1. C A R M A X , I N C . A N N U A L R E P O RT
FISCAL YEAR 2004
CARMAX 2003 C4n1

2. THE CARMAX
ADVANTAGE
COMPELLING MARKET UNIQUE CONSUMER OFFER P R O P R I E TA RY P R O C E S S E S
1 2 3
• Huge • Low, No-Haggle Prices A N D S YS T E M S
• Stable • Broad Selection • Information Systems
• Non-Commodity • Great Quality • Purchasing and Inventory
• Fragmented Competition • Customer-Friendly Service Management
• Consumer Need • carmax.com • Reconditioning
• Finance Originations
See page 4. See page 6.
See page 8.
S T R O N G R E S U LT S S K I L L E D, D E D I C AT E D P E O P L E S O L I D G R OW T H O P P O RT U N I T Y
4 5 6
• Revenues • Training and Development • Growth Plan
• Earnings • Store Management Teams • Defensible Competitive Advantage
• Return on Invested Capital • Regional Management Teams • Outlook
• Return on Shareholders’ Equity • Corporate Management Team See page 14.
See page 11. See page 12.
CARMAX MARKETS
(as of May 1, 2004)
8
1 Alabama Nevada
1 4
Birmingham Las Vegas (2)
1
1 1
2 California North Carolina
11
1
1
2 Los Angeles (2) Charlotte (2)
2
1 Sacramento Greensboro
11
4
Raleigh
1
Florida
4
Miami (3) South Carolina
Orlando (2) Columbia
4 2
Tampa (2) Greenville
2
1
Georgia Tennessee
3
Atlanta (4) Knoxville
Memphis
Illinois
Nashville
Chicago (8)
U S E D C A R S U P E R S TO R E S
Texas
Indiana
Mid-Sized Markets (17) Dallas/Fort Worth (4)
Indianapolis Houston (4)
Large Markets (8)
San Antonio
Kansas
1 Numbers in circles indicate the number Kansas City Virginia
of used car superstores in a market.
Richmond
Kentucky
Louisville Washington, D.C./
Baltimore (4)
Cover photo: CarMax’s used car superstore in Henderson, Nevada, one of two superstores opened in the Las Vegas market in fiscal 2004.

3. Te n y e a r s a f t e r p i o n e e r i n g t h e u s e d c a r s u p e r s t o r e c o n c e p t i n 1 9 9 3 , C a r M a x , I n c . i s t h e n a t i o n ’s l e a d i n g
s p e c i a l t y re t a i l e r o f u s e d c a r s . A t Fe b r u a r y 2 9 , 2 0 0 4 , C a r M a x o p e r a t e d 4 9 u s e d c a r s u p e r s t o re s i n 2 3 m a r ke t s ,
as well as 12 new car franchises, all of which were integrated or co-located with its used car superstores.
C a r M a x s o l d 2 2 4 , 0 9 9 u s e d v e h i c l e s i n f i s c a l 2 0 0 4 , r e p r e s e n t i n g 9 1 % o f t h e t o t a l 2 4 5 , 7 4 0 v e h i c l e s s o l d by t h e
company during the year.
F I N A N C I A L H I G H L I G H T S (Dollars in millions except per share data)
FISCAL YEARS ENDED FEBRUARY 29 OR 28
% CHANGE
2004 2003* 2002* 2001 2000
’03 TO ’04
Operating Results
Net sales and operating revenues 16% $4,597.7 $3,969.9 $3,533.8 $2,758.5 $2,201.2
Net earnings 23% $ 116.5 $ 94.8 $ 90.8 $ 45.6 $ 1.1
Separation costs nm $ — $ 7.8 $ 0.4 $ — $ —
Net earnings excluding separation costs 14% $ 116.5 $ 102.6 $ 91.2 $ 45.6 $ 1.1
Per Share Data
Diluted earnings 21% $ 1.10 $ 0.91 $ 0.87 $ 0.44 $ 0.01
Separation costs nm $ — $ 0.07 $ 0.01 $ — $ —
Diluted earnings excluding separation costs 12% $ 1.10 $ 0.98 $ 0.88 $ 0.44 $ 0.01
Other Information
Cash provided by (used in) operating activities 106% $ 148.5 $ 72.0 $ 42.6 $ 18.0 $ (23.6)
Used car superstores at end of year 23% 49 40 35 33 33
* Results for fiscal 2003 and fiscal 2002 include costs related to the October 2002 separation of CarMax from Circuit City Stores, Inc.
nm = not meaningful
REVENUES NET EARNINGS COMPARABLE USED CARS SOLD
STORE USED UNIT
(In billions) (In millions)
SALES
224,099
(Percentage change)
$116.5
$4.60
190,135
$3.97
24
$94.8
$90.8
$3.53
164,062
$2.76
$2.20
13
$45.6
132,868
111,247
8
6
$1.1
00
00 01 02 03 04
00 01 02 03 04 00 01 02 03 04 01 02 03 04
(8)
Forward-Looking Statements: Statements in this annual report about the company’s future business plans, prospects, and financial performance are forward-looking statements
that are made in reliance on the safe harbor provisions of the Private Securities Reform Act of 1995. These statements are based on management’s current knowledge and
assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from anticipated results. For additional information on
important factors that could affect expectations, see the company’s Securities and Exchange Commission filings, including “Management’s Discussion and Analysis” contained
in this annual report.
Separation: On October 1, 2002, CarMax, Inc. was separated from Circuit City Stores, Inc. and became an independent, separately traded public company. Details of the
separation are discussed in “Management’s Discussion and Analysis” and the “Notes to Consolidated Financial Statements” contained in this annual report. The consolidated
financial statements and related information contained in this annual report are presented as if CarMax existed as a separate entity during all periods presented.

