
As
of February 29 or 28
|
||||||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||||||
|
CarMax
|
$ | 100.00 | $ | 225.91 | $ | 219.27 | $ | 208.77 | $ | 350.17 | $ | 243.99 | ||||||||||||
|
S&P
500
Index
|
$ | 100.00 | $ | 138.52 | $ | 148.19 | $ | 160.63 | $ | 179.86 | $ | 173.39 | ||||||||||||
|
S&P
500 Retailing Index
|
$ | 100.00 | $ | 156.38 | $ | 173.07 | $ | 187.81 | $ | 207.00 | $ | 157.17 | ||||||||||||
|
FY08
|
FY07
|
FY06
|
FY05
|
FY04
|
FY03
|
|||||||||||||||||||
|
Income
statement information
(In
millions)
|
||||||||||||||||||||||||
|
Used vehicle
sales
|
$ | 6,589.3 | $ | 5,872.8 | $ | 4,771.3 | $ | 3,997.2 | $ | 3,470.6 | $ | 2,912.1 | ||||||||||||
|
New vehicle
sales
|
370.6 | 445.1 | 502.8 | 492.1 | 515.4 | 519.8 | ||||||||||||||||||
|
Wholesale vehicle
sales
|
985.0 | 918.4 | 778.3 | 589.7 | 440.6 | 366.6 | ||||||||||||||||||
|
Other sales and
revenues
|
254.6 | 229.3 | 207.6 | 181.3 | 171.1 | 171.4 | ||||||||||||||||||
|
Net sales and operating
revenues
|
8,199.6 | 7,465.7 | 6,260.0 | 5,260.3 | 4,597.7 | 3,969.9 | ||||||||||||||||||
|
Gross
profit
|
1,072.4 | 971.1 | 790.7 | 650.2 | 570.9 | 468.2 | ||||||||||||||||||
|
CarMax Auto Finance
income
|
85.9 | 132.6 | 104.3 | 82.7 | 85.0 | 82.4 | ||||||||||||||||||
|
SG&A
|
858.4 | 776.2 | 674.4 | 565.3 | 479.3 | 399.5 | ||||||||||||||||||
|
Earnings before income
taxes
|
297.1 | 323.3 | 217.6 | 165.8 | 178.4 | 149.6 | ||||||||||||||||||
|
Provision for income
taxes
|
115.0 | 124.8 | 83.4 | 64.5 | 68.9 | 59.2 | ||||||||||||||||||
|
Net
earnings
|
182.0 | 198.6 | 134.2 | 101.3 | 109.6 | 90.4 | ||||||||||||||||||
|
Share
and per share
information
(Shares in
millions)
|
||||||||||||||||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||||||||||
|
Basic
|
216.0 | 212.5 | 209.3 | 208.1 | 207.0 | 206.0 | ||||||||||||||||||
|
Diluted
|
220.5 | 216.7 | 212.8 | 211.3 | 210.6 | 209.1 | ||||||||||||||||||
|
Net
earnings per share:
|
||||||||||||||||||||||||
|
Basic
|
$ | 0.84 | $ | 0.93 | $ | 0.64 | $ | 0.49 | $ | 0.53 | $ | 0.44 | ||||||||||||
|
Diluted
|
$ | 0.83 | $ | 0.92 | $ | 0.63 | $ | 0.48 | $ | 0.52 | $ | 0.43 | ||||||||||||
|
Balance sheet information
(In
millions)
|
||||||||||||||||||||||||
|
Total current
assets
|
$ | 1,356.9 | $ | 1,150.5 | $ | 941.7 | $ | 853.0 | $ | 760.5 | $ | 697.3 | ||||||||||||
|
Total
assets
|
2,333.2 | 1,885.6 | 1,509.6 | 1,306.3 | 1,055.1 | 921.7 | ||||||||||||||||||
|
Total current
liabilities
|
490.0 | 512.0 | 344.9 | 317.8 | 232.2 | 237.7 | ||||||||||||||||||
|
Short-term
debt
|
21.0 | 3.3 | 0.5 | 65.2 | 4.4 | 56.1 | ||||||||||||||||||
|
Current portion of long-term
debt
|
79.7 | 148.4 | 59.8 | 0.3 | — | — | ||||||||||||||||||
|
Long-term debt, excluding current
portion
|
227.2 | 33.7 | 134.8 | 128.4 | 100.0 | 100.0 | ||||||||||||||||||
|
Total shareholders’
equity
|
1,488.9 | 1,247.4 | 980.1 | 814.2 | 688.0 | 558.6 | ||||||||||||||||||
|
Unit
sales information
|
||||||||||||||||||||||||
|
Used vehicle units
sold
|
377,244 | 337,021 | 289,888 | 253,168 | 224,099 | 190,135 | ||||||||||||||||||
|
New vehicle units
sold
|
15,485 | 18,563 | 20,901 | 20,636 | 21,641 | 22,360 | ||||||||||||||||||
|
Wholesale vehicle units
sold
|
222,406 | 208,959 | 179,548 | 155,393 | 127,168 | 104,593 | ||||||||||||||||||
|
Percent
changes in
|
||||||||||||||||||||||||
|
Comparable store used vehicle unit
sales
|
3 | 9 | 4 | 1 | 6 | 8 | ||||||||||||||||||
|
Total used vehicle unit
sales
|
12 | 16 | 15 | 13 | 18 | 16 | ||||||||||||||||||
|
Total net sales and operating
revenues
|
10 | 19 | 19 | 14 | 16 | 12 | ||||||||||||||||||
|
Net
earnings
|
(8 | ) | 48 | 32 | (8 | ) | 21 | 2 | ||||||||||||||||
|
Diluted net earnings per
share
|
(10 | ) | 46 | 31 | (8 | ) | 21 | — | ||||||||||||||||
|
Other
year-end information
|
||||||||||||||||||||||||
|
Used car
superstores
|
89 | 77 | 67 | 58 | 49 | 40 | ||||||||||||||||||
|
Retail
stores
|
92 | 81 | 71 | 61 | 52 | 44 | ||||||||||||||||||
|
Associates
|
15,637 | 13,736 | 11,712 | 10,815 | 9,355 | 8,263 | ||||||||||||||||||
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is provided as a supplement to, and should be
read in conjunction with, our consolidated financial statements and the
accompanying notes presented in Item 8, Consolidated Financial Statements and
Supplementary Data. Note references are to the notes to consolidated
financial statements included in Item 8. Amounts and percentages in
tables may not total due to rounding. Certain prior year amounts have
been reclassified to conform to the current year’s presentation. All
share and per share amounts for prior periods have been adjusted to reflect our
2-for-1 common stock split in March 2007.
BUSINESS
OVERVIEW
General
CarMax is
the nation’s largest retailer of used vehicles. We pioneered the used
car superstore concept, opening our first store in 1993. Our strategy
is to better serve the auto retailing market by addressing the major sources of
customer dissatisfaction with traditional auto retailers and to maximize
operating efficiencies through the use of standardized operating procedures and
store formats enhanced by sophisticated, proprietary management information
systems. As of February 29, 2008, we operated 89 used car superstores
in 41 markets, comprised of 30 mid-sized markets, 10 large markets and 1 small
market. We define mid-sized markets as those with television viewing
populations generally between 600,000 and 2.5 million people. We also
operated six new car franchises, all of which were integrated or co-located with
our used car superstores. In fiscal 2008, we sold 377,244 used cars,
representing 96% of the total 392,729 vehicles we sold at retail.
We
believe the CarMax consumer offer is distinctive within the automobile retailing
marketplace. Our offer provides customers the opportunity to shop for
vehicles the same way they shop for other items at other big box
retailers. Our consumer offer is structured around our four customer
benefits: low, no-haggle prices; a broad selection; high quality vehicles; and a
customer-friendly sales process. Our website, carmax.com, is a
valuable tool for communicating the CarMax consumer offer, a sophisticated
search engine and an efficient channel for customers who prefer to conduct their
shopping online. We generate revenues, income and cash flows
primarily by retailing used vehicles and associated items including vehicle
financing, extended service plans (“ESPs”) and vehicle repair
service. A majority of the used vehicles we sell at retail are
purchased directly from consumers.
We also
generate revenues, income and cash flows from the sale of vehicles purchased
through our appraisal process that do not meet our retail
standards. These vehicles are sold through on-site wholesale
auctions. Wholesale auctions are held on a weekly, bi-weekly or
monthly basis, and as of February 29, 2008, we conducted auctions at 49 used car
superstores. During fiscal 2008, we sold 222,406 wholesale
vehicles. On average, the vehicles we wholesale are approximately 10
years old and have more than 100,000 miles. Participation in our
wholesale auctions is restricted to licensed automobile dealers, the majority of
whom are independent dealers and licensed wholesalers.
