Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 29, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission file number 001-31420

CARMAX, INC.

(Exact name of registrant as specified in its charter)



Virginia		54-1821055
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

12800 Tuckahoe Creek Parkway
Richmond,	Virginia	23238
(Address of Principal Executive Offices)		(Zip Code)

(804) 747-0422

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	KMX	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the registrant’s common stock held by non-affiliates as of August 31, 2019, computed by reference to the closing price of the registrant’s common stock on the New York Stock Exchange on that date, was $13,731,676,765.

On March 31, 2020, there were 162,574,714 outstanding shares of CarMax, Inc. common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the CarMax, Inc. Notice of 2020 Annual Meeting of Shareholders and Proxy Statement are incorporated by reference in Part III of this Form 10-K.

CARMAX, INC.

FORM 10-K

FOR FISCAL YEAR ENDED FEBRUARY 29, 2020

TABLE OF CONTENTS



		Page No.

PART I

Item 1.	Business	5
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	19

	Executive Officers of the Company	20

PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 8.	Consolidated Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	83
Item 9A.	Controls and Procedures	83
Item 9B.	Other Information	83

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	83
Item 11.	Executive Compensation	84
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	84
Item 13.	Certain Relationships and Related Transactions and Director Independence	84
Item 14.	Principal Accountant Fees and Services	84

PART IV
Item 15.	Exhibits and Financial Statement Schedules	84
Item 16.	Form 10-K Summary	88
	Signatures	89

PART I

In this document, “we,” “our,” “us,” “CarMax” and “the company” refer to CarMax, Inc. and its wholly owned subsidiaries, unless the context requires otherwise.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This Annual Report on Form 10-K and, in particular, the description of our business set forth in Item 1 and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), including statements regarding:

•

The effect and consequences of the novel coronavirus (“COVID-19”) public health crisis on matters including U.S. and local economies; our business operations and continuity; the availability of corporate and consumer financing; the health and productivity of our associates; the ability of third-party providers to continue uninterrupted service; and the regulatory environment in which we operate.


•	Our projected future sales growth, comparable store sales growth, margins, tax rates, earnings, CarMax Auto Finance income and earnings per share.


•	Our business strategies.


•	Our expectations of factors that could affect CarMax Auto Finance income.


•	Our expected future expenditures, cash needs, and financing sources.


•	Our expected capital structure, stock repurchases and indebtedness.


•	The projected number, timing and cost of new store openings.


•	Our gross profit margin, inventory levels and ability to leverage selling, general and administrative and other fixed costs.


•	Our sales and marketing plans.


•	The capabilities of our proprietary information technology systems and other systems.


•	Our assessment of the potential outcome and financial impact of litigation and the potential impact of unasserted claims.


•	Our assessment of competitors and potential competitors.


•	Our expectations for growth in our markets and in the used vehicle retail sector.


•	Our assessment of the effect of recent legislation and accounting pronouncements.

In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “predict,” “should,” “will” and other similar expressions, whether in the negative or affirmative. We cannot guarantee that we will achieve the plans, intentions or expectations disclosed in the forward-looking statements. There are a number of important risks and uncertainties that could cause actual results to differ materially from those indicated by our forward-looking statements. These risks and uncertainties include, without limitation, those set forth in Item 1A under the heading “Risk Factors.” We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. We disclaim any intent or obligation to update any forward-looking statements made in this report.

Item 1. Business.

BUSINESS OVERVIEW

CarMax Background

CarMax, Inc. delivers an unrivaled customer experience by offering a broad selection of quality used vehicles and related products and services at competitive, no-haggle prices. We are the nation’s largest retailer of used cars, and we sold 832,640 used vehicles at retail during the fiscal year ended February 29, 2020. We are also one of the nation’s largest operators of wholesale vehicle auctions, with 466,177 vehicles sold during fiscal 2020, and one of the nation’s largest providers of used vehicle financing, servicing approximately 1,036,000 customer accounts in our $13.62 billion portfolio of managed receivables as of February 29, 2020.

By the end of fiscal 2020, more than 60% of customers had access to our omni-channel experience, which provides them the option to buy or sell a car on their terms—from home, in-store or in a seamless combination of online and in-store experiences. Our omni-channel experience provides multiple options for customers to interact with us throughout their car buying journey including our mobile apps; carmax.com; over the phone or online with a centralized customer experience consultant; or, in-person at one of our attractive, modern sales facilities. Through these new capabilities, a customer can also have a car or test drive delivered right to their home or enjoy express, or curbside, pick up of their vehicle at the store closest to them.

CarMax was incorporated under the laws of the Commonwealth of Virginia in 1996. CarMax, Inc. is a holding company and our operations are conducted through our subsidiaries. Under the ownership of Circuit City Stores, Inc. (“Circuit City”), we began operations in 1993 with the opening of our first CarMax store in Richmond, Virginia. On October 1, 2002, the CarMax business was separated from Circuit City through a tax-free transaction, becoming an independent, publicly traded company. As of February 29, 2020, we operated 216 used car stores in 106 U.S. television markets. Our home office is located at 12800 Tuckahoe Creek Parkway, Richmond, Virginia.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued lockdown orders impacting the operations of our stores and consumer demand. Since then, the COVID-19 situation within the U.S. has rapidly escalated and approximately half of our stores have been closed or have run under limited operations. Based upon the fluidity of the current environment, we expect that stores will continue to re-open or close in accordance with government mandates or public health concerns. Consumer demand has deteriorated, and sales have dropped significantly; most of our stores that remain open are selling 50% or less of what they sold last year, a trend that continued into April 2020. In April 2020, we announced approximately 15,500 associates have been placed on furlough, effective April 18, 2020. The majority of furloughed associates are employed at stores that are currently closed due to government mandates. We have taken other measures, subsequent to the end of our fiscal year, to enhance our liquidity position and provide additional financial flexibility, including drawing down additional funds on our revolving credit facility, halting our stock repurchase program, pausing our store expansion strategy and remodels and actively aligning operating expenses to the current state of the business. We continue to monitor the situation closely and it is possible that we will implement further measures.

We had intended to complete our omni-channel rollout in fiscal 2021, but in light of the evolving COVID-19 outbreak, we have pivoted to focus on rolling out the most pertinent parts of the experience, such as online self-progression and curbside or express pick up, as quickly and broadly as possible in our remaining markets given current customer needs.

CarMax Business

We operate in two reportable segments: CarMax Sales Operations and CarMax Auto Finance (“CAF”). Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF. Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.

CarMax Sales Operations. Our CarMax Sales Operations segment sells used vehicles, purchases used vehicles from customers and other sources, sells related products and services, and arranges financing options for customers, all for fixed, no-haggle prices. We enable our customers to separately evaluate each component of the sales process based on comprehensive information about the terms and associated prices of each component. Customers can accept or decline any individual element of the offer without affecting the price or terms of any other component of the offer.

Purchasing a Vehicle:

The vehicle purchase process at CarMax differs fundamentally from the traditional auto retail experience. Our no-haggle pricing removes a frequent customer frustration with the purchase process and allows customers to shop for vehicles the same way they

shop for other consumer products. Our new omni-channel experience further empowers our customers to buy a car on their own terms, either completely from home, in-store, or in a combination of online and in-store experiences.

Our new omni-channel experience provides multiple ways for our customers to interact with us. A customer may interact with our customer experience consultants when communicating with us via phone or text messages. These employees are paid a fixed hourly rate and receive incentive bonuses based on their ability to effectively progress the customer through their car buying journey. Customers may also interact in-person with our sales consultants who are generally paid commissions on a fixed dollars-per-unit standard, thereby earning the same commission regardless of the vehicle being sold, the amount a customer finances or the related interest rate. These pay structures align our associates’ interests with those of our customers, in contrast to other dealerships where sales and finance personnel may receive higher commissions for negotiating higher prices and interest rates, or steering customers to vehicles with higher gross profits.

We recondition every used vehicle we retail to meet our CarMax Quality Certified standards, and each vehicle must pass an inspection before being offered for sale. We stand behind every used vehicle we sell with a 7-day, money-back guarantee and a 90-day/4,000-mile limited warranty. Our CarMax Quality Certified standards were developed internally by CarMax and are not affiliated with any third party or original equipment manufacturer program.

We maximize customer choice by offering a large selection of inventory on our lots and by making our nationwide inventory of approximately 80,000 retail vehicles as of February 29, 2020, available for viewing on carmax.com, as well as our mobile apps. Upon request by a customer, we will transfer virtually any used vehicle in our inventory. This gives CarMax customers access to a much larger selection of vehicles than any traditional auto retailer. In fiscal 2020, approximately 34% of our vehicles sold were transferred at customer request.

In addition to retailing used vehicles, we sell new vehicles at two locations under franchise agreements.

Selling us a Vehicle:

We have separated the practice of trading in a used vehicle in conjunction with the purchase of another vehicle into two distinct and independent transactions. We will appraise a customer’s vehicle free of charge and make a written, guaranteed offer to buy that vehicle regardless of whether the owner is purchasing a vehicle from us. This no-haggle offer is good for seven days.

Based on age, mileage or condition, fewer than half of the vehicles acquired through our appraisal process meet our retail standards. Those vehicles that do not meet our retail standards are sold to licensed dealers through our wholesale auctions. Unlike many other auto auctions, we own all the vehicles that we sell in our auctions, which allows us to maintain a high auction sales rate. This high sales rate, combined with dealer-friendly practices, makes our auctions an attractive source of vehicles for licensed dealers. As of February 29, 2020, we conducted wholesale auctions at 74 of our 216 stores with an average auction sales rate of approximately 95%.

Financing a Vehicle:

The availability of on-the-spot financing is a critical component of the vehicle purchase process, and having an array of finance sources increases approvals, expands finance opportunities for our customers and mitigates risk to CarMax. Our finance program provides access to credit for customers across a wide range of the credit spectrum through both CAF and third-party providers. We believe that our processes and systems, transparency of pricing, and vehicle quality, as well as the integrity of the information collected at the time the customer applies for credit, allow CAF and our third-party providers to make underwriting decisions in a unique and advantageous environment distinct from the traditional auto retail environment. All finance offers, whether from CAF or our third-party providers, are backed by a 3-day payoff option, which allows customers to refinance their loan with another finance provider within three business days at no charge.

Related Products and Services:

We provide customers with a range of other related products and services, including extended protection plan (“EPP”) products and vehicle repair service. EPP products include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”), which is designed to cover the unpaid balance on an auto loan in the event of a total loss of the vehicle or unrecovered theft. Our ESP customers have access to vehicle repair service at each CarMax store and at thousands of independent and franchised service providers. We believe that the broad scope of our ESPs helps promote customer satisfaction and loyalty, and thus increases the likelihood of repeat and referral business. In fiscal 2020, approximately 61% of the customers who purchased a retail used vehicle also purchased an ESP and approximately 19% purchased GAP.

CarMax Auto Finance. CAF provides financing solely to customers buying retail vehicles from CarMax. CAF allows us to manage our reliance on third-party finance providers and to leverage knowledge of our business to provide qualifying customers a competitive financing option. CAF utilizes proprietary scoring models based upon the credit history and other credit data of the

customer along with CAF’s historical experience to predict the likelihood of customer repayment. Because CAF offers financing solely to CarMax customers, our scoring models are optimized for the CarMax channel. We believe CAF enables us to capture additional profits, cash flows and sales. After the effect of 3-day payoffs and vehicle returns, CAF financed 42.5% of our retail used vehicle unit sales in fiscal 2020.

CAF also services all auto loans it originates and is responsible for providing billing statements, collecting payments, maintaining contact with delinquent customers, and arranging for the repossession of vehicles securing defaulted loans.

Competition

CarMax Sales Operations. The U.S. used car marketplace is highly fragmented, and we face competition from franchised dealers, who sell both new and used vehicles; online sellers; independent used car dealers; and private parties. According to industry sources, as of December 31, 2019, there were approximately 18,000 franchised dealers in the U.S., who we consider to be our primary retail competitors, as they sell the majority of late-model used vehicles. Competition in our industry has evolved with the adoption of online platforms and marketing tools, all of which facilitate increased competition.

Based on industry data, there were approximately 41 million used cars sold in the U.S. in calendar 2019, of which approximately 23 million were estimated to be age 0- to 10-year old vehicles. While we are the largest retailer of used vehicles in the U.S., in calendar 2019, we estimate we sold approximately 4.7% of the age 0- to 10-year old vehicles sold in the current comparable store markets in which we operate, a 4.2% increase in these markets from approximately 4.4% in calendar 2018. Our market share is generally the highest in markets in which we have been established for many years. Entering new markets could have a dampening effect on our market share given that our initial market share in new markets is generally much lower than our average. On a nationwide basis, we estimate we sold approximately 3.5% of the age 0- to 10-year old vehicles sold in calendar year 2019.

We believe that our principal competitive advantages in used vehicle retailing include our ability to provide a high degree of customer satisfaction with the car-buying experience by virtue of our competitive, no-haggle prices and our customer-friendly sales process; our breadth of selection of the most popular makes and models available on site and via carmax.com and our mobile apps; the quality of our vehicles; our proprietary information systems; the transparency and availability of CAF and third-party financing; the locations of our retail stores; and our commitment to evolving our car-buying experience to meet customers’ changing expectations. We believe our omni-channel experience reinforces our competitive advantages, and we are currently pivoting to focus on rolling out the most pertinent parts of the experience as quickly and broadly as possible given current customer needs. In addition, we believe our willingness to appraise and purchase a customer’s vehicle, whether or not the customer is buying a car from us, provides a competitive sourcing advantage for retail vehicles. Our high volume of appraisal purchases supplies not only a large portion of our retail inventory, but also provides the scale that enables us to conduct our own wholesale auctions to dispose of vehicles that do not meet our retail standards.

