Transcript 100803_c

Forward-Looking Statement
This presentation contains forward-looking
statements, which are subject to risks and
uncertainties. Additional discussion of factors that
could cause actual results to differ materially from
management’s projections, forecasts, estimates and
expectations is contained in the CarMax, Inc. SEC
filings.
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CarMax Today
Used Car Superstores
 Nation’s leading used car
specialist
 Pioneered used car superstore
–1993
Chicago
 Operates 44 used car superstores
7
Sacramento
1
4 Baltimore / DC
Richmond
1
Raleigh
Knoxville
1 1
1
2
1
Greensboro
Charlotte
Nashville
1 Greenville
4
Birmingham 1
Atlanta
Kansas City
1
Las Vegas
1
1
Los Angeles
Dallas/Fort Worth 4
Mid-sized Markets (13)
Large Markets (8)
San Antonio
1
Houston
4
Tampa 2
2
 FY03:
- Sales:
- Net profit:
- Separation Costs:
- Earnings ex Sep.:
$ 4Bn
$ 95mm
$ 8mm
$103mm
Orlando
3 Miami / Ft. Lauderdale
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What Is CarMax?
 Unique retail opportunity
 Provides superior economic returns
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CarMax Sells More Cars
Sales/Store (Units)
2002
 CARMAX
5,210
 Public dealers
2,023
 Average dealer (NADA)
1,376
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CarMax Gains Market Share
Used Car
Comp Unit Sales
2002
 CARMAX
+ 8%
 Public dealers
- 8%
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CarMax Earns Higher Returns
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(1)
ROIC
15.8%
14.1%
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12.9%
12.8%
12.4%
ROIC (%)
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10.5%
10
10.2%
8
6.7%
6
4
2
0
HD
BBY
KMX
KSS
WMT
(1) After-tax EBITR/Average invested capital. Invested capital includes operating leases capitalized at 8x.
(2) Auto dealer average includes: ABG, AN, GPI, LAD, SAH and UAG.
Source: CarMax calculations based on companies’ public filings, most recent fiscal year.
COST
SPLS
Auto
Dealer
(2)
Average
Why Does CarMax Work?
 Used car focus
 Consumer-preferred concept
 Process-driven competitive advantages
 Organic growth plan
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Used Car Focus
Used Car Mix %
(Units)
 CARMAX
91%
 Public new car companies
38%
 Average new car dealers (NADA)
48%
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Why Used Cars?
 Huge, fragmented business
 Non-commodity
 Stable
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Used Vehicle Sales Stable
% Change New Vehicle Unit Sales
% Change Used-Vehicle Unit Sales
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
15.0%
10.0%
5.0%
0.0%
(5.0)%
(10.0)%
(15.0)%
Source: Manheim Auctions
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Process-driven
PROPRIETARY
PROCESS
Proprietary OPERATING
Operating Process
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
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Marketing
CARMAX MARKETING
COMPETITIVE ADVANTAGES
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Marketing
CarMax Marketing
Competitive Advantages
I. What we offer
II. How we offer it
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Marketing
I. The CarMax Offer - Overview
Consumer Need
1. “No Games”
CarMax Offer
Low No-Haggle Price
2. “I don’t want to drive
all over town”
Broad Selection
3. “I want a car I can
trust”
Great Quality
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I. The CarMax Offer
1. Low, No Haggle Prices
No haggle on price
- on trade-in
- on financing
- on extended service plan
Competitive Prices
($500 - $1,000 Below KBB)
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I. The CarMax Offer
2. Great Selection
 10x typical dealer
 All makes and models on one lot tailored to local area
 15,000+ cars available for transfer
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I. The CarMax Offer
3. Great Quality
 No flood/frame damage
 125+ point inspections and
reconditioning
 5 day money back guarantee
 30 day worry free warranty
 Extended warranties
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I. The CarMax Offer
Matching Consumer Needs
Percent of shoppers stating they came to
CarMax because of... (n = 9800)
No Haggle Pricing
81%
Large Selection
79%
Vehicle Quality
78%
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I. The CarMax Offer
Superior to Competition
Shoppers that rate CarMax superior to other
dealerships on... (n = 9800)
Price
Selection
Vehicle Quality
72%
81%
75%
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Marketing
CarMax Marketing
Competitive Advantages
I. What We offer
II. How We Offer It
- Internet Competitive Advantages
- Newspaper Competitive Advantages
- Television Competitive Advantages
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II. How We Offer It
CarMax Primary Competition
Small Franchise
Dealers
Mid-Size Franchise
Dealers
Large Franchise
Dealers
New Sales
Per Month
Less than
35
35-65
65+
Used Sales
Per Month
Less than
25
25-45
45+
Number of
Dealerships
8,690
6,080
6,950
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II. How We Offer It