CarMax
provides financing to qualified customers through CarMax Auto Finance (“CAF”),
our finance operation, and a number of other third-party financing
providers. We collect fixed, prenegotiated fees from the majority of
the third-party providers, and we periodically test additional
providers. CarMax has no recourse liability for the financing
provided by these third parties.
We sell
ESPs on behalf of unrelated third parties who are the primary
obligors. We have no contractual liability to the customer under
these third-party service plans. Extended service plan revenue
represents commissions from the unrelated third parties.
We are
still at a relatively early stage in the national rollout of our retail concept,
and as of February 29, 2008, we had used car superstores located in markets that
comprised approximately 43% of the U.S. population. We currently plan
to open used car superstores at a rate of approximately 15% of our used car
superstore base each year. Over the long term, we expect comparable
store used unit sales increases to average in the range of 4% to 8%, reflecting
the multi-year ramp in sales at newly opened stores as they mature, continued
market share gains at stores that have reached basic maturity sales levels, and
underlying industry sales growth. We estimate that our stores
generally reach basic maturity sales levels in their fifth year of
operation.
While
total gross profit per unit has gradually increased over the last several years,
we believe the primary driver for future earnings growth will be vehicle unit
sales growth, from both new stores and from stores included in our comparable
store base. We target a dollar range of gross profit per used unit
sold. The gross profit dollar target for an individual vehicle is
based on a variety of factors, including its anticipated probability of sale and
its mileage relative to its age; however, it is not based on the vehicle’s
selling price.
The
principal challenges we face in expanding our store base include our ability to
build our management bench strength to support the store growth and our ability
to procure suitable real estate at reasonable costs. We staff each
newly opened store with an experienced management team. We must
therefore continually recruit, train and develop managers and associates to fill
the pipeline necessary to support future store openings. If at any
time we believed that the rate of store growth was causing our performance to
falter, we would consider slowing the growth rate.
Fiscal
2008 Highlights
|
·
|
We
believe that difficult macro-economic conditions caused an industry-wide
slowdown in sales in the automotive retail market in fiscal
2008.
|
|
·
|
Net
sales and operating revenues increased 10% to $8.20 billion from $7.47
billion in fiscal 2007, while net earnings decreased 8% to $182.0 million,
or $0.83 per share, from $198.6 million, or $0.92 per
share.
|
|
·
|
Total
used vehicle unit sales increased 12%, reflecting the combination of the
growth in our store base and a 3% increase in comparable store used unit
sales. Comparable store used unit sales growth slowed from the
prior year level, reflecting the combination of the near-term decline in
consumer confidence and a slowing sales pace for the automotive retail
industry, as well as the challenging comparison with our 9% increase
during fiscal 2007.
|
|
·
|
We
opened 12 used car superstores in fiscal 2008, increasing our store base
by 16%. The new stores included four production superstores and
eight non-production superstores, and they represented our entry into five
new markets.
|
|
·
|
Total
wholesale vehicle unit sales increased 6%. Wholesale unit sales
grew at a slower pace than our used vehicle unit sales, reflecting a
decrease in our appraisal buy rate (defined as appraisal purchases as a
percent of vehicles appraised).
|
|
·
|
New
vehicle unit sales declined 17% due to the combination of the softer new
car industry trends and the sale of a new car franchise during fiscal
2008.
|
|
·
|
Our
total gross profit per unit remained consistent at $2,731 in both fiscal
2008 and fiscal 2007. Total gross profit per unit increased
modestly in the first half of fiscal 2008, before declining in the second
half of the year in response to the more challenging economic
conditions.
|
|
·
|
CAF
income declined 35% to $85.9 million from $132.6 million in fiscal
2007. In fiscal 2008, CAF income was adversely affected by the
disruption in the global credit markets and worsening economic
conditions. As a result, we experienced a substantial increase
in CAF’s funding costs and higher net credit losses, and we increased the
discount rate used to value our retained interest to 17% from
12%. In fiscal 2007, CAF income included a benefit of $13.0
million, or $0.04 per share, primarily related to favorable valuation
adjustments.
|
|
·
|
Selling,
general and administrative expenses as a percent of net sales and
operating revenues (the “SG&A ratio”) increased to 10.5% from 10.4% in
fiscal 2007. This increase largely resulted from the modest
level of comparable store sales increase and our commitment to our ongoing
growth plan, as well as the decision to continue spending on strategic,
operational and Internet initiatives in fiscal
2008.
|
|
·
|
Net
cash provided by operations decreased to $79.5 million from $136.8 million
in fiscal 2007, primarily reflecting an increased investment in working
capital.
|
CRITICAL
ACCOUNTING POLICIES
Our
results of operations and financial condition as reflected in the consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. Preparation of financial statements
requires management to make estimates and assumptions affecting the reported
amounts of assets, liabilities, revenues, expenses and the disclosures of
contingent assets and liabilities. We use our historical experience
and other relevant factors when developing our estimates and
assumptions. We continually evaluate these estimates and
assumptions. Note 2 includes a discussion of significant accounting
policies. The accounting policies discussed below are the ones we
consider critical to an understanding of our consolidated financial statements
because their application places the most significant demands on our
judgment. Our financial results might have been different if
different assumptions had been used or other conditions had
prevailed.
Securitization
Transactions
We use a
securitization program to fund substantially all of the auto loan receivables
originated by CAF. The securitization transactions are accounted for
as sales. A gain, recorded at the time of the securitization
transaction, results from recording a receivable equal to the present value of
the expected residual cash flows generated by the securitized
receivables. The fair value of our retained interest in
securitization transactions includes the present value of the expected residual
cash flows generated by the securitized receivables, cash reserve accounts, an
undivided ownership interest in certain receivables and retained subordinated
bonds.
The
present value of the expected residual cash flows generated by the securitized
receivables is determined by estimating the future cash flows using management’s
assumptions of key factors, such as finance charge and fee income, cost of
funds, loss rates, prepayment rates and discount rates appropriate for the type
of asset and risk. These assumptions are derived from historical
experience and projected economic trends. Adjustments to one or more
of these assumptions may have a material impact on the fair value of the
retained interest. The fair value of the retained interest may also
be affected by external factors, such as changes in the behavior patterns of
customers, changes in the economy and developments in the interest rate and
credit markets. Note 2(C) includes a discussion of accounting
policies related to securitizations. Note 4 includes a discussion of
securitizations and provides a sensitivity analysis showing the hypothetical
effect on the retained interest if there were variations from the assumptions
used. In addition, see the “CarMax Auto Finance Income” section of
this MD&A for a discussion of the effect of changes in our
assumptions.
Revenue
Recognition
We
recognize revenue when the earnings process is complete, generally either at the
time of sale to a customer or upon delivery to a customer. We
recognize used vehicle revenue when a sales contract has been executed and the
vehicle has been delivered, net of a reserve for returns under our 5-day,
money-back guarantee. A reserve for vehicle returns is recorded based
on historical experience and trends, and it could be affected if future vehicle
returns differ from historical averages.
We also
sell ESPs on behalf of unrelated third parties to customers who purchase a
vehicle. Because these third parties are the primary obligors under
these programs, we recognize commission revenue on the ESPs at the time of the
sale, net of a reserve for returns. The reserve for ESP returns is
recorded based on historical experience and trends, and it could be affected if
future ESP returns differ from historical averages.
Income
Taxes
Estimates
and judgments are used in the calculation of certain tax liabilities and in the
determination of the recoverability of certain of the deferred tax
assets. In the ordinary course of business, transactions occur for
which the ultimate tax outcome is uncertain at the time of the
transactions. We adjust our income tax provision in the period in
which we determine that it is probable that our actual results will differ from
our estimates. Tax law and rate changes are reflected in the income
tax provision in the period in which such changes are enacted. Note 7
includes information regarding income taxes.
We
evaluate the need to record valuation allowances that would reduce deferred tax
assets to the amount that will more likely than not be realized. When
assessing the need for valuation allowances, we consider future reversals of
existing temporary differences and future taxable income. Except for
a valuation allowance recorded for a capital loss carryforward that may not be
utilized before its expiration, we believe that our recorded deferred tax assets
as of February 29, 2008, will more likely than not be
realized. However, if a change in circumstances results in a change
in our ability to realize our deferred tax assets, our tax provision would
increase in the period when the change in circumstances occurs.