Our wholesale auctions compete with other automotive auction houses. In contrast to the highly fragmented used vehicle retail market, the automotive auction market has two primary competitors: Manheim, a subsidiary of Cox Enterprises, and KAR Auction Services, Inc., which together represent an estimated 70% of the North American wholesale car auction market. These competitors auction vehicles of all ages, while CarMax’s auctions predominantly sell older, higher mileage vehicles. In response to the impacts of COVID-19 subsequent to the end of fiscal 2020, we have been able to quickly move our wholesale auctions to an online platform. We believe our ability to move our auctions online, when necessary, provides us an additional competitive advantage.

CarMax Auto Finance. CAF operates and is a significant participant in the auto finance sector of the consumer finance market. This sector is primarily comprised of banks, captive finance divisions of new car manufacturers, credit unions and independent finance companies. According to industry sources, this sector represented more than $1 trillion in outstanding receivables as of December 31, 2019. CAF’s primary competitors are banks and credit unions that offer direct financing to customers purchasing used cars.

We believe that CAF’s principal competitive advantage is its strategic position as the primary finance source for CarMax customers, and that CAF’s primary driver for growth is the growth in CarMax’s retail used unit sales. We periodically test different credit offers and closely monitor acceptance rates and the effect on sales to assess market competitiveness. We also monitor 3-day payoffs, as the percentage of customers exercising this option can be an indication of the competitiveness of our offer.

Products and Services

Retail Merchandising. We offer customers a broad selection of makes and models of used vehicles, including domestic, imported and luxury vehicles, at competitive prices. Our focus is vehicles that are 0 to 10 years old; these vehicles generally range in price from $11,000 to $36,000. The mix of our used vehicle inventory by make, model and age will vary from time to time, depending on consumer preferences, seasonality and market pricing and availability.

Wholesale Auctions. The typical vehicle sold at our wholesale auctions is approximately 10 years old and has more than 100,000 miles. We provide condition disclosures on each vehicle, including those for vehicles with major mechanical issues, possible frame or flood damage, branded titles, salvage history and unknown true mileage. Professional, licensed auctioneers conduct our auctions. Dealers pay a fee to us based on the sales price of the vehicles they purchase. Our auctions are generally held on a weekly or bi-weekly basis.

Extended Protection Plans. In conjunction with the sale of a vehicle, we offer customers EPP products. We receive revenue for selling these plans on behalf of unrelated third parties, who are the primary obligors. We have no contractual liability to customers for claims under these agreements. The ESPs we currently offer on all used retail vehicles provide coverage up to 60 months (subject to mileage limitations). GAP covers the customer for the term of their finance contract. The EPPs that we sell (other than manufacturer programs on new car sales) have been designed to our specifications and are administered by the third parties through private-label arrangements. Periodically, we may receive profit-sharing revenues based upon the performance of the ESP policies administered by third parties. As of February 29, 2020, our third-party ESP providers included Assurant, Inc., CNA National Warranty Corporation and Fidelity Warranty Services, Inc. Our third-party GAP provider as of February 29, 2020 was Safe-Guard Products International LLC.

Reconditioning and Service. An integral part of our used car consumer offer is the reconditioning process designed to make sure every car meets our internal standards before it can become a CarMax Quality Certified vehicle. This process includes an inspection of the engine and all major systems. Based on this inspection, we determine the reconditioning necessary to bring the vehicle up to our internal quality standards. Many of our stores depend upon nearby, typically larger, CarMax stores for reconditioning, which increases efficiency and reduces overhead. We perform most routine mechanical and minor body repairs in-house; however, for some reconditioning services, including, but not limited to, services related to manufacturer’s warranties, we engage third parties specializing in those services. CarMax does not have manufacturer authorization to complete recall-related repairs, and some vehicles CarMax sells may have unrepaired safety recalls. However, safety recall information, as reported by the National Highway Traffic Safety Administration, is available on our website, and we review any unrepaired safety recall information with our used vehicle customers before purchase.

All CarMax used car stores provide vehicle repair service, including repairs of vehicles covered by the ESPs we sell. Additionally, we have partnered with third-party providers of auto service and repair. Through these partnerships, we can provide our customers with access to a nationwide network of trusted, quality and fair-priced service and repair locations.

Customer Credit. We offer financing alternatives for retail customers across a wide range of the credit spectrum through CAF and arrangements with several financial institutions. Vehicles are financed using retail installment contracts secured by the vehicle. As of February 29, 2020, our third-party finance providers included Ally Financial, American Credit Acceptance, Capital One Auto Finance, Chase Auto Finance, Exeter Finance Corp., Santander Consumer USA, Wells Fargo Dealer Services and Westlake Financial Services. We have no recourse liability for credit losses on retail installment contracts arranged and held by third-party providers, and we periodically test additional third-party providers.

Generally, credit applications submitted by customers to CarMax are initially reviewed by CAF using our proprietary underwriting standards. Based on that review, CAF makes financing offers designed to create a loan portfolio that meets our targeted risk profile in the aggregate. Applications that CAF declines or approves with conditions are generally evaluated by other third-party finance providers. Third-party providers generally either pay us or are paid a fixed, pre-negotiated fee per contract. We refer to the providers who generally pay us a fee or to whom no fee is paid as Tier 2 providers and we refer to providers to whom we pay a fee as Tier 3 providers. We are willing to pay a fee to Tier 3 providers because we believe their participation provides us with incremental sales by enabling customers to secure financing that they may not otherwise be able to obtain. All fees either received or paid are pre-negotiated at a fixed amount and do not vary based on the amount financed, the interest rate, the term of the loan or the loan-to-value ratio. CAF also provides financing for a small percentage of customers who would typically be financed by a Tier 3 provider; however, subsequent to the end of fiscal 2020, we paused our Tier 3 lending in response to the COVID-19 situation.

We do not offer financing to dealers purchasing vehicles at our wholesale auctions. However, we have made arrangements to have third-party financing available to our auction customers.

Suppliers for Used Vehicles

We acquire a significant percentage of our retail used vehicle inventory directly from consumers through our appraisal process, as well as through local, regional and online auctions. While in any individual period conditions may vary, over the past 5 fiscal years, 36% to 41% of our retail inventory has been acquired through our appraisal process annually. We also acquire used vehicle inventory from wholesalers, franchised and independent dealers and fleet owners, such as leasing companies and rental

companies. The used vehicle inventory we acquire directly from consumers through our appraisal process helps provide an inventory of makes and models that reflects consumer preferences in each market.

The supply of late-model used vehicles is influenced by a variety of factors, including the total number of vehicles in operation; the volume of new vehicle sales, which in turn generate used car trade-ins; and the number of used vehicles sold or remarketed through retail channels, wholesale transactions and at automotive auctions. According to industry sources, there were approximately 280 million light vehicles in operation in the U.S. as of December 31, 2019. During calendar year 2019, it is estimated that approximately 17 million new cars and 41 million used cars were sold at retail, many of which were accompanied by trade-ins, and more than 20 million wholesale vehicles were sold at auctions and through other channels.

Based on the large number of vehicles remarketed each year, consumer acceptance of our appraisal process, our experience and success in acquiring vehicles from auctions and other sources, and the large size of the U.S. auction market relative to our needs, we believe that sources of used vehicles will continue to be sufficient to meet our current and future needs.

Seasonality

Historically, our business has been seasonal. Our stores typically experience their strongest traffic and sales in the spring and summer, with an increase in traffic and sales in February and March, coinciding with federal income tax refunds. Sales are typically slowest in the fall.

Technology

We leverage a combination of cloud-based and proprietary technologies. Our teams use a “test and learn” approach to iterate and deploy new technology-enabled solutions to our associates and customers. CarMax also has been developing advanced data science and machine learning capabilities to optimize our business as well as customer experience. Our business is supported by digital and mobile technologies that provide enhanced customer experience while enabling highly integrated automation of all operating functions, including credit processing and supply chain management. Buyers and sales consultants are equipped with mobile and centralized tools that allow them to access real-time information to better serve our customers. Our proprietary store technology provides our management with real-time information about many aspects of store operations, such as inventory management, pricing, vehicle transfers, wholesale auctions and sales consultant productivity.

Our proprietary centralized inventory management and pricing system tracks each vehicle throughout the sales process and allows us to buy the mix of makes, models, age, mileage and price points tailored to customer buying preferences at each CarMax location. Leveraging our more than twenty-five years of experience buying and selling millions of used vehicles, our system generates recommended initial retail price points, as well as retail price markdowns for specific vehicles based on algorithms that take into account factors that include sales history, consumer interest and seasonal patterns. We believe this systematic approach to vehicle pricing allows us to optimize inventory turns, which reduces the depreciation risk inherent in used cars and helps us to achieve our targeted gross profit dollars per unit. Because of the pricing discipline afforded by our inventory management and pricing system, generally more than 99% of our entire used car inventory offered at retail is sold at retail.

Marketing and Advertising

Our marketing strategies are focused on developing awareness of the advantages of shopping at our stores and on carmax.com and on attracting customers who are already considering buying or selling a vehicle. These strategies are implemented through a broad range of media types including, but not limited to, traditional broadcast, digital, search, video on demand and social. Our website and related mobile apps received an average of 25 million monthly visits during fiscal 2020 and are marketing tools for communicating the CarMax consumer offer in detail. They are also sophisticated search engines for finding the right vehicle and sales channels for customers who prefer to conduct part of the shopping and sales process online. Our website and mobile apps also include a variety of other customer service features, including the ability to initiate vehicle transfers, schedule appointments and apply for financing pre-approval. Information on the thousands of cars available in our nationwide inventory is updated near real-time. Our survey data indicates that during fiscal 2020, approximately 93% of customers who purchased a vehicle from us had first visited us online.

In 2019 we introduced a new advertising campaign - The Way It Should Be - highlighting the human element that CarMax provides to the car buying and selling experiences.

Associates

On February 29, 2020, we had a total of 27,050 full- and part-time associates, including 22,272 hourly and salaried associates and 4,778 sales associates, who predominantly worked on a commission basis. We employ additional associates during peak selling seasons. We believe we have created a unique corporate culture and maintain good employee relations. No associate is subject to a collective bargaining agreement. We focus on developing our associates and providing them with the information and resources

they need to offer exceptional customer service and have been recognized for the success of our efforts by a number of external organizations.

In April 2020, in response to the COVID-19 situation, we announced approximately 15,500 associates have been placed on furlough, effective April 18, 2020. The majority of furloughed associates are employed at stores that are currently closed due to government mandates.

Intellectual Property

Our brand image is a critical element of our business strategy. We rely on trademarks, domain names, copyrights, trade secrets and patents to protect our intellectual property.

Laws and Regulations

Vehicle Dealer and Other Laws and Regulations. We operate in a highly regulated industry. In every state in which we operate, we must obtain licenses and permits to conduct business, including dealer, service, sales and finance licenses issued by state and local regulatory authorities. A wide range of federal, state and local laws and regulations govern the manner in which we conduct business, including advertising, sales, financing and employment practices. These laws include consumer protection laws and privacy laws, as well as other laws and regulations applicable to motor vehicle dealers. These laws also include federal and state wage-hour, anti-discrimination and other employment practices laws. Our financing activities with customers are subject to federal truth-in-lending, consumer leasing, equal credit opportunity and fair credit reporting laws and regulations, as well as state and local motor vehicle finance, collection, repossession and installment finance laws. Our activities are subject to enforcement by the Federal Trade Commission and other federal and state regulators, and our financing activities are also subject to enforcement by the Consumer Financial Protection Bureau (“CFPB”).

The CFPB has supervisory authority over large nonbank auto finance companies, including CarMax’s CAF segment. The CFPB can use this authority to conduct supervisory examinations to ensure compliance with various federal consumer protection laws.

Claims arising out of actual or alleged violations of law could be asserted against us by individuals or governmental authorities and could expose us to significant damages or other penalties, including revocation or suspension of the licenses necessary to conduct business and fines.

Additionally, we are subject to laws, regulations, and other governmental actions instituted in response to the COVID-19 outbreak. Among other things, these actions require, in many localities, the closing of stores and wholesale auctions.

Environmental Laws and Regulations. We are subject to a variety of federal, state and local laws and regulations that pertain to the environment. Our business involves the use, handling and disposal of hazardous materials and wastes, including motor oil, gasoline, solvents, lubricants, paints and other substances. We are subject to compliance with regulations concerning, among other things, the operation of underground and above-ground gasoline storage tanks, gasoline dispensing equipment, above-ground oil tanks and automotive paint booths.

AVAILABILITY OF REPORTS AND OTHER INFORMATION

The following items are available free of charge on our website through the “Corporate Governance” link on our investor information home page at investors.carmax.com, shortly after we file them with, or furnish them to, the U.S. Securities and Exchange Commission (the “SEC”): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A, and any amendments to those reports. The following documents are also available free of charge on our website: Corporate Governance Guidelines, Code of Business Conduct, and the charters of the Audit, Nominating and Governance, and Compensation and Personnel Committees. We publish any changes to these documents on our website. We also promptly disclose reportable waivers of the Code of Business Conduct on our website. The contents of our website are not, however, part of this report.

Printed copies of these documents are also available to any shareholder, without charge, upon written request to our corporate secretary at the address set forth on the cover page of this report.

Item 1A. Risk Factors.

We are subject to a variety of risks, the most significant of which are described below. Our business, sales, results of operations and financial condition could be materially adversely affected by any of these risks.

The recent outbreak of COVID-19 will likely have a significant negative impact on our business, sales, results of operations and financial condition.

