Team C Student Research

January 22, 2010 Ticker: KMX Recommendation: SELL

Exchange: NYSE Industry: Auto Dealerships
Price: $21.29 Price Target: $16.21

CarMax: Premium for lofty growth expectations drives SELL rating

Earnings/Share Q1 Q2 Q3 Q4 Year P/E Ratio
2008A 0.30 0.29 0.14 0.10 0.82 25.8
2009A 0.13 0.06 (0.10) 0.17 0.27 79.7
2010E 0.13 0.47 0.33 0.28 1.21 17.6
2011E 0.33 0.37 0.23 0.27 1.20 17.7

Investment Summary
Since its IPO in 2002, CarMax has enjoyed a large premium to the rest of the industry
Valuation models due to the company’s rapid growth (15% annual growth in store square footage) and
support SELL rating: consumer friendly business model. Although the growth potential for the business is
Price Target of $16.21 high, we believe the company is trading ahead of its earnings power and faces several
near-term and long-term risks that are not priced in at the current multiple. The current
price assumes that 2005-2007 normalized earnings are around the corner. This belief is
unrealistic given a new normal for the company’s financing unit (CAF), consumer
deleveraging, working capital constraints, a sales pull-ahead due to government
incentives in 2009, interest rate risk, and declining gross profits per vehicle. In addition,
the company’s business model faces long-term headwinds from increased competition in
a fragmented industry where CarMax enjoys little market power. Financial analysis
reveals that unless KMX can restart its nationwide expansion, significantly increase
inventory turns in existing stores, or profitably expand its new car sales operations, the
company will not be able to meet current investor growth expectations. Risks to our view
Shares trading at pre- include a faster economic recovery than we are predicting, a shorter break from new store
crash levels despite openings than estimated, continued government stimulus, a secular increase in used car
compelling risks prices, and a restoration of the asset-backed securities (ABS) market to 2005-2007 levels.

Market Profile
Share Price (1/22/09) $21.29 Beta 1.29
Diluted Shares Outstanding (M) 221.983 Dividend Yield 0%
Market Cap (M) $4,726 Institutional Holdings 98.4%
Short % of Float 6.9%
Total Cash (M) $15.2 Fiscal Year End Feb
Total Debt (M) $146.9 EV/EBITDA (TTM) 10.8
Enterprise Value (M) $4,888 Book Value Per Share 8.90

52 Week Price Range $6.96 - $24.75 Average Daily Volume (3m) 2,197,000
% of 52-Week High 86% as a % of Market Cap 0.05%
 Team C Student Research Jan 22, 2010
New Normal for CAF
CarMax will face significant challenges in restoring pre-2008 margins and ROIC given a
lower profit contribution from CAF. Roughly 40% of EBIT over the 2005-2007 period
came from CAF. The company enjoyed above average earnings over the last few years
Financing is not the due to the strong ABS market and a low write-off rate. The unusually strong ABS
profit center of the past market during prior years allowed the company to achieve an abnormally large spread
between the rate it offered consumers on auto financing and the ABS securitization rate.
This spread has collapsed since 2008, virtually eliminating CAF gross profits. Even at
current levels, the ABS securitization rate is propped up by government supports, such as
TALF. These supports will eventually end further harming CAF profits. Long term, we
do not see the ABS securitization market returning to levels seen before the credit crisis,
meaning expectations based on 2005-2007 normalized earnings may not be realized for
the CAF division.

CAF financed more than 40% of CarMax vehicle purchases in FY2009. Of the
$4097.4M in loan receivables originated by CAF, only $134M where held for investment
on CarMax’s books as of Q3 2010. The remaining 96% of originated loan receivables
were either securitized or housed in their warehouse facility awaiting securitization.
Therefore, the cost of capital for CAF is almost entirely dependent on the ABS market
and whether or not they can sell their portfolio of auto loans. Continued declines in the
appetite for securitized consumer credit could lead to increased borrowing costs for CAF
and the parking of more risky assets on CarMax’s balance sheet.

Tightening lending Lost in the shadows of CarMax’s blowout Q2 and Q3 earnings reports are CAF’s
standards mean falling tightening lending standards. The company believes the more stringent lending standards
same store sales decreased same store sales by “several percentage points.”

Consumer Deleveraging
The recent credit crisis has the potential to act as a catalyst for broad-based deleveraging
of the American consumer. The household debt to personal disposable income ratio
currently stands at over 120% and is falling. As a relatively young company, CarMax
has yet to witness the full effect of a long term deleveraging cycle. The beginning of this
cycle can be seen in the current stagnation of the non-revolving consumer credit market –
the kind of borrowing that encompasses auto loans. This stagnation can be attributed to
Rising consumer credit declines in outstanding debt held by finance companies and securitized assets as shown in
drove CarMax sales Exhibit 11. Since financing is fundamental to the overwhelming majority of car purchase
since inception decisions, ramifications of sustained weakness may lead to lower used car sales. In
addition, a deteriorating macro environment may impact delinquency losses, gas prices,
inflation, discretionary spending, and consumer sentiment. Each of these economic
indicators is linked to the used car market. Even if used car sales have already bottomed,
we expect sales to remain below the 2005-2007 levels due to these macro factors.

Working Capital Constraints

Investors have priced large growth expectations into the company’s stock. We believe
these growth expectations are unrealistic given the time required to restart store growth
and CarMax’s working capital constraints. CarMax abruptly announced an end to store
28% Inventory growth slashing capital expenditures from over 250M in FY 2007 to under 30M in FY
reduction allowed 2010. We expect store growth to take some time to restart given the sudden secession of
onetime liquidity growth plans. In addition, we believe sudden growth will put pressure on constrained
benefit working capital and may be dilutive if restarted too soon. The company received a
massive onetime benefit to working capital in FY2009 due to a 28% inventory reduction.
The lower inventory allowed CarMax to temporarily increase free cash flow. Going
forward, the company will have to spend cash in order to replenish lowered inventory
levels. Increased capital expenditures to support store growth and increased spending on
inventory replenishment will put significant pressure on working capital if the economic
recovery does not occur as fast as expected.

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Sales Pull-Ahead due to Cash for Clunkers
The Cash for Clunkers program and other dealer incentive programs increased traffic
creating a “false sense of automotive market recovery” and lead to increased auction
participation by car dealerships to restock inventories, driving up used car prices.
Appraisal buy-rates improved because used car prices climbed and customers received
Cash for Clunkers = higher appraisals from CarMax on their cars. In addition, Cash for Clunkers not only
False Sense of Recovery propped up demand for used cars through this auction process, but also resulted in a
700,000 vehicle reduction in used car supply. All of the cars traded in for rebates under
the Cash for Clunkers program were scrapped for metal and removed from the used car
supply. The short term demand shock for used cars offered at auction and the longer
term supply shock from the program both point to a potential bubble in wholesale car
prices and used car prices in general. The below figures show the effect the program had
on CarMax’s year over year used and wholesale vehicle pricing:

• 5.6% increase in used vehicle prices on average to $17,185 in Q2

• 10.3% increase in used vehicle prices on average to $17,810 in Q3
• 1.1% increase in wholesale vehicle prices on average to $3,978 in Q2
• 13.6% increase in wholesale vehicle prices on average to $4,321 in Q3

Not only did the Cash for Clunkers program artificially inflate prices for Q2 and Q3
FY2010, but it also pulled ahead sales from FY 2011, meaning it incentivized people to
buy cars they otherwise wouldn’t have bought until the following year. We believe this
sales pull ahead effect will slow CarMax’s sales in the coming fiscal year.

A similar sales pull ahead effect occurred in automobile dealerships around the country in
Sales pull ahead 2006. In the summer of 2005, GM rolled out an ‘Employee Pricing for Everyone’
effect will be similar promotion in order to rid itself of large inventory of unsold 2005 models. The promotion
to 2001 and 2006 was such a success that Ford and Chrysler followed suit. During 2005, sales climbed
rapidly. The Seasonally Adjusted Annual Sales Rate reached 20 million in July 2005.
To put that figure in context, the prior all-time record for U.S. auto sales was 17.4 million
in 2000 when GM lead a wave of zero percent financing. Following the big sales spikes
of 2000 and 2005, showrooms were deserted for much of 2001 and 2006. This
phenomenon is known as “pull-ahead” in the automotive industry, since people who were
on the fence about purchasing a vehicle purchased one during the promotion instead of
waiting. We believe the Cash for Clunkers promotion of FY 2010 may result in a similar
pull ahead induced lull in FY 2011.

Interest Rate Risk

Interest rates currently stand near all-time lows. We believe any economic recovery will
be met by rate increases by the Fed to assuage inflation fears. Increased interest rates
reduce the spread CarMax makes on auto loans and increases default risk. All auto loans
Tightening by Fed will are fixed, but CarMax finances these loans with floating debt. The Company uses swaps
cause write-downs for to hedge interest rate risk, but the company does still keep some risk on its books.
CarMax According to company estimates, a 100bps increase in rates will reduce EPS by $0.01.
Of far greater concern is the effect that higher interest rates can have on write downs and
credit losses. An increase in interest rates may cause serious write downs as they did in
the last fiscal year when the credit markets imploded.

Gross Profit per Vehicle Improvement Is Unsustainable

As CEO Tom Folliard admits, gross profit per vehicle is unlikely to remain at the
elevated $2,120 level. Since the recent decrease in new vehicle sales also reduced the
supply of late model used vehicles which account for 85% of CarMax’s unit sales,
demand at auctions rose and used vehicle prices increased. As a result, the company
reported the best gross profit per vehicle since its IPO in 2002. Indeed, the Manheim

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Used Vehicle Index has been at its highest level since the current index began in January
Highest Used Car 1995. We believe this trend is not sustainable and expect the figure to return to below
Prices Since 1995 $1,885, the gross profit per vehicle in FY06-08. Pricing pressures from new vehicle
incentives and overall reduced demand for new and used vehicles caused by consumer
deleveraging may act as a catalyst to return the gross profit per vehicle figure to a
reasonable level.

Business Model Faces Long-Term Headwinds

CarMax can extract a premium from customers due to its unique consumer-centric
business model and no-haggle prices. We, however, see this premium falling and
margins being squeezed as the firm battles several long-term headwinds. First, since cars
Americans replace are more reliable than in the past due to improvements in the engineering and
more reliable cars manufacturing process, consumers will likely purchase cars less frequently. Currently,
less often the average American keeps their car for 3-5 years. We estimate an increase to 4-6 years
in the near future. Consumer Reports, a leading source of automobile reviews,
documented the change in reliability from 2000 to 2009 models noting a decline in the
average problem rate across the board for most vehicles with regard to the engine,
transmission, drive system, fuel system, suspension, brakes, exhaust, and body hardware.
Less frequent purchasing of cars will reduce sales volumes for CarMax.