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We
recognize potential liabilities for anticipated tax audit issues in the U.S. and
other tax jurisdictions based on our estimate of whether, and the extent to
which, additional taxes will be due. If payments of these amounts
ultimately prove to be unnecessary, the reversal of the liabilities would result
in tax benefits being recognized in the period when we determine the liabilities
are no longer necessary. If our estimate of tax liabilities proves to
be less than the ultimate assessment, a further charge to expense would result
in the period of determination.
Defined
Benefit Retirement Plan
The plan
obligations and related assets of our defined benefit retirement plan are
presented in Note 8. Plan assets, which consist primarily of
marketable equity and debt instruments, are valued using current market
quotations. Plan obligations and the annual pension expense are
determined by independent actuaries using a number of assumptions that we
provide. Key assumptions used to measure the plan obligations include
the discount rate, the estimated rate of salary increases, the estimated future
return on plan assets and the mortality rate. In determining the
discount rate, we use the current yield on high-quality, fixed-income
investments that have maturities corresponding to the timing of the benefit
payments. Salary increase assumptions are based upon our historical
experience and anticipated future board and management actions. Asset
returns are estimated based upon the anticipated average yield on the plan
assets. We do not believe that any significant changes in assumptions
used to measure the plan obligations are likely to occur that would have a
material impact on our financial position or results of operations.
RESULTS
OF OPERATIONS
Net
Sales and Operating Revenues
|
Years
Ended February 29 or 28
|
||||||||||||||||||||||||
|
(In
millions)
|
2008
|
%
|
2007
|
%
|
2006
|
%
|
||||||||||||||||||
|
Used
vehicle
sales
|
$ | 6,589.3 | 80.4 | $ | 5,872.8 | 78.7 | $ | 4,771.3 | 76.2 | |||||||||||||||
|
New
vehicle
sales
|
370.6 | 4.5 | 445.1 | 6.0 | 502.8 | 8.0 | ||||||||||||||||||
|
Wholesale
vehicle
sales
|
985.0 | 12.0 | 918.4 | 12.3 | 778.3 | 12.4 | ||||||||||||||||||
|
Other
sales and revenues:
|
||||||||||||||||||||||||
|
Extended service plan
revenues
|
132.4 | 1.6 | 114.4 | 1.5 | 97.9 | 1.6 | ||||||||||||||||||
|
Service department
sales
|
96.0 | 1.2 | 90.6 | 1.2 | 93.4 | 1.5 | ||||||||||||||||||
|
Third-party finance fees,
net
|
26.1 | 0.3 | 24.3 | 0.3 | 16.3 | 0.3 | ||||||||||||||||||
|
Total
other sales and revenues
|
254.6 | 3.1 | 229.3 | 3.1 | 207.6 | 3.3 | ||||||||||||||||||
|
Total
net sales and operating revenues
|
$ | 8,199.6 | 100.0 | $ | 7,465.7 | 100.0 | $ | 6,260.0 | 100.0 | |||||||||||||||
Retail
Vehicle Sales Changes
|
Years
Ended February 29 or 28
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Vehicle
units:
|
||||||||||||
|
Used
vehicles
|
12 | % | 16 | % | 15 | % | ||||||
|
New
vehicles
|
(17 | )% | (11 | )% | 1 | % | ||||||
|
Total
|
10 | % | 14 | % | 14 | % | ||||||
|
Vehicle
dollars:
|
||||||||||||
|
Used
vehicles
|
12 | % | 23 | % | 19 | % | ||||||
|
New
vehicles
|
(17 | )% | (11 | )% | 2 | % | ||||||
|
Total
|
10 | % | 20 | % | 17 | % | ||||||
Comparable
store used unit sales growth is one of the key drivers of our
profitability. A store is included in comparable store retail sales
in the store’s fourteenth full month of operation.
Comparable
Store Retail Vehicle Sales Changes
|
Years
Ended February 29 or 28
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Vehicle
units:
|
||||||||||||
|
Used
vehicles
|
3 | % | 9 | % | 4 | % | ||||||
|
New
vehicles
|
(11 | )% | (11 | )% | 1 | % | ||||||
|
Total
|
2 | % | 8 | % | 4 | % | ||||||
|
Vehicle
dollars:
|
||||||||||||
|
Used
vehicles
|
3 | % | 16 | % | 8 | % | ||||||
|
New
vehicles
|
(11 | )% | (12 | )% | 1 | % | ||||||
|
Total
|
2 | % | 13 | % | 8 | % | ||||||
Change
in Used Car Superstore Base
|
Years
Ended February 29 or 28
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Used
car superstores, beginning of
year
|
77 | 67 | 58 | |||||||||
|
Superstore
openings:
|
||||||||||||
|
Production
superstores
|
4 | 5 | 5 | |||||||||
|
Non-production
superstores
|
8 | 5 | 4 | |||||||||
|
Total
superstore
openings
|
12 | 10 | 9 | |||||||||
|
Used
car superstores, end of
year
|
89 | 77 | 67 | |||||||||
|
Openings
as a percent of the beginning-of-year store base
|
16 | % | 15 | % | 16 | % | ||||||
During
fiscal 2008, we opened 12 used car superstores, expanding our presence in 5
existing large and mid-sized markets and opening stores in 5 new markets,
including Tucson, Arizona; Milwaukee, Wisconsin; San Diego, California; Omaha,
Nebraska; and Jackson, Mississippi.
Used
Vehicle Sales
Fiscal 2008
Versus Fiscal 2007. The 12% increase in our used vehicle
revenues in fiscal 2008 resulted from a corresponding increase in unit
sales. The unit sales growth reflected sales from newer superstores
not yet included in the comparable store base and a 3% increase in comparable
store used units. This lower-than-normal level of comparable store
used unit growth reflected the combination of the near-term decline in consumer
confidence and a slowing sales pace for the automotive retail industry, as well
as the challenging comparison with our 9% increase during fiscal
2007. In fiscal 2008, we experienced an overall increase in consumer
traffic, which we believe benefited from the strength of our consumer offer, as
well as the favorable response to the improvements made to
carmax.com. However, compared with fiscal 2007, our sales conversion
rate declined slightly as consumers appeared to be somewhat more hesitant in
committing to big-ticket purchases. Our average used vehicle selling
price in fiscal 2008 was similar to the prior year, reflecting consumer-driven
mix shifts from large and mid-sized SUVs to smaller, more fuel-efficient
vehicles.
Sales
were supported by the continued consistent availability of credit from CAF and
from third-party financing providers. Despite the deceleration in
automotive industry sales, our data indicated that we continued to gain share
within our existing markets in the late-model used vehicle market.
Fiscal 2007
Versus Fiscal 2006. The 23% increase in used vehicle revenues
in fiscal 2007 resulted from a 16% increase in unit sales and a 6% increase in
average selling price. The unit sales growth reflected a 9% increase
in comparable store used units, together with sales from newer superstores not
yet included in the comparable store base. Our comparable store used
unit sales growth benefited from strong store and Internet traffic and continued
strong execution by our store teams. The increase in the average
retail selling price was primarily the result of a shift in vehicle mix, as we
experienced a resurgence in the sales of SUVs and trucks, which we believe had
been adversely affected in the prior year by consumer reaction to higher
gasoline prices. The increase in average retail selling price also
reflected growth in the percentage of luxury vehicles in our sales
mix.
Sales
financed by the third-party subprime financing provider declined to less than 1%
of our used vehicle unit sales in fiscal 2007 from approximately 3% in fiscal
2006. In the fourth quarter of fiscal 2006, this provider implemented program
changes in certain states, narrowing the selection of vehicles it would finance,
and making this business less economically attractive to us. We chose
to curtail our business with this provider in these states to preserve margins
and profits. This decline in subprime-financed sales in fiscal 2007
was substantially offset, however, by incremental sales financed by additional
providers added to the group of third-party lenders in the second half of fiscal
2006.
New
Vehicle Sales
Fiscal 2008
Versus Fiscal 2007. The 17% decrease in new vehicle revenues
in fiscal 2008 was the result of a corresponding decrease in unit
sales. The decline in new vehicle unit sales reflected soft new car
industry sales trends, particularly for the domestic manufacturers that we
represent, and the sale of our Orlando Chrysler-Jeep-Dodge franchise in the
second quarter of fiscal 2008.
Fiscal 2007
Versus Fiscal 2006. The 11% decrease in new vehicle revenues
in fiscal 2007 was substantially the result of decreases in unit sales, and in
part reflected our strategic decision in fiscal 2007 to increase targeted gross
profit dollars per unit on new vehicles. We had anticipated that this
decision would result in some reduction in new vehicle unit
sales. The decline in new vehicle unit sales also reflected the
effects of reduced industry new car sales for several of the brands we
represent, including Chevrolet, Chrysler and Nissan.