The global outbreak of COVID-19 has led to severe disruptions in general economic activities, particularly retail operations, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. We have experienced significant disruption to our business, both in terms of disruption of our operations and the adverse effect on overall economic conditions. We have closed or limited operations at many of our retail and wholesale locations since the beginning of the outbreak and the ultimate scope and duration of these closures is not known. For stores that remain open, consumer demand has deteriorated. These conditions will significantly negatively impact all aspects of our business, including used vehicle sales operations, wholesale vehicle auctions, used vehicle financing, extended protection plan sales, inventory acquisition, and retail service. The unexpected deterioration in economic conditions may also lead to future credit losses in our portfolio of auto loans receivable that are not incorporated in the existing allowance for loan losses. Our business is also dependent on the continued health and productivity of our associates, including store, region and corporate management teams, throughout this crisis. Individually and collectively, the consequences of the COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition.

Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, support the origination of auto loans receivable, and meet our financial obligations. Currently capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve the Company's cash position and capital structure.

The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.

The automotive retail industry in general and our business in particular are sensitive to economic conditions. These conditions could adversely affect our business, sales, results of operations and financial condition.

We are subject to national and regional U.S. economic conditions. These conditions include, but are not limited to, recession, inflation, interest rates, unemployment levels, the state of the housing market, gasoline prices, consumer credit availability, consumer credit delinquency and loss rates, personal discretionary spending levels, and consumer sentiment about the economy in general. These conditions and the economy in general could be affected by significant national or international events such as a global health crisis, like COVID-19, and acts of terrorism. When these economic conditions worsen or stagnate, it can have a material adverse effect on consumer demand for vehicles generally, demand from particular consumer categories or demand for particular vehicle types. It can also negatively impact availability of credit to finance vehicle purchases for all or certain categories of consumers. This could result in lower sales, decreased margins on units sold, and decreased profits for our CAF segment. Worsening or stagnating economic conditions can also have a material adverse effect on the supply of late-model used vehicles, as automotive manufacturers produce fewer new vehicles and consumers retain their current vehicles for longer periods of time. This could result in increased costs to acquire used vehicle inventory and decreased margins on units sold.

Any significant change or deterioration in economic conditions could have a material adverse effect on our business, sales, results of operations and financial condition.

Our business is dependent upon capital to operate, fund growth and support the activities of our CAF segment. Changes in capital and credit markets could adversely affect our business, sales, results of operations and financial condition.

Changes in the availability or cost of capital and working capital financing, including the long-term financing to support the expansion of our store base and sales growth in existing stores, could adversely affect sales, operating strategies and store growth. Although, in recent years, internally generated cash flows have been sufficient to maintain our operations and fund our growth, there can be no assurance that we will continue to generate sufficient cash for these purposes. Failure to do so—or our decision to put our cash to other uses—would make us more dependent on external sources of financing to fund our growth.

Changes in the availability or cost of the long-term financing to support the origination of auto loans receivable through CAF could adversely affect sales and results of operations. We use a securitization program to fund the majority of the auto loans

receivable originated by CAF. Changes in the condition of the asset-backed securitization market could lead us to incur higher costs to access funds in this market or require us to seek alternative means to finance CAF’s loan originations. In the event that this market ceased to exist and there were no immediate alternative funding sources available, we might be forced to curtail our lending practices for some period of time. The impact of reducing or curtailing CAF’s loan originations could have a material adverse effect on our business, sales and results of operations.

Our revolving credit facility, term loan, senior unsecured notes and certain securitization and sale-leaseback agreements contain covenants and performance triggers. Any failure to comply with these covenants or performance triggers could have a material adverse effect on our business, results of operations and financial condition.

Disruptions in the capital and credit markets could adversely affect our ability to draw on our revolving credit facility. If our ability to secure funds from the facility were significantly impaired, our access to working capital would be impacted, our ability to maintain appropriate inventory levels could be affected and these conditions—especially if coupled with a failure to generate significant cash flows—could have a material adverse effect on our business, sales, results of operations and financial condition.

We operate in a highly competitive industry. Failure to develop and execute strategies to remain the nation’s preferred retailer of used vehicles and to adapt to the increasing use of the internet to market, buy, sell and finance used vehicles could adversely affect our business, sales and results of operations.

Automotive retailing is a highly competitive and highly fragmented business. Our competition includes publicly and privately owned new and used car dealers and online and mobile sales platforms, as well as millions of private individuals. Competitors buy and sell the same or similar makes of vehicles that we offer in the same or similar markets at competitive prices. New car dealers leverage their franchise relationships with automotive manufacturers to brand certain used cars as “certified pre-owned,” which could provide those competitors with an advantage over CarMax.

Retail Competition. Some of our competitors have replicated or attempted to replicate portions of the consumer offer that we pioneered when we opened our first used car store in 1993, including our use of competitive, no-haggle prices and our commitment to buy a customer’s vehicle even if they do not purchase one from us.

Competitors using online focused business models, both for direct sales and consumer-to-consumer facilitation, could materially impact our business model. The online availability of used vehicle information, including pricing information, could make it more difficult for us to differentiate our customer offering from competitors’ offerings, could result in lower-than-expected retail margins, and could have a material adverse effect on our business, sales and results of operations. If we fail to respond effectively to our retail competitors, it could have a material adverse effect on our business, sales and results of operations.

Online Facilitation. In addition, our competitive standing is affected by companies, including search engines and online classified sites, that are not direct competitors but that may direct online traffic to the websites of competing automotive retailers. The increasing activities of these companies could make it more difficult for carmax.com to attract traffic. These companies could also make it more difficult for CarMax to otherwise market its vehicles online.

The increasing use of the internet to facilitate consumers’ sales or trade-ins of their current vehicles could have a material adverse effect on our ability to source vehicles through our appraisal process, which in turn could have a material adverse effect on our vehicle acquisition costs and results of operations. For example, online appraisal tools are available to consumers that generate offers and facilitate purchases by dealers other than CarMax.

In addition, there are companies that sell software and data solutions to new and used car dealers to enable those dealers to, among other things, more efficiently source and price inventory. Although these companies do not compete with CarMax, the increasing use of such products by dealers who compete with CarMax could reduce the relative competitive advantage of CarMax’s internally developed proprietary systems.

If we fail to respond effectively to competitive pressures or to changes in the used vehicle marketplace, it could have a material adverse effect on our business, sales and results of operations.

CAF Competition. Our CAF segment is subject to competition from various financial institutions, including banks and credit unions, which provide vehicle financing to consumers. If we were unable to continue providing competitive finance offers to our customers through CAF, it could result in a greater percentage of sales financed through our third-party finance providers, which are generally less profitable to CarMax, or through other outside financing sources. Moreover, if CAF competitors are able to attract potential customers before they visit CarMax, whether through competitive finance offers or ease of customer experience, they may be directed to retail options other than CarMax. Accordingly, if CAF was unable to continue making competitive finance

offers to our customers, or our finance competitors are able to successfully attract and redirect a disproportionate number of our potential customers, it could have a material adverse effect on our business, sales and results of operations.

Evolving Marketplace. The marketplace for used vehicles may be impacted by the significant, and likely accelerating, changes to the broader automotive industry. Technological changes, including the development of autonomous vehicles, new products and services, new business models and new methods of travel could reduce automotive retail demand or disrupt our current business model. If we fail to respond effectively to the evolving marketplace, it could have a material adverse effect on our business, sales and results of operations.

CarMax was founded on the fundamental principle of integrity. Failure to maintain a reputation of integrity and to otherwise maintain and enhance our brand could adversely affect our business, sales and results of operations.

Our reputation as a company that is founded on the fundamental principle of integrity is critical to our success. Our reputation as a retailer offering competitive, no-haggle prices, a broad selection of CarMax Quality Certified used vehicles and superior customer service is also critical to our success. If we fail to maintain the high standards on which our reputation is built, or if an event occurs that damages this reputation, it could adversely affect consumer demand and have a material adverse effect on our business, sales and results of operations. Such an event could include an isolated incident at a single store, particularly if such incident results in adverse publicity, governmental investigations, or litigation and could involve, among other things, our sales process, our provision of financing, our reconditioning process, or our treatment of customers. Even the perception of a decrease in the quality of our brand could impact results.

The use of social media increases the speed with which information and opinions can be shared and thus the speed with which reputation can be affected. We monitor social media and attempt to address customer concerns, provide accurate information and protect our reputation, but there can be no guarantee that our efforts will succeed. If we fail to correct or mitigate misinformation or negative information, including information spread through social media or traditional media channels, about the vehicles we offer, our customer experience, or any aspect of our brand, it could have a material adverse effect on our business, sales and results of operations.

Our failure to realize the benefits associated with our omni-channel initiatives could have a material adverse effect on our business, sales and results of operations.

We announced the rollout of a new omni-channel experience in December 2018, and by the end of fiscal 2020, our omni-channel experience was available to more than 60% of customers. For our remaining markets, we are pivoting to focus on rolling out the most pertinent parts of the experience as quickly and broadly as possible given current customer needs. If we fail to complete this rollout, if we are inefficient in implementing this rollout or if we are unable to capture the benefits that we expect from this rollout, it could have a material adverse effect on our business, sales and results of operations. We must anticipate and meet our customers’ expectations in an evolving retail industry. Our business, sales and results of operations may be negatively affected if we fail to provide a high quality and consistent customer experience, regardless of sales channel, if our omni-channel experience does not meet customer expectations, or if we are unable to attract, retain and manage the personnel at various levels who have the necessary skills and experience we need to implement our omni-channel initiatives.

Our success depends upon the continued contributions of our associates.

In April 2020, in response to the COVID-19 situation, we announced approximately 15,500 associates have been placed on furlough, effective April 18, 2020. Our associates are the driving force behind our success. We believe that one of the things that sets CarMax apart is a culture centered on valuing all associates. If we fail to maintain our culture while responding to the COVID-19 situation or in the aftermath of recovery and reintegration of furloughed associates, it could have a material adverse effect on our business, sales and results of operations.

In addition, our response to COVID-19 as well as our strategic initiatives require management, employees and contractors to adapt and learn new skills and capabilities. Our failure to maintain this culture or to continue developing and retaining the associates that drive our success could have a material adverse effect on our business, sales and results of operations.

In response to COVID-19, we have instituted a hiring freeze. Once that freeze is lifted, we will need to recruit new associates and our ability to recruit associates while controlling related costs is subject to numerous external and internal factors, including unemployment levels, prevailing wage rates, our growth plans, changes in employment legislation, and competition for qualified employees in the industry and regions in which we operate and for service technicians in particular. Our ability to recruit associates while controlling related costs is also subject to our ability to maintain positive associate relations. If we are unable to do so, or

if, despite our efforts, we become subject to successful unionization efforts, it could increase costs, limit our ability to respond to competitive threats and have a material adverse effect on our business, sales and results of operations.

Our response to COVID-19 and our ongoing success also depend upon the continued contributions of our store, region and corporate management teams. Consequently, the loss of the services of any of these associates could have a material adverse effect on our business, sales and results of operations. In addition, an inability to build our management bench strength to support store growth could have a material adverse effect on our business, sales and results of operations.

We collect sensitive confidential information from our customers. A breach of this confidentiality, whether due to a cybersecurity or other incident, could result in harm to our customers and damage to our brand.

We collect, process and retain sensitive and confidential customer information in the normal course of business and may share that information with our third-party service providers. This information includes the information customers provide when purchasing a vehicle and applying for vehicle financing. We also collect, process and retain sensitive and confidential associate information in the normal course of business and may share that information with our third-party service providers. Although we have taken measures designed to safeguard such information and have received assurances from our third-party providers, our facilities and systems, and those of third-party providers, could be vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events. Numerous national retailers have disclosed security breaches involving sophisticated cyber-attacks that were not recognized or detected until after such retailers had been affected, notwithstanding the preventive measures such retailers had in place. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer or associate information, whether experienced by us or by our third-party service providers, and whether due to an external cybersecurity incident, a programming error, or other cause, could damage our reputation, expose us to mitigation costs and the risks of private litigation and government enforcement, disrupt our business and otherwise have a material adverse effect on our business, sales and results of operations. In addition, our failure to respond quickly and appropriately to such a security breach could exacerbate the consequences of the breach.

Our business is sensitive to changes in the prices of new and used vehicles.

Any significant changes in retail prices for new and used vehicles could have a material adverse effect on our sales and results of operations. For example, if retail prices for used vehicles rise relative to retail prices for new vehicles, it could make buying a new vehicle more attractive to our customers than buying a used vehicle, which could have a material adverse effect on sales and results of operations and could result in decreased used margins. Manufacturer incentives could contribute to narrowing this price gap. In addition, any significant changes in wholesale prices for used vehicles could have a material adverse effect on our results of operations by reducing wholesale margins.

We may experience greater credit losses in CAF’s portfolio of auto loans receivable than anticipated.

We are exposed to the risk that our customers who finance their purchases through CAF will be unable or unwilling to repay their loans according to their terms and that the vehicle collateral securing the payment of their loans may not be sufficient to ensure full repayment. Credit losses are inherent in CAF’s business and could have a material adverse effect on our results of operations.

We make various assumptions and judgments about CAF’s portfolio of auto loans receivable and provide an allowance for loan losses based on a number of factors. Although management will establish an allowance for loan losses it believes is appropriate, this allowance may not be adequate. For example, when economic conditions deteriorate unexpectedly, such as in connection with the COVID-19 outbreak, additional loan losses not incorporated in the existing allowance for loan losses may occur. Losses in excess of the existing allowance for loan losses could have a material adverse effect on our business, results of operations and financial condition.

Our business is dependent upon access to vehicle inventory. A failure to expeditiously liquidate that inventory—or obstacles to acquiring inventory—whether because of supply, competition, or other factors could have a material adverse effect on our business, sales and results of operations.