Internet Competitive Advantages
 National scale: selection
 Site optimization
Consumer Preferred
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II. Internet Competitive Advantages
National Scale: Selection
 Single national brand
 15,000+ cars
 Transferable anywhere
- Over 4,500 SUV’s
- Over 2,300 vehicles under $10K
- Over 525 Jeep Grand Cherokees
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II. Internet Competitive Advantage
Ease of Use
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II. Internet Competitive Advantage
Consumer Preferred
 Number 1 car site in every market
 84% say site is excellent/very good
 90% say better than other dealers
 Second most mentioned car site
nationwide! (J.D. Power)
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II. How We Offer It
Newspaper Competitive Advantages
 Scale: lower costs
 Ad optimization
Consumer Preferred
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II. Newspaper Competitive Advantages
Scale: Lower Costs
 Purchasing advantage vs. 90% of dealers
 Consistent ad (3,000 ads - 4 designers)
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II. Newspaper Competitive Advantages
Optimized for Used Car Shopper
Quality
Selection
Price
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II. Newspaper Competitive Advantage
Consumer Preferred
 Non-CarMax markets
 190+ competitor ads
CarMax Ad Had Highest Visit Intent (n = 400)
46%
16%
First
Top 3
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II. How We Offer It
Television Competitive Advantages
 Scale: lower costs
 Ad optimization
Consumer Preferred
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II. Television Competitive Advantages
Scale: Lower Costs
 Buying scale vs. most (10 - 35%)
 Ad production economies
(20 ads vs. 0-4 ads)
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II. Television Competitive Advantage
Ad Optimization
 350-600 consumers test every ad
 2-4 cities
 Moment to moment reaction
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II. Television Competitive Advantage
Consumer Preferred
Likelihood to Visit
Less
Neutral
Typical
CarMax ad
Local dealer
ad (22 ads)
More
+30%
-16%
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II. How We Offer It
Impact of Marketing Scale
Unique website
Visitors/month
Newspaper
Pages/week
TV points/week
Marketing Expense
(% of sales)
Small Dealer
(40%)
Large Dealer
(30%)
CarMax
0-100
1,000-5,000+
50,000+
0.1
1.0
3
17
150
1.3%
1.3%
1.2%
2.1
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Process-driven
PROPRIETARY
PROCESS
Proprietary OPERATING
Operating Process
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
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Process-driven
PROPRIETARY
PROCESS
Proprietary OPERATING
Operating Process
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
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Proprietary Operating Process
Competitive Advantage
 Consistent processes across stores
 Scalable
 Hard to replicate
– time
– re-applied learning
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Proprietary Operating Process
Why Others Failed
 Operating processes weak
 Only copied the sales end
 Did not fully adopt equities
 Focused on the visible consumer offer
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Consumer
Offer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
40
Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing /
Purchasing/
Inventory
Inventory
Management
Management
Reconditioning
Finance
Originations
Information Systems
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Reconditioning
Finance
Originations
Information Systems
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Consumer
Offer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Finance
Originations
Originations
Information Systems
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing /
Purchasing/
Inventory
Inventory
Management
Management
Reconditioning
Finance
Originations
Information Systems
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Purchasing/ Inventory
Management
Efficient Inventory Management
 1 million served
 4 million appraisals
 All transactions captured and analyzed
 Right car, right place, right price and right time
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Purchasing/ Inventory
Management
People Development
 Volume buying = great buyers
 130 buyers with over 10,000 appraisals
 Report card = accountability and
improvement
 Difficult to replicate
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Purchasing/ Inventory
Management
Proprietary Pricing Model
 Sophisticated model
 Refined over 10 years
 Store specific
 Automated and flexible
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Purchasing/ Inventory
Management
We Buy Cars
 Cash offer on every car
 We will buy your car even if you don’t buy
from us
 1/2 of our vehicles are sourced through
appraisals
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing /
Purchasing/
Inventory
Inventory
Management
Management
Reconditioning
Finance
Originations
Information Systems