Wholesale
Vehicle Sales
Our
operating strategy is to build customer satisfaction by offering high-quality
vehicles. Fewer than half of the vehicles acquired from consumers
through the appraisal purchase process meet our standards for reconditioning and
subsequent retail sale. Those vehicles that do not meet our standards
are sold through on-site wholesale auctions.
Fiscal 2008
Versus Fiscal 2007. The 7% increase in wholesale vehicle
revenues in fiscal 2008 resulted from a 6% increase in wholesale unit sales
combined with a 1% increase in average wholesale selling
price. Compared with the prior year, while appraisal traffic
increased, we experienced a decline in our buy rate. Our wholesale
auction prices usually reflect the trends in the general wholesale market for
the types of vehicles we sell, although they may also be affected by changes in
vehicle mix or the average age, miles or condition of the vehicles
wholesaled.
Fiscal 2007
Versus Fiscal 2006. The 18% increase in wholesale vehicle
revenues in fiscal 2007 resulted from a 16% increase in wholesale unit sales and
a 1% increase in average wholesale selling price. Our wholesale unit
sales benefited from a substantial increase in appraisal traffic, primarily
spurred by our strong comparable store unit sales growth, and the expansion of
our store base. In the first half of fiscal 2007, our average
wholesale selling price climbed 6% reflecting, we believe, the residual effects
of industry shortages of older, higher-mileage vehicles experienced following
Hurricanes Katrina, Rita and Wilma in the fall of 2005. In the second
half of fiscal 2007, our average wholesale selling price was 4% below the prior
year level reflecting the challenging comparison with the previous
year.
Other
Sales and Revenues
Other
sales and revenues include commissions on the sale of ESPs, service department
sales and third-party finance fees. The fixed fees paid by
third-party financing providers vary by provider, reflecting their differing
levels of credit risk exposure. We record the discount at which the
subprime provider purchases loans as an offset to finance fee revenues received
from the other providers.
Fiscal 2008
Versus Fiscal 2007. Other sales and revenues increased 11% in
fiscal 2008, similar to the 12% increase in used vehicle unit
sales.
Fiscal 2007
Versus Fiscal 2006. Other sales and
revenues increased 10% in fiscal 2007. The increase was primarily the
result of increased sales of ESPs and an increase in third-party finance
fees. The increase in ESP sales was consistent with our increase in
used vehicle unit sales. The third-party finance fees increased
nearly 50% in fiscal 2007, benefiting from the decline in sales financed by the
subprime provider. Service department sales declined modestly in
fiscal 2007, as the reconditioning activities required to support our strong
comparable store used vehicle sales growth limited the service capacity
available for customer pay work.
Supplemental
Sales Information
Unit
Sales
|
Years
Ended February 29 or 28
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Used
vehicles
|
377,244 | 337,021 | 289,888 | |||||||||
|
New
vehicles
|
15,485 | 18,563 | 20,901 | |||||||||
|
Wholesale
vehicles
|
222,406 | 208,959 | 179,548 | |||||||||
Average
Selling Prices
|
Years
Ended February 29 or 28
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Used
vehicles
|
$ | 17,298 | $ | 17,249 | $ | 16,298 | ||||||
|
New
vehicles
|
$ | 23,795 | $ | 23,833 | $ | 23,887 | ||||||
|
Wholesale
vehicles
|
$ | 4,319 | $ | 4,286 | $ | 4,233 | ||||||
Retail
Vehicle Sales Mix
|
Years
Ended February 29 or 28
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Vehicle
units:
|
||||||||||||
|
Used
vehicles
|
96 | % | 95 | % | 93 | % | ||||||
|
New
vehicles
|
4 | 5 | 7 | |||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
|
Vehicle
dollars:
|
||||||||||||
|
Used
vehicles
|
95 | % | 93 | % | 90 | % | ||||||
|
New
vehicles
|
5 | 7 | 10 | |||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
Retail
Stores
|
As
of February 29 or 28
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Production
superstores
|
57 | 53 | 48 | |||||||||
|
Non-production
superstores
|
32 | 24 | 19 | |||||||||
|
Total
used car
superstores
|
89 | 77 | 67 | |||||||||
|
Co-located
new car
stores
|
3 | 4 | 4 | |||||||||
|
Total
|
92 | 81 | 71 | |||||||||
As of
February 29, 2008, we had a total of six new car franchises representing the
Chevrolet, Chrysler, Nissan and Toyota brands. Two franchises are
integrated within used car superstores, and the remaining four franchises are
operated from three facilities that are co-located with select used car
superstores. During the second quarter of fiscal 2008, we sold our
Orlando Chrysler-Jeep-Dodge franchise.
During
fiscal 2008, we expanded our car-buying center test with the opening of buying
centers in Raleigh, North Carolina, and Tampa, Florida, expanding the test we
began in Atlanta, Georgia, in fiscal 2007. At these three locations,
we conduct appraisals and purchase, but do not sell, vehicles. These
test centers are part of our long-term plan to increase both appraisal traffic
and retail vehicle sourcing self-sufficiency.
Gross
Profit
|
Years
Ended February 29 or 28
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
$
per unit (1)
|
% | (2) |
$
per unit (1)
|
% | (2) |
$
per unit (1)
|
% | (2) | ||||||||||||||||
|
Used
vehicle gross profit
|
$ | 1,878 | 10.8 | $ | 1,903 | 10.9 | $ | 1,808 | 11.0 | |||||||||||||||
|
New
vehicle gross profit
|
$ | 994 | 4.2 | $ | 1,169 | 4.9 | $ | 934 | 3.9 | |||||||||||||||
|
Wholesale
vehicle gross profit
|
$ | 794 | 17.9 | $ | 742 | 16.9 | $ | 700 | 16.1 | |||||||||||||||
|
Other
gross
profit
|
$ | 437 | 67.5 | $ | 431 | 66.8 | $ | 391 | 58.5 | |||||||||||||||
|
Total
gross
profit
|
$ | 2,731 | 13.1 | $ | 2,731 | 13.0 | $ | 2,544 | 12.6 | |||||||||||||||
|
|
(1) Calculated
as category gross profit divided by its respective units sold, except the
other and total categories, which are divided by total retail units
sold.
|
|
|
(2) Calculated
as a percentage of its respective sales or
revenue.
|
Used
Vehicle Gross Profit
We target
a dollar range of gross profit per used unit sold. The gross profit
dollar target for an individual vehicle is based on a variety of factors,
including its anticipated probability of sale and its mileage relative to its
age; however, it is not based on the vehicle’s selling price. Our
ability to quickly adjust appraisal offers to be consistent with the broader
market trade-in trends and our rapid inventory turns reduce the exposure to the
inherent continual depreciation in used vehicle values and contribute to our
ability to manage gross profit dollars per unit. We employ a
volume-based strategy, and we systematically mark down individual vehicle prices
based on proprietary pricing algorithms in order to appropriately balance sales
growth, inventory turns and gross profit achievement. When customer
traffic and sales are consistently strong, we generally take fewer pricing
markdowns, which in turn benefits gross profit dollars per
unit. Conversely, when the sales pace slows, we generally take more
pricing
markdowns,
which may pressure gross profit dollars per unit. Over the past
several years, we have continued to refine our car-buying strategies, which we
believe has benefited used vehicle gross profit per unit.
Fiscal 2008
Versus Fiscal 2007. Our used vehicle gross profit declined $25
per unit in fiscal 2008. The gross profit per unit increased modestly
in the first half of the year before declining in the second half of the
year. As the economic environment continued to weaken in the third
quarter of fiscal 2008, we moderately reduced our margin targets at the
beginning of the fourth quarter in order to create additional value for
customers and drive sales. This was consistent with our long-term
strategy to deliver a superior customer experience and grow market
share.
Fiscal 2007
Versus Fiscal 2006. Our used vehicle gross profit increased
$95 per unit in fiscal 2007. This increase reflected the benefit of
our strong, consistent sales performance throughout the year. We
believe several external factors contributed to a greater degree of sales
volatility in the prior year, including significant changes in gasoline prices,
new vehicle incentives and interest rates. We did not experience
similar variability in these external factors in fiscal 2007, and therefore
benefited from a more stable business environment. In addition, our
used vehicle gross profit in fiscal 2006 was adversely affected by slowing
demand for SUVs and trucks that have lower gas mileage, which resulted in higher
pricing markdowns for these vehicles.