CarMax also faces emerging competition from online car retailers. The company’s
website, CarMax.com, has been critical to the firm’s success. More than 70% of
customers who purchased a vehicle from CarMax had visited the website first. When
Internet breaks started, it was unique in that it offered access to a nationwide inventory of used vehicles
down comparative whereas used car dealers offered a limited in-store inventory. However, with the recent
advantages emergence of AutoTrader.com, Cars.com, and dealership inventories posted on the
Internet, we expect fierce online competition to fuel pricing pressure on used vehicles.
The addition of direct to customer car retailers including EBay Motors, Craigslist’s, and
wholesaler auction websites pose a further challenge for CarMax. The threat of emerging
online competition is exacerbated by the company’s limited market power in a
fragmented industry, with only 2% market share of the late model used vehicle market.

Valuation
We valued CarMax using a combination of discounted cash flow analysis, forward P/E
model, and comparable ratio valuation. The weighted price target was calculated as
follows:

$16.21 price target 50% weighted DCF - $12.36

implies 23.8% 25% forward P/E model - $21.27
discount to current 25% comparable ratio valuation - $18.87
price
These calculations resulted in a twelve month price target of $16.21, which implies a
23.8% decrease in price of the stock from the January 22nd closing price of $21.29.

Financial Forecast Assumptions

We started modeling CarMax by first building revenue projections for the income
statement. Revenue projections are based on price per unit and total units (volume) sold.
We used the Manheim Used Vehicle Value Index to estimate the increase in price of used
cars, which drove the revenues in our model. These revenue projections were segmented
into used car sales, new car sales, wholesale vehicle sales, others and revenue from CAF.
After analyzing historical trends of CarMax and their cash flow cycles, we used quarterly
projections for each year because of high seasonality in the business. In Q2 FY2010, the
model includes a large increase in revenues from the used cars section as the “cash-for-
clunkers” program took effect. The program also contributed to improving revenue in Q3
FY2010. Additionally, revenues were driven higher by the increase in used car prices as

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Team C Student Research Jan 22, 2010
indicated by the Manheim Used Vehicle Value Index. Historical trends indicate that used
Seasonality taken car sales should increase in the first two quarters of 2010. CarMax has had its best sales
into account in Q1 and Q2 over the past 5 years and negative sales growth in every third quarter,
which will likely continue to be a trend over FY2011 and FY2012.

Cost drivers were forecasted on a percentage of sales basis and each cost line item was
adjusted based on its sensitivity to market forces. We expect gross margins to continue to
increase through FY2011 since a halt to store expansion allows the company to turn its
focus inwards, which should drive better margins, higher returns and improved free cash
flow. As industry conditions normalize after 2011, we expect lower margins. Based on
an understanding of its operations, we projected selling, general & administrative
expenses to be roughly 35% variable and 65% fixed versus the norm of 50% variable and
50% fixed for more traditional used vehicle retailers.

Capital expenditure and depreciation are forecasted as a percentage of Plant, Property &
Equipment, while taking into account potential new store developments as well as
inventory declines. The majority of the balance sheet is modeled as a percentage of
revenue based on historical trends and projected future trends. For financing, we assume
that current debt levels will decline significantly as the asset securitization market thaws.
However, debt does not have a significant effect on CarMax’s valuation because it has
always been very low, only 6% of the total value of the company.

Discounted Free Cash Flow

After building and forecasting CarMax’s income statement, balance sheet and statement
of cash flows, we computed free cash flow for years 2009 – 2014 and in perpetuity. We
3 Scenario DCF discounted the free cash flow stream at our computed weighted average cost of capital for
allows for varying CarMax (Exhibit 5). Our inputs to the WACC calculation include market risk premium,
estimates of levered beta and the ten-year treasury risk free rate. We acknowledge that the risk free
economic recovery rate is abnormally low in this period but is offset by higher market risk premium. The
and used car prices levered beta of 1.29 reflects the cyclicality of CarMax’s business. The cost of debt is the
weighted average of short term and long term debt. We then subtracted the value of
operating leases and net debt (debt, net of cash) to arrive at the equity value. The share
value of $13.84 is obtained by dividing this equity value by the number of basic shares
outstanding.

In the best case scenario we forecast slightly lower revenues as volume sales are expected
to slow. Additionally, we expect margins to tighten as CarMax will face pressure to
increase SG&A and capital expenditures. The best case scenario brought the projection
down to $13.79. The worst scenario case adopts a similar strategy and results in
increases of cash flow, driven by increased margins and higher sales volume. The prices
are not affected much since government incentive programs like “cash-for-clunkers” are
not expected to occur again. The worst scenario brought the price up to $18.42.

Ratio Valuation
There were no direct comparables to CarMax because of its size, unique business model,
and the high fragmentation in the used car market. We compared CarMax to other public
auto dealers based on similar size. This screen left us with Group 1 Automotive Inc.
(GPI), Penske Automotive Group Inc. (PAG), Sonic Automotive Inc (SAH), Asbury
Automotive Group, Inc. (ABG), and AutoNation Inc. (AN). The metrics used as a basis
of valuation were EV / EBITDA multiple and P/E ratio. We also compared the gross
margin and EBITDA margin to understand how CARMAX trades relative to the industry
comparables.

CarMax currently trades at a premium compared to almost all the competitors and
industry median on basis of comparables. As seen in Exhibit 6, the January 22nd closing
price is higher that the prices implied by all the median comparable values, despite

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Team C Student Research Jan 22, 2010
CarMax’s lower gross margins. This reveals that most of CarMax’s valuation is based on
optimistic growth expectations rather than the actual results it has shown over the past
few years.

Lastly, we investigated historical trading data for CARMAX and its competitors in order
CarMax historically to uncover any trends over recent years. Over the past eight years of CarMax’s trading
trades at a premium history, P/E ratios for competitors have remained in a range of 12x–13x and declined
significantly since 2007. However, during this period, CarMax’s P/E has consistently
traded at a much higher multiple of around 25x, shooting up to almost 30x during
FY2010. We attribute this to the benefit CarMax obtained from the “cash-for-clunkers”
program and high growth expectations that are priced into its stock. As a result, we
believe that CarMax is significantly overvalued.

Business Description
Background
CarMax (NYSE: KMX), headquartered in Richmond, Va., is the nation's largest used car
Late-Model Used retailer with 100 superstores in 46 metropolitan markets throughout the United States.
Car Dealer with CarMax opened its first store in 1993, when it was a subsidiary of Circuit City. The
Unique Business company separated from Circuit City on October 1, 2002 and became a separate publicly
Model traded company. At the end of fiscal year 2009, CarMax had 13,035 associates, including
2,934 sales associates that are paid on commission.

Major Buyers
In fiscal year 2009, new and used car sales accounted for 3% and 97% respectively of
CarMax's total unit sales. The company sells cars to retail buyers through individual
transactions and to other automotive dealers during wholesale auctions. In fiscal year
2009, retail buyers accounted for 64% of used car unit sales and wholesale activities
constituted 36% of unit sales.

Industry Overview and Competitive Positioning

The used car industry is divided into the retail and wholesale segments. According to
Manheim Consulting, the retail used car market is valued in excess of $376 billion. The
Fragmented industry is very fragmented with an estimated 20,000 franchised dealerships that sell new
industry with low and used cars and 39,000 dealers that sell just used vehicles. Individuals also sell used
barriers to entry cars through online forums and classified advertisements. As shown in Exhibit 14:
Porter's Five Forces Analysis, the industry has low barriers to entry due to the easy
accessibility of online marketplaces. Indeed the presence of 59,000 car dealers and
millions of individual sellers across the United States demonstrates the ease of access to
this marketplace.

Despite a challenging 2008, the used car industry performed well in 2009 due to
government programs. The Manheim Used Vehicle Index, a key measure of used car
value, rose 5.1% during the year, for the index's largest annual increase in its 15 year
history. The index's record rise was attributed to large government income tax refunds
which boosted Q1 FY2010 sales. The "cash-for-clunkers" program helped Q3 FY2010 as
late-model car prices rose because new vehicle inventories were greatly reduced.
Improved credit conditions and more interest in car buying also aided used car dealers.
Like the retail market, wholesale operations were surprisingly strong through FY 2010.
Wholesale prices rose as the supply of vehicles suitable for re-sale lagged demand for
used cars.

FY2011 is likely to disappoint investors as used car purchases fall below expectations
due to the possibility of rising interest rates, a narrower price differential between new

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Team C Student Research Jan 22, 2010
and used cars, and the absence of government incentive programs. Higher interest rates
increase borrowing costs and deter consumers from taking out new loans. Likewise,
Interest rates and rebates, discounts and incentives offered on new cars reduce the price spread between
borrowing are new and used vehicles, prompting many consumers to purchase new rather than used.
central to car Automakers are likely to continue such programs through FY2011, and used vehicle
purchase decision demand will likely decline. Most importantly, many buyers accelerated their car
purchases in FY2010 to take advantage of the "cash-for-clunkers" program. FY2011 sales
will likely fall below expectations because many consumers who would have replaced
their vehicles in FY2011 did so in FY2010.

Like the retail market, wholesale prices saw a large rise through FY2010, and by the end
of the year prices were "pushing up against the natural limit imposed by new vehicle
pricing," according to Manheim Consulting. The wholesale market is poised for lower
prices as demand dissipates through FY2011 and the supply shortage is mitigated.

Market Share
Although it is the nation's largest used car retailer, CarMax has only 2% market share in
the national late-model used car market. Late-model used cars are defined as vehicles one
to six years old with less than 60,000 miles. Approximately 85% of CarMax's retail
inventory is composed of late model used cars. CarMax management has identified
franchised dealerships as the company's primary competition. Recently, industry
consolidation as major automakers like Chrysler and General Motors close franchised
dealerships has reduced the number of competitors.

CarMax's market share has steadily grown as the number of superstores increased from
one in 1993 to 100 by the end of 2009. Due to its small national market share and
absence from large metropolitan markets along the Northeast corridor, CarMax has large
growth potential. However, CarMax executives halted the company's planned 15%
annual growth due to financing concerns in December 2008. Executives have not
released a timeframe for reinstituting the growth program.