Used vehicle inventory is subject to depreciation risk. Accordingly, if we develop excess inventory, the inability to liquidate such inventory at prices that allow us to meet margin targets or to recover our costs could have a material adverse effect on our results of operations.

A reduction in the availability of, or access to, sources of inventory could have a material adverse effect on our business, sales and results of operations.

We source a significant percentage of our vehicles though our appraisal process and these vehicles are generally more profitable for CarMax. Accordingly, if we fail to adjust appraisal offers to stay in line with broader market trade-in offer trends, or fail to recognize those trends, it could adversely affect our ability to acquire inventory. It could also force us to purchase a greater percentage of our inventory from third-party auctions, which is generally less profitable for CarMax. Our ability to source vehicles through our appraisal process could also be affected by competition, both from new and used car dealers directly and through third parties driving appraisal traffic to those dealers. See the risk factor above titled “We operate in a highly competitive industry” for discussion of this risk. Our ability to source vehicles from third-party auctions could be affected by an increase in the number of closed auctions that are open only to new car dealers who have franchise relationships with automotive manufacturers.

We rely on third-party finance providers to finance a significant portion of our customers’ vehicle purchases. Accordingly, our sales and results of operations are partially dependent on the actions of these third parties.

We provide financing to qualified customers through CAF and a number of third-party finance providers. If one or more of these third-party providers cease to provide financing to our customers, provide financing to fewer customers or no longer provide financing on competitive terms, it could have a material adverse effect on our business, sales and results of operations. Additionally, if we were unable to replace the current third-party providers upon the occurrence of one or more of the foregoing events, it could also have a material adverse effect on our business, sales and results of operations.

We rely on third-party providers to supply EPP products to our customers. Accordingly, our sales and results of operations are partially dependent on the actions of these third-parties.

We receive revenue for selling EPP products on behalf of unrelated third-parties, who are the primary obligors. If one or more of these third-party providers cease to provide EPP products, make changes to their products or no longer provide their products on competitive terms, it could have a material adverse effect on our business, sales and results of operations. Additionally, if we were unable to replace the current third-party providers upon the occurrence of one or more of the foregoing events, it could also have a material adverse effect on our business, sales and results of operations.

We operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations. Changes in these laws and regulations, or our failure to comply, could have a material adverse effect on our business, sales, results of operations and financial condition.

We are subject to a wide range of federal, state and local laws and regulations, as well as changes in these laws and regulations and the manner in which they are interpreted or applied. Our sale of used vehicles is subject to state and local licensing requirements, federal and state laws regulating vehicle advertising, and state laws regulating vehicle sales and service. Our provision of vehicle financing is subject to federal and state laws regulating the provision of consumer finance. Our facilities and business operations are subject to laws and regulations relating to environmental protection and health and safety. In addition to these laws and regulations that apply specifically to our business, we are also subject to laws and regulations affecting public companies and large employers generally, including privacy laws and federal employment practices, securities and tax laws. For additional discussion of these laws and regulations, see the section of this Form 10-K titled “Business – Laws and Regulations.”

The violation of any of these laws or regulations could result in administrative, civil or criminal penalties or in a cease-and-desist order against our business operations, any of which could damage our reputation and have a material adverse effect on our business, sales and results of operations. We have incurred and will continue to incur capital and operating expenses and other costs to comply with these laws and regulations.

Our failure to manage our growth and the related challenges could have a material adverse effect on our business, sales and results of operations.

Our growth is dependent on the success of our omni-channel experience as well as on opening stores in new and existing markets and continued sales growth in our existing stores. The omni-channel rollout and the expansion of our store base places significant demands on our management team, our associates and our information systems. If we fail to effectively or efficiently manage our growth, it could have a material adverse effect on our business, sales and results of operations. Sales growth in our existing stores requires that we continue to effectively execute our business strategies and implement new and ongoing initiatives to elevate the experience of our customers. See the risk factor above titled “Our failure to realize the benefits associated with our omni-channel initiatives could have a material adverse effect on our business, sales and results of operations” for more discussion of this risk. The expansion of our store base and implementation of new initiatives also requires us to recruit and retain the associates necessary to support that expansion. See the risk factor above titled “Our success depends upon the continued contributions of our associates” for discussion of this risk. The expansion of our store base also requires real estate. Our inability to acquire or lease suitable real estate at favorable terms could limit our expansion and could have a material adverse effect on our business and results of operations.

Subsequent to the end of fiscal 2020, we paused our store expansion strategy and the implementation of certain of our customer experience initiatives in recognition of the potential impact of the COVID-19 health crisis on our business and financial condition. While the ultimate duration and impact of this pause is unknown, it could have a material adverse effect on our business, sales and results of operations.

We rely on sophisticated information systems to run our business. The failure of these systems, or the inability to enhance our capabilities, could have a material adverse effect on our business, sales and results of operations.

Our business is dependent upon the integrity and efficient operation of our information systems. In particular, we rely on our information systems to manage sales, inventory, our customer-facing websites and applications (carmax.com, CarMax mobile apps, and carmaxauctions.com), consumer financing and customer information. The failure of these systems to perform as designed, the failure to maintain or update these systems as necessary, or the inability to enhance our information technology capabilities, could disrupt our business operations and have a material adverse effect on our sales and results of operations.

Despite our ongoing efforts to maintain and enhance the integrity and security of these systems, we could be subjected to attacks by hackers, including denial-of-service attacks directed at our websites or other system breaches or malfunctions due to associate error or misconduct or other disruptions. Such incidents could disrupt our business and have a material adverse effect on sales and results of operations. See the risk factor above titled “We collect sensitive confidential information from our customers” for the risks associated with a breach of confidential customer or associate information.

In addition, COVID-19 may have an adverse impact on our information technology systems, including telecommuting issues associated with certain associates working remotely or an increase in online transactions due to disruptions or closures of our retail store operations that overburdens our existing information technology systems.

We rely on third-party vendors for key components of our business.

Many components of our business, including data management, key operational processes and critical customer systems are provided by third parties. We carefully select our third-party vendors, but we do not control their actions. If our vendors fail to perform as we expect, our operations and reputation could suffer if the failure harms the vendors’ ability to serve us and our customers. One or more of these third-party vendors may experience financial distress, staffing shortages or liquidity challenges, file for bankruptcy protection, go out of business, or suffer disruptions in their business due to the COVID-19 outbreak. The use of third-party vendors represents an unavoidable inherent risk to our company that could have a material adverse effect on our business, sales and results of operations.

We are subject to various legal proceedings. If the outcomes of these proceedings are adverse to CarMax, it could have a material adverse effect on our business, results of operations and financial condition.

We are subject to various litigation matters from time to time, which could have a material adverse effect on our business, results of operations and financial condition. Claims arising out of actual or alleged violations of law could be asserted against us by individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. These claims could be asserted under a variety of laws including, but not limited to, consumer finance laws, consumer protection laws, intellectual property laws, privacy laws, labor and employment laws, securities laws and employee benefit laws. These actions could expose us to adverse publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties including, but not limited to, suspension or revocation of licenses to conduct business.

Our business is sensitive to conditions affecting automotive manufacturers, including manufacturer recalls.

Adverse conditions affecting one or more automotive manufacturers could have a material adverse effect on our sales and results of operations and could impact the supply of vehicles, including the supply of late-model used vehicles. In addition, manufacturer recalls are a common occurrence. Because we do not have manufacturer authorization to complete recall-related repairs, some vehicles we sell may have unrepaired safety recalls. Such recalls, and our lack of authorization to make recall-related repairs, could adversely affect used vehicle sales or valuations, could cause us to temporarily remove vehicles from inventory, could force us to incur increased costs and could expose us to litigation and adverse publicity related to the sale of recalled vehicles, which could have a material adverse effect on our business, sales and results of operations.

Our failure to realize the benefits associated with our strategic investments could have a material adverse effect on our business, sales and results of operations and we may incur impairment losses on our strategic investments in equity securities.

From time to time, CarMax makes strategic investments and we currently hold non-controlling investments in the equity securities of a number of companies. For example, in January 2020, we announced that we were partnering with, and investing $50 million in Edmunds for a minority stake in the company. We may encounter difficulties in managing strategic investments and in assimilating new capabilities to meet the future needs of our business. Furthermore, we may not realize all of the anticipated benefits of these investments, or the realized benefits may be significantly delayed. While our evaluation of any potential transaction includes business, legal, and financial due diligence with the goal of identifying and evaluating the material risks involved, our due diligence reviews may not identify all of the issues necessary to accurately estimate the cost and potential benefits and risks of a particular investment.

Additionally, under GAAP, if any investment’s fair value declines below its carrying value, we will need to record an impairment loss in the applicable fiscal period. As a result, we may incur expenses related to the impairment of existing or future equity investments. Any such impairment charge could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations and financial condition are subject to management’s accounting judgments and estimates, as well as changes in accounting policies.

The preparation of our financial statements requires us to make estimates and assumptions affecting the reported amounts of CarMax’s assets, liabilities, revenues, expenses and earnings. If these estimates or assumptions are incorrect, it could have a material adverse effect on our results of operations or financial condition. We have identified several accounting policies as being “critical” to the fair presentation of our financial condition and results of operations because they involve major aspects of our business and require us to make judgments about matters that are inherently uncertain. These policies are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the notes to consolidated financial statements included in Item 8. Consolidated Financial Statements and Supplementary Data.

The implementation of new accounting requirements or other changes to U.S. generally accepted accounting principles could have a material adverse effect on our reported results of operations and financial condition.

The market price of our common stock may be volatile and could expose us to securities class action litigation.

The price of our common stock may be subject to wide fluctuations based upon our operating results, general economic and market conditions, general trends and prospects for our industry, announcements by our competitors and other factors. In addition, the market price of our common stock may also be affected by whether we meet analysts’ expectations. Failure to meet such expectations could have a material adverse effect on the price of our common stock. Following periods of volatility in the market price of a company’s securities, securities class action litigation may be initiated. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our attention and resources, which could have a material adverse effect on our business.

We may not be able to adequately protect our intellectual property, which could adversely affect our business, sales, results of operations and financial condition.

Protecting our intellectual property (including patents, trademarks, copyrights, confidential information and trade secrets) is integral to our business. The failure to protect our intellectual property, including from unauthorized uses, can erode consumer trust and our brand value and have a material adverse effect on our business.

Our business is sensitive to weather events.

The occurrence of severe weather events, such as rain, hail, snow, wind, storms, hurricanes, extended periods of unusually cold weather or natural disasters, could cause store closures or affect the timing of consumer demand, either of which could adversely affect consumer traffic and could have a material adverse effect on our sales and results of operations in a given period.

We are subject to local conditions in the geographic areas in which we are concentrated.

Our performance is subject to local economic, competitive and other conditions prevailing in geographic areas where we operate. Since a large portion of our sales is generated in the Southeastern U.S., California, Texas and Washington, D.C./Baltimore, our results of operations depend substantially on general economic conditions and consumer spending habits in these markets. In

the event that any of these geographic areas experience a downturn in economic conditions, it could have a material adverse effect on our business, sales and results of operations.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We conduct our retail vehicle operations primarily in two formats – production and non-production stores. Production stores are those locations at which vehicle reconditioning is performed. Production stores have more service bays and require additional space for reconditioning activities and, therefore, are generally larger than non-production stores. In determining whether to construct a production or a non-production store on a given site, we take several factors into account, including the anticipated long-term regional reconditioning needs and the available acreage of the sites in that market. As a result, some stores that are constructed to accommodate reconditioning activities may initially be operated as non-production stores until we expand our presence in that market. We also have production and non-production stores that operate in Metropolitan Statistical Areas (“MSAs”) of less than 600,000 people, which we define as small markets. Some of these stores also have a smaller footprint compared with our stores in larger markets.

USED CAR STORES BY FORMAT AS OF FEBRUARY 29, 2020



	Production Stores	Non-production Stores
Store count	102	114
Store location size	generally 10 - 25 acres	generally 4 - 12 acres
Stores located in small MSAs	11	41

As of February 29, 2020, we operated 74 wholesale auctions, most of which were located at production stores. Stores at which auctions are conducted generally have additional space to store wholesale inventory.

USED CAR STORES BY STATE AS OF FEBRUARY 29, 2020



State	Count	State	Count
Alabama	5	Missouri	3
Arizona	4	Nebraska	1
California	27	Nevada	4
Colorado	6	New Hampshire	1
Connecticut	3	New Jersey	2
Delaware	1	New Mexico	2
Florida	19	New York	3
Georgia	11	North Carolina	11
Idaho	1	Ohio	5
Illinois	9	Oklahoma	3
Indiana	3	Oregon	3
Iowa	1	Pennsylvania	4
Kansas	2	Rhode Island	1
Kentucky	2	South Carolina	4
Louisiana	4	Tennessee	10
Maine	1	Texas	23
Maryland	7	Utah	1
Massachusetts	4	Virginia	10
Michigan	1	Washington	5
Minnesota	2	Wisconsin	4
Mississippi	3	Total	216

Of the 216 used car stores open as of February 29, 2020, 138 were located on owned sites and 78 were located on leased sites. The leases are classified as follows:



Land-only leases	22
Land and building leases	56
Total leased sites	78

As of February 29, 2020, we leased our CAF office buildings in Atlanta, Georgia, as well as office buildings for our customer experience centers in Atlanta, Georgia; Kansas City, Missouri; and Phoenix, Arizona. We also lease other ancillary properties to support our corporate and store operations. We own our home office building in Richmond, Virginia and land associated with planned future store openings.

Item 3. Legal Proceedings.