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Auctions: Disposing of Vehicles
We Buy Cars
 The majority of appraisal buys don’t make
the cut
 125,000 cars/$420 million in sales
 $3,400 cost, 10 years old, over 100,000
miles
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Auctions: Disposing of Vehicles
Traditional Disposal Options
 Wholesale individually
 Take to off-site auction
–
–
–
Excessive fees
60% sales rate
1:6 dealer/car ratio
 Minimal control, high cost
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Auctions: Disposing of Vehicles
Carmax Auctions
 Economic and efficient
–
–
–
No fees
98% sales rate
1:2 dealer to car ratio
 Real-time market feedback
 Total control
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Auctions: Disposing of Vehicles
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Auctions: Disposing of Vehicles
Auction Summary
 500,000 vehicles sold
 Integrated operating system
 Customer profiles
 Industry-leading attendance and results
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Reconditioning
Finance
Originations
Information Systems
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Service Operations
Service Operations
 Reconditioning and retail service
 Reconditioning is majority of work
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Service Operations
Competitive Advantages
1. Reconditioning treated as manufacturing
2. Centralized production planning
3. People development
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Service Operations
1. Reconditioning = Mfg.
 Engineered process
 Operating procedures on-line
 Proprietary custom system – ERO
 Maximize facility utilization
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Service Operations
2. Centralized Production Planning
 Sophisticated weekly planning algorithm
 Balances capacity across all stores
 Minimizes inventories
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Service Operations
3. People Development
 Structured training program
 Technicians
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Consumer
Offer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
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Business Office
Complex Transactions
 An average transaction
 How traditional dealers do it
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Business Office
Why That Won’t Work For Us
 Volume
 Across states
 Store growth
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Business Office
10 Years Of Process Development
 Over 4 million transactions
 900 forms, 14,000 fees & taxes
 Integrated systems designed around
process
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Business Office
Competitive Advantage
 44 stores, 1 system
 Seamless transactions across stores
 Easily leverage workforce for growth
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Business Office
781
Business Office
791
Business Office
801
Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Consumer
Offer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
81
Sales Floor
Sales Force
 Over 2000 sales consultants
 Flat commissions benefit customer
 Structured advancement program
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Sales Floor
Simplified Process
 Online financing
 Step by step delivery
 Consistent and easy to learn
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Sales Floor
Performance Management
 Systematic feedback
 Goal oriented
 Real time information
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85
86
87
88
89
90
91
92
93
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing/
Inventory
Management
Reconditioning
Finance
Originations
Information Systems
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Information Systems
Two Primary Advantages
 Process for development
 Cumulative result of that process
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Information Systems
Typical Dealer Systems
 Few alternatives
 Limited flexibility
 High cost
 Functionality does not exist
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Information Systems
Our Advantage vs. Dealers
 Started with a blank slate
 Tuned to the concept
 Re-applied learning
 Half the cost
 Highly flexible
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Process-driven
PROPRIETARY OPERATING PROCESS
Consumer
Offer
Purchasing/
Inventory
Management
Finance
Reconditioning
Finance
Originations
Originations
Information Systems
102
Consumer Finance
Finance Originations
 Maximize sales
 Minimize risk
 Optimize profitability
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Consumer Finance
Maximizing Sales
 CarMax consumer offer
– Low no-haggle prices
– Choice
– Customer-friendly process
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Maximizing Sales
Traditional Negotiations
 Payment
 Vehicle price
 APR and term
 Trade-in
 Ancillary products
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Maximizing Sales
Process Flow
 Fast
 Efficient
 Technologically advanced
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Maximizing Sales
Prime
Application Routing
CAF
Transmission
KMX App.