Competitive Positioning
CarMax differentiates itself from franchised dealerships and small used car retailers
“No Haggle” through its reconditioning program, "no haggle" pricing, and national network of
Pricing defines supercenters. The company's inventory is largely comprised of late-model vehicles in the
CarMax price range of $11,000 to $28,000. However, CarMax also sells luxury brands and used
vehicles older than six years or with over 60,000 miles. As shown in Exhibit 2, the
company has several disadvantages relative to peers. CarMax’s strengths include:

• Customer Appeal Due to “No Haggle” Pricing and Financing Capabilities

• Good Employee Relations

Despite these strengths, CarMax does not have a sustainable competitive advantage
because its business model is seriously challenged by online marketplaces. Used car
buyers are increasingly using the Internet to make purchase decisions, as shown by a
CarMax survey that found 70% of customers who eventually buy a car at one of the
company’s superstores first researched their purchase online. As buyers migrate to the
Internet, CarMax is less able to differentiate itself through its customer service
Vehicle history and experience and physical locations.
pre-purchase
The company’s value proposition is further eroding as comprehensive vehicle histories
inspection services
become cheaply available through CARFAX and buyers can inspect their purchases
now independently
through a mechanic for less than CarMax would charge them for the same service. The
available
company does not realize significant economies of scale through its reconditioning or
selling processes. As shown by Exhibit 12, CarMax vehicles are typically the most
expensive on online marketplaces. Listing its relatively expensive cars on websites like

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Team C Student Research Jan 22, 2010
AutoTrader.com and cars.com provides little competitive advantage to CarMax as most
used car buyers make purchasing decisions based on price.

Financial Analysis
Revenues
In FY2009, CarMax recorded its first decline in sales with annual revenues slipping
14.9% to $6.97 billion from $8.20 billion in FY2008. Much like the rest of the auto retail
industry, CarMax was unable to overcome the economic challenges of 2008 and early
2009. All of CarMax’s major revenue generating segments recorded double digit
declines in FY2009 versus FY2008 headlined by a 14.5% decline in total retail vehicles
sales and a 20.8% decline in wholesale vehicle sales.

On a same store basis, the declines were steeper with a 23.6% decrease in total retail
vehicle sales and a 29.3% decrease in wholesale vehicle sales, the second fiscal year in a
row that CarMax experienced same store declines in both categories. FY2008 saw 3.0%
and 5.6% year-over-year declines in total retail vehicle and wholesale vehicle sales
respectively. Four out of the past six fiscal years have seen year-over-year declines in
same store sales. Despite the recent lackluster same store sales, CarMax has been able to
report double digit top line growth five out of the past six years. This growth has been
driven by the near doubling of CarMax locations from 52 franchises in February of 2004
to 103 in February of last year, as shown in Exhibit 13.

Used vehicle sales dropped 13.6% in FY2009 to $5.69 billion from $6.59 billion the year
before. New vehicle sales fared worse with revenues slipping 29.3% to $261.94 million
– the third year in a row and fifth out of the past six that CarMax’s new vehicle segment
reported year-over-year declines. FY2009 also marked the first time CarMax realized a
year-over-year decline in total vehicles sold from 615,135 in FY2008 to 550,630 in
FY2009, a 10.5% fall.

FY2010 thus far has served CarMax better than FY2009 with revenues YTD up 2.4% to
$5.6 billion from $5.5 billion. Q2 FY2010 and Q3 FY2010 have been especially strong
quarters for CarMax with used vehicle sales increasing by 15.6% and 20.4% respectively
and wholesale vehicle sales increasing by 6.1% and 28.2% respectively. Those numbers
were largely skewed by the “cash-for-clunkers” incentive program. CarMax’s results
YTD have also benefited from a truly terrible year for the auto industry in FY2009 with
all-time high gas prices in Q1 and Q2, and credit market turmoil in Q3. The first three
quarters of FY2009 have been very soft comparables for this fiscal year. FY2009
excluded, Q1 and Q4 sales have mirrored each other. This relationship should be
reestablished due to the expiration of incentive programs. We anticipate Q4 growth to
reach 25% on a year-over-year basis. Overall, FY2010 sales should return CarMax to FY
08 levels.

Beyond FY2010, we do not expect revenue growth to match pre-FY2009 numbers. Same
store sales were stagnate for seven fiscal years before plummeting in FY2009.
Top line growth due Historically, CarMax’s top line growth has been solely attributable to its increase in
to new superstores superstores. Management’s decision to halt expansion will make it extremely difficult
not same store sales for CarMax to return to pre-FY2009 sales levels. We are projecting store growth to
growth resume in Q3’FY2011 with five CarMax locations opening every fiscal year after that.
Used vehicle sales growth is the next largest driver of total revenue growth for CarMax
and we project their core business to follow historical trends and grow 10% during Q1s
and Q2s, and 7.5% in Q3s and Q4s. The seasonality in the auto retail industry has
historically made Q1 and Q2 the highest grossing and growing quarters in the fiscal year,
and that trend should persist.

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Team C Student Research Jan 22, 2010
We aggressively projected for continued increases in used car prices through FY2016
despite evidence to the contrary. “Cash-for-clunkers” eliminated nearly 700,000 cars
from the used car market and created unsustainable demand for used cars in the
wholesale market. In the short and long terms, we believe these demand and supply
shocks have lead to a bubble in the used vehicle and wholesale vehicle markets. Data
from the Manheim Used Car Index shows that used car values are at their highest levels
in the index’s 15 year history. Long-run demand forecasts do not justify these price
levels. We projected used car prices to increase at a steady 0.9% until FY2016.

Gross Margins and Earnings

Despite CarMax’s top line troubles in FY2009, gross margins improved by 80 basis
points to 13.9%. FY2009 marked the fourth straight fiscal year of year-over-year gross
margin improvements. Used vehicle and wholesale vehicle margins came in at 11.3%
and 20.8% respectively, representing 50 and 290 basis point improvements over FY2008.
Wholesale gross margins have steadily increased for six straight fiscal years from 5.5% in
FY2003 to 20.8% in FY2009, while margins on used and new vehicles have kept steady.
This margin growth can be attributed to improvements in gross profit per unit from $192
in FY2003 to $814 in FY2009 for wholesale vehicles, and outpacing growth by
wholesale vehicles compared to CarMax’s other businesses. In that same time period,
Long run demand
gross profit per unit on used vehicles went from $1,648 to $1,865. In the future, we
does not justify
predict a return to historical levels for gross profit per unit on wholesale vehicles,
current prices
eventually pulling back gross margins on wholesale vehicles to 12%, which represents
sustainable levels attained in FY2005. Total gross margins will in turn fall back to
FY2008 levels at 13.3% by FY2013.

FY2010 YTD gross margins have continued to improve and stand at 14.8%. We expect
Q4 margins to fall back to historical levels and project margins for FY2010 at 14.5%, a
70 basis point increase from FY2009.

For FY2010, we project EPS at $1.23. The decline in gross margins will offset the slow
top line growth we’ve projected for FY2011 before margins steady and the top and
bottom lines grow together with the top pulling the bottom.

Balance Sheet and Cash Flows

CarMax’s balance sheet remains solid with very little long term debt on the company’s
books. As of Q3 FY2010, its debt-to-equity ratio was 8%. Due to its low debt burden,
CarMax can restart its intended 15% annual growth as credit markets improve and
management sentiment changes. If future expansion were as efficient as past growth,
CarMax’s top line would benefit.

Investment Risks
The following risks are relevant to a SELL rating on CarMax. For a worst case scenario,
where each of these risks is realized, we assign a probability of 20% and give a price
target of $18.42.
CarMax future tied • Continued gross margin improvement, which could be caused by higher inventory
to economic turns, better pricing power, or a secular increase in used car prices.
recovery • Possible expansion of new car sales to all 100 superstores, which could drive top line
growth. The number of franchised dealerships significantly declined in 2009 and
CarMax could profitably expand into the market for new cars.
• Shorter break from new store openings than estimating. Once new store openings
commence, management plans to add stores in new and existing markets at a 15%
annual rate.
• New government stimulus such as the reinstatement of sales tax deductions for
vehicle purchases or a modified cash for clunkers program.

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Team C Student Research Jan 22, 2010

• Faster economic recovery than we are predicting, including meaningful change in

unemployment, consumer credit, and consumer discretionary spending.
• Increase in comparable same store sales due to past experience with CarMax. Since
more than half of the company’s stores are less than five years old and consumers
buy cars every 3-5 years, comparable same store sales may increase over time as
previous CarMax customers return for another vehicle purchase.
• Better than expected reduction (greater than $100) in vehicle reconditioning costs
through FY 2010.

Ownership Considerations
Short Sellers
With more than 6% of the float held short, covering may give the stock upward
momentum. Indeed, since March the number of shares held short has fallen by more than
55%.

Institutional Ownership
A look at the top 10 holders on the long side indicates that the company is a favorite of
institutional buyers, particularly those with a history of lower turnover. However since
ownership is heavily concentrated in the top twenty holders, if any decide to sell, the
price can quickly fall due to large block orders.

Insider Selling
SEC Form 4 disclosures show heavy insider selling the past few months by several top
Heavy insider selling executives and Board members. While exercising of stock options and selling resulting
raises eyebrow shares is more common and sometimes necessary for personal liquidity reasons, large
sales of personal stock ownership may indicate that insiders feel the stock is fairly or
overvalued. Indeed, Beth Stewart, a Board member, had sold her entire stake in October
2009. The CEO Tomas Folliard sold almost 12% of his holdings in December 2009 and
Executive VP Michael Dolan sold one third of his stake as recently as January 6, 2010.
The size and nature of recent insider sales does raise an eyebrow into how insiders value
the company’s growth projections.

10
Team C Student Research Jan 22, 2010

Disclosures:
Ownership and material conflicts of interest:
The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company.
The authors, or a member of their household, of this report do not know of the existence of any conflicts of interest that might
bias the content or publication of this report.
Receipt of compensation:
Compensation of the authors of this report is not based on investment banking revenue.
Position as a officer or director:
The authors, or a member of their household, do not serve as an officer, director, or advisory board member of the subject
company.
Market making:
The authors do not act as a market maker in the subject company’s securities.
Ratings guide:
Banks rate companies as either a BUY, HOLD, or SELL. A BUY rating is given when the security is expected to significantly
outperform the market over the next twelve month period. A SELL rating is given when the security is expected to significantly
underperform the market over the next twelve months, while a HOLD rating implies flat returns with the market over the next
twelve months.
Investment Research Challenge and Global Investment Research Challenge Acknowledgement:
CFA Virginia Investment Research Challenge as a part of the CFA Institute Global Investment Research Challenge is based on
the Investment Research Challenge originally developed by the New York Society of Security Analysts.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the
authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or
completeness. The information is not intended to be used as the bases of any investment decision by any person or entity. This
information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This
report should not be considered to be a recommendation by an individual affiliated with the CFA Virginia, CFA Institute, or the
Global Investment Research Challenge with regard to this company’s stock.