Information in response to this Item is included in Note 17 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference.

Item 4. Mine Safety Disclosures.

None.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

The following table identifies our current executive officers. We are not aware of any family relationships among any of our executive officers or between any of our executive officers and any directors. All executive officers are elected annually and serve for one year or until their successors are elected and qualify. The next election of officers will occur in June 2020.



Name	Age	Office
William D. Nash………………………..….……...........	50	President, Chief Executive Officer and Director
Thomas W. Reedy……………………….…..….............	56	Executive Vice President, Finance
Edwin J. Hill……………………....……………............	60	Executive Vice President and Chief Operating Officer
James Lyski………………….……..……………..........	57	Executive Vice President and Chief Marketing Officer
Eric M. Margolin………………….……..………..........	67	Executive Vice President, General Counsel and Corporate Secretary
Diane L. Cafritz……………………....…………….......	49	Senior Vice President and Chief Human Resources Officer
Jon G. Daniels………………….……..…………...........	48	Senior Vice President, CarMax Auto Finance
Enrique Mayor-Mora......................................................	51	Senior Vice President and Chief Financial Officer
Shamim Mohammad………………….……..…...….....	51	Senior Vice President and Chief Information and Technology Officer
Darren C. Newberry.........................................................	50	Senior Vice President, Store Operations
C. Joseph Wilson.............................................................	47	Senior Vice President, Store Strategy and Logistics

Mr. Nash joined CarMax in 1997 as auction manager. In 2007, he was promoted to vice president and later, senior vice president of merchandising, a position he held until 2011, when he was named senior vice president, human resources and administrative services. In 2012, he was promoted to executive vice president, human resources and administrative services. In February 2016, he was promoted to president, and in September 2016, he was promoted to chief executive officer and named to the board of directors. Prior to joining CarMax, Mr. Nash worked at Circuit City.

Mr. Reedy joined CarMax in 2003 as its vice president and treasurer and, in January 2010, was promoted to senior vice president, finance. In October 2010, Mr. Reedy was promoted to senior vice president and chief financial officer. In 2012, he was promoted to executive vice president and chief financial officer. In 2019, he was named executive vice president, finance. Prior to joining CarMax, Mr. Reedy was vice president, corporate development and treasurer of Gateway, Inc., a technology retail company.

Mr. Hill joined CarMax in 1995 as director of service operations and, in 2000, was promoted to assistant vice president, service operations. In 2001, Mr. Hill was promoted to vice president, service operations, a position he held until 2010, when he was promoted to senior vice president of service operations. In 2013, Mr. Hill was promoted to senior vice president, strategy and transformation and in 2016, he was promoted to executive vice president, strategy and business transformation. Mr. Hill was promoted to executive vice president and chief operating officer in August 2018.

Mr. Lyski joined CarMax in August 2014 as senior vice president and chief marketing officer. In 2017, he was promoted to executive vice president and chief marketing officer. Prior to joining CarMax, he served as chief marketing officer of The Scotts Miracle-Gro Company from 2011 to 2014 and as chief marketing officer at Nationwide Mutual Insurance Company from 2006 to 2010. In addition, Mr. Lyski has held marketing leadership positions at Cigna Healthcare Inc. and FedEx Corporation.

Mr. Margolin joined CarMax in 2007 as senior vice president, general counsel and corporate secretary. In 2016, Mr. Margolin was promoted to executive vice president, general counsel and corporate secretary. Prior to joining CarMax, he was senior vice president, general counsel and corporate secretary with Advance Auto Parts, Inc. and, before that, vice president, general counsel and corporate secretary with Tire Kingdom, Inc.

Ms. Cafritz joined CarMax in 2003 as assistant general counsel. She was promoted to associate general counsel, director in 2005, deputy general counsel, assistant vice president in 2010, and vice president in 2014. During her tenure in the CarMax legal department, Ms. Cafritz managed commercial and consumer litigation, was responsible for operational regulatory guidance and led CarMax’s government affairs program. In 2017, Ms. Cafritz was named senior vice president and chief human resources officer. Prior to joining CarMax, Ms. Cafritz was a partner at McDermott, Will & Emery.

Mr. Daniels joined CarMax in 2008 as vice president, risk and analytics. In 2014, he was promoted to senior vice president, CarMax Auto Finance. Prior to joining CarMax, Mr. Daniels served as group director, credit risk management of HSBC and vice president of Metris.

Mr. Mayor-Mora joined CarMax in 2011 as vice president, finance before assuming the role of vice president and treasurer in 2016. Mr. Mayor-Mora was promoted to senior vice president and chief financial officer in October 2019. Prior to joining CarMax, he served as vice president of financial planning and analysis and investor relations at Denny’s Corporation from 2005 to 2011. He also served in financial positions of increasing responsibility at Gap, Inc. from 2001 to 2005.

Mr. Mohammad joined CarMax in 2012 as vice president of application development and IT planning. In 2014, he was promoted to senior vice president and chief information officer. In 2018, he was named senior vice president and chief information and technology officer. Prior to joining CarMax, Mr. Mohammad was vice president of information technology at BJ’s Wholesale Club from 2006 to 2012 and held various positions at Blockbuster and TravelCLICK.

Mr. Newberry joined CarMax in March 2004 as location general manager-in-training in the Los Angeles region and was promoted to location general manager of the Duarte, California store in 2006. He was subsequently promoted to positions of increasing responsibility, including regional vice president general manager in 2013 and vice president, regional sales in 2016. In 2017, he was promoted to senior vice president, store operations. Prior to joining CarMax, Mr. Newberry served as store manager and area manager for Bed, Bath and Beyond from 1994 to 2004.

Mr. Wilson joined CarMax in 1995 as a buyer-in-training at the Raleigh, North Carolina store, where he was subsequently promoted to buyer and then senior buyer. Mr. Wilson later served as purchasing manager at two CarMax stores in southern Florida before being promoted to regional vice president of merchandising. He was promoted to assistant vice president, auction services and merchandising development in 2008, vice president, auction services and merchandising development in 2013, and then vice president, merchandising operations in 2016. In 2017, Mr. Wilson was promoted to senior vice president, store strategy and logistics.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed and traded on the New York Stock Exchange under the ticker symbol KMX. We are authorized to issue up to 350,000,000 shares of common stock and up to 20,000,000 shares of preferred stock. As of February 29, 2020, there were 163,081,376 shares of CarMax common stock outstanding and we had approximately 3,000 shareholders of record. As of that date, there were no preferred shares outstanding.

We have not paid any dividends on our common stock and do not plan to pay dividends on our common stock for the foreseeable future.

During the fourth quarter of fiscal 2020, we sold no CarMax equity securities that were not registered under the Securities Act.

Issuer Purchases of Equity Securities

The following table provides information relating to the company’s repurchase of common stock during the fourth quarter of fiscal 2020. The table does not include transactions related to employee equity awards or the exercise of employee stock options.



					Approximate
					Dollar Value
				Total Number	of Shares that
	Total Number	Average		of Shares Purchased	May Yet Be
	of Shares	Price Paid		as Part of Publicly	Purchased Under
Period	Purchased	per Share		Announced Programs	the Programs ⁽¹⁾
December 1-31, 2019	430,093	$	92.54	430,093	$	1,626,158,768
January 1-31, 2020	267,955	$	87.76	267,955	$	1,602,642,182
February 1-29, 2020	524,200	$	95.96	524,200	$	1,552,337,370
Total	1,222,248			1,222,248

⁽¹⁾

On October 23, 2018, the board authorized the repurchase of up to $2 billion of our common stock with no expiration date. Purchases may be made in open market or privately negotiated transactions at management’s discretion and the timing and amount of repurchases are determined based on share price, market conditions, legal requirements and other factors. Shares repurchased are deemed authorized but unissued shares of common stock.

Performance Graph

The following graph compares the cumulative total shareholder return (stock price appreciation plus dividends, as applicable) on our common stock for the last five fiscal years with the cumulative total return of the S&P 500 Index and the S&P 500 Retailing Index. The graph assumes an original investment of $100 in CarMax common stock and in each index on February 28, 2015, and the reinvestment of all dividends, as applicable.



	As of February 28 or 29
	2015		2016		2017		2018		2019		2020
CarMax	$	100.00	$	68.93	$	96.17	$	92.27	$	92.53	$	130.10
S&P 500 Index	$	100.00	$	93.81	$	117.24	$	137.29	$	143.71	$	155.49
S&P 500 Retailing Index	$	100.00	$	107.24	$	129.78	$	182.48	$	198.27	$	221.61

Item 6. Selected Financial Data.



(Dollars and shares in millions, except per share or per unit data)	FY20			FY19			FY18			FY17			FY16
Income statement information
Used vehicle sales	$	17,169.5		$	15,172.8		$	14,392.4		$	13,270.7		$	12,439.4
Wholesale vehicle sales	2,500.0			2,393.0			2,181.2			2,082.5			2,188.3
Net sales and operating revenues	20,320.0			18,173.1			17,120.2			15,875.1			15,149.7
Gross profit	2,722.3			2,480.6			2,328.9			2,183.3			2,018.8
CarMax Auto Finance income	456.0			438.7			421.2			369.0			392.0
Selling, general and administrative expenses	1,940.1			1,730.3			1,617.1			1,488.5			1,351.9
Interest expense	83.0			75.8			70.7			56.4			36.4
Net earnings	888.4			842.4			664.1			627.0			623.4
Share and per share information
Weighted average diluted shares outstanding	166.8			175.9			184.5			192.2			205.5
Diluted net earnings per share	$	5.33		$	4.79		$	3.60		$	3.26		$	3.03
Balance sheet information
Auto loans receivable, net	$	13,551.7		$	12,428.5		$	11,535.7		$	10,596.1		$	9,536.9
Total assets	21,082.2			18,717.9			17,486.3			16,279.4			14,459.9
Total current liabilities	1,534.7			1,311.5			1,174.1			1,105.8			1,005.2
Total notes payable and other debt:
Non-recourse notes payable	13,589.5			12,512.3			11,622.4			10,720.9			9,507.2
Other⁽¹⁾	1,788.0			1,660.5			1,481.9			1,436.0			1,127.1
Unit sales information
Used vehicle units sold	832,640			748,961			721,512			671,294			619,936
Wholesale vehicle units sold	466,177			447,491			408,509			391,686			394,437
Per unit information
Used vehicle gross profit	$	2,186		$	2,175		$	2,173		$	2,163		$	2,159
Wholesale vehicle gross profit	975			963			961			926			984
SG&A per used unit	2,330			2,310			2,241			2,217			2,181
Percent changes in
Comparable store used vehicle unit sales	7.7		%	0.3		%	2.0		%	4.3		%	2.4		%
Total used vehicle unit sales	11.2			3.8			7.5			8.3			6.5
Wholesale vehicle unit sales	4.2			9.5			4.3			(0.7		)	4.9
CarMax Auto Finance information
CAF total interest margin ⁽²⁾	5.7		%	5.6		%	5.7		%	5.8		%	6.1		%
Other information
Used car stores	216			203			188			173			158
Associates	27,050			25,946			25,110			24,344			22,429


⁽¹⁾	In connection with our adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”) during the current fiscal year, certain prior period amounts have been reclassified to conform to the current year’s presentation.


⁽²⁾	Represents CAF total interest margin (which reflects the spread between interest and fees charged to consumers and our funding costs) as a percentage of total average managed receivables.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes presented in Item 8. Consolidated Financial Statements and Supplementary Data. Note references are to the notes to consolidated financial statements included in Item 8. Certain prior year amounts have been reclassified to conform to the current year’s presentation. All references to net earnings per share are to diluted net earnings per share. Amounts and percentages may not total due to rounding.

OVERVIEW

See Part I, Item 1 for a detailed description and discussion of the company’s business.

CarMax is the nation’s largest retailer of used vehicles. We operate in two reportable segments: CarMax Sales Operations and CarMax Auto Finance (“CAF”). Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF. Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.

CarMax Sales Operations

Our sales operations segment consists of retail sales of used vehicles and related products and services, such as wholesale vehicle sales; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service. We offer competitive, no-haggle prices; a broad selection of CarMax Quality Certified used vehicles; value-added EPP products; and superior customer service. Our website and related mobile apps are tools for communicating the CarMax consumer offer in detail; sophisticated search engines for finding the right vehicle; and sales channels for customers who prefer to conduct all or part of the shopping and sales process online.

Our customers finance the majority of the retail vehicles purchased from us, and availability of on-the-spot financing is a critical component of the sales process. We provide financing to qualified retail customers through CAF and our arrangements with industry-leading third-party finance providers. All of the finance offers, whether by CAF or our third-party providers, are backed by a 3-day payoff option.

As of February 29, 2020, we operated 216 used car stores in 106 U.S. television markets. As of that date, we also conducted wholesale auctions at 74 used car stores and we operated 2 new car franchises.

CarMax Auto Finance

In addition to third-party finance providers, we provide vehicle financing through CAF, which offers financing solely to customers buying retail vehicles from CarMax. CAF allows us to manage our reliance on third-party finance providers and to leverage knowledge of our business to provide qualifying customers a competitive financing option. As a result, we believe CAF enables us to capture additional profits, cash flows and sales. CAF income primarily reflects the interest and fee income generated by the auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct expenses. CAF income does not include any allocation of indirect costs. After the effect of 3-day payoffs and vehicle returns, CAF financed 42.5% of our retail used vehicle unit sales in fiscal 2020. As of February 29, 2020, CAF serviced approximately 1,036,000 customer accounts in its $13.62 billion portfolio of managed receivables.

Management regularly analyzes CAF’s operating results by assessing the competitiveness of our consumer offer, profitability, the performance of the auto loans receivable, including trends in credit losses and delinquencies, and CAF direct expenses.