4. TO O U R S H A R E H O L D E R S
WHERE WE ARE
Austin Ligon
In fiscal 2004 we delivered strong earnings growth, up 14%
President and Chief Executive Officer
excluding the non-deductible separation costs we paid for in
fiscal 2003, and up 23% on a net earnings basis. Our earnings
growth resulted from an 18% increase in used vehicle unit
WHERE WE’VE BEEN
During the past year, we’ve celebrated some important mile- sales, driven both by our new store openings and 6% compa-
stones that reflect just how far we’ve come since we began. rable store used unit sales growth. With our unique consumer
Last July, we sold our 1 millionth car. In late September, we offer and strong store execution, we continued to take market
celebrated our 10th anniversary since opening, and on share. We hit our gross margin dollars per used unit target for
October 1, our first anniversary as an independent public the year despite a particularly challenging model year
company. As we finished the fiscal year, we hit a few other changeover period in the third quarter. Our proprietary buy-
impressive milestones: ing and inventory processes and systems continue to help us
■ Over 11 million customers greeted with a smile. “buy right” and “price right.”
■ Over 4.5 million free appraisals and cash offers This earnings growth was achieved while we absorbed
to customers. both the penalty that comes with ramping up our store
■ Over 1 million used cars sold. growth and the expected decline in CarMax Auto Finance
■ Over $20 billion in cumulative sales. spreads. As planned, we opened nine used car superstores,
■ Our 3rd consecutive PricewaterhouseCoopers/ compared with five the previous year. Consequently, SG&A
Automotive News award for top 3-year shareholder expense reflected appreciably higher preopening expense, as
return among auto retailers. well as the significantly higher SG&A ratio of new stores
All in all, a pretty good first decade for an organic growth compared with stores at mature sales levels. We also absorbed
start-up in the retail industry — all thanks to the extraordinary approximately $13.5 million in incremental costs related to
efforts of the 9,500-plus CarMax associates who’ve joined us being a stand-alone company compared with fiscal 2003.
along the way and made it all happen. Twenty-six of the Also as expected, CAF income grew a modest 3% for the
original 100 associates that were with CarMax the day we year. For more than two years — through the first half of fiscal
2004 — we benefited from much higher than normal spreads
at CAF because market rates for consumer auto loans did not
fall as fast as our cost of funds. During the second half, spreads
returned to more normal ranges. We expect CAF income com-
parisons in fiscal 2005 to be challenging for the first two quar-
ters, and then they should be on a more comparable basis.
WHERE WE’RE GOING
We are pleased that CarMax has built a strong foundation
for consistent and profitable growth. We have adjusted our
longer-term used unit comp store growth expectation to a
Founding Associates, September 1993
range of 4% to 8%. We continue to expect to deliver average
opened the Richmond store on September 29, 1993, are still
annual earnings growth of approximately 20%, once our CAF
a part of our team today. They now play a wide variety of
income comparisons have cycled around to reflect spreads in
roles throughout our organization, and their stories are the
the normal range for each period. Our operating cash flow
story of CarMax’s growth and development.
2 CARMAX 2004

5. provides more than enough resources for our net capital also taking advantage of data provided by our new electronic
spending needs, and we have ready availability of attractively repair order system to improve the quality of our recondition-
priced debt financing through our inventory facility and real ing process while reducing the cost and cycle time involved.
• Associate Development: To open the 10 stores planned
estate financing relationships. We are now past the vast major-
ity of disruption and costs associated with separating from our for 2005, we need to generate approximately 140 managers
parent company. In fiscal 2005, we expect to incur another from our existing base of approximately 700 store-level
$4 million in incremental stand-alone costs, largely related to managers across the sales, purchasing, service operations,
outsourcing our payroll systems, and the following year, we and business office teams and replace them with internal
expect to incur roughly another $3 million to $5 million as promotions and outside hires. It also means identifying,
we outsource our computer operations center. We expect this interviewing, selecting, hiring, and training more than
to be the last major SG&A addition related to our separation. 1,000 additional talented associates in the various operating
■ Growth Program. Our growth plan calls for a ramp up departments. To do this smoothly, open the new stores suc-
to a 15%–20% annual growth rate of new stores. Our focus for cessfully, and continue to improve operational execution in
the first 4 to 5 years of the program is adding satellite fill-in our existing stores is an enormous task. This is, as they say,
stores in established markets and standard stores in new mid- Job #1 for CarMax management.
sized markets. These represent the lowest risk, highest early We also believe the broad diversity that we’ve been able
return opportunities, which help offset the penalties of a growth to achieve in both our overall associate teams and our man-
program buildup. At year-end, we had opened 15 new stores agement teams has given us a significant competitive advan-
plus one replacement store at our LAX location since resuming tage compared to other auto retailers. We intend to build on
growth. Seven of these stores are satellite fill-in stores while the this advantage.
• Company Culture: The entrepreneurial culture of
other eight are standard stores in new mid-sized markets.
This year was the first we’ve grown at a 20% pace, and we service and quality that our associates have built as a team
intend to do so again in fiscal 2005 by opening five standard over the last decade has been critical to our success. We’ve
superstores and five satellite superstores, including a standard also realized how much fun both we and our customers can
and a satellite store in the Los Angeles market. We do not have when you remove all the negatives from the car-buying
expect the L.A. stores to initially perform as strongly as our process. Yet our own success and growth can become the
regular openings due to a current lack of enough stores to enemy if we’re not careful. We want to sustain an enthusiastic,
support TV advertising in L.A. The L.A. stores are intended down-to-earth, non-hierarchical business culture that treats
to lay the groundwork for an eventual rollout of the entire every associate and every customer with the respect and per-
market. A satellite opening in Richmond is a continuation of sonal attention they deserve. A culture where our stores and
our efforts to understand how densely we can store an older, store associates come first. They serve our customers, they
higher-market-share market. In 4 to 5 years, we hope to better create the value in the company, and our job is to support
understand what our ultimate market share potential might them and help make their jobs easier in every way we can.
be, and therefore how many stores we may eventually be able Ultimately, all truly great service and retail companies create a
to build nationwide. culture built on similar principles, and they prosper only as
■ Operational Goals. During fiscal 2005, we have three long as they sustain it.
■ Board of Directors Additions. This past year we wel-
major internal goals.
• Quality: First, we want to continue our efforts at contin- comed Fully Clingman and Tom Stemberg to our board of
uous quality improvement throughout our operating processes directors. Fully is the retired president of the H.E. Butt
and particularly our reconditioning process. I believe we have Grocery Company, named one of the top three supermarket
the best and most consistent inspection, reconditioning, and chains in the nation by the Grocery Manufacturers of
certification process in the auto industry — indeed, several America. Tom is the founder and executive chairman of
manufacturers have studied our process as the basis for their Staples, Inc. Together they add enormous depth in big-box
own certification programs. But we know there are still errors to retail experience to our board. We are delighted to have their
eliminate and efficiencies to be gained. This past year, our sen- expertise as we grow.
ior operating team studied the quality improvement processes
and cultures of top auto manufacturers like Toyota and Nissan.
Although I believe we’re among the better specialty retailers in
process improvement and significantly ahead of anyone else in Austin Ligon
auto retail, our visits to the Toyota and Nissan factories have President and Chief Executive Officer
helped us understand how much more can be achieved. We are March 30, 2004
CARMAX 2004 3