11
Exhibit 1: Income Statement ($000s)
Source: Company Documents, Student Estimates

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010e FY 2011e FY 2012e FY 2013e FY 2014e FY 2015e
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15
Revenue:
Used vehicles 4,771,325 5,872,816 6,589,342 5,690,658 6,075,960 6,442,032 6,816,610 7,236,717 7,639,077 8,154,849
New vehicles 502,805 445,144 370,603 261,940 169,962 187,303 199,347 203,334 207,400 211,548
Wholesale vehicles 778,268 918,408 985,048 779,785 800,074 834,032 873,315 916,611 957,331 1,008,790
Other sales and revenues 207,569 229,288 254,578 241,583 249,224 255,607 263,655 272,543 280,930 291,508
Net sales and operating revenues 6,259,967 7,465,656 8,199,571 6,973,966 7,295,220 7,718,973 8,152,925 8,629,204 9,084,738 9,666,696

Cost of Sales 5,469,253 6,494,594 7,127,146 6,005,796 6,250,527 6,733,159 7,100,565 7,544,419 7,975,329 8,455,716

Gross Profit 790,714 971,062 1,072,425 968,170 1,044,693 985,815 1,052,361 1,084,786 1,109,409 1,210,980
CarMax Auto Finance income 104,327 132,625 85,865 15,286 167,537 161,736 185,041 204,238 221,104 239,211
Selling, General & Administrative 674,370 776,168 858,372 882,358 785,426 748,187 800,141 808,304 838,646 913,773
Interest Expense 4,093 5,373 4,955 6,086 3,838 5,000 5,000 5,000 5,000 5,000
Interest Income 1,023 1,203 1,366 1,786 493 500 500 500 500 500
Earnings before Taxes 217,601 323,349 296,329 96,798 423,460 394,864 432,761 476,220 487,367 531,918
Provision for Taxes 83,381 124,752 115,044 37,585 160,161 152,023 166,613 183,345 187,636 204,788
Net earnings excl. extraordinary items 134,220 198,597 181,285 59,213 263,299 242,841 266,148 292,875 299,730 327,129

Net earnings attributed to CC common stock

Extraordinary Items, net of tax 445
Net earnings reported 134,220 198,597 181,730 59,213 263,299 242,841 266,148 292,875 299,730 327,129

Weighted Avg Common Shares (Basic) 209,270 212,454 216,045 217,537 219,290 219,290 219,290 219,290 219,290 219,290
Weighted Avg Common Shares (Diluted) 212,846 216,739 220,522 220,513 221,983 221,983 221,983 221,983 221,983 221,983

Basic EPS, cont. ops 0.64 0.93 0.84 0.27 1.20 1.11 1.21 1.34 1.37 1.49
Diluted EPS, cont. ops 0.63 0.92 0.82 0.27 1.19 1.09 1.20 1.32 1.35 1.47

Basic EPS, reported 0.64 0.93 0.84 0.27 1.20 1.11 1.21 1.34 1.37 1.49
Diluted EPS, reported 0.63 0.92 0.82 0.27 1.19 1.09 1.20 1.32 1.35 1.47

Tax rate 38.3% 38.6% 38.8% 38.8% 37.8% 38.5% 38.5% 38.5% 38.5% 38.5%

Comparable 18.87
Key Income Statement Metrics Forward P/E price 21.27
Margins:
Gross Margin 12.6% 13.0% 13.1% 13.9% 14.3% 12.8% 12.9% 12.6% 12.2% 12.5%
CAF as % of Total Revenue 1.7% 1.8% 1.0% 0.2% 2.3% 2.1% 2.3% 2.4% 2.4% 2.5%
EBITDA margin 4.0% 4.8% 4.2% 2.2% 6.6% 6.0% 6.2% 6.4% 6.2% 6.3%
Operating margin 3.5% 4.4% 3.7% 1.4% 5.9% 5.2% 5.4% 5.6% 5.4% 5.5%
Pretax margin 3.5% 4.3% 3.6% 1.4% 5.8% 5.1% 5.3% 5.5% 5.4% 5.5%
Net margin (reported) 2.1% 2.7% 2.2% 0.8% 3.6% 3.1% 3.3% 3.4% 3.3% 3.4%
SG&A % of revenues 10.8% 10.4% 10.5% 12.7% 10.8% 9.7% 9.8% 9.4% 9.2% 9.5%
SG&A % of gross profit 85.3% 79.9% 80.0% 91.1% 75.2% 75.9% 76.0% 74.5% 75.6% 75.5%
D&A % of revenues 0.4% 0.5% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
D&A % of gross profit
Gross Profit Mix:
CarMax Gross Profit 88.3% 88.0% 92.6% 98.4% 86.2% 85.9% 85.0% 84.2% 83.4% 83.5%
CarMax Auto Finance income 11.7% 12.0% 7.4% 1.6% 13.8% 14.1% 15.0% 15.8% 16.6% 16.5%
Total Gross 'Profit' 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Revenue
Used vehicles 19.4% 23.1% 12.2% -13.6% 6.8% 6.0% 5.8% 6.2% 5.6% 6.8%
New vehicles 2.2% -11.5% -16.7% -29.3% -35.1% 10.2% 6.4% 2.0% 2.0% 2.0%
Wholesale vehicles 32.0% 18.0% 7.3% -20.8% 2.6% 4.2% 4.7% 5.0% 4.4% 5.4%
Other sales and revenues 14.5% 10.5% 11.0% -5.1% 3.2% 2.6% 3.1% 3.4% 3.1% 3.8%
Total revenues 19.0% 19.3% 9.8% -14.9% 4.6% 5.8% 5.6% 5.8% 5.3% 6.4%
Other
Total gross profit 21.6% 22.8% 10.4% -9.7% 7.9% -5.6% 6.8% 3.1% 2.3% 9.2%
SG&A 19.3% 15.1% 10.6% 2.8% -11.0% -4.7% 6.9% 1.0% 3.8% 9.0%
EBITDA 31.8% 46.4% -4.3% -55.0% 211.2% -5.1% 8.9% 9.3% 2.6% 8.5%
Operating Income 31.7% 48.4% -8.4% -66.3% 322.2% -6.4% 9.5% 9.9% 2.3% 9.1%
Pretax Income From Continuing Operations 31.7% 48.6% -8.4% -67.3% 337.5% -6.8% 9.6% 10.0% 2.3% 9.1%
Net Income - Cont Ops 33.0% 48.0% -8.7% -67.3% 344.7% -7.8% 9.6% 10.0% 2.3% 9.1%
Diluted SO 0.7% 1.8% 1.7% 0.0% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0%
EPS - Cont. Ops 32.0% 45.3% -10.3% -67.3% 341.7% -7.8% 9.6% 10.0% 2.3% 9.1%
EPS - Reported 31.5% 45.3% -10.1% -67.4% 341.7% -7.8% 9.6% 10.0% 2.3% 9.1%
CAF Net Income 26.2% 27.1% -35.3% -82.2% 996.0% -3.5% 14.4% 10.4% 8.3% 8.2%
Net Income Ex-CAF 38.6% 67.7% 9.9% -61.3% 219.1% -9.9% 6.3% 9.8% -2.1% 9.9%
YOY bps ∆:
Gross Margin 27 38 7 80 44 (155) 14 (34) (36) 32
SG&A as % of Gross Profit (165) (536) 11 1,110 (1,595) 71 14 (152) 108 (14)
EBITDA margin 38 90 (62) (199) 441 (68) 18 20 (16) 12
Operating margin 34 86 (73) (221) 440 (68) 19 21 (16) 13
Net margin 23 52 (45) (136) 276 (46) 12 13 (9) 8

Per Store Metrics

# of Stores 71 81 92 103 103 106 111 116 121 126
SG&A per $9,498 $9,582 $9,330 $8,567 $7,625 $7,058 $7,208 $6,968 $6,931 $7,252
Exhibit 2: Balance Sheet ($000s)
Source: Company Documents, Student Estimates

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010e FY 2011e FY 2012e FY 2013e FY 2014e FY 2015e
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15
Assets:
Cash and cash equivalents 21,759 19,455 12,965 140,597 66,867 265,823 445,600 651,462 870,043 1,117,486
Accounts receivable, net 76,621 71,413 73,228 75,876 79,948 84,591 89,347 94,567 99,559 105,936
Automobile loan receivables held for sale 4,139 6,162 4,984 9,748 20,397 20,397 20,397 20,397 20,397 20,397
Retained interests in securitized receivables 158,308 202,302 270,761 348,262 486,120 486,120 486,120 486,120 486,120 486,120
Inventory 669,700 836,116 975,777 703,157 833,404 897,754 946,742 1,005,922 1,063,377 1,127,429
Prepaid expenses and other current assets 11,211 15,068 19,210 10,112 10,112 10,112 10,112 10,112 10,112 10,112
Total current assets 941,738 1,150,516 1,356,925 1,287,752 1,496,848 1,764,798 1,998,318 2,268,580 2,549,608 2,867,480
CAF Pool of Auto Receivables 4,302,899 4,713,812 5,184,407 5,622,857 6,113,943
Property and equipment, net 499,298 651,850 862,497 938,259 905,855 934,748 1,020,586 1,103,216 1,182,477 1,258,201
Deferred income taxes 24,576 40,174 67,066 103,163 103,163 103,163 103,163 103,163 103,163 103,163
Other assets 44,000 43,033 46,673 50,013 50,013 50,013 50,013 50,013 50,013 50,013
Total assets 1,509,612 1,885,573 2,333,161 2,379,187 2,555,879 7,155,622 7,885,892 8,709,379 9,508,118 10,392,801

Liabilities:
Accounts payable 188,614 254,895 306,013 237,312 231,184 249,035 262,624 279,040 294,978 312,746
Accrued expenses and other current liabilities 85,316 68,885 58,054 55,793 55,793 55,793 55,793 55,793 55,793 55,793
Accrued income taxes 5,598 23,377 7,569 26,551 26,551 26,551 26,551 26,551 26,551 26,551
Deferred income taxes 23,562 13,132 17,710 12,129 12,129 12,129 12,129 12,129 12,129 12,129
Short-term debt 463 3,290 21,017 878 878 878 878 878 878 878
Current installments of LT debt 59,762 148,443 79,661 158,107 158,107 158,107 158,107 158,107 158,107 158,107
Total current liabilities 363,315 512,022 490,024 490,770 484,642 502,493 516,082 532,498 548,436 566,204
CAF Bonds outstanding 3,902,899 4,247,710 4,666,917 5,060,878 5,502,794
Long-term debt, excluding current installments 134,787 33,744 227,153 178,062 27,533 27,533 27,533 27,533 27,533 27,533
Deferred revenue and other liabilities 31,407 92,432 127,058 117,288 117,288 117,288 117,288 117,288 117,288 117,288
Deferred income taxes
Total liabilities 529,509 638,198 844,235 786,120 629,463 4,550,213 4,908,612 5,344,236 5,754,135 6,213,819