Revenues and Profitability

Our primary sources of revenue and gross profit from CarMax Sales Operations for fiscal 2020 are as follows:



	Net Sales and Operating Revenues	Gross Profit

A high-level summary of our financial results from fiscal 2020 compared with fiscal 2019 is as follows:



(Dollars in millions except per share or per unit data)	2020			Change from 2019
Income statement information
Net sales and operating revenues	$	20,320.0		11.8	%
Gross profit	$	2,722.3		9.7	%
CAF income	$	456.0		4.0	%
Selling, general and administrative expenses	$	1,940.1		12.1	%
Net earnings	$	888.4		5.5	%
Unit sales information
Used unit sales	832,640			11.2	%
Change in used unit sales in comparable stores	7.7		%	N/A
Wholesale unit sales	466,177			4.2	%
Per unit information
Used gross profit per unit	$	2,186		0.5	%
Wholesale gross profit per unit	$	975		1.2	%
SG&A per used vehicle unit	$	2,330		0.9	%
Per share information
Net earnings per diluted share	$	5.33		11.3	%

Refer to “Results of Operations” for further details on our revenues and profitability. A discussion regarding Results of Operations and Financial Condition for fiscal 2019 as compared to fiscal 2018 is included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2019, filed with the SEC on April 19, 2019.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued lockdown orders impacting the operations of our stores and consumer demand. We are following the mandates from public health officials and government agencies, including implementation of enhanced cleaning measures, social distancing guidelines and, in many localities, the closing of stores and wholesale auctions. We continue to monitor the situation closely and it is possible that we will implement further measures.

The positive sales momentum experienced in fiscal 2020 carried into the beginning of March, with robust comparable store used unit sales through the first week of the month. Since then, the COVID-19 situation within the U.S. has rapidly escalated and approximately half of our stores have been closed or have run under limited operations. Based upon the fluidity of the current environment, we expect that stores will continue to re-open or close in accordance with government mandates or public health concerns. Consumer demand has deteriorated and sales have dropped significantly; most of our stores that remain open are selling 50% or less of what they sold last year, a trend that continued into April 2020. For wholesale, we have moved many of our auctions to an online platform as a number of our auction locations are closed. We expect our sales to continue to be impacted during fiscal 2021, but the extent and duration of those impacts remains uncertain at this time. We also anticipate pressure on our gross profit per unit in the near-term as we attempt to right-size our inventory levels in light of the current environment.

CAF loan origination volume has been consistent with our sales performance noted above. During the second half of March and continuing into April 2020, we have seen an increase in delinquencies and greater demand for payment extensions. We expect our loan portfolio to continue to be negatively impacted during fiscal 2021, but the extent and duration of those impacts remains uncertain at this time. Similarly, while we anticipate some unfavorable loss experience as a result of the COVID-19 situation, we are unable to determine the impact on our future results at this time.

At CAF, we have begun to implement a variety of measures to support our customers through this difficult time and enhance long-term collectability for the portfolio. This includes suspending repossessions, waiving late fees, and providing loan payment extensions where appropriate. We have also mobilized our associates to work remotely while responding to the increasing demands of our customers. Given the current economic outlook, we have also paused our in-house Tier 3 lending. We have made no changes to our core lending standards but are monitoring trends in customer demographics and credit mix and will adjust accordingly.

We have taken certain measures in response to the COVID-19 situation, subsequent to the end of our fiscal year, to enhance our liquidity position and provide additional financial flexibility, including drawing down additional funds on our revolving credit facility. During March 2020, we made net borrowings under this facility of approximately $675 million, following which more than $300 million in unused borrowing capacity remained. As of March 31, 2020, we had approximately $700 million of cash and cash equivalents on hand and more than $2.5 billion of inventory. We also owned real estate and buildings at more than 140 locations across the country, with a net book value in excess of $1.8 billion.

In addition, we halted our stock repurchase program, although the repurchase authorization remains effective, and temporarily paused our store expansion strategy and remodels.

In order to best position ourselves to emerge in strong financial health after the COVID-19 situation stabilizes, we have begun reducing inventory levels and aligning operating expenses to the state of the business. This includes implementing a hiring freeze, reducing advertising spending and reducing labor hours.

In April 2020, we announced approximately 15,500 associates have been placed on furlough, effective April 18, 2020. The majority of furloughed associates are employed at stores that are currently closed due to government mandates. Prior to the effective date of any furlough, we provided transition pay to each impacted associate. In addition, for furloughed associates enrolled in our medical plan, we are paying the current cost of the associate’s portion of the medical plan, plus the employer portion, until further notice. We are also providing resources to help associates understand the changes and take advantage of the assistance available under the new CARES Act, which should provide significant financial support for most furloughed employees. Additionally, our president and CEO is forgoing 50% of his salary, each member of our senior leadership team is taking a reduction in pay until further notice and our board of directors has unanimously determined to forgo their cash retainer indefinitely.

Due to the uncertainty as to the severity and duration of the pandemic, the full impact on our revenues, profitability, financial position and liquidity is uncertain at this time, though it is important to note that the impacts on our fiscal 2020 results, as described herein, were not significant.

Liquidity

Our primary ongoing sources of liquidity include funds provided by operations, proceeds from non-recourse funding vehicles, and borrowings under our revolving credit facility or through other financing sources. During fiscal 2020, net cash used in operations totaled $236.6 million. This amount, combined with $1.08 billion of net issuances of non-recourse notes payable, resulted in $841.3 million of adjusted net cash provided by operating activities, a non-GAAP measure. This liquidity was primarily used to fund the 7.0 million common shares repurchased under our share repurchase program, our store growth and strategic initiatives.

When considering cash from operating activities, management does not include increases in auto loans receivable that have been funded with non-recourse notes payable, which are separately reflected as cash provided by financing activities. For a reconciliation of adjusted net cash provided by operating activities to net cash (used in) provided by operating activities, the most directly

comparable GAAP financial measure, see “Reconciliation of Adjusted Net Cash from Operating Activities” included in “FINANCIAL CONDITION – Liquidity and Capital Resources.”

As noted above, in response to the COVID-19 situation, we have taken certain measures, subsequent to the end of our fiscal year, to enhance our liquidity position and provide additional financial flexibility, including drawing down additional funds on our revolving credit facility, halting our stock repurchase program, pausing our store expansion strategy and remodels and actively aligning operating expenses to the current state of the business, including our recently announced furlough of approximately 15,500 associates in April 2020. Our current capital allocation strategy is to prioritize navigating the near-term challenges that COVID-19 presents and continuing to fund operating activities.

Future Outlook

The COVID-19 situation has created an unprecedented and challenging time. Our current focus is on positioning the company for a strong recovery when this crisis is over. As discussed above, we have taken several steps to enhance our liquidity position and provide additional financial flexibility. We have also taken steps to begin reducing our inventory and align our operating expenses to the state of the business. We plan to continue to keep our stores open where permitted to support our customers’ needs for reliable vehicles and to provide as many jobs as possible for our associates. As noted above, approximately 15,500 associates were placed on furlough effective April 18, 2020. Any ongoing furlough determinations are subject to change due to future government mandates, as well as future business conditions. We will continue to monitor the COVID-19 situation and look for ways to preserve cash and reduce our operating expenses as we are able. In the near-term, we are pivoting the roll-out of our omni experience and implementing the most pertinent parts of the experience, such as online self-progression and curbside or express pick up, as quickly and broadly as possible given the current needs of our customers.

Our long-term strategy continues to be focused on completing the rollout of our retail concept, including our omni-channel experience, and to increase our share of used vehicle unit sales in each of the markets in which we operate. Our omni-channel experience empowers customers to buy a car on their own terms, whether completely from home, in-store or through a seamlessly integrated combination of online and in-store experiences. We believe that, over the long term, used vehicle unit sales are the primary driver for earnings growth. We also believe that increased used vehicle unit sales will drive increased sales of wholesale vehicles and ancillary products and, over time, increased CAF income.

In calendar 2019, we estimate we sold approximately 4.7% of the age 0- to 10-year old vehicles sold in the current comparable store markets in which we operate and approximately 3.5% of the age 0- to 10-year old vehicles sold on a nationwide basis. Our strategy to increase our market share includes focusing on:


•	Opening stores in new markets and expanding our presence in existing markets.


•	Delivering a customer-driven, omni-channel buying and selling experience that is a unique and powerful integration of our in-store and online capabilities.


•	Hiring and developing an engaged and skilled workforce.


•	Improving efficiency in our stores and our logistics operations to drive out waste.


•	Leveraging data and advanced analytics to continuously improve the customer experience as well as our processes and systems.

In order to execute our long-term strategy, we have invested in various strategic initiatives to increase innovation, specifically with regards to customer facing and customer-enabling technologies. We continue to make improvements to our website and enhance customer experiences, such as finance pre-approval, home delivery, online appraisal and express, or curbside, pick-up. We are also developing and implementing tools that help our associates be more efficient and effective. Additionally, we have centralized customer support in our customer experience centers (“CEC”), which we believe provides a more seamless integration between the online and in-store experience for our customers. Our use of data is a core component of these initiatives and continues to be a strategic asset for us as we leverage data to enhance the customer experience and increase operational efficiencies.

In December 2018, we launched our omni-channel car buying experience in the Atlanta market. During fiscal 2020, we continued this roll-out to additional markets, making the omni-channel experience available to more than 60% of our customers. For our remaining markets, in response to the COVID-19 health crisis, we are pivoting and implementing the most relevant parts of the omni experience given the current needs of our customers.

As of February 29, 2020, we had used car stores located in 106 television markets, which covered approximately 78% of the U.S. population. The format and operating models utilized in stores are continuously evaluated and may evolve over time based upon market and consumer expectations. We opened 13 stores in fiscal 2020, 1 store in March of fiscal 2021 and 1 store under limited operations in April of fiscal 2021. Prior to the recent COVID-19 situation in the U.S., it was our intent to open 13 stores during

fiscal 2021 and a similar number of stores in fiscal 2022. Given the current environment, we have paused our store expansion strategy until the COVID-19 situation stabilizes.

While we execute both our short- and long-term strategy, there are trends and factors that could impact our strategic approach or our results in the short and medium term. For additional information about risks and uncertainties facing our company, see “Risk Factors,” included in Part I, Item 1A of this Form 10-K.

CRITICAL ACCOUNTING POLICIES

Our results of operations and financial condition as reflected in the consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We regularly evaluate these estimates and assumptions. Note 1 includes a discussion of significant accounting policies. The accounting policies discussed below are the ones we consider critical to an understanding of our consolidated financial statements because their application places the most significant demands on our judgment. Our financial results might have been different if different assumptions had been used or other conditions had prevailed. Additionally, we expect that the COVID-19 outbreak in March 2020 will impact future assumptions and estimates made related to the critical accounting policies listed below, though the extent of those impacts is uncertain at this time.

Financing and Securitization Transactions

We maintain a revolving funding program composed of three warehouse facilities (“warehouse facilities”) that we use to fund auto loans receivable originated by CAF. We typically elect to fund these receivables through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement, at a later date. We recognize transfers of auto loans receivable into the warehouse facilities and asset-backed term funding transactions, including term securitizations (together, “non-recourse funding vehicles”), as secured borrowings, which result in recording the auto loans receivable and the related non-recourse notes payable on our consolidated balance sheets. CAF income included in the consolidated statements of earnings primarily reflects the interest and fee income generated by the auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.

See Notes 1(F), 1(H) and 4 for additional information on securitizations and auto loans receivable.

Allowance for Loan Losses

The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date. Such losses are expected to become evident during the following 12 months. Because net loss performance can vary substantially over time, estimating net losses requires assumptions about matters that are uncertain.

The allowance for loan losses is estimated using a combination of analytical models and management judgment. These models are primarily based on the composition of the portfolio of managed receivables (including month of origination and actual prior performance of the receivables), historical observation periods and net loss data, the period of time between the loss event inherent in the portfolio and the charge-off date and forecasted forward loss curves. For receivables that have less than 18 months of performance history, the estimate also takes into account the credit grades of the receivables and historical losses by credit grade to supplement actual loss data in estimating future performance, subsequent to which the estimate reflects actual loss experience of those receivables to date along with forward loss curves to predict future performance. The forward loss curves are constructed using historical performance data and show the average timing of losses over the course of a receivable’s life.

Estimates from these models rely on historical performance information and may not fully reflect losses inherent in the present portfolio. Therefore, management also considers recent trends in delinquencies and defaults, recovery rates and the economic environment in assessing the models used in estimating the allowance for loan losses, and may adjust the allowance for loan losses to reflect factors that may not be captured in the models. In addition, management periodically considers whether the use of additional metrics would result in improved model performance and revises the models when appropriate.

Determining the appropriateness of the allowance for loan losses requires management to exercise judgment about matters that are inherently uncertain, including the timing and distribution of net losses that could materially affect the allowance for loan losses and, therefore, net earnings. To the extent that actual performance differs from our estimates, additional provision for credit losses may be required that would reduce net earnings. A 10% change in the estimated loss rates would have changed the allowance for loan losses by approximately $15.8 million as of February 29, 2020.

See Notes 1(H) and 4 for additional information on the allowance for loan losses.

Revenue Recognition

We recognize revenue when the earnings process is complete, generally either at the time of sale to a customer or upon delivery to a customer. As part of our customer service strategy, we guarantee the retail vehicles we sell with a 7‑day, money-back guarantee. We record a reserve for estimated returns based on historical experience and trends, and results could be affected if future vehicle returns differ from historical averages.