6. 1
3 COMPELLING MARKET
HUGE STABLE
■ ■
With annual sales of approximately $366 billion, used Only twice in the last two decades has the volume of
vehicles comprise nearly half of the U.S. auto retail used unit sales fluctuated by more than 3% from one
market, the largest retail segment of the economy. year to the next, far less volatile than the annual change
in new car units sold.
■ In 2003, there were an estimated 43.6 million used
■
vehicles sold compared with 16.7 million new vehicles. The market for late-model used cars is almost acyclical.
As the economy improves, buyers who move from used
■ CarMax’s primary focus — 1- to 6-year-old vehicles — is
cars to new cars are replaced by buyers who can now
a market estimated at $265 billion in annual sales and
afford a later model used car.
20 million units per year.
■ This stability provides the foundation for CarMax’s
■ The used vehicle market is substantially bigger than other
market share growth strategy in both existing and
large retail categories such as the school and office
new markets.
products market ($229 billion in estimated annual sales)
and the home improvement market ($212 billion in
estimated annual sales).
R E TA I L M A R K E T S I Z E U S E D V E H I C L E S A L E S S TA B I L I T Y
(In billions) (Percentage change)
$366
15
$265
10
$229
$212
5
0
-5
-10
-15
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
School and Home
1- to 6-
U.S.
Office Improve-
Year-Old % Change Used Vehicle Unit Sales
Used Car % Change New Vehicle Unit Sales
Products ment
Used
Market
Cars Source: Manheim Auctions
Source: Manheim Auctions; CarMax estimates; the School, Home and
Office Products Association estimates; and the Home Improvement
Research Institute estimates
4 CARMAX 2004

7. S TA B I L I T Y P R O V I D E D B Y C O N S I S T E N T FRAGMENTED COMPETITION
T U R N O V E R O F V E H I C L E S I N O P E R AT I O N
■ The U.S. used car marketplace is highly fragmented and
(Percent annual turnover*)
includes 21,700 franchised new car dealers, 54,000
25
independent dealers, and millions of private individuals.
■
20 Our primary competitors are the 21,700 franchised
new car dealers who sell the majority of late-model,
15
1- to 6-year-old vehicles. These dealers focus primarily on
10
new cars and secondarily on financing and service. Used
car retailing is often a lower priority business for them.
5
■ Independent dealers predominantly sell older, higher
0
mileage cars than does CarMax.
93 94 95 96 97 98 99 00 01 02 03
1 out of 5 vehicles in operation in the U.S. changes hands annually. ■ To date, there have been no successful, large-scale attempts
* Total used vehicle sales divided by total vehicles in operation
to replicate the CarMax used car superstore model.
Source: Manheim Auctions
NON-COMMODITY CONSUMER NEED
■ Unlike new cars, every used car is unique, reflecting ■ Our consumer research confirms that most consumers
differences in mileage, condition, and age. This uniqueness dislike the traditional high-pressure sales tactics employed
provides CarMax the opportunity to add value. by many auto retailers.
■ We carefully select the vehicles we offer for retail sale. ■ For more than 20 years, “car salesmen” have ranked last in
Our choices are driven by our high quality standards and the annual Gallup survey on the honesty and ethics of
our exceptional understanding of consumer buying various professions.
preferences at each of our stores. ■ The CarMax customer-friendly consumer offer is unique
■ Every retail vehicle undergoes a rigorous reconditioning in auto retailing. We eliminate the traditional adversarial
process to ensure it meets our high quality standards. relationship and let customers shop for cars the same way
they shop at other “big-box” retailers.
■ We back our quality promise with a 5-day, 250-mile, no-
questions-asked, money-back guarantee and a free 30-day,
industry-leading limited warranty. We also sell extended
service plans that can provide coverage up to 6 years.
CARMAX 2004 5