Shareholders' equity:
Common stock 52,477 108,014 109,308 110,196 110,196 110,196 110,196 110,196 110,196 110,196
Capital in excess of par value 554,076 587,546 641,766 685,938 688,723 688,723 688,723 688,723 688,723 688,723
Accumulated other comprehensive gain (loss) (20,332) (16,728) (16,860) (16,860) (16,860) (16,860) (16,860) (16,860) (16,860)
Retained earnings 373,550 572,147 754,580 813,793 1,773,820 6,373,563 7,103,833 7,927,320 8,726,059 9,610,742
Total shareholders' equity 980,103 1,247,375 1,488,926 1,593,067 1,926,416 2,605,409 2,977,280 3,365,144 3,753,983 4,178,982

Total liabilites & shareholders' equity 1,509,612 1,885,573 2,333,161 2,379,187 2,555,879 7,155,622 7,885,892 8,709,379 9,508,118 10,392,801
check - - - - - - - - - -
3,709,495 4,129,812
-44488.72021 -49169.47472
KEY BALANCE SHEET METRICS
Turns:
Days Receivables = (Receivables/Sales)*365 4.5 3.5 3.3 4.0 4.0 4.0 4.0 4.0 4.0 4.0
Inventory Turnover = CGS/Inventory 8.2 7.8 7.3 8.5 7.5 7.5 7.5 7.5 7.5 7.5
Asset Turnover 7.0 7.1 6.5 5.3 5.2 4.7 4.3 4.0 3.8 3.6
Days Non-Debt Current Liab. = Days Payable 12.6 14.3 15.7 14.4 13.5 13.5 13.5 13.5 13.5 13.5
Current Ratio 2.6 2.2 2.8 2.6 3.1 3.5 3.9 4.3 4.6 5.1
Capitalization:
Total Assets to Equity 154.0% 151.2% 156.7% 149.3% 132.7% 274.6% 264.9% 258.8% 253.3% 248.7%
Total Debt/Equity (%) 19.9% 14.9% 22.0% 21.2% 9.7% 7.2% 6.3% 5.5% 5.0% 4.5%
Total Debt/Capital (%) 16.2% 12.2% 16.9% 16.5% 8.4% 2.7% 2.5% 2.2% 2.0% 1.9%
Cash per Share 0.10 0.09 0.06 0.64 0.30 1.20 2.01 2.93 3.92 5.03
BVPS 5.52 6.61 8.24 8.75 9.52 12.58 14.25 16.00 17.75 19.67
Return on Average (%):
Assets 14.7% 18.7% 14.2% 4.2% 18.7% 14.7% 14.0% 13.6% 12.3% 12.0%
Equity 15.1% 17.8% 13.3% 3.8% 15.0% 10.7% 9.5% 9.2% 8.4% 8.2%
Capital 12.4% 15.2% 11.2% 3.2% 13.0% 9.9% 8.9% 8.7% 8.0% 7.9%
ROIC 19.7% 24.0% 17.3% 5.1% 20.0% 8.8% 6.1% 6.1% 5.6% 5.6%
Implied Annual Life:
Depreciation & Amortization as % average PPE 5.9% 6.0% 6.2% 6.1% 6.3% 6.6% 6.6% 6.3% 6.2% 6.1%
Implied Annual Life 17.0 16.7 16.2 16.4 15.8 15.1 15.2 15.8 16.2 16.4
Working Capital - Ex Cash & ST Investments
W orking Capital 556,664 619,039 853,936 656,385 945,339 996,483 1,036,637 1,084,620 1,131,130 1,183,791
Sequential Change - Use/(Source) 50,138 62,375 234,897 (197,551) 288,954 51,144 40,154 47,983 46,509 52,661
YoY Change 135.2% 124.4% 376.6% -84.1% -146.3% 17.7% 78.5% 119.5% 96.9% 113.2%
% of Sales 8.9% 8.3% 10.4% 9.4% 13.0% 12.9% 12.7% 12.6% 12.5% 12.2%
Book Capital:
Total Debt 195,012 185,477 327,831 337,047 186,518 186,518 186,518 186,518 186,518 186,518
Total Equity 980,103 1,247,375 1,488,926 1,593,067 1,926,416 2,605,409 2,977,280 3,365,144 3,753,983 4,178,982
Book Capitalization 1,175,115 1,432,852 1,816,757 1,930,114 2,112,934 2,791,927 3,163,798 3,551,662 3,940,501 4,365,500
Shares Outstanding 212,846 216,739 220,522 220,513 221,983 221,983 221,983 221,983 221,983 221,983
Invested Capital 1,206,522 1,525,284 1,943,815 2,047,402 2,230,222 6,812,114 7,528,796 8,335,866 9,118,667 9,985,582
LTMs:
Sales 6,259,967 7,465,656 8,199,571 6,973,966 7,295,220 7,718,973 8,152,925 8,629,204 9,084,738 9,666,696
COGS 5,469,253 6,494,594 7,127,146 6,005,796 6,250,527 6,733,159 7,100,565 7,544,419 7,975,329 8,455,716
Depreciation & amortization 26,692 34,551 46,615 54,741 58,197 61,107 64,162 67,370 70,739 74,276
EBIT 220,671 327,519 299,918 101,098 426,805 399,364 437,261 480,720 491,867 536,418
Net Income 134,220 198,597 181,285 59,213 263,299 242,841 266,148 292,875 299,730 327,129
Interest Income LTM 1,023 1,203 1,366 1,786 493 500 500 500 500 500
Other Interest Expense LTM 4,093 5,373 4,955 6,086 3,838 5,000 5,000 5,000 5,000 5,000
Tax Rate Statutory 38.3% 38.6% 38.8% 38.8% 37.8% 38.5% 38.5% 38.5% 38.5% 38.5%
Exhibit 3: Statement of Cash Flows ($000s)
Source: Company Documents, Student Estimates

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010e FY 2011e FY 2012e FY 2013e FY 2014e

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14
Cash flows from operating activities
Net earnings 134,220 198,597 182,025 59,213 263,299 242,841 266,148 292,875 299,730
Depreciation and amortization 26,692 34,551 46,615 54,741 58,197 61,107 64,162 67,370 70,739
Share-based compensation expense 21,632 31,826 33,467 35,436 39,197 36,152 39,621 43,600 44,621
Amortization of retricted stock awards - - - - - 0 0 0 0
Writedown of goodwill - 4,891 - - - 0 0 0 0
Loss (gain) on disposition of assets (764) 88 1,404 10,728 359 0 0 0 0
Provision for deferred income taxes (19,088) (14,169) (24,405) (41,502) 20,312 0 0 0 0
Increase in automobile loan receivables held for sale 18,013 (2,023) 1,178 (4,764) (10,649) - - - -
Decrease (increase) in securitized receivables (10,345) (43,994) (68,459) (77,501) (137,858) - - - -
Changes in operating assets and liabilities:
Increase in accounts receivable, net (454) 5,208 (1,815) (2,648) (4,072) (4,644) (4,756) (5,219) (4,992)
(Increase) decrease in inventory (93,133) (166,416) (139,661) 272,620 (130,247) (64,351) (48,988) (59,181) (57,455)
Decrease in prepaid expenses and other current assets 1,797 (3,857) (4,148) 9,090 (216) - - - -
Decrease in other assets (5,975) (3,924) 1,360 647 1,290 - - - -
Increase in accounts payable 35,133 85,633 14,561 (40,276) 29,045 17,851 13,589 16,417 15,938
Increase in deferred revenue and other liabilities 9,785 10,389 37,398 (11,193) (12,578) - - - -
Net cash provided by operating activities 117,513 136,800 79,520 264,591 116,079 288,956 329,777 355,862 368,581
Cash flows from investing activities: (173,586) 78,891 90,207 198,956 179,777 205,862 218,581
Cash used in business acquisitions - - - - -
Purchases for property and equipment/ CapEx (194,433) (191,760) (253,106) (185,700) (25,872) (90,000) (150,000) (150,000) (150,000)
Proceeds from sales of property and equipment 78,340 4,569 1,089 34,341 79 0 0 0 0
Decrease in inter-group receivable, net - - - - -
Sales of money market securities - 16,765 (19,565) (3,987) -2,196 0 0 0 0
Purchases of investment securities available-for-sale - (16,765) 14,565 - 2,200 0 0 0 0
Other
Net cash used in investing activities (116,093) (187,191) (257,017) (155,346) (25,789) (90,000) (150,000) (150,000) (150,000)
Cash flows from financing activities:
Issuance of long term debt 174,929 1,232,400 972,300 789,800 616,000 0 0 0 0
Payments on long-term debt (116,993) (1,244,762) (841,119) (761,827) (805,435) 0 0 0 0
Special dividend paid - - - - -
Increase (decrease) in short-term debt, net (64,734) 2,827 17,727 (20,139) (688) 0 0 0 0
Equity issuances, net 6,035 35,411 14,730 10,162 23,318 0 0 0 0
Excess tax benefits from share-based payment arrangements 3,978 22,211 7,369 391 2,785 0 0 0 0
Net cash provided by (used in) financing activities 3,215 48,087 171,007 18,387 (164,020) - - - -

Increase (decrease) in cash and cash equivalents 4,635 (2,304) (6,490) 127,632 (73,730) 198,956 179,777 205,862 218,581
Cash and cash equivalents at beginning of year 17,124 21,759 19,455 12,965 140,597 66,867 265,823 445,600 651,462
fwv 21,759 19,455 12,965 140,597 66,867 265,823 445,600 651,462 870,043
Balance Sheet check 21,759 19,455 12,965 140,597 66,867 265,823 445,600 651,462 870,043
KEY CASH FLOW METRICS
Net Property Plant and Equipment 499,298 651,850 862,497 938,259 905,855 934,748 1,020,586 1,103,216 1,182,477
Depreciation & Ammortization LTM 26,692 34,551 46,615 54,741 58,197 61,107 64,162 67,370 70,739
Capex LTM 194,433 191,760 253,106 185,700 25,872 90,000 150,000 150,000 150,000
Sales LTM 6,259,967 7,465,656 8,199,571 6,973,966 7,295,220 7,718,973 8,152,925 8,629,204 9,084,738
Gross Profit LTM 790,714 971,062 1,072,425 968,170 1,044,693 985,815 1,052,361 1,084,786 1,109,409
Capex % Net PPE LTM 38.9% 29.4% 29.3% 19.8% 2.9% 9.6% 14.7% 13.6% 12.7%
Capex % D&A LTM 728.4% 555.0% 543.0% 339.2% 44.5% 147.3% 233.8% 222.7% 212.0%
Capex % Sales LTM 3.1% 2.6% 3.1% 2.7% 0.4% 1.2% 1.8% 1.7% 1.7%
Capex % Gross LTM 24.6% 19.7% 23.6% 19.2% 2.5% 9.1% 14.3% 13.8% 13.5%
D&A % Net PPE LTM 5.3% 5.3% 5.4% 5.8% 6.4% 6.5% 6.3% 6.1% 6.0%
D&A % of Sales LTM 0.4% 0.5% 0.6% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
Implied Annual Life 234.5 216.1 175.9 127.4 125.4 126.3 127.1 128.1 128.4
Exhibit 4: Model Assumptions - Most Likely
Source: Company Documents, Student Estimates