We also sell ESPs and GAP on behalf of unrelated third parties, who are the primary obligors, to customers who purchase a retail vehicle. The ESPs we currently offer on all used vehicles provide coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the term of their retail installment contract. We recognize revenue, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base. Our risk related to contract cancellations is limited to the revenue that we receive. Cancellations fluctuate depending on the volume of EPP sales, customer financing default or prepayment rates, and shifts in customer behavior related to changes in the coverage or term of the product. Results could be affected if actual events differ from our estimates. A 10% change in the estimated cancellation rates would have changed cancellation reserves by approximately $11.8 million as of February 29, 2020. See Note 8 for additional information on cancellation reserves.

We are contractually entitled to receive profit-sharing revenues based on the performance of the ESPs administered by third parties. These revenues are a form of variable consideration included in EPP revenues to the extent that it is probable that it will not result in a significant revenue reversal. An estimate of the amount to which we expect to be entitled, subject to various constraints, is recognized upon satisfying the performance obligation of selling the ESP. These constraints include factors that are outside of the company’s influence or control and the length of time until settlement. We apply the expected value method, utilizing historical claims and cancellation data from CarMax customers, as well as external data and other qualitative assumptions. This estimate is reassessed each reporting period with changes reflected in other sales and revenues on our consolidated statements of earnings and other assets on our consolidated balance sheets.

Customers applying for financing who are not approved or are conditionally approved by CAF are generally evaluated by other third-party finance providers. These providers generally either pay us or are paid a fixed, pre-negotiated fee per contract. We recognize these fees at the time of sale.

We collect sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale. These taxes are accounted for on a net basis and are not included in net sales and operating revenues or cost of sales.

See Note 2 for additional information on revenue recognition.

RESULTS OF OPERATIONS – CARMAX SALES OPERATIONS

NET SALES AND OPERATING REVENUES



	Years Ended February 29 or 28
(In millions)	2020			Change		2019			Change		2018
Used vehicle sales	$	17,169.5		13.2	%	$	15,172.8		5.4	%	$	14,392.4
Wholesale vehicle sales	2,500.0			4.5	%	2,393.0			9.7	%	2,181.2
Other sales and revenues:
Extended protection plan revenues	437.4			14.4	%	382.5			13.7	%	336.4
Third-party finance fees, net	(45.8		)	(5.6	)%	(43.4		)	13.0	%	(49.9		)
Other	258.9			(3.5	)%	268.2			3.1	%	260.2
Total other sales and revenues	650.5			7.1	%	607.3			11.1	%	546.7
Total net sales and operating revenues	$	20,320.0		11.8	%	$	18,173.1		6.1	%	$	17,120.2

UNIT SALES



	Years Ended February 29 or 28
	2020	Change		2019	Change		2018
Used vehicles	832,640	11.2	%	748,961	3.8	%	721,512
Wholesale vehicles	466,177	4.2	%	447,491	9.5	%	408,509

AVERAGE SELLING PRICES



	Years Ended February 29 or 28
	2020		Change		2019		Change		2018
Used vehicles	$	20,418	1.7	%	$	20,077	1.6	%	$	19,757
Wholesale vehicles	$	5,089	(0.2	)%	$	5,098	(0.1	)%	$	5,102

COMPARABLE STORE USED VEHICLE SALES CHANGES



	Years Ended February 29 or 28
	2020		2019		2018
Used vehicle units	7.7	%	0.3	%	2.0	%
Used vehicle dollars	9.7	%	1.9	%	2.9	%

Stores are added to the comparable store base beginning in their fourteenth full month of operation. We do not remove renovated stores from our comparable store base. Comparable store calculations include results for a set of stores that were included in our comparable store base in both the current and corresponding prior year periods.

VEHICLE SALES CHANGES



	Years Ended February 29 or 28
	2020		2019		2018
Used vehicle units	11.2	%	3.8	%	7.5	%
Used vehicle revenues	13.2	%	5.4	%	8.5	%

Wholesale vehicle units	4.2	%	9.5	%	4.3	%
Wholesale vehicle revenues	4.5	%	9.7	%	4.7	%

USED VEHICLE FINANCING PENETRATION BY CHANNEL (BEFORE THE IMPACT OF 3-DAY PAYOFFS)



	Years Ended February 29 or 28⁽¹⁾
	2020		2019		2018
CAF⁽²⁾	46.7	%	48.4	%	48.4	%
Tier 2 ⁽³⁾	20.2		17.9		16.6
Tier 3⁽⁴⁾	10.2		9.9		10.5
Other ⁽⁵⁾	22.9		23.8		24.5
Total	100.0	%	100.0	%	100.0	%


⁽¹⁾	Calculated as used vehicle units financed for respective channel as a percentage of total used units sold.


⁽²⁾	Includes CAF’s Tier 3 loan originations, which represent less than 1% of total used units sold.


⁽³⁾	Third-party finance providers who generally pay us a fee or to whom no fee is paid.


⁽⁴⁾	Third-party finance providers to whom we pay a fee.


⁽⁵⁾	Represents customers arranging their own financing and customers that do not require financing.

CHANGE IN USED CAR STORE BASE



	Years Ended February 29 or 28
	2020	2019	2018
Used car stores, beginning of year	203	188	173
Store openings	13	15	15
Used car stores, end of year	216	203	188

During fiscal 2020, we opened 13 stores, including six stores in new television markets (Waco, TX; McAllen, TX; Lubbock, TX; Palm Springs, CA; Gulfport, MS; and Ft. Wayne, IN) and seven stores in existing television markets (Memphis, TN; San Francisco, CA; Phoenix, AZ; Dallas, TX; Atlanta, GA; Portland, OR; and Nashville, TN).

Used Vehicle Sales

Fiscal 2020 Versus Fiscal 2019. The 13.2% increase in used vehicle revenues in fiscal 2020 was primarily due to an 11.2% increase in unit sales. The increase in used unit sales included a 7.7% increase in comparable store used unit sales and sales from newer stores not yet included in the comparable store base. The comparable store used unit sales performance reflected strong conversion, which was aided by continued support from our third-party lending partners and growth in selling opportunities (e.g., web and phone leads), which we believe benefited from both our national marketing campaign and the favorable response to our consumer initiatives. We believe that solid execution in operations, finance, customer progression and marketing, in addition to an overall favorable used car sales environment, also contributed to our sales growth. Our data indicates that our share of the age 0- to 10-year old used vehicles in our current comparable store markets increased approximately 4.2% to 4.7% in calendar 2019.

The increase in used unit comparable sales in fiscal 2020 was slightly stronger in markets offering a full omni-channel experience. Additionally, many of our omni-channel related digital initiatives, including improved customer lead management tools, finance self-service tools and digital merchandising, have been rolled out nationwide. We believe these initiatives supported our strong used unit comparable sales performance in markets both with and without the full omni-channel experience. We also believe all stores benefited from our national marketing campaign launched in October.

The increase in average retail selling price reflected higher vehicle acquisition costs as well as shifts in the mix of our sales by both vehicle age and class.

Wholesale Vehicle Sales

Vehicles sold at our wholesale auctions are, on average, approximately 10 years old with more than 100,000 miles and are primarily comprised of vehicles purchased through our appraisal process that do not meet our retail standards. Our wholesale auction prices usually reflect the trends in the general wholesale market for the types of vehicles we sell, although they can also be affected by changes in vehicle mix or the average age, mileage or condition of the vehicles being sold.

Fiscal 2020 Versus Fiscal 2019. The 4.5% increase in wholesale vehicle revenues in fiscal 2020 was primarily due to a 4.2% increase in wholesale unit sales. The wholesale unit growth was primarily driven by an increase in our appraisal buy rate and the growth in our store base, partially offset by lower appraisal traffic. We achieved a record buy rate in fiscal 2020. Wholesale vehicle average selling price for fiscal 2020 remained consistent with the prior year.

Other Sales and Revenues

Other sales and revenues include revenue from the sale of ESPs and GAP (collectively reported in EPP revenues, net of a reserve for estimated contract cancellations), net third-party finance fees, and other revenues, which are predominantly comprised of service department and new vehicle sales. The fees we pay to the Tier 3 providers are reflected as an offset to finance fee revenues received from the Tier 2 providers. The mix of our retail vehicles financed by CAF, Tier 2 and Tier 3 providers, or customers that arrange their own financing, may vary from quarter to quarter depending on several factors including the credit quality of applicants, changes in providers’ credit decisioning and external market conditions. Changes in originations by one tier of credit providers may also affect the originations made by providers in other tiers.

Fiscal 2020 Versus Fiscal 2019. Other sales and revenues increased 7.1% in fiscal 2020, driven by the 14.4% increase in EPP revenues. The increase in EPP revenues reflected the combined effects of our used unit growth, increased margins and increased profit-sharing revenues. These increases were partially offset by the net effects of a $15.2 million favorable adjustment to cancellation reserves during fiscal 2019 and a $2.3 million unfavorable adjustment in fiscal 2020. We recognized $20.3 million in profit-sharing revenue during fiscal 2020, an increase of $11.9 million over the prior year. We received payments of $46.0 million in the fourth quarter of fiscal 2020, representing the profit-sharing accrued during fiscal 2019 and fiscal 2020, which was based on claims experience from calendar years 2016 through 2019. In future years, we expect EPP profit-sharing revenue will be less material, as it will reflect only a single incremental year versus four years of activity.

GROSS PROFIT



	Years Ended February 29 or 28
(In millions)	2020		Change		2019		Change		2018
Used vehicle gross profit	$	1,820.1	11.7	%	$	1,628.7	3.9	%	$	1,567.6
Wholesale vehicle gross profit	454.4		5.4	%	431.0		9.8	%	392.5
Other gross profit	447.8		6.4	%	420.9		14.1	%	368.8
Total	$	2,722.3	9.7	%	$	2,480.6	6.5	%	$	2,328.9

GROSS PROFIT PER UNIT



	Years Ended February 29 or 28
	2020			2019			2018
	$ per unit ⁽¹⁾		% ⁽²⁾	$ per unit ⁽¹⁾		% ⁽²⁾	$ per unit ⁽¹⁾		% ⁽²⁾
Used vehicle gross profit	$	2,186	10.6	$	2,175	10.7	$	2,173	10.9
Wholesale vehicle gross profit	$	975	18.2	$	963	18.0	$	961	18.0
Other gross profit	$	538	68.9	$	562	69.3	$	511	67.5
Total gross profit	$	3,270	13.4	$	3,312	13.6	$	3,228	13.6


⁽¹⁾	Calculated as category gross profit divided by its respective units sold, except the other and total categories, which are divided by total used units sold.


⁽²⁾	Calculated as a percentage of its respective sales or revenue.

Used Vehicle Gross Profit

We target a dollar range of gross profit per used unit sold. The gross profit dollar target for an individual vehicle is based on a variety of factors, including its probability of sale and its mileage relative to its age; however, it is not primarily based on the vehicle’s selling price. Our ability to quickly adjust appraisal offers to be consistent with the broader market trade-in trends and the pace of our inventory turns reduce our exposure to the inherent continual fluctuation in used vehicle values and contribute to our ability to manage gross profit dollars per unit.

We systematically adjust individual vehicle prices based on proprietary pricing algorithms in order to appropriately balance sales trends, inventory turns and gross profit achievement. Other factors that may influence gross profit include the wholesale and retail vehicle pricing environments, vehicle reconditioning and logistics costs, and the percentage of vehicles sourced directly from consumers through our appraisal process. Vehicles purchased directly from consumers typically generate more gross profit per unit compared with vehicles purchased at auction or through other channels.

Fiscal 2020 Versus Fiscal 2019. The 11.7% increase in used vehicle gross profit in fiscal 2020 was primarily driven by the 11.2% growth in total used unit sales. Our used vehicle gross profit per unit remained consistent with fiscal 2019. We believe we can manage to a targeted gross profit per unit dollar range, subject to future changes to our business, pricing strategy or external market conditions.

Wholesale Vehicle Gross Profit

Our wholesale gross profit per unit reflects the demand for older, higher mileage vehicles, which are the mainstay of our auctions, as well as strong dealer attendance and resulting high dealer-to-car ratios at our auctions. The frequency of our auctions, which are generally held weekly or bi-weekly, minimizes the depreciation risk on these vehicles. Our ability to adjust appraisal offers in response to the wholesale pricing environment is a key factor that influences wholesale gross profit.

Fiscal 2020 Versus Fiscal 2019. The 5.4% increase in wholesale vehicle gross profit in fiscal 2020 was driven by both the 4.2% increase in wholesale unit sales and a slight increase in wholesale gross profit per unit.

Other Gross Profit

Other gross profit includes profits related to EPP revenues, net third-party finance fees and other revenues, which are predominantly comprised of service department operations, including used vehicle reconditioning, and new vehicle sales. We have no cost of sales related to EPP revenues or net third-party finance fees, as these represent revenues paid to us by certain third-party providers. Third-party finance fees are reported net of the fees we pay to third-party Tier 3 finance providers. Accordingly, changes in the relative mix of the components of other gross profit can affect the composition and amount of other gross profit.

Fiscal 2020 Versus Fiscal 2019. Other gross profit rose 6.4% in fiscal 2020, primarily reflecting the growth in EPP revenues discussed above, offset by a decline in service department profits of $25.4 million. Service profits were adversely affected by a recent increase in our post-sale warranty period from 30 to 90 days and near-term inefficiencies resulting from our recent ramp in technician hiring.

Impact of Inflation

Historically, inflation has not had a significant impact on results. Profitability is primarily affected by our ability to achieve targeted unit sales and gross profit dollars per vehicle rather than by changes in average retail prices. However, we believe higher vehicle acquisition prices have adversely impacted, and could impact in the future, our comparable store used unit sales growth. Changes in average vehicle selling prices also impact CAF income, to the extent the average amount financed also changes.