8. UNIQUE
2 CONSUMER OFFER
The CarMax offer is structured around our core equities — BROAD SELECTION
those things we offer customers that, taken together, make us ■ A typical CarMax superstore has between 300 and
unique in auto retailing. 400 used vehicles for sale compared with approxi-
mately 90 used vehicles at the average new car dealer.
LOW, NO-HAGGLE PRICES ■ Our primary focus is vehicles that are 1 to 6 years old,
with fewer than 60,000 miles. For the most cost-
■ We offer our best price up front and never haggle on any
conscious consumer, we also offer older, higher mileage
element of the sales transaction.
ValuMax cars that meet our same mechanical, electrical,
• The price of the vehicle is competitively low and clearly
and safety standards. These older vehicles typically
posted on the car, in the store, and on carmax.com.
comprise approximately 15% of our inventory.
• The price of the extended service plan is competitive
■ Each store’s inventory is tailored to the buying
and fixed, based primarily on the repair record of
preferences of the consumers in that store’s trade area.
similar vehicles and the length of coverage.
• The price of the financing is competitive, no-haggle,
and based on the lender’s assessment of credit risk.
GREAT QUALITY
Customers see the finance offer as it is made directly
■ Every used vehicle we sell must meet stringent
from the lender and, if approved by more than one
mechanical, electrical, and safety standards.
lender, may choose among competing offers.
• The price of the “trade-in” is a written cash offer, ■ Every used vehicle we retail is put through a thorough,
based solely on the wholesale value of the vehicle, and 125-point inspection. Needed repairs are made and the
our offer is good whether the customer buys from us car is thoroughly detailed inside and out to make it look
or not. The offer is good for 7 days or 300 miles. and feel as close to new as possible.
■ Our no-haggle offer streamlines the buying process ■ We stand behind our quality standards with our 5-day,
and helps ensure that we create only a comfortable, 250-mile, money-back guarantee and our industry-
friendly relationship with customers. leading, 30-day limited warranty. We also offer extended
service plans on every vehicle we sell that provide up to
6 years of coverage.
6 CARMAX 2004

9. CUSTOMER-FRIENDLY SERVICE CARMAX.COM
■ ■
We designed the CarMax offer to give consumers what Carmax.com is a valuable marketing and research tool
they asked for: no haggling on any aspect of the sale, broad that allows customers to see a car’s photo, price, and
selection, high quality, and a customer-friendly process. specifications, as well as to make side-by-side vehicle
comparisons, all from the comfort of home. We have
■ To ensure that sales consultant objectives are completely
sales consultants dedicated to caring for customers who
aligned with those of the customer, we pay our sales
contact us through the Internet.
consultants a fixed-dollar-per-unit commission. The sales
■
consultant earns the same dollar amount regardless of the Using carmax.com, customers can browse our nationwide
price and profit on the vehicle. Consequently, the sales inventory of approximately 20,000 used vehicles. This
consultant’s only objective is to help customers find the Web-accessible inventory will continue to expand as we
right car for their needs at a price they can afford. grow geographically.
■ ■
Our computerized inventory system makes it easy to Any used vehicle in our nationwide inventory can be
search our vehicle inventory. transferred at customer request to a local superstore.
Transfers are free within a market; longer-distance
■ There is no hand-off of customers to a finance manager
transfers include a charge to cover transportation costs.
or sales manager. The sales consultant helps the customer
■
through the entire sales process. Currently, more than 10% of our vehicles sold are
transferred at customer request, and approximately 20% of
retail sales are initiated through our Internet sales process.
CARMAX 2004 7

10. PROPRIETARY
3 PROCESSES AND SYSTEMS
INFORMATION SYSTEMS
P R O P R I E TA R Y P R O C E S S E S A N D S Y S T E M S
■ We recognized at the very beginning of CarMax’s concept
development that management information systems
would be critical to success in the complex used car
retailing business.
Consumer
Offer
■ Our systems capture data on every aspect of our business.
• Every vehicle purchased is electronically tracked
through its CarMax life from purchase through
reconditioning and test drives to ultimate sale.
Purchasing/
We also capture data on vehicles we wholesale,
Inventory
helping us track market pricing changes.
Management
• In addition, we collect data on activities such as:
> Customer visits.
Finance
> Sales consultant/customer engagements.
Reconditioning Originations
> Appraisals.
> Extended service plan sales.
IN S
EM
FO > Financings.
T
RMA
SYS
TION
■ This information is continually used to enhance
our processes and systems.
■ We believe our processes and systems provide us with a
Our business is not unlike an iceberg. Our unique consumer
key competitive advantage. These enabling technologies
offer is what draws customers to our stores; it is what can
have been developed over our more than 10-year history,
be seen “above the waterline.” However, our key processes
and we are dedicated to their continuous improvement to
and systems “below the waterline” are what make our business maintain this competitive edge.
successful — sophisticated purchasing and inventory manage-
ment, reconditioning, and finance originations, all supported
by proprietary information systems. Competitors who have
tried to copy our concept have typically failed because they
focused only on our consumer concept. They ignored the
hidden danger of failing to build strong operating processes
early in concept development.
8 CARMAX 2004