FY 2010 2009 2010 2011 2012 2013

Q1 Q2 Q3 Q4e FY 2009 FY 2010e FY 2011e FY 2012e FY 2013e
May-09 Aug-09 Nov-09 Feb-10 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
REVENUE DRIVERS:
Used vehicles 1,549,275 1,706,616 1,407,077 1,412,992 5,690,658 6,075,960 6,442,032 6,816,610 7,236,717
% change 26.09% 10.16% -17.55% 0.42% -13.64% 6.77% 6.02% 5.81%
New vehicles 48,553 63,206 38,158 20,045 261,940 169,962 187,303 199,347 203,334
% change 9.00% 30.18% -39.63% -47.47% -29.32% -35.11% 10.20% 6.43%
Wholesale vehicles 171,496 236,991 226,907 164,680 779,785 800,074 834,032 873,315 916,611
% change 24.97% 38.19% -4.26% -27.42% -20.84% 2.60% 4.24% 4.71%
Other sales and revenues 64,976 69,858 53,835 60,555 241,583 249,224 255,607 263,655 272,543
% change 8.20% 7.51% -22.94% 12.48% -5.10% 3.16% 2.56% 3.15%
Net sales and operating revenues 1,834,301 2,076,672 1,725,976 1,658,271 6,973,965 7,295,219 7,718,974 8,152,926 8,629,204
% change 24.74% 13.21% -16.89% -3.92% -14.95% 4.61% 5.81% 5.62%

MARGINS:
Gross Margin 15.1% 15.1% 14.1% 12.7% 13.9% 14.3% 12.8% 12.9% 12.6%
CAF as % of Total Revenue -1.2% 3.5% 3.8% 3.1% 0.2% 2.3% 2.1% 2.3% 2.4%
EBITDA margin 3.5% 8.8% 7.6% 6.5% 2.2% 6.6% 6.0% 6.2% 6.4%
Operating margin 2.6% 8.1% 6.8% 5.6% 1.4% 5.9% 5.2% 5.4% 5.6%
Pretax margin 2.6% 8.1% 6.7% 5.6% 1.4% 5.8% 5.1% 5.3% 5.5%
Net margin (reported) 1.6% 5.0% 4.3% 3.4% 0.8% 3.6% 3.1% 3.3% 3.4%
SG&A % of revenues 11.2% 10.5% 11.1% 10.2% 12.7% 10.8% 9.7% 9.8% 9.4%
SG&A % of gross profit 74.7% 69.3% 79.1% 80.0% 91.1% 75.2% 75.9% 76.0% 74.5%
D&A % of revenues 0.8% 0.7% 0.8% 0.9% 0.8% 0.8% 0.8% 0.8% 0.8%
D&A % of gross profit

GROSS PROFIT MIX:

CarMax Gross Profit 108.5% 81.3% 78.7% 80.5% 98.4% 86.2% 85.9% 85.0% 84.2%
CarMax Auto Finance income -8.5% 18.7% 21.3% 19.5% 1.6% 13.8% 14.1% 15.0% 15.8%
Total Gross 'Profit' 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

KEY CASH FLOW ELEMENTS:

Net Income (ex. special items) 28,749 102,972 74,588 56,991 59,212 263,299 242,841 266,148 292,875
+ Depreciation & Amortization 15,032 14,547 14,368 14,250 54,741 58,197 61,107 64,162 67,370
- Capital Expenditures (5,662) (8,666) (4,044) (7,500) (151,359) (25,872) (90,000) (150,000) (150,000)
- Change in Working Capital (15,153) (48,864) 966 (53,726) 228,240 (116,777) (51,144) (40,154) (47,983)
+ Other items 12,493 10,161 8,043 8,500 35,436 39,197 36,152 39,621 43,600
= Free Cash Flow 35,459 70,150 93,921 18,514 226,270 218,044 198,955 179,777 205,862
Free Cash Flow per Share $0.16 $0.32 $0.42 $0.08 $1.03 $0.98 $0.90 $0.81 $0.93
EBIT 48,377 168,558 116,528 93,343 101,097 426,805 399,363 437,260 480,719
EBITDA 63,409 183,105 130,896 107,593 155,838 485,002 460,470 501,422 548,090
EBIT per share 0.22 0.76 0.52 0.42 0.46 1.92 1.80 1.97 2.17
EBITDA per share 0.29 0.83 0.58 0.48 0.71 2.18 2.07 2.26 2.47

YOY % ∆:
Revenue
Used vehicles -14.7% 15.6% 20.4% 15.0% -13.6% 6.8% 6.0% 5.8% 6.2%
New vehicles -40.8% -18.8% -33.6% -55.0% -29.3% -35.1% 10.2% 6.4% 2.0%
Wholesale vehicles -29.2% 6.1% 28.2% 20.0% -20.8% 2.6% 4.2% 4.7% 5.0%
Other sales and revenues -3.8% 13.3% 2.8% 0.8% -5.1% 3.2% 2.6% 3.1% 3.4%
Total revenues -17.0% 12.9% 18.6% 12.8% -14.9% 4.6% 5.8% 5.6% 5.8%
Other
Total gross profit -2.3% 22.9% 21.9% -8.4% -9.7% 7.9% -5.6% 6.8% 3.1%
SG&A -15.1% -3.1% -11.7% -14.1% 2.8% -11.0% -4.7% 6.9% 1.0%
EBITDA 1.0% 383.5% -763.7% 43.7% -55.0% 211.2% -5.1% 8.9% 9.3%
Operating Income -2.4% 613.5% -446.7% 51.7% -66.3% 322.2% -6.4% 9.5% 9.9%
Pretax Income From Continuing Operations -0.5% 644.0% -436.9% 52.1% -67.3% 337.5% -6.8% 9.6% 10.0%
Net Income - Cont Ops -2.7% 635.2% -441.0% 51.9% -67.3% 344.7% -7.8% 9.6% 10.0%
Diluted SO -1.1% 0.2% 2.8% 1.8% 0.0% 0.7% 0.0% 0.0% 0.0%
EPS - Cont. Ops -1.6% 633.9% -431.6% 49.2% -67.3% 341.7% -7.8% 9.6% 10.0%
EPS - Reported -1.6% 633.9% -431.6% 49.2% -67.4% 341.7% -7.8% 9.6% 10.0%
CAF Net Income -82.2% 996.0% -3.5% 14.4% 10.4%
Net Income Ex-CAF -61.3% 219.1% -9.9% 6.3% 9.8%

Per Store Metrics

# of Stores 103 103 103 103 103 103 106 111 116
SG&A per $2,002 $2,118 $1,865 $1,640 $8,567 $7,625 $7,058 $7,208 $6,968
Exhibit 5: Discounted Cash Flow and WACC Calculation
Source: Company Documents, Student Estimates

Discounted Cash Flow - Most Likely

2009A 2010E 2011E 2012E 2013E 2014E

Free Cash Flows Projected 226,271.0 218,043.4 198,955.7 179,777.1 205,862.2 218,580.7
Terminal Value with Perpetuity Growth of 3.5% 3,306,056.1
Total Free Cash Flow 226,271.0 218,043.4 198,955.7 179,777.1 205,862.2 3,524,636.9

Enterprise Value 2,858,777

Net Debt 131,712
Equity Value 2,727,065
Shares Outstanding 221,983
Equity Value Per Share $ 12.36

WACC
Shares Outstanding 221,983
Price per share $21.29
Market Value of equity $4,677,374
Levered Beta 1.28
Risk Free Rate 1.65%
Market Risk Premium 7.00%
Cost of equity 10.61%
Market value of debt 152,845
Cost of debt 3.50%
Tax rate 38.00%
E/V 96.84%
D/V 3.16%
WACC 10.34%
Exhibit 6: Comparables Valuation
Source: Company Documents, Student Estimates
* calculations based on calendar year

Hisoric Comps 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Mean Median

CarMax Inc. KMX NA NA NA 15.2x 4.3x 6.1x 15.2x 13.8x 15.0x 13.7x 14.1x 12.1x 12.6x 14.0x
AutoNation Inc. AN 30.5x 10.8x 6.3x 8.0x 7.8x 8.1x 9.1x 9.9x 9.5x 8.9x 8.9x 7.9x 10.5x 8.9x
Group 1 Automotive Inc. GPI NA 17.6x 10.2x 6.0x 7.0x 7.3x 8.9x 9.7x 9.8x 10.2x 9.6x 9.0x 9.8x 9.7x
Penske Automotive Group, Inc. PAG 21.1x 45.3x 15.7x 7.9x 8.8x 9.9x 11.3x 11.0x 10.3x 11.4x 11.6x 9.8x 14.5x 11.3x
Sonic Automotive Inc. SAH 15.8x 16.4x 11.7x 7.9x 6.9x 9.5x 9.7x 11.5x 10.7x 9.7x 9.1x 7.6x 10.8x 9.7x
Asbury Automotive, Inc. ABG NA NA NA NA NA 8.4x 9.2x 10.0x 9.5x 8.8x 8.7x 8.0x 9.3x 9.0x
EV/EBITDA (average) MEDIAN 21.1x 17.0x 11.0x 7.9x 7.0x 8.3x 9.5x 10.5x 10.1x 10.0x 9.4x 8.5x 11.0x 10.0x
MEAN 22.5x 22.5x 11.0x 9.0x 7.0x 8.2x 10.6x 11.0x 10.8x 10.5x 10.3x 9.1x 12.0x 10.6x
HIGH 30.5x 45.3x 15.7x 15.2x 8.8x 9.9x 15.2x 13.8x 15.0x 13.7x 14.1x 12.1x 17.3x 15.0x
LOW 15.8x 10.8x 6.3x 6.0x 4.3x 6.1x 8.9x 9.7x 9.5x 8.8x 8.7x 7.6x 8.8x 8.8x