New
Vehicle Gross Profit
Fiscal 2008
Versus Fiscal 2007. Our new vehicle gross
profit decreased $175 per unit in fiscal 2008. The decline in overall
consumer demand for new cars in fiscal 2008 pressured profits for many new car
retailers, including CarMax.
Fiscal 2007
Versus Fiscal 2006. Our new vehicle gross
profit increased $235 per unit in fiscal 2007. The increase primarily
reflected our strategic decision to increase targeted new vehicle gross profit
dollars per unit in fiscal 2007. While this decision contributed to a
reduction in new vehicle unit sales, it resulted in an increase in the total
gross profit contribution from new vehicles.
Wholesale
Vehicle Gross Profit
Our
wholesale vehicle profitability has steadily increased over the last several
years, reflecting the benefits realized from improvements and refinements in our
car-buying strategies, appraisal delivery processes and in-store auction
processes. We have made continuous improvements in these processes,
which we believe has allowed us to become more efficient. Our
in-store auctions have benefited from initiatives to increase average dealer
attendance, which we believe has allowed us to achieve higher
prices.
Fiscal 2008
Versus Fiscal 2007. Our wholesale vehicle gross profit
increased $52 per unit in fiscal 2008. We continued to experience
strong dealer attendance at our auctions throughout the year, despite the
challenging economic environment.
Fiscal 2007
Versus Fiscal 2006. Our wholesale vehicle
gross profit increased $42 per unit in fiscal 2007, primarily as a result of
ongoing initiatives to improve our car-buying and auction
processes.
Other
Gross Profit
We have
no cost of sales related to either extended service plan revenues or third-party
finance fees, as these represent commissions paid to us by the third-party
providers. Accordingly, changes in the mix of extended service plan
revenues and third-party finance fees, relative to service department sales, can
affect other gross profit.
Fiscal 2008
Versus Fiscal 2007. Other gross profit
increased $6 per unit in fiscal 2008. The improvement was the result
of the growth in ESP sales and third-party finance fees, partially offset by a
small reduction in service department margins.
Fiscal 2007
Versus Fiscal 2006. Other gross profit
increased $40 per unit in fiscal 2007. The improvement was the result
of the growth in ESP sales and third-party finance fees and an increase in
service department margins. Our service department reported higher
profits in fiscal 2007, as our strong comparable store used unit sales growth
increased our ability to leverage total service and reconditioning overhead
expenses.
Impact
of Inflation
Inflation
has not been a significant contributor to results. Profitability is
affected by our ability to achieve targeted unit sales and gross profit dollars
per vehicle rather than on average retail prices. However, increases
in average vehicle selling prices will benefit the SG&A ratio and CAF income
to the extent the average amount financed also increases.
CarMax
Auto Finance Income
CAF
provides financing for our used and new car sales. Because the
purchase of a vehicle is traditionally reliant on the consumer’s ability to
obtain on-the-spot financing, it is important to our business that financing be
available to creditworthy customers. While financing can also be
obtained from third-party sources, we believe that total reliance on third
parties can create unacceptable volatility and business
risk. Furthermore, we believe that our processes and systems, the
transparency of our pricing and our vehicle quality provide a unique and ideal
environment in which to procure high quality auto loans, both for CAF and for
the third-party financing providers. CAF provides us the opportunity
to capture additional profits and cash flows from auto loan receivables while
managing our reliance on third-party financing sources.
Components
of CAF Income
|
Years
Ended February 29 or 28
|
||||||||||||||||||||||||
|
(In
millions)
|
2008
|
%
|
2007
|
%
|
2006
|
%
|
||||||||||||||||||
|
Total
gain income (1)
|
$ | 48.5 | 1.9 | $ | 99.7 | 4.3 | $ | 77.1 | 4.1 | |||||||||||||||
|
Other
CAF income: (2)
|
||||||||||||||||||||||||
|
Servicing fee
income
|
37.4 | 1.0 | 32.4 | 1.1 | 27.6 | 1.0 | ||||||||||||||||||
|
Interest
income
|
33.3 | 0.9 | 26.6 | 0.9 | 21.4 | 0.8 | ||||||||||||||||||
|
Total
other CAF
income
|
70.7 | 2.0 | 59.0 | 1.9 | 49.0 | 1.8 | ||||||||||||||||||
|
Direct
CAF expenses: (2)
|
||||||||||||||||||||||||
|
CAF payroll and fringe benefit
expense
|
15.9 | 0.4 | 12.0 | 0.4 | 10.3 | 0.4 | ||||||||||||||||||
|
Other direct CAF
expenses
|
17.4 | 0.5 | 14.0 | 0.5 | 11.5 | 0.4 | ||||||||||||||||||
|
Total
direct CAF
expenses
|
33.3 | 0.9 | 26.0 | 0.9 | 21.8 | 0.8 | ||||||||||||||||||
|
CarMax
Auto Finance income (3)
|
$ | 85.9 | 1.0 | $ | 132.6 | 1.8 | $ | 104.3 | 1.7 | |||||||||||||||
|
Total
loans
sold
|
$ | 2,534.4 | $ | 2,322.7 | $ | 1,887.5 | ||||||||||||||||||
|
Average
managed
receivables
|
$ | 3,608.4 | $ | 3,071.1 | $ | 2,657.7 | ||||||||||||||||||
|
Ending
managed
receivables
|
$ | 3,838.5 | $ | 3,311.0 | $ | 2,772.5 | ||||||||||||||||||
|
Total
net sales and operating revenues
|
$ | 8,199.6 | $ | 7,465.7 | $ | 6,260.0 | ||||||||||||||||||
Percent
columns indicate:
|
|
(1)
Percent of loans sold.
|
|
|
(2)
Percent of average managed
receivables.
|
|
|
(3)
Percent of total net sales and operating
revenues.
|
CAF
income does not include any allocation of indirect costs or
income. We present this information on a direct basis to avoid making
arbitrary decisions regarding the indirect benefit or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal, treasury and
executive payroll.
CAF
originates auto loans to qualified customers at competitive market rates of
interest. The majority of CAF income is generated by the spread
between the interest rates charged to customers and the related cost of
funds. Substantially all of the loans originated by CAF are sold in
securitization transactions. A gain, recorded at the time of
securitization, results from recording a receivable approximately equal to the
present value of the expected residual cash flows generated by the securitized
receivables. In a normalized environment, we expect the gain on loans
originated and sold as a percent of loans originated and sold (the “gain
percentage”) to be in the range of 3.5% to 4.5%.
Gain
Income and Loans Sold
|
Years
Ended February 29 or 28
|
||||||||||||
|
(In
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Gain
on sales of loans originated and sold(1)
|
$ | 58.1 | $ | 86.7 | $ | 61.9 | ||||||
|
Other
(losses) gains(1)
|
(9.6 | ) | 13.0 | 15.2 | ||||||||
|
Total
gain
income
|
$ | 48.5 | $ | 99.7 | $ | 77.1 | ||||||
|
Loans
originated and
sold
|
$ | 2,430.8 | $ | 2,240.2 | $ | 1,792.6 | ||||||
|
Receivables
repurchased from public securitizations and resold
|
103.6 | 82.5 | 94.8 | |||||||||
|
Total
loans
sold
|
$ | 2,534.4 | $ | 2,322.7 | $ | 1,887.5 | ||||||
|
Gain
percentage on loans originated and sold
|
2.4 | % | 3.9 | % | 3.5 | % | ||||||
|
Total
gain income as a percentage of total loans sold
|
1.9 | % | 4.3 | % | 4.1 | % | ||||||
|
|
(1)
Beginning in fiscal 2008, the effects of changes in valuation assumptions
or funding costs related to loans originated and sold during previous
quarters of the same fiscal year are presented in gain on sales of loans
originated and sold. Previously, these adjustments were
reported in other losses or gains. These adjustments totaled
$(35.9) million in fiscal 2008. As a result, the sum of amounts
previously reported for interim quarters will not equal the total reported
for fiscal 2008. The impact of similar adjustments for prior
fiscal years was not material.
|
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal year that the
loans were originated. Other losses or gains include the effects of
changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal years. In addition, other losses or
gains could include the effects of new public securitizations, changes in the
valuation of retained subordinated bonds and the resale of receivables in
existing public securitizations, as applicable. In the 2008-1 public
securitization, we held $44.7 million of subordinated bonds, because the
economics of doing so were more favorable than selling them in the public
market.