11. PURCHASING AND INVENTORY RECONDITIONING
MANAGEMENT ■ The majority of our service operation resources are
used in vehicle reconditioning, which supports our
■ More than half the cars we retail are purchased directly
used vehicle sales.
from consumers, an excellent source of quality, high-
demand vehicles. Customer vehicle purchases that do not ■ We employ state-of-the-art production techniques, and
meet our retail standards are sold at our own in-store we focus on balancing quality, speed, and cost. Our
auctions, which are an economic and efficient means of production planning process allows us to match
disposal. reconditioning capacity and inventory demand across
multiple stores.
■ We have built a team of more than 500 skilled buyers,
150 of whom have each completed more than 10,000 ■ At the end of fiscal 2003, we rolled out our electronic
appraisals. Our buyers have online access to data on repair order system (“ERO”), which optimizes the
current inventory and recent sales, as well as wholesale sequencing of vehicle reconditioning procedures. ERO
industry information. has reduced reconditioning cycle time and is providing
the basis for further quality improvements.
■ In our 10 years of operation, we have appraised more than
4.5 million customer vehicles, retailed more than 1 million ■ Over the past five years, we have reduced our reconditioning
used cars, and sold nearly 600,000 cars at our auctions. work-in-process cycle time by 50% through our improved
Information captured and analyzed on each transaction process and production techniques.
allows us to continually refine our complex inventory and ■ Automotive technicians are in short supply in the U.S.
pricing models. We are able to attract and retain skilled technicians by
■ Our inventory and pricing models help us: offering a superior working environment, including air
• Buy the mix of makes, models, age, mileage, and price conditioned bays, a corporate benefit program, and the
points tailored to the buying preferences at each super- opportunity for career advancement. We also have
store. developed an extensive in-house apprentice program.
• Recommend pricing adjustments based on complex
algorithms that take into account factors including
sales history, consumer interest, and seasonal patterns.
• Optimize inventory turns to help maintain gross mar-
gin dollars per unit and minimize the depreciation risk
inherent in used cars.
CARMAX 2004 9

12. ■
FINANCE ORIGINATIONS This structure reduces or eliminates two of the three risks
inherent in used car lending.
■ CarMax has created a unique finance origination structure
• The consumer risk — the customer’s willingness and
that provides significant customer benefits and competi-
ability to pay — is the basic risk borne by all lenders.
tive advantages.
• The collateral risk — the risk of the vehicle — is mini-
• The sales consultant collects the customer’s credit infor-
mized by the consistent, high quality of our cars, the
mation and electronically submits the loan application to
large percentage of vehicles covered by extended service
CarMax Auto Finance (“CAF”) and a third-party prime
plans, and the consistency of the relationship between
lender. If there are no prime offers, the application is auto-
wholesale and retail values for CarMax vehicles. CAF
matically routed to third-party, non-prime lenders.
and our third-party lenders have found they can rely on
• Customers see each offer directly from the lender, and,
CarMax information to determine true vehicle worth.
where multiple offers exist, they may choose the offer
• The “intermediary” risk — the risk introduced by the
that best suits their needs.
person between the customer and the finance source —
• We provide a 3-day payoff option, which gives cus-
is eliminated at CarMax. There is no commission-
tomers up to three business days to replace the loan with
driven finance manager to distort the facts on the
cash or an alternative lending source, free of penalty or
price or quality of the vehicle or the consumer credit
interest.
information. With the price of all components fixed,
• The sales consultant receives no commission on the value-oriented, and non-negotiable at CarMax, both
finance process. CAF and third-party lenders benefit from superior
information quality in making financing decisions.
■ Having our own finance operation also reduces the sales
risk associated with changes in third-party credit availability.
10 CARMAX 2004

13. 4
STRONG RESULTS
$4,597.7
REVENUES R E T U R N O N I N V E S T E D C A P I TA L
$3,969.9
(In millions) (Unleveraged)
$3,533.8
12.7%
12.4%
12.1%
$2,758.5
8.5%
$2,201.2
$1,607.3
3.5%
$950.7
FY95 FY96 FY97 FY98 FY99
$566.7
$327.1
$93.5
(0.5)%
(0.8)%
FY00 FY01 FY02 FY03 FY04
(0.8)%
(4.1%)
(5.3)%
FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04
$116.5
EARNINGS RETURN ON SHAREHOLDERS’ EQUITY
(In millions)
$94.8
$90.8
20.7%
18.9%
18.2%
12.4%
$45.6
$1.1
0.3%
FY95 FY96 FY97 FY98 FY99
FY97 FY98 FY99
FY00 FY01 FY02 FY03 FY04
$(4.1)
$(5.2)
FY02
FY00 FY01 FY03 FY04
$(9.3)
$(23.5)
(5%)
(6.7%)
$(34.2)
(9.1%)
ROE calculations not meaningful for periods prior to fiscal 1997.
CARMAX 2004 11

14. CarMax’s success depends on the skilled and dedicated people who deliver our consumer offer and who develop and execute our
processes and systems. The integrity and transparency of the CarMax consumer offer allows us to attract managers and
associates with much more diverse backgrounds than the traditional auto retailer. With access to the best of a broad range of
applicants, we’ve built a team that can consistently deliver superior customer service, strong leadership, and excellent results.
The associates pictured on these pages represent the more than 9,500 employees who contribute to our success.
SKILLED,
5 DEDICATED PEOPLE
■
TRAINING AND DEVELOPMENT We recruit the majority of our superstore managers
from the top big-box retailers across the country,
■ In any complex retail business, the primary challenge
focusing on individuals with a broad, general
and limitation to growth is in the ability to recruit, train,
management background and a successful career
and develop people.
progression. Our management training program
■ We have formal training programs that span each of our four
includes rotations through each functional area.
functional areas — sales, service, buying, and business office.
■ Our comprehensive workforce planning process looks
The programs include classroom and online training as well
forward more than 48 months, considering planned
as formal mentoring assignments. Standardized training and
store openings and anticipated turnover.
processes also facilitate transfers between stores and regions.
S TO R E M A N A G E M E N T
12 CARMAX 2004