CarMax Inc. KMX NA NA NA NA 26.4x 26.6x 27.4x 24.3x 26.5x 24.3x 25.3x 22.9x 26.1x 26.4x
AutoNation Inc. AN NA 42.4x 17.0x 8.5x 11.9x 15.2x 10.6x 11.8x 13.5x 14.3x 13.6x 9.3x 15.3x 13.5x
Group 1 Automotive Inc. GPI NA 29.8x 17.8x 6.9x 11.1x 11.8x 10.8x 12.2x 18.9x 15.3x 11.2x 8.1x 14.0x 11.8x
Penske Automotive Group, Inc. PAG 26.0x 14.7x 16.0x 9.3x 12.6x 15.5x 13.1x 13.5x 12.9x 16.3x 15.7x 10.0x 14.6x 14.1x
Sonic Automotive Inc. SAH 22.3x 29.5x 16.9x 6.8x 8.5x 12.0x 8.9x 10.4x 10.2x 11.1x 11.9x 5.4x 12.8x 10.8x
Asbury Automotive, Inc. ABG NA NA NA NA NA 13.5x 10.3x 20.8x 12.1x 10.7x 13.0x 6.7x 12.4x 12.1x
P/E (average) MEDIAN 24.2x 29.7x 17.0x 7.7x 11.9x 14.4x 10.7x 12.9x 13.2x 14.8x 13.3x 8.7x 14.9x 13.3x
MEAN 24.2x 29.1x 16.9x 7.9x 14.1x 15.8x 13.5x 15.5x 15.7x 15.3x 15.1x 10.4x 16.1x 15.4x
HIGH 26.0x 42.4x 17.8x 9.3x 26.4x 26.6x 27.4x 24.3x 26.5x 24.3x 25.3x 22.9x 24.9x 25.7x
LOW 22.3x 14.7x 16.0x 6.8x 8.5x 11.8x 8.9x 10.4x 10.2x 10.7x 11.2x 5.4x 11.4x 10.6x

CarMax Inc. KMX 8.4% 11.0% 11.9% 13.1% 12.4% 13.6% 14.1% 13.7% 14.0% 14.5% 14.4% 13.0% 13.1% 13.6%
AutoNation Inc. AN 10.8% 15.3% 14.5% 14.7% 15.0% 15.6% 15.6% 15.6% 15.9% 16.0% 16.1% 16.8% 15.4% 15.6%
Group 1 Automotive Inc. GPI 13.5% 14.5% 15.0% 14.7% 15.2% 15.5% 16.0% 15.3% 15.6% 15.8% 15.6% 16.2% 15.4% 15.5%
Penske Automotive Group, Inc. PAG 13.2% 13.6% 13.7% 14.1% 13.9% 14.5% 14.6% 15.0% 15.2% 15.1% 14.8% 15.4% 14.6% 14.6%
Sonic Automotive Inc. SAH 11.8% 12.9% 14.1% 15.0% 15.6% 15.7% 15.3% 15.3% 15.3% 15.7% 15.8% 16.3% 15.1% 15.3%
Asbury Automotive, Inc. ABG NA 14.3% 14.7% 14.9% 15.5% 15.8% 15.4% 15.1% 15.1% 15.3% 15.6% 16.4% 15.4% 15.4%
Gross Margin MEDIAN 11.8% 14.0% 14.3% 14.7% 15.1% 15.6% 15.4% 15.2% 15.3% 15.5% 15.6% 16.3% 15.0% 15.3%
MEAN 11.5% 13.6% 14.0% 14.4% 14.6% 15.1% 15.2% 15.0% 15.2% 15.4% 15.4% 15.7% 14.8% 15.1%
HIGH 13.5% 15.3% 15.0% 15.0% 15.6% 15.8% 16.0% 15.6% 15.9% 16.0% 16.1% 16.8% 15.7% 15.8%
LOW 8.4% 11.0% 11.9% 13.1% 12.4% 13.6% 14.1% 13.7% 14.0% 14.5% 14.4% 13.0% 13.1% 13.6%

CarMax Inc. KMX NA NA 0.7% 3.7% 6.5% 4.4% 4.7% 3.8% 3.9% 4.9% 4.8% 1.9% 4.0% 4.4%
AutoNation Inc. AN 0.5% 4.3% 3.2% 4.5% 3.6% 4.4% 4.6% 4.7% 4.9% 4.9% 4.8% 4.1% 4.1% 4.4%
Group 1 Automotive Inc. GPI 2.8% 3.6% 3.8% 3.8% 3.8% 3.6% 3.7% 3.0% 3.3% 3.7% 3.6% 3.2% 3.5% 3.6%
Penske Automotive Group, Inc. PAG 1.5% 3.0% 3.2% 3.6% 3.3% 3.3% 3.3% 3.4% 3.4% 3.2% 3.1% 2.8% 3.1% 3.2%
Sonic Automotive Inc. SAH 3.1% 3.7% 3.9% 4.2% 4.2% 3.9% 3.3% 3.6% 3.7% 3.8% 4.3% 3.0% 3.7% 3.7%
Asbury Automotive, Inc. ABG NA 2.6% 3.3% 3.8% 3.6% 3.7% 3.5% 3.2% 3.5% 3.7% 3.7% 3.3% 3.4% 3.5%
EBITDA Margin MEDIAN 2.2% 3.6% 3.3% 3.8% 3.7% 3.8% 3.6% 3.5% 3.6% 3.8% 4.0% 3.1% 3.5% 3.6%
MEAN 2.0% 3.4% 3.0% 3.9% 4.2% 3.9% 3.9% 3.6% 3.8% 4.0% 4.1% 3.1% 3.5% 3.8%
HIGH 3.1% 4.3% 3.9% 4.5% 6.5% 4.4% 4.7% 4.7% 4.9% 4.9% 4.8% 4.1% 4.6% 4.5%
LOW 0.5% 2.6% 0.7% 3.6% 3.3% 3.3% 3.3% 3.0% 3.3% 3.2% 3.1% 1.9% 2.6% 3.1%
Exhibit 7: Insider Activity and Institutional Ownership
Source: Company Documents, Student Estimates

Insider Activity
Date Insider Position Type Shares Sold Sale Price Shares Remaining % of Holdings Sold
1/6/2010 Michael K. Dolan Executive VP Sale 45734 24.43 91,518 33.3%
12/23/2009 Joseph S. Kunkel Senior VP Exercise and Sale 40000 24 127,818 NA
12/22/2009 Thomas J. Folliard CEO Sale 50000 24.11 374,290 11.8%
10/9/2009 Richard Murray Smith Senior VP Exercise and Sale 20000 20.45 137,804 NA
10/2/2009 Beth Stewart Director Sale 28248 19.13 0 100.0%
9/29/2009 Michael K. Dolan Executive VP Exercise and Sale 130000 20.85 137,252 NA
9/25/2009 Richard Murray Smith Senior VP Sale 25000 20.12 137,804 15.4%
9/25/2009 Hugh G. Robinson Director Exercise and Sale 2532 20.47 5,631 NA
9/24/2009 Keith D. Browning CFO Sale 50000 19.83 250,000 16.7%
7/28/2009 Joseph S. Kunkel Senior VP Exercise and Sale 50000 15.54 130,218 NA
7/21/2009 Thomas J. Folliard CEO Exercise and Sale 150000 15.15 425,790 NA
7/15/2009 Keith D. Browning CFO Sale 50000 15.18 300,000 14.3%
7/15/2009 Keith D. Browning CFO Exercise and Sale 50000 15.18 350,000 NA
6/26/2009 Beth Stewart Director Exercise and Sale 11470 14.49 12,254 NA
4/9/2009 Beth Stewart Director Sale 25339 11.82 28,248 47.3%
4/7/2009 Beth Stewart Director Sale 74661 11.51 53,587 58.2%

Institutional Holders
Name Shares (M) Value* % of Holdings % of Outstanding
Davis Selected Advisers, L.P. 21.61 M 451.58 0.70% 9.70%
PRIMECAP Management Company 17.94 M 375.02 0.67% 8.05%
Capital World Investors 16.16 M 337.84 0.10% 7.25%
Dodge & Cox 15.58 M 325.69 0.32% 6.99%
T. Rowe Price Associates, Inc. 15.19 M 317.42 0.14% 6.81%
Berkshire Hathaway Inc. 9M 188.10 0.32% 4.04%
BlackRock Institutional Trust Company, N.A. 8.44 M 176.48 0.03% 3.79%
Vanguard Group, Inc. 7.64 M 159.57 0.03% 3.43%
State Street Global Advisors (US) 5.41 M 113.00 0.03% 2.43%
Markel-Gayner Asset Management Corp. 5.33 M 111.45 8.31% 2.39%
* Value of shares is estimated based on the closing price of the month in which the shares were purchased.
Exhibit 8: Historic Trading Multiples
Source: Company Documents, Student Estimates

For Fiscal Year Ended

Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Median

EV/LTM Revenue Average 0.2x 0.3x 0.7x 0.6x 0.6x 0.7x 0.6x 0.4x 0.6x
High 0.3x 0.6x 1.0x 0.8x 0.7x 0.9x 0.8x 0.6x 0.8x
Low 0.1x 0.1x 0.4x 0.4x 0.5x 0.5x 0.5x 0.2x 0.4x
Close 0.3x 0.4x 0.8x 0.7x 0.6x 0.8x 0.5x 0.3x 0.6x

EV/LTM EBITDA Average 4.9x 6.6x 16.5x 13.9x 14.2x 14.3x 13.3x 12.7x 13.6x
High 6.9x 10.7x 22.7x 18.9x 19.1x 17.2x 16.1x 17.8x 17.5x
Low 2.4x 2.8x 7.0x 9.7x 11.9x 11.8x 10.0x 7.6x 8.7x
Close 6.5x 8.2x 17.9x 18.7x 13.4x 15.5x 10.9x 17.1x 14.5x

P/LTM EPS Average 28.9x 24.5x 29.5x 24.3x 25.3x 25.2x 24.1x 26.2x 25.3x
High 43.8x 44.5x 40.6x 33.3x 33.6x 30.4x 28.9x 50.0x 37.1x
Low 14.7x 15.0x 14.0x 16.8x 21.4x 20.6x 18.1x 14.5x 15.9x
Close 35.7x 16.7x 31.7x 33.0x 24.3x 27.4x 20.0x 47.8x 29.6x