Routing
KMX App.
Routing
Prime #2
Customer
Views and
Chooses
From
Among all
Offers
Non-prime
Prime
Decline
KMX App.
Routing
Non-prime
KMX App.
Routing
Non-prime
Non-prime
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Maximizing Sales
Technology Advantages
 Connectivity
 Scale
 Data collection
 Point of sale support
 Accuracy / compliance
108
Consumer Finance
Minimizing Risk
 Transparent loan originations:
- Consumer risk
- Vehicle risk
- Intermediary risk
110
Consumer Finance
Optimizing Profitability
 3rd party finance company selection:
- CarMax-specific programs
- Stability and scale
- Balanced agreement
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Consumer Finance
Finance Originations
 Maximize sales
 Minimize risk
 Optimize profitability
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GROWTH PLAN
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Growth Plan
Organic Growth
 Creates value
 Not acquisition dependent
 Not 3rd-party constrained
115
Growth Plan
Opportunity Scale
 Market:
$265 Bn
 Currently:
18%-20% of U.S.
 Mature stores:
8%-10% market share
116
Growth Plan
Expanding The Opportunity
 Market share experience
 Higher-density storing
- Charlotte
- Orlando
- Las Vegas
- Richmond
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Growth Plan
Growth Plan To Date:
Mid-Sized
Markets:
Large Market
Satellites:
FY02
Greensboro
FY03
Sacramento
Knoxville
FY04
Las Vegas
Kansas City
Birmingham
Memphis (Oct.)
Louisville (Feb.)
CHI:Merrillville
CHI: Oak Lawn
ATL: Lithia Springs
CHI: Glencoe (Nov.)
CHA: South Blvd.
ORL: Sanford
LSV: Sahara (Jan.)
40
48-49
Mid-Sized Market
Satellites:
YE Total (Used):
35
118
Growth Plan
Growth Plan: Next 3 Years
FY05
8-10
FY06
10-12
FY07
12-14
Focus:
 Mid-sized
 Satellite
 Mid-sized
 Satellite
 Mid-sized
 Satellite
 New large
market
YE Total:
56-59
66-71
78-85
Store Goal:
119
Growth Plan
Used Car Store Model
Year 5
Standard
Satellite
Superstore Superstore
$ mm
$ mm
Year 1
Year 2
Year 5
Sales Ramp
70%
88%
100%
Store Operating
Profit
0.7-4.2% 2.9-6.3% 4.0-8.5% $2.4-10.3
$60-120
$43-86
$1.6-7.3
120
Growth Plan
Average Store Investment
Land & Bldg.
FF+ E
Inventory
Initial CarMax Cash
Standard ($mm)
$12.6-20.0
1.3 - 1.6
5.3 - 9.2
$19.2-30.8
Cash Recovery
Sale/Leaseback
$12.6-20.0
Inventory Financing (@ 90%)
4.8 - 8.3
Net CarMax Cash
$ 1.8 - 2.5
(@ 90% Inventory)
Satellite ($mm)
$ 7.5 -10.5
0.5 - 0.8
4.8 - 6.9
$12.8- 18.2
$7.5-10.5
4.3 - 6.2
$1.0 - 1.5
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Growth Plan
Investment Returns
Historical
ROIC
 Comparable Standard and Satellites (FY03)
18.7%
(CAF normalized)
 Total CarMax (FY03)
12.9%
Prototypical
 Standard (Yr 5, CAF normalized)
 Satellite (Yr 5, CAF normalized)
14.9%
16.6%
Leading Retail Comparison (‘92-’02 Avg.)
 Home Depot
 Wal-Mart
14.6%
12.4%
122
Growth Plan
Growth Plan
Sales Growth
 4-year goal:
$8 Bn
 Comp used-unit growth :
 New store openings :
5%-9%
15%-20%
Profit Growth
 New store openings
 Store margin expansion
 Corporate overhead leverage
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