15. R E G I O N A L M A N AG E M E N T T E A M S
C O R P O R AT E M A N A G E M E N T T E A M
TEAMS
CARMAX 2004 13

16. SOLID GROWTH
6 OPPORTUNITY
■
GROWTH PLAN Satellite stores are being added in under-served trade areas
in established multi-store markets and to increase
■ By focusing on used cars, CarMax can grow organically,
penetration and market share in established mid-sized
unrestrained by new car franchise or manufacturer
markets. Satellite stores are highly efficient because they
restrictions.
are built on smaller sites and require little or no
■ We resumed our growth plan at the end of fiscal 2002,
incremental advertising.
following a two-year hiatus during which we concentrated
■ In fiscal 2005, we expect to open 10 superstores,
on improving sales and profits. We opened two superstores
including four standard stores in mid-sized markets, four
in fiscal 2002, five superstores in fiscal 2003, and nine
satellite stores in established markets, and two additional
superstores in fiscal 2004, including a replacement store
stores in Los Angeles. The L.A. stores will help provide
in Los Angeles.
the foundation for an eventual full-market rollout.
■ During the next three years, we plan to open stores at an
annual rate of approximately 15%-20% of our used car
superstore base, focusing primarily on new mid-sized
markets and adding satellite stores in established markets.
■ We define mid-sized markets as those with television
viewing populations ranging from 1 million to
2.5 million. These markets are the easiest to enter
from a real estate and advertising perspective, and
49
historically they are where we have experienced the
fastest store ramp-up and profitability.
40
35
S T O R E E X PA N S I O N 33 33
(Number of used car superstores)
29
18
7
4
2
1
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
14 CARMAX 2004

17. ■ We estimate we have an 8% – 10% market share of late OUTLOOK
model, 1- to 6-year-old used cars within the trade areas ■ Over the next several years, we believe we can achieve
of our most mature stores. This benchmark implies comparable store used unit growth in the range of 4%
a $20 billion to $25 billion sales potential in today’s to 8% per year.
dollars as our stores reach maturity and we achieve full
■ In fiscal 2005, we expect comparable store used unit
national scope.
growth in the range of 3% to 7%, slightly below our
■ Our market share is significantly higher within a 5-to- longer-term expectation due to the exceptionally strong
10-mile radius. We are adding satellite stores in older mid- sales base established over the last three years. We expect
sized markets to determine optimal storing density, best total used unit growth in the range of 18% to 22%.
storing patterns, and incremental market share
■ We expect fiscal 2005 earnings per share in the range of
opportunities.
$1.21 to $1.26, up 10% to 15% from fiscal 2004. The
benefit of our comparable and new store sales growth is
DEFENSIBLE COMPETITIVE expected to be partly offset by the return to more
normalized spreads at CAF.
ADVANTAGE
■ There have been numerous unsuccessful attempts to
replicate the CarMax model. At present, however, we are
fortunate to have no similar-format challengers. This
advantageous competitive landscape is allowing us to
expand on our own timetable, following our own
strategic priorities.
■ CarMax has more than a 10-year development advantage
over any challenger who attempts to copy our business.
Building an organization, developing specialized
processes and systems, refining execution…all take time.
■ CarMax intends to stay ahead of any potential
competition through relentless attention to people,
processes, and execution.
CARMAX 2004 15

18. S E L E C T E D F I N A N C I A L D ATA
FY04 FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95
(Dollars in millions except per share data)
Net sales and
operating revenues $4,597.7 $3,969.9 $3,533.8 $2,758.5 $2,201.2 $1,607.3 $950.7 $566.7 $327.1 $ 93.5
Net earnings (loss) $ 116.5 $ 94.8 $ 90.8 $ 45.6 $ 1.1 $ (23.5) $ (34.2) $ (9.3) $ (5.2) $ (4.1)
Net earnings (loss) per share:
Basic $ 1.13 $ 0.92 $ 0.89 $ 0.45 $ 0.01 $ (0.24) $ (0.35) $ (0.10) N/A N/A
Diluted $ 1.10 $ 0.91 $ 0.87 $ 0.44 $ 0.01 $ (0.24) $ (0.35) $ (0.10) N/A N/A
Total assets $1,037.0 $ 917.6 $ 720.2 $ 711.0 $ 675.5 $ 571.2 $448.3 $427.2 $102.6 $114.3
Long-term debt, excluding
current installments $ 100.0 $ 100.0 $ —$ 83.1 $ 121.3 $ 139.7 $ 27.4 $ — $ 78.5 $111.6
Used units sold 224,099 190,135 164,062 132,868 111,247 96,915 56,594 31,701 19,618 5,574
New units sold 21,641 22,360 24,164 20,157 17,775 6,152 4,265 2,799 — —
Comparable store
used unit growth (%) 6 8 24 13 (8) (5) 6 7 12 19
Comparable store vehicle
dollar growth (%) 6 6 28 17 2 (2) 6 23 12 43
Total used unit growth (%) 18 16 23 19 15 71 79 62 252 335
Total sales growth (%) 16 12 28 25 37 69 68 73 250 356
Used car superstores
at year-end 49 40 35 33 33 29 18 7 4 2
Retail stores at year-end 52 44 40 40 40 31 18 7 4 2
Associates at year-end 9,355 8,263 7,196 6,065 5,676 4,789 3,605 1,614 903 146
16 CARMAX 2004

19. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
The following Management’s Discussion and Analysis finance operation allows us to limit the risk of reliance on
(“MD&A”) is intended to help the reader understand third-party finance sources, while also allowing us to capture
CarMax, Inc. MD&A is presented in nine sections: Business additional profit and cash flows. The majority of CAF’s profit
Overview; Critical Accounting Policies; Results of Operations; contribution is generated from the spread between the interest
Operations Outlook; Recent Accounting Pronouncements; rate charged the customer and our cost of funds. We collect
Financial Condition; Contractual Obligations; Market Risk; fixed, pre-negotiated fees from most of the third-party lenders
and Cautionary Information About Forward-Looking for each CarMax customer loan they finance.
Statements. MD&A is provided as a supplement to, and We sell extended warranties on behalf of unrelated third
should be read in conjunction with, our consolidated financial parties who are the primary obligors. Under these third-party
statements and the accompanying notes contained elsewhere warranty programs, we have no contractual liability to the
in this annual report. customer. Extended warranty revenue represents commissions
In MD&A, “we,” “our,” “us,” “CarMax,” and “the from the unrelated third parties.
company” refer to CarMax, Inc. and its wholly owned We are still at an early stage in the national rollout of our
subsidiaries, unless the context requires otherwise. Amounts retail concept. The primary drivers for future earnings growth
and percents in tables may not total due to rounding. will be vehicle unit growth from geographic expansion and
comparable store sales increases, and the related expense
leverage. We target a roughly similar fixed dollar amount of
B U S I N E S S OV E RV I E W
gross profit per used unit, regardless of price, making unit
General
growth our primary focus. During the next two-to-three years,
CarMax was formerly a subsidiary of Circuit City Stores, Inc.
we plan to focus our store growth primarily on adding standard
(“Circuit City”). On October 1, 2002, the CarMax business was
superstores to new mid-sized markets, which we define as those
separated from Circuit City through a tax-free transaction and
with television viewing audiences between 1 million and 2.5
became an independent, separately traded public company. We
million people, and satellite fill-in superstores in established
pioneered the used car superstore concept, opening our first store
markets. In addition, in fiscal 2005 we plan to open two stores
in 1993. Over the next six years, we opened an additional 32
in Los Angeles on sites that were purchased prior to suspending
used car superstores before suspending new store development to
growth in 1999. Following these openings, we will have four
focus on improving profitability. After a period of concept
stores in Los Angeles, which will provide a foundation for
refinement and execution improvement, we resumed used car
future expansion in this market. In fiscal 2006 or 2007, we
superstore growth in fiscal 2002, adding two stores late in the
expect to once again begin entering additional larger, multi-
fiscal year, five stores in fiscal 2003, and nine stores in fiscal 2004.
store markets. Over the three-year period, we plan to open used
At the end of fiscal 2004, we had 49 used car superstores in 23
car superstores at a rate of 15% to 20% of our store base each
markets, including 8 large markets and 15 mid-sized markets.
year. We also expect used unit comparable store sales increases
CarMax is the nation’s leading specialty retailer of used
in the range of 4% to 8%, reflecting the multi-year ramp in
vehicles. The CarMax consumer offer is unique in the auto
sales of newly opened stores as they mature and continued
retailing marketplace. It gives consumers a way to shop for cars
market share gains at stores that have reached mature sales
the same way they shop for items at other “big-box” retailers.
levels. On a combined basis, we expect that new store openings
Our consumer offer is structured around four core equities,
and comparable store used unit increases will drive total used
including low, no-haggle prices; a broad selection; high
unit growth of approximately 20% annually.
quality; and customer-friendly service. We generate revenues,
The principal challenges we face in expanding our store
income, and cash flows by retailing used and new vehicles and
base and meeting our total unit growth targets include:
associated items including vehicle financing, extended
warranties, and vehicle repair service. In addition, vehicles ■ Our ability to procure suitable real estate at reasonable
purchased through our appraisal process that do not meet our costs. Real estate acquisition will be an increasing challenge
retail standards are wholesaled at on-site auctions. as we enter large, multi-store markets.
Sales of new vehicles represented a decreasing percentage of ■ Our ability to build our management bench strength to
our total revenues over the last three years as we divested new support the store growth.
car franchises and added used car superstores. While further
We staff each newly opened store with an experienced
franchise disposals are planned, we expect to keep a small
management team, including the location general manager,
number of core new car franchises in order to maintain long-
operations manager, purchasing manager, and business office
term strategic relationships with automotive manufacturers.
manager, as well as a number of experienced sales managers
We provide prime financing for customers through CarMax
and buyers. We must therefore be continually recruiting,
Auto Finance (“CAF”) and Bank of America. We also provide
training, and developing managers and associates to fill the
financing for non-prime customers through three third-party
pipeline necessary to support future store openings. If at any
lenders. We continue to test additional non-prime lenders, as
time we believe that the rate of store growth is causing our
well as lenders for sub-prime financing. Having our own
performance to falter, we will slow the growth rate.
CARMAX 2004 17