P/BV Average 1.1x 1.9x 5.0x 3.7x 3.6x 4.0x 3.7x 2.0x 3.7x
High 2.2x 3.6x 6.8x 5.6x 5.2x 5.2x 4.9x 3.2x 5.1x
Low 0.3x 0.9x 2.4x 2.7x 3.3x 3.3x 2.5x 0.9x 2.5x
Close 2.1x 2.9x 5.4x 4.5x 4.7x 4.7x 2.8x 1.3x 3.7x

P/Tangible BV Average 1.1x 1.9x 5.0x 3.7x 3.6x 4.0x 3.7x 2.0x 3.7x
High 2.2x 3.6x 6.8x 5.6x 4.5x 5.2x 4.9x 3.2x 4.7x
Low 0.3x 0.9x 2.4x 2.7x 3.1x 3.3x 2.5x 0.9x 2.5x
Close 2.1x 2.9x 5.4x 4.5x 3.6x 4.7x 2.8x 1.3x 3.3x
Exhibit 9: Macroeconomic Indicators
Source: Manheim Consulting, Wall Street Journal

Manheim Used Vehicle Value Index

130

120

110

100

90

80

Unemployment Rate
12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
Exhibit 10: Share Price Performance with Forecasts
Daily Jan 24, 2005 - Jan 22, 2009, 1/24/2005 = $14.38

35

30

25

20
$18.42 = Worst
$16.21 = Likely
$16.21 = Likely
$13.79 = Best
15 $13.79 = Best

10

0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Exhibit 11: Nonrevolving Consumer Credit Outstanding (in millions)
Source: Federal Reserve Statistical Release

1,800,000

1,600,000

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

-
Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Total Commercial Banks Finance Companies

Credit Unions Federal Government Savings Institutions

Nonfinancial Business Pools of Securitized Assets

Exhibit 12: Price Comparison for CarMax's 10 Most Popular Vehicles as of 12/28/2009*
Source: Respective Websites

Autotrader.com CarMax.com Cars.com

Chevrolet Silverado 1500 $ 13,000 $ 14,599 $ 12,854
Tahoe $ 18,982 $ 18,998 $ 15,988
Ford F-150 $ 12,500 $ 14,849 $ 11,944
Mustang $ 17,899 $ 17,998 $ 22,995
Honda Accord $ 9,700 $ 13,998 $ 10,995
Civic $ 10,900 $ 14,599 $ 9,800
Jeep Wrangler $ 16,887 $ 17,599 $ 15,395
Nissan Altima $ 10,400 $ 14,599 $ 11,900
Toyota Camry $ 10,988 $ 12,998 $ 8,995
Tacoma $ 12,500 $ 14,849 $ 12,980

*For each make and model, the prices listed are for cars that share the same model year,
comparable mileage (within 5k), options, trim, transmission, color,
Exhibit 13: CarMax Profile
Source: Company Reports and CarMax website

Number of Dealerships (New & Used) Sales & Net Income Growth

120 $9,000 $300

103 $8,000
100 92 $250
$7,000
81

Net Income ($mm)

80 71

Revenue ($mm)
$6,000 $200
61
60 52 $5,000
44 $150
40 40 $4,000
40
$3,000 $100
20
$2,000
$50
0 $1,000
2001 2002 2003 2004 2005 2006 2007 2008 2009
$ $
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Revenue Net Income from Cont Ops

KMX Vehicle Inventory as of 1/22/2010 FY2009 Sales & Profit Mix

Toyota
Ford Other 3.5%
11%
14% Wholesale 11.2% 15.7% Other
Chrysler 3.8%
17% New Vehicle 16.8% Wholesale
0.9%
Honda
8%
Used Vehicle
81.6%
GM 66.5%
18% Nissan
Other Hyundai/Kia 12%
6% 5% Mercedes Volkswagen
BMW
3% 3% 3%
 Exhibit 14: Porter's Five Forces Analysis and CarMax Response to Competitive Environment
High Threat of Potential
Entrants
• For individual sellers, the used • Buyers include
car industry has low barriers to
entry due to easily accessible
classified advertising and free
online marketplaces
• Dealerships and retail locations
have moderate barriers due to
state licensing requirements,
difficulties finding a
commercially valuable
location, and high capital
requirements
• Some economies of scale exist
relating to vehicle
reconditioning and advertising,
but dealerships face serious
competition from individuals
who have lower fixed costs and
are able to sell their vehicles
for less than many dealerships
sell comparable cars
Response to Threat of
Potential Entrants
• CarMax lists its entire retail
inventory on CarMax.com,
AutoTrader.com, and cars.com
• Exhibit __ shows that
CarMax’s higher prices put it
at a competitive disadvantage
• CarMax has just 2% market
share and is not large enough
to deter potential entrants
Low Buyer Moderate Supplier
Bargaining Power Bargaining Power
• Vehicle suppliers include
individual individual sellers,
purchasers and wholesalers, franchised
dealers who buy dealers, car rental companies,
used cars for re-sell auctioneers, and franchised
on their own lots or independent dealers
• Buyers have low • Vehicle suppliers currently
bargaining power have moderate bargaining
because the buyer power because used car
market is so demand is higher than supply
fragmented and no • Supplier bargaining power is
individual buyer or reduced by the fragmentation
group of buyers of suppliers and low
accounts for a large switching costs related to
percentage of sells changing suppliers
• Demand has • Labor suppliers have low
exceeded supply bargaining power due to a
during 2009 and national unemployment rate
likely in 2010, of 10% and no union
further restraining negotiating power within the
buyer power industry
CarMax Competitive Positioning Within the Used Car Industry
Response to Buyer Response to Supplier
Bargaining Power Bargaining Power
• CarMax sets non- • CarMax purchases most of
negotiable prices its used vehicles from
for all retail individuals, resulting in a
vehicles highly fragmented supplier
• CarMax has open base with no negotiating
wholesale auctions leverage or ability to collude
for licensed dealers and control prices
to limit buyer • CarMax is vulnerable to
power limited supply of used cars
Low Threat of High Rivalry among
Substitutes Existing Competitors
• Substitutes are • Rivalry is high among
products that dealerships due to market
perform the same fragmentation and high
function as capital costs associated with
vehicles car inventories and
• There are no • Rivalry is high and
substitutes that increasing among individual
provide a sellers as online
comparable marketplaces and low
price/performance vehicle transfer costs reduce
tradeoff to the expense of transporting
automobiles cars across large distances
• Rather than pursue maintaining retail locations
a car substitute, • Rivalry increases during a
buyers are likely to recession as used cars
"down-trade" by account for a larger
purchasing an percentage of sales for
inexpensive new franchised dealerships,
car or buying a leading these dealerships to
used car rather devote more resources to
than a new vehicle used car sells
Response to Threat Response to Existing
of Substitutes Competitors
• Intuitively, • CarMax tries to differentiate
CarMax's focus on itself with "no haggle"
used cars positions pricing, well-inspected
it well for “down- vehicles, and large selection
trading.” However, • CarMax is not differentiated
its higher prices from online marketplaces
erode this because its inventory is
competitive listed alongside individual
advantage sellers and other dealers
 Exhibit 15: SWOT Analysis Shows CarMax Lacks a Sustainable Competitive Advantage
Internal Strengths:
Good Customer Service Due to Financing and "No Haggle" Pricing
• CarMax Auto Finance (CAF) financed over 40% of the company’s retail vehicle
sales in 2009. CarMax can use its loan platform to increase customer
convenience when purchasing vehicles by providing immediate financing to
those who qualify.
• CarMax sets non-negotiable prices and pays commissions on a fixed dollars-
per-unit standard so that sales consultants are incentivized to help customers
rather than negotiate a price.
Good Employee Relations
• CarMax was named the 31st best company to work for by Fortune magazine in
2009. This marked the sixth straight year CarMax received such recognition
from Fortune. Although CarMax eliminated 625 positions, the company
provided a severance package of four to 26 weeks’ pay. CarMax employee
turnover is lower than the average for comparable retail operations.
Internal Weaknesses:
Difficulty Competing with Online Marketplaces
• Online marketplaces pose a serious threat to CarMax's business model because
they allow buyers to browse and easily compare thousands of used vehicles.
CarMax has tried to co-opt this threat by listing its inventory on CarMax.com,
cars.com, and AutoTrader.com. However, CarMax vehicles typically cost more
than comparable cars sold by individuals and small dealers due to the company's
reconditioning process and guaranteed vehicle history.
• Online marketplaces are becoming more popular and pose a growing threat to
CarMax. An internal company study found that over 70% of customers visited
CarMax.com before purchasing a vehicle from one of the company's
superstores.
• Online marketplaces will remain competitive as transfer costs for shipping cars
to buyers are lower than the price premium CarMax adds to its vehicles.
Business Differentiation is Eroding
• CarMax differentiates itself from other used car dealers and individual sellers by
providing a "no haggle" price, reconditioning all cars it sells, and offering
detailed ownership histories. However, these services are more cheaply
available to buyers through third-party vendors and CarMax's value proposition
is declining as a result.
External Opportunities:
Growth Potential
• Prior to August 2008, CarMax hoped to increase the number of used car
superstores by 15% each year. It suspended store growth in December 2008.
CarMax has national market penetration of just 2% and is absent from most major
markets in the Northeast. Its low debt burden and improving capital markets
provide favorable financing conditions for expansion.
Leverage Existing Resources to Increase New Vehicle Sales
• Five CarMax superstores sell new vehicles from General Motors, Nissan, Chrysler,
and Toyota. New vehicle sales accounted for just 3% of total fiscal year 2009
vehicle sales at CarMax.
• CarMax can capture new car market share as franchised dealerships for major
automakers like Chrysler and General Motors consolidate.
• New car sales can be added to all of CarMax's existing superstores at minimal
capital investment.
External Threats:
More Fuel Efficient and Cheaper New Cars
• Greater fuel efficiency and cheaper new cars will incentivize "up-trading" as the
payback period for new vehicles declines relative to used cars. American
automakers have promised more fuel efficient cars such as the Volt from
Chevrolet. High gas prices and environmental consciousness increase the
likelihood that consumers will purchase new fuel efficient cars rather than less fuel
efficient used cars.
• CarMax can preempt this emerging threat by selling new cars. However, new
vehicle currently account for just 3% of unit sales and management has not
indicated that it plans to expand in this market.
Volatility in Asset-Backed Securitization Market
• CarMax securitizes its auto loan receivables. Although the weighted average FICO
score of customers that composed CarMax securities was 704 in mid-2009,
investors perceive CarMax as having a high exposure to securitization.
Higher Interest Rates
• The Federal Funds Rate is currently in a range of 0-0.25%, and many
macroeconomists believe interest rates will rise during 2010. Higher interest rates
will raise borrowing costs for used car buyers and decrease demand.