Our
public securitizations typically contain an option to repurchase the securitized
receivables when the outstanding balance in the pool of auto loan receivables
falls below 10% of the original pool balance. This option was
exercised two times in each of fiscal 2008, 2007 and 2006. In each
case, the remaining eligible receivables were subsequently resold into the
warehouse facility. These transactions did not have a material effect
on CAF income in fiscal 2008, 2007 or 2006.
Fiscal 2008
Versus Fiscal 2007. CAF income declined 35%
to $85.9 million in fiscal 2008, reflecting the disruption in the global credit
markets and worsening economic conditions. The gain on sales of loans
originated and sold decreased 33% to $58.1 million in fiscal 2008. In
the second half of the fiscal year, credit spreads in the asset-backed
securities market widened, resulting in a substantial increase in CAF’s funding
costs. In addition, we increased the discount rate assumption used to
calculate our gain on sales of loans to 17% from 12%, and we increased our
cumulative net loss assumptions on loans originated and sold during fiscal 2008
to a range of 2.7% to 3.0%, which was significantly higher than the cumulative
net loss assumptions used on loans originated in fiscal 2007. As a
result, the gain percentage declined to 2.4% in fiscal 2008 compared with 3.9%
in fiscal 2007.
We
recognized other losses of $9.6 million, or $0.03 per share, in fiscal 2008,
which included the effects of the increase in the discount rate and cumulative
net loss assumptions on loans originated and sold in previous
years. Other losses also included a $2.7 million reduction in the
carrying value of the retained subordinated bonds. In fiscal 2007, we
recognized other gains of $13.0 million, or $0.04 per share, which included the
effects of reducing cumulative net loss assumptions on loans originated and sold
in previous years.
The
increases in other CAF income and other direct CAF expenses in fiscal 2008 were
proportionate to the growth in managed receivables during the year.
Fiscal 2007
Versus Fiscal 2006. CAF income rose 27% to
$132.6 million in fiscal 2007. CAF income benefited from the growth
in retail vehicle unit sales, increases in the gain percentage, average amount
financed and total managed receivables. The gain percentage increased
to 3.9% in fiscal 2007 from 3.5% in fiscal 2006, reflecting changes in the
interest
rate environment. In fiscal 2006, our funding costs were rising
faster than rates charged to consumers resulting in a lower gain
percentage. In fiscal 2007, the relative stability in our funding
cost allowed us to achieve a higher gain percentage.
We
recognized other gains of $13.0 million, or $0.04 per share, in fiscal 2007
compared with $15.2 million, or $0.04 per share, in fiscal 2006. In
both years, the majority of the other gains resulted from reductions in our
cumulative net loss assumptions related to receivables originated in prior
fiscal years.
The
increases in other CAF income and other direct CAF expenses in fiscal 2007 were
proportionate to the growth in managed receivables during the year.
Past
Due Account Information
|
As
of February 29 or 28
|
||||||||||||
|
(In
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Loans
securitized
|
$ | 3,764.5 | $ | 3,242.1 | $ | 2,710.4 | ||||||
|
Loans
held for sale or
investment
|
74.0 | 68.9 | 62.0 | |||||||||
|
Total
managed
receivables
|
$ | 3,838.5 | $ | 3,311.0 | $ | 2,772.5 | ||||||
|
Accounts
31+ days past
due
|
$ | 86.1 | $ | 56.9 | $ | 37.4 | ||||||
|
Past
due accounts as a percentage of total managed
receivables
|
2.24 | % | 1.72 | % | 1.35 | % | ||||||
Credit
Loss Information
|
Years
Ended February 29 or 28
|
||||||||||||
|
(In
millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
credit losses on managed
receivables
|
$ | 38.3 | $ | 20.7 | $ | 18.4 | ||||||
|
Average
managed
receivables
|
$ | 3,608.4 | $ | 3,071.1 | $ | 2,657.7 | ||||||
|
Net
credit losses as a percentage of average managed receivables
|
1.06 | % | 0.67 | % | 0.69 | % | ||||||
|
Recovery
rate
|
50 | % | 51 | % | 51 | % | ||||||
We are at
risk for the performance of the managed securitized receivables to the extent of
our retained interest in the receivables. If the managed receivables
do not perform in accordance with the assumptions used in determining the fair
value of the retained interest, earnings could be affected.
In fiscal
2008, we experienced increases in both past due accounts as a percentage of
total managed receivables and net credit losses as a percentage of average
managed receivables compared with the previous fiscal year. We
believe these increases were the result of a combination of factors, including
the prior expansion of our credit offers and the less favorable general economic
and industry trends for losses and delinquencies.
We
continually strive to refine CAF’s origination strategy in order to optimize
profitability and sales while controlling risk. In general, we
originate pools of loans targeted to have cumulative net loss rates in the range
of 2.0% to 2.5%. Receivables originated in calendar years 2003, 2004
and early 2005 have experienced loss rates well below both CAF’s historical
averages and these targeted loss rates. We believe this favorability
was due, in part, to the credit scorecard we implemented in late
2002. As it became evident that the scorecard was resulting in
lower-than-expected loss rates, CAF gradually expanded its credit offers
beginning in late 2004. As a result, receivables originated in late
2005 and in 2006 and 2007 have been experiencing higher loss and delinquency
rates compared with the receivables originated in these earlier
years. While the delinquency and projected loss rates on the more
recent originations were higher than our initial expectations, we believe this
was primarily related to the worsening economic
climate. Consequently, we increased our cumulative net loss
assumptions on the 2007 and 2008 public securitizations, and we incorporated
similar economic stress into the projections for our most recent
originations.
The
recovery rate represents the average percentage of the outstanding principal
balance we receive when a vehicle is repossessed and liquidated at wholesale
auction. Historically, the annual recovery rate has ranged from a low
of 42% to a high of 51%, and it is primarily affected by changes in the
wholesale market pricing environment.
Selling,
General and Administrative Expenses
Fiscal 2008
Versus Fiscal 2007. The SG&A ratio
increased to 10.5% from 10.4% in fiscal 2007. During fiscal 2008, we
increased our SG&A spending related to specific strategic, operational and
Internet initiatives intended to improve customer satisfaction and increase
efficiencies over the long term. As a result, our 3% increase in
comparable store used unit sales in fiscal 2008 did not generate sufficient
overhead leverage to offset the increases in spending related to our ongoing
growth plan and these initiatives.
Fiscal 2007
Versus Fiscal 2006. The SG&A ratio
declined to 10.4% from 10.8% in fiscal 2006. In fiscal 2007, we
benefited from the leverage of fixed expenses generated by our strong comparable
store sales growth. The improvement in the fiscal 2007 SG&A ratio
was partially offset by an increase in share-based compensation costs due to the
accelerated vesting of stock options upon the retirement of our former chief
executive officer and by the recognition of an impairment loss totaling $4.9
million, or $0.01 per share. The impairment loss related to the write
down of intangible assets associated with one of our new car franchises, which
was subsequently sold.
Income
Taxes
The
effective income tax rate was 38.7% in fiscal 2008, 38.6% in fiscal 2007 and
38.3% in fiscal 2006.
OPERATIONS
OUTLOOK
Store
Openings and Capital Expenditures
During
the fiscal year ending February 28, 2009, we plan to expand our used car
superstore base by approximately 16%, opening an estimated 14 used car
superstores, including 7 production and 7 non-production stores.
Fiscal
2009 Planned Superstore Openings
|
Location
|
Television
Market
|
Market
Status
|
Production
Superstores
|
Non-production
Superstores
|
|
San
Antonio, Texas (1)
|
San
Antonio
|
Existing
market
|
-
|
1
|
|
Modesto,
California (1)
|
Sacramento
|
Existing
market
|
1
|
-
|
|
Phoenix,
Arizona (1)
|
Phoenix
|
New
market
|
1
|
1
|
|
Charleston,
South Carolina (1)
|
Charleston
|
New
market
|
-
|
1
|
|
Huntsville,
Alabama
|
Huntsville
|
New
market
|
1
|
-
|
|
Colorado
Springs, Colorado
|
Colorado
Springs
|
New
market
|
1
|
-
|
|
Costa
Mesa,
California
|
Los
Angeles
|
Existing
market
|
-
|
1
|
|
Tulsa,
Oklahoma
|
Tulsa
|
New
market
|
1
|
-
|
|
Hickory,
North
Carolina
|
Charlotte
|
Existing
market
|
-
|
1
|
|
Augusta,
Georgia
|
Augusta
|
New
market
|
-
|
1
|
|
Dayton,
Ohio
|
Dayton
|
New
market
|
1
|
-
|
|
Cincinnati,
Ohio
|
Cincinnati
|
New
market
|
1
|
-
|
|
Potomac
Mills,
Virginia
|
D.C.