SG&A Expenses

COMPONENTS OF SG&A EXPENSES AS A PERCENTAGE OF TOTAL SG&A EXPENSES

Fiscal Year 2020

COMPONENTS OF SG&A EXPENSES COMPARED WITH PRIOR PERIODS



	Years Ended February 29 or 28
(In millions except per unit data)	2020		Change			2019		Change			2018
Compensation and benefits:
Compensation and benefits, excluding share-based compensation expense	$	913.2	9.4		%	$	835.0	3.7		%	$	805.5
Share-based compensation expense	99.4		42.2		%	69.9		21.2		%	57.7
Total compensation and benefits⁽¹⁾	$	1,012.6	11.9		%	$	904.9	4.8		%	$	863.2
Store occupancy costs	393.4		9.6		%	359.1		6.5		%	337.3
Advertising expense	191.3		15.0		%	166.4		5.5		%	157.7
Other overhead costs⁽²⁾	342.8		14.3		%	299.9		15.8		%	258.9
Total SG&A expenses	$	1,940.1	12.1		%	$	1,730.3	7.0		%	$	1,617.1
SG&A per used vehicle unit ⁽³⁾	$	2,330	$	20		$	2,310	$	69		$	2,241


⁽¹⁾	Excludes compensation and benefits related to reconditioning and vehicle repair service, which are included in cost of sales. See Note 12 for details of stock-based compensation expense by grant type.


⁽²⁾	Includes IT expenses, preopening and relocation costs, insurance, non-CAF bad debt, travel, charitable contributions and other administrative expenses.


⁽³⁾	Calculated as total SG&A expenses divided by total used vehicle units.

Fiscal 2020 Versus Fiscal 2019 (Increase of $209.8 million or 12.1%). In addition to the 6% growth in our store base during fiscal 2020 (representing the addition of 13 stores), higher costs associated with our comparable store unit growth and continued spending to advance our technology platforms and support our core and omni-channel initiatives, the net increase also reflected the following:


•	$29.5 million increase in share-based compensation expense, which increased SG&A per unit by $26. The increase in share-based compensation expense was largely related to cash-settled restricted stock units, as the expense associated with these units was primarily driven by the change in the company's stock price during the relevant periods.


•	$24.9 million increase in advertising expense due to our new advertising campaign launched in October 2020 and incremental marketing to support our omni-channel roll out. Advertising spend per retail unit rose modestly to $230 versus $222 in fiscal 2019.

Interest Expense

Interest expense includes the interest related to short- and long-term debt, financing obligations and finance lease obligations. It does not include interest on the non-recourse notes payable, which is reflected within CAF income.

Fiscal 2020 Versus Fiscal 2019. Interest expense increased to $83.0 million in fiscal 2020 versus $75.8 million in fiscal 2019. The increase primarily reflected higher outstanding debt levels and an increase in finance lease obligations in fiscal 2020.

Income Taxes

The effective income tax rate was consistent with the prior year at 23.5% in fiscal 2020 versus 24.3% in fiscal 2019.

RESULTS OF OPERATIONS – CARMAX AUTO FINANCE

CAF income primarily reflects interest and fee income generated by CAF’s portfolio of auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses. Total interest margin reflects the spread between interest and fees charged to consumers and our funding costs. Changes in the interest margin on new originations affect CAF income over time. Increases in interest rates, which affect CAF’s funding costs, or other competitive pressures on consumer rates, could result in compression in the interest margin on new originations. Changes in the allowance for loan losses as a percentage of ending managed receivables reflect the effect of the change in loss and delinquency experience on our outlook for net losses expected to occur over the next 12 months.

CAF’s managed portfolio is composed primarily of loans originated over the past several years. Trends in receivable growth and interest margins primarily reflect the cumulative effect of changes in the business over a multi-year period. We strive to originate loans with an underlying risk profile that we believe will, in the aggregate and excluding CAF’s Tier 3 originations, result in cumulative net losses in the 2% to 2.5% range over the life of the loans. Actual loss performance of the loans may fall outside of this range based on various factors, including intentional changes in the risk profile of originations, economic conditions (including the possible effects of the COVID-19 outbreak) and wholesale recovery rates. Current period originations reflect current trends in both our retail sales and the CAF business, including the volume of loans originated, current interest rates charged to consumers, loan terms and average credit scores. Because we recognize CAF income over the life of the underlying auto loan, loans originated in a given fiscal period generally do not have a significant effect on that period’s financial results.

CAF income does not include any allocation of indirect costs. Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions. Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses.

See Note 3 for additional information on CAF income and Note 4 for information on auto loans receivable, including credit quality.

SELECTED CAF FINANCIAL INFORMATION



	Years Ended February 29 or 28
(In millions)	2020			% ⁽¹⁾		2019			% ⁽¹⁾		2018			% ⁽¹⁾
Interest margin:
Interest and fee income	$	1,104.1		8.4		$	972.9		8.0		$	856.6		7.6
Interest expense	(358.1		)	(2.7	)	(289.3		)	(2.4	)	(215.0		)	(1.9	)
Total interest margin	$	746.0		5.7		$	683.6		5.6		$	641.6		5.7
Provision for loan losses	$	(185.7	)	(1.4	)	$	(153.8	)	(1.3	)	$	(137.6	)	(1.2	)
CarMax Auto Finance income	$	456.0		3.5		$	438.7		3.6		$	421.2		3.8


⁽¹⁾	Percent of total average managed receivables.

CAF ORIGINATION INFORMATION (AFTER THE IMPACT OF 3-DAY PAYOFFS)



	Years Ended February 29 or 28
	2020			2019			2018
Net loans originated (in millions)	$	7,089.7		$	6,330.1		$	5,962.2
Vehicle units financed	353,654			323,864			310,739
Net penetration rate ⁽¹⁾	42.5		%	43.2		%	43.1		%
Weighted average contract rate	8.4		%	8.5		%	7.8		%
Weighted average credit score ⁽²⁾	710			706			707
Weighted average loan-to-value (LTV)⁽³⁾	94.2		%	94.8		%	95.0		%
Weighted average term (in months)	66.1			66.0			65.8


⁽¹⁾	Vehicle units financed as a percentage of total used units sold.

⁽²⁾

The credit scores represent FICO® scores and reflect only receivables with obligors that have a FICO® score at the time of application. The FICO® score with respect to any receivable with co-obligors is calculated as the average of each obligor’s FICO® score at the time of application. FICO® scores are not a significant factor in our primary scoring model, which relies on information from credit bureaus and other application information as discussed in Note 4. FICO® is a federally registered servicemark of Fair Isaac Corporation.


⁽³⁾	LTV represents the ratio of the amount financed to the total collateral value, which is measured as the vehicle selling price plus applicable taxes, title and fees.

LOAN PERFORMANCE INFORMATION



	As of and for the Years Ended February 29 or 28
(In millions)	2020			2019			2018
Total ending managed receivables	$	13,617.8		$	12,510.2		$	11,618.9
Total average managed receivables	$	13,105.1		$	12,150.2		$	11,210.8
Allowance for loan losses ⁽¹⁾	$	157.8		$	138.2		$	128.6
Allowance for loan losses as a percentage of ending managed receivables	1.16		%	1.10		%	1.11		%
Net credit losses on managed receivables	$	166.1		$	144.2		$	132.6
Net credit losses as a percentage of total average managed receivables	1.27		%	1.19		%	1.18		%
Past due accounts as a percentage of ending managed receivables	3.44		%	3.61		%	3.38		%
Average recovery rate ⁽²⁾	48.1		%	47.7		%	46.1		%


⁽¹⁾	The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date and anticipated to occur during the following 12 months.

⁽²⁾

The average recovery rate represents the average percentage of the outstanding principal balance we receive when a vehicle is repossessed and liquidated, generally at our wholesale auctions. While in any individual period conditions may vary, over the past 10 fiscal years, the annual recovery rate has ranged from a low of 46% to a high of 60%, and it is primarily affected by changes in the wholesale market pricing environment.

Fiscal 2020 Versus Fiscal 2019.


•	CAF Income (Increase of $17.3 million or 4.0%)


◦	The increase in CAF income reflects an increase in the average managed receivables, partially offset by an increase in the provision for loan losses.


◦	Average managed receivables grew 7.9% to $13.11 billion in fiscal 2020 driven primarily by the rise in CAF loan originations in recent years.


◦	The growth in net loan originations in fiscal 2020 was largely due to our used vehicle sales growth as well as an increase in the average amount financed, partially offset by a decline in CAF’s penetration rate.


•	Provision for Loan Losses (Increased to $185.7 million from $153.8 million)


◦	The increase in the provision for loan losses was primarily due to the growth in average managed receivables as well as a modest increase in losses.


◦	The allowance for loan losses as a percentage of ending managed receivables was 1.16% as of February 29, 2020 compared with 1.10% as of February 28, 2019.


◦	Net losses for fiscal 2020 remained well within our long-term targeted performance range.


•	Total interest margin increased slightly as a percentage of average managed receivables to 5.7% in fiscal 2020 compared with 5.6% in fiscal 2019.

Tier 3 Loan Originations. CAF also originates a small portion of auto loans to customers who typically would be financed by our Tier 3 finance providers, in order to better understand the performance of these loans, mitigate risk and add incremental profits. Historically, CAF has targeted originating approximately 5% of the total Tier 3 loan volume; however, this rate may vary over time based on market conditions. A total of $167.5 million and $162.4 million in CAF Tier 3 receivables were outstanding as of February 29, 2020 and February 28, 2019, respectively. These loans have higher loss and delinquency rates than the remainder of the CAF portfolio, as well as higher contract rates. As of February 29, 2020 and February 28, 2019, approximately 10% of the total allowance for loan losses related to the outstanding CAF Tier 3 loan balances. Subsequent to the end of fiscal 2020, we paused our CAF Tier 3 lending given the current economic outlook and uncertainty surrounding the COVID-19 outbreak.

PLANNED FUTURE ACTIVITIES

In March 2020, we opened one store in an existing market (Tampa, FL). In April 2020, we opened one store under limited operations in an existing market (Philadelphia, PA). Previously, it was our intent to open 13 stores in fiscal 2021 and a similar number of stores in fiscal 2022. While we remain committed to executing our store growth plan for the long-term benefit of customers and shareholders, we have decided to pause our store expansion and remodel strategy until the COVID-19 situation stabilizes.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1(X) to the consolidated financial statements for information on recent accounting pronouncements applicable to CarMax.

FINANCIAL CONDITION

Liquidity and Capital Resources

Our primary ongoing cash requirements are to fund our existing operations, store expansion and improvement and CAF. Since fiscal 2013, we have also elected to use cash for our share repurchase program. Our primary ongoing sources of liquidity include funds provided by operations, proceeds from non-recourse funding vehicles and borrowings under our revolving credit facility or through other financing sources.

We currently target an adjusted debt to capital ratio in a range of 35% to 45%. At the end of fiscal 2020, our adjusted debt to capital ratio was at the lower end of our targeted range. In calculating this ratio, we utilize total debt, excluding non-recourse notes payable, finance lease liabilities, a multiple of eight times rent expense and total shareholders’ equity. Generally, we expect to use our revolving credit facility and other financing sources, together with stock repurchases, to maintain this targeted ratio; however, in any period, we may be outside this range due to seasonal, market, strategic or other factors.

We ended fiscal 2020 with a healthy liquidity position. In response to the COVID-19 crisis, we are taking immediate and proactive measures to bolster our liquidity position and provide additional financial flexibility to improve our ability to meet our short-term liquidity needs. These measures include drawing down additional funds on our revolving credit facility, halting our stock repurchase program, pausing our store expansion strategy and actively aligning operating expenses to the current state of the business, including our recently announced furlough of approximately 15,500 associates in April 2020. Our current capital allocation strategy is to prioritize navigating the near-term challenges that COVID-19 presents and continuing to fund operating activities.

Operating Activities. During fiscal 2020, net cash used in operating activities totaled $236.6 million compared with net cash provided by operating activities of $163.0 million in fiscal 2019, which included increases in auto loans receivable of $1.31 billion in fiscal 2020 and $1.05 billion in fiscal 2019. The majority of the increases in auto loans receivable are accompanied by increases in non-recourse notes payable, which are separately reflected as cash provided by financing activities.

As of February 29, 2020, total inventory was $2.85 billion, representing an increase of $327.0 million, or 13.0%, compared with the balance as of the start of the fiscal year. The increase primarily reflected the addition of inventory to support our comparable store sales growth, including seasonal sales opportunities, and new store openings in fiscal 2020. The increase also reflects a higher average carrying cost of inventory due to changes in our vehicle mix.

When considering cash from operating activities, management uses an adjusted measure of net cash from operating activities that offsets the changes in auto loans receivable with the corresponding changes in non-recourse notes payable. This is achieved by adding back the cash provided from the net issuances of non-recourse notes payable, which represents the increase in auto loans receivable that were funded through the issuance of non-recourse notes payable during the year. The resulting financial measure, adjusted net cash from operating activities, is a non-GAAP financial measure. We believe adjusted net cash from operating activities

is a meaningful metric for investors because it provides better visibility into the cash generated from operations. Including the increases in non-recourse notes payable, net cash provided by operating activities would have been as follows:

RECONCILIATION OF ADJUSTED NET CASH FROM OPERATING ACTIVITIES



	Years Ended February 29 or 28
(In millions)	2020			2019		2018
Net cash (used in) provided by operating activities	$	(236.6	)	$	163.0	$	(80.6	)
Add: Net issuances of non-recourse notes payable ⁽¹⁾	1,077.9			890.8		902.2
Adjusted net cash provided by operating activities	$	841.3		$	1,053.8