/ Baltimore
|
Existing
market
|
-
|
1
|
|
Total
planned openings
|
7
|
7
|
||
|
(1)
|
Opened
in March or April 2008.
|
We expect
to enter eight new markets and expand our presence in five existing markets in
fiscal 2009. We currently expect to open approximately nine
superstores in the first half of fiscal 2009 and five superstores in the second
half of the fiscal year. However, normal construction, permitting or
other scheduling delays could shift opening dates of any stores into a later
period.
In fiscal
2009, we also plan to open a central reconditioning facility in the Washington,
D.C. / Baltimore market, where we currently have six superstores. We
have experienced strong sales growth in this market, and this facility will
support additional expected market share gains. In addition, we are
converting our non-production store in Ontario, California, to a production
store with the addition of reconditioning facilities, which will support our
continued growth in the Los Angeles market.
In fiscal
2009, we also plan to expand our car-buying center test with the opening of our
fourth and fifth centers, in Dallas, Texas, (opened April 2008) and in
Baltimore, Maryland. We will continue to evaluate the performance of
these five centers before deciding whether to open additional centers in future
years.
We
currently estimate gross capital expenditures will total approximately $350
million in fiscal 2009. Planned expenditures primarily relate to new
store construction and land purchases associated with future year store
openings, as well as the reconditioning capacity expansions. Compared
with the $253 million spent in fiscal 2008, the fiscal 2009 capital spending
estimate reflects an increase in land purchases to support future year store
openings and the increase in the number of stores planned to be
opened.
Fiscal
2009 Expectations
The
fiscal 2009 expectations discussed below are based on historical and current
trends in our business and should be read in conjunction with “Risk Factors,” in
Part I, Item 1A of this Form 10-K.
Fiscal 2009
Sales. We currently anticipate the change in comparable store
used unit sales in the range of (2%) to 5% in fiscal 2009. The wide
range reflects an expectation of continued softness in the economy and
volatility in the market for late-model used cars. We expect total
revenues to increase between 7% and 14%, reflecting our planned new store
openings, the comparable store sales performance and anticipated declines in
both used vehicle average selling prices and new car revenues.
We are
not anticipating any material change in credit availability for our customers in
fiscal 2009, despite the fact that AmeriCredit Corp. is no longer one of our
third-party financing providers effective April 1, 2008. We
anticipate the majority of loans previously financed by AmeriCredit will be
financed by other third-party providers.
Fiscal 2009
Earnings Per Share. We currently expect fiscal 2009 earnings
per share in the range of $0.78 to $0.94. The width of this range
reflects the uncertainty of current market conditions, especially in the credit
markets. We expect to maintain our used and wholesale gross profit
dollars per unit at levels similar to those in fiscal 2008.
We
currently believe the CAF gain percentage on loans originated and sold in fiscal
2009 could be well below the normalized range of 3.5% to 4.5% reflecting the
continued use of a 17% discount rate in calculating the gain on loans sold, and
our expectations that funding costs and cumulative net loss rates will remain at
higher-than-normal levels due to the stresses of the current
economy.
We are
anticipating that the disruption in the credit markets will continue to
adversely affect CAF income throughout fiscal 2009 relative to historical
norms. In addition, based on the funding cost spreads achieved in
recent comparable public securitizations, we estimate that CAF will have to
absorb approximately $14 million of incremental funding costs upon the
refinancing of the $855 million that was outstanding in the warehouse facility
to the end of fiscal 2008.
Our
fiscal 2009 earnings estimates also reflect an expected increase in our SG&A
ratio. The combination of the anticipated comparable store sales
performance and the decline in used vehicle average selling prices, together
with continued investments supporting our growth plan, will likely cause the
SG&A ratio to increase in fiscal 2009.
We expect
average outstanding debt will rise in fiscal 2009, which will increase our
interest expense. The higher debt levels primarily relate to planned
capital spending, as well as the prospect of continuing to retain some
subordinated bonds in connection with future CAF securitizations.
RECENT
ACCOUNTING PRONOUNCEMENTS
For a
discussion of recent accounting pronouncements applicable to CarMax, see Note
16.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
Operating
Activities. We generated net
cash from operating activities of $79.5 million in fiscal 2008, $136.8 million
in fiscal 2007 and $117.5 million in fiscal 2006. Cash generated by
operating activities was $57.3 million lower in fiscal 2008 compared with fiscal
2007. The decrease resulted from a higher level of working capital
investment in fiscal 2008, combined with the $16.6 million decrease in net
earnings. Our retained interest in securitized receivables increased
by $68.5 million in fiscal 2008 reflecting our decision to retain the $44.7
million
face
value of CAF subordinated bonds in the 2008-1 public securitization and the
growth in the total managed receivables. Inventories increased by
17%, or $139.7 million, in fiscal 2008, which was higher than our 10% increase
in vehicle revenues. The growth in inventories resulted from the
increase in our store base and from a test underway in fiscal 2008 to determine
whether increasing onsite vehicle inventory by approximately 50 to 100 cars per
store would favorably affect sales. In the fourth quarter of fiscal
2008, this test was being conducted in approximately 30% of our
stores. We plan to continue this test in fiscal 2009.
Cash
generated from operating activities was $19.3 million higher in fiscal 2007
compared with fiscal 2006. The $64.4 million increase in net earnings
in fiscal 2007 was more than offset by the increased growth in
inventories. Inventories increased $166.4 million in fiscal 2007
compared with a $93.1 million increase in fiscal 2006. The fiscal
2007 inventory increase related to store openings during fiscal 2007 and shortly
after the end of the fiscal year, as well as to added vehicle inventory required
to support our strong increase in fourth quarter comparable store used unit
sales.
The
aggregate principal amount of outstanding auto loan receivables funded through
securitizations, which are discussed in Notes 3 and 4, totaled $3.76 billion as
of February 29, 2008; $3.24 billion as of February 28, 2007; and $2.71 billion
as of February 28, 2006. During fiscal 2008, we completed three
public securitizations of auto loan receivables, funding a total of $1.78
billion of auto loan receivables. In the 2008-1 public
securitization, we held $44.7 million face value of subordinated
bonds.
As of
February 29, 2008, the warehouse facility limit was $1.3 billion and unused
warehouse capacity totaled $445.5 million. The warehouse facility
limit was $825 million at the beginning of fiscal 2008, and it was increased to
$1.0 billion at its annual renewal in July 2007 in response to the growth in our
business. In December 2007, we arranged a temporary $300 million
increase in the warehouse facility capacity to $1.3 billion through April 2008,
in order to provide additional funding flexibility. The warehouse
facility matures in July 2008, and we anticipate that we will be able to renew,
expand or enter into new securitizations or other funding arrangements to meet
CAF’s future funding needs. Note 4 includes additional
discussion of the warehouse facility.
Investing
Activities. Net cash used in investing activities was $257.0
million in fiscal 2008, $187.2 million in fiscal 2007 and $116.1 million in
fiscal 2006. Capital expenditures were $253.1 million in fiscal 2008,
$191.8 million in fiscal 2007 and $194.4 million in fiscal 2006. In
addition to store construction costs, capital expenditures for all three years
included the cost of land acquired for future year store openings. In
fiscal 2006, capital expenditures also included costs associated with our new
home office, which was completed in October 2005.
Historically,
capital expenditures have been funded with internally generated funds, short-
and long-term debt and sale-leaseback transactions. Net proceeds from
the sales of assets totaled $1.1 million in fiscal 2008, $4.6 million in fiscal
2007 and $78.3 million in fiscal 2006. The majority of the sale
proceeds in fiscal 2006 related to sale-leaseback transactions. In
fiscal 2006, we entered into sale-leaseback transactions involving five
superstores valued at $72.7 million. These transactions were
structured with initial lease terms of either 15 or 20 years with four,
five-year renewal options. As of February 29, 2008, we owned 32
superstores currently in operation, as well as our home office in Richmond,
Virginia. In addition, five superstores were accounted for as capital
leases.
Financing
Activities. Net cash provided by financing activities was
$171.0 million in fiscal 2008, $48.1 million in fiscal 2007 and $3.2 million in
fiscal 2006. In fiscal 2008, we increased total debt by $148.9
million, primarily to fund increased inventory and capital
expenditures. We used cash generated from operations to reduce total
debt by $9.5 million in fiscal 2007 and $6.8 million in fiscal
2006.
We have a
$500 million revolving credit facility, which is available until December
2011. Borrowings under this credit facility are available for working
capital and general corporate purposes, and are secured by our vehicle
inventory, which was $975.8 million at the end of fiscal 2008. As of
February 29, 2008, $300.2 million was outstanding under the credit facility,
with the remainder fully available to us. The outstanding balance
included $21.0 million classified as short-term debt, $79.2 million classified
as current portion of long-term debt and $200.0 million classified as long-term
debt. We classified $79.2 million of the outstanding balance as of
February 29, 2008, as current portion of long-term debt based on our expectation
that this balance will not remain outstanding for more than one
year.
Cash
received on equity issuances, which primarily related to employee stock option
exercises, was $14.7 million in fiscal 2008, $35.4 million in fiscal 2007 and
$6.0 million in fiscal 2006. The increase in fiscal 2007 reflected
exercises by the former chief executive officer in connection with his
retirement, and other exercises prompted by the significant increase
in our
stock price during that fiscal year.
We expect
that cash generated by operations and proceeds from securitization transactions
or other funding arrangements, sale-leaseback transactions and borrowings under
existing or expanded credit facilities will be sufficient to fund capital
expenditures and working capital for the foreseeable future.
Contractual
Obligations
|
As
of February 29, 2008
|
||||||||||||||||||||||||
|
(In
millions)
|
Total
|
Less
Than
1
Year
|
1
to 3
Years
|
3
to 5
Years
|
More
Than
5
Years
|
Other
|
||||||||||||||||||
|
Revolving
credit agreement (1)
|
$ | 300.2 | $ | — | $ | — | $ | 300.2 | $ | — | $ | — | ||||||||||||
|
Capital
leases (2)
|
54.7 | 3.4 | 7.2 | 7.3 | 36.8 | — | ||||||||||||||||||
|
Operating
leases (2)
|
931.7 | 73.5 | 148.3 | 148.9 | 561.0 | — | ||||||||||||||||||
|
Purchase
obligations (3)
|
114.6 | 90.5 | 22.1 | 2.0 | — | — | ||||||||||||||||||
|
Asset
retirement obligations (4)
|
1.1 | — | — | — | 1.1 | — | ||||||||||||||||||
|
Defined
benefit retirement plans (5)
|
60.8 | 0.3 | — | — | — | 60.5 | ||||||||||||||||||
|
Unrecognized
tax benefits (6)
|
32.7 | 2.4 | — | — | — | 30.3 | ||||||||||||||||||
|
Total
|
$ | 1,495.8 | $ | 170.1 | $ | 177.6 | $ | 458.4 | $ | 598.9 | $ | 90.8 | ||||||||||||
|
|
(1)
Due to the uncertainty of forecasting expected variable interest rate
payments, those amounts are not included in the table. See Note
9.
|
|
|
(2)
Excludes taxes, insurance and other costs payable directly by
us. These costs vary from year to year and are incurred in the
ordinary course of business. See Note
13.
|
|
|
(3)
Includes certain enforceable and legally binding obligations related to
the purchase of real property and third-party outsourcing
services.
|
|
|
(4)
Represents the liability to retire signage, fixtures and other assets at
certain leased locations.
|
|
|
(5)
Represents the recognized funded status of our retirement
plan, of which $60.5 million has no contractual payment
schedule and we expect payments to occur beyond 12 months from
February 29, 2008. See Note 8.
|
| (6) Represents the gross unrecognized tax benefits related to uncertain tax positions. The timing of payments associated with $30.3 million of these tax benefits could not be estimated as of February 29, 2008. See Note 7. |
Off-Balance
Sheet Arrangements
CAF
provides financing for our used and new car sales. We use a
securitization program to fund substantially all of the auto loan receivables
originated by CAF. We sell the auto loan receivables to a wholly
owned, bankruptcy-remote, special purpose entity that transfers an undivided
interest in the receivables to a group of third-party investors. This
program is referred to as the warehouse facility.
We
periodically use public securitizations to refinance the receivables previously
securitized through the warehouse facility. In a public
securitization, a pool of auto loan receivables is sold to a bankruptcy-remote,
special purpose entity that in turn transfers the receivables to a special
purpose securitization trust.
Additional
information regarding the nature, business purposes and importance of our
off-balance sheet arrangement to our liquidity and capital resources can be
found in the CarMax Auto Finance Income, Financial Condition and Market Risk
sections of this MD&A, as well as in Notes 3 and 4.
Auto
Loan Receivables
As of
February 29, 2008, and February 28, 2007, all loans in our portfolio of auto
loan receivables were fixed-rate installment loans. Financing for
these auto loan receivables was achieved through asset securitization programs
that, in turn, issued both fixed- and floating-rate securities. We
manage the interest rate exposure relating to floating-rate securitizations
through the use of interest rate swaps. Disruptions in the credit
markets may impact the effectiveness of our hedging
strategies. Receivables held for investment or sale are financed with
working capital. Generally, changes in interest rates associated with
underlying swaps will not have a material impact on earnings; however, they
could have a material impact on cash and cash flows.
Credit
risk is the exposure to nonperformance of another party to an
agreement. We mitigate credit risk by dealing with highly rated bank
counterparties. The market and credit risks associated with financial
derivatives are similar to those relating to other types of financial
instruments. Note 5 provides additional information on financial
derivatives.
Composition
of Auto loan receivables
|
As
of February 29 or 28
|
||||||||
|
(In
millions)
|
2008
|
2007
|
||||||
|
Principal
amount of:
|
||||||||
|
Fixed-rate
securitizations
|
$ | 2,533.4 | $ | 2,644.1 | ||||
|
Floating-rate securitizations
synthetically altered to fixed (1)
|
1,230.6 | 597.5 | ||||||
|
Floating-rate
securitizations
|
0.5 | 0.6 | ||||||
|
Loans held for investment (2)
|
69.0 | 62.7 | ||||||
|
Loans held for sale (3)
|
5.0 | 6.2 | ||||||
|
Total
|
$ | 3,838.5 | $ | 3,311.0 | ||||
| (1) Includes $376.7 million of variable-rate securities issued in connection with the 2007-3 and 2008-1 public securitizations that were synthetically altered to fixed at the bankruptcy-remote special purpose entity. | |
|
|
(2)
The majority is held by a bankruptcy-remote special purpose
entity.
|
|
|
(3)
Held by a bankruptcy-remote special purpose
entity.
|
Interest
Rate Exposure
We also
have interest rate risk from changing interest rates related to our outstanding
debt. Substantially all of our debt is floating-rate debt based on
LIBOR. A 100-basis point increase in market interest rates would have
decreased our fiscal 2008 net earnings per share by less than
$0.01.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL
OVER
FINANCIAL REPORTING
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Accordingly, even effective internal control over
financial reporting can provide only reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework and criteria established in Internal Control—Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management has
concluded that our internal control over financial reporting was effective as of
February 29, 2008.
KPMG LLP,
the company's independent registered public accounting firm, has issued a report
on our internal control over financial reporting. Their report is
included herein.
/s/ Thomas J. Folliard
THOMAS
J. FOLLIARD
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
/s/ Keith D. Browning
KEITH
D. BROWNING
EXECUTIVE
VICE PRESIDENT AND
CHIEF
FINANCIAL OFFICER
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
The Board
of Directors and Shareholders
CarMax,
Inc.:
We have
audited the accompanying consolidated balance sheets of
CarMax, Inc. and subsidiaries (the “Company”) as of February 29, 2008 and
February 28, 2007, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the fiscal years in the
three-year period ended February 29, 2008. In connection with our
audits of the consolidated financial statements, we also have audited financial
statement schedule II – valuation and qualifying accounts and reserves as of and
for each of the fiscal years in the three-year period ended February 29,
2008. We also have audited the Company’s internal control over
financial reporting as of February 29, 2008, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these consolidated financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule and an opinion on the Company's
internal control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of CarMax, Inc. and subsidiaries as of February 29, 2008 and February
28, 2007, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended February 29, 2008, in conformity
with U.S. generally accepted accounting principles. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of February 29, 2008, based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As
discussed in Note 7 to the consolidated financial statements, the Company
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109, effective March 1,
2007. As
discussed in Note 8(A) to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 158,
Employers’ Accounting for
Defined Pension and Other Postretirement Plans, effective
February 28, 2007.
/s/ KPMG LLP
Richmond,
Virginia
April 25,
2008
CONSOLIDATED
STATEMENTS OF EARNINGS
|
Years
Ended February 29 or 28
|
||||||||||||||||||||||||
|
(In
thousands except per share data)
|
2008
|
% | (1) |
2007
|
% | (1) |
2006
|
% | ||||||||||||||||