20. Fiscal 2004 Highlights and assumptions affecting the reported amounts of assets,
In fiscal 2004, net sales and operating revenues increased 16% liabilities, revenues, expenses, and the disclosures of contingent
to $4.60 billion from $3.97 billion and net earnings increased assets and liabilities. We use our historical experience and other
23% to $116.5 million, or $1.10 per share, from $94.8 relevant factors when developing our estimates and assumptions.
million, or $0.91 per share. Sales and earnings were affected We continually evaluate these estimates and assumptions. Note 2
by the following items: to the company’s consolidated financial statements includes a
discussion of significant accounting policies. The accounting
■ We opened nine used car superstores, including five standard-
policies discussed below are the ones we consider critical to an
sized stores in new markets and four satellite stores in existing
understanding of the company’s consolidated financial
markets, including one replacement store in Los Angeles.
statements because their application places the most significant
■ Total used units increased 18%.
demands on our judgment. Our financial results might have
■ Comparable store used units increased 6%. The expected
been different if different assumptions had been used or other
cannibalization resulting from the addition of satellite stores conditions had prevailed.
occurred somewhat faster than originally projected;
however, we do not believe the ultimate amount of Calculation of the Fair Value of Retained Interests
cannibalization will be higher than originally planned. We in Securitization Transactions
are achieving our net incremental sales objectives in the We use a securitization program to fund substantially all of the
markets where satellites have been added. automobile loan receivables originated by CAF. The fair value of
retained interests in securitization transactions includes the
■ Gross profit benefited from a change in our appraisal cost
present value of the expected residual cash flows generated by the
recovery methodology, which is allowing us to more fully
securitized receivables, the restricted cash on deposit in various
recover the cost of our buying and wholesaling operations with
reserve accounts, and an undivided ownership interest in the
no adverse effect on the acceptance rate for our appraisal offers.
receivables securitized through a warehouse facility and certain
■ CarMax Auto Finance income increased 3% in fiscal 2004,
public securitizations. The present value of the expected residual
as the benefit of the growth in our portfolio of CAF loans
cash flows generated by the securitized receivables is determined
was largely offset by the return to more normalized spreads
by estimating the future cash flows using management’s
in the second half of the year. During fiscal 2002, fiscal
assumptions of key factors, such as finance charge income,
2003, and the first half of fiscal 2004, CAF benefited from
default rates, prepayment rates, and discount rates appropriate
the unusually low interest rate environment, with consumer
for the type of asset and risk. These assumptions are derived from
rates falling more slowly than our cost of funds.
historical experience and projected economic trends.
■ Selling, general, and administrative expenses as a percent of
Adjustments to one or more of these assumptions may have a
sales (the “SG&A ratio”) increased to 10.2% in fiscal 2004 material impact on the fair value of retained interests. The fair
from 9.9% in fiscal 2003. Excluding separation costs, the value of retained interests may be affected by external factors,
fiscal 2003 SG&A ratio was 9.7%. The increase in the such as changes in the behavior patterns of customers, changes in
SG&A ratio reflects both the growth penalty associated the strength of the economy, and developments in the interest
with our resumption of geographic expansion and the rate markets. Note 2(C) to the company’s consolidated financial
higher costs of being an independent company following statements includes a discussion of accounting policies related to
the separation from Circuit City. New stores generally have securitizations. Note 4 to the company’s consolidated financial
higher SG&A ratios during the approximately four years it statements includes a discussion of securitizations and provides a
takes to reach mature levels of revenues. sensitivity analysis showing the hypothetical effect on the
Net cash provided by operations increased to $148.5 million retained interests if there are variations from the assumptions
in fiscal 2004 from $72.0 million in fiscal 2003, driven by the used. In addition, see the “CarMax Auto Finance Income”
increase in earnings and a slight reduction in inventory, despite section of this MD&A for a discussion of the current year impact
adding nine used car superstores during fiscal 2004. The decrease of changing our assumptions.
in inventory reflects both higher-than-normal inventories at the
Revenue Recognition
end of fiscal 2003 resulting from weather-impeded sales in
We recognize revenue when the earnings process is complete,
February 2003 and the disposal of four new car franchises during
generally either at the time of sale to a customer or upon
the current fiscal year. During fiscal 2004, we completed three
delivery to a customer. The majority of our revenue is generated
sale-leaseback transactions covering a total of nine stores for total
from the sale of used vehicles. We recognize vehicle revenue
proceeds of $107.0 million and we completed two public
when a sales contract has been executed and the vehicle has
securitizations of CAF receivables totaling $1.11 billion.
been delivered, net of a reserve for returns. A reserve for vehicle
returns is recorded based on historical experience and trends.
CRITICAL ACCOUNTING POLICIES
The estimated reserve for these returns could be affected if
Our results of operations and financial condition, as reflected in
future occurrences differ from historical averages.
the company’s consolidated financial statements, have been
We also sell extended warranties on behalf of unrelated third
prepared in accordance with accounting principles generally
parties to customers who purchase a vehicle. Because these third
accepted in the United States of America. Preparation of
parties are the primary obligors under these warranties, we
financial statements requires management to make estimates
18 CARMAX 2004

21. recognize commission revenue on extended warranties at the primarily of marketable equity and debt instruments, are valued
time of the sale, net of a provision for estimated warranty using market quotations. Plan obligations and the annual
returns. The reserve for returns is based on historical pension expense are determined by independent actuaries using
experience and trends. a number of assumptions provided by the company. Key
assumptions used to measure the plan obligations include the
Income Taxes discount rate, the rate of salary increases, and the estimated
Estimates and judgments are used in the calculation of certain future return on plan assets. In determining the discount rate,
tax liabilities and in the determination of the recoverability of we use the current yield on high-quality, fixed-income
certain deferred tax assets. In the ordinary course of business, investments that have maturities corresponding to the
many transactions occur for which the ultimate tax outcome is anticipated timing of the benefit payments. Salary increase
uncertain at the time of the transactions. We adjust our income assumptions are based upon historical experience and
tax provision in the period in which we determine that it is anticipated future board and management actions. Asset returns
probable that our actual results will differ from our estimates. are estimated based upon the anticipated average yield on the
Tax law and rate changes are reflected in the income tax plan assets. We do not believe that any significant changes in
provision in the period in which such changes are enacted. assumptions used to measure the plan obligations are likely to
We evaluate the need to record valuation allowances that occur that would have a material impact on the company’s
would reduce deferred tax assets to the amount that will more financial position or results of operations.
likely than not be realized. When assessing the need for
valuation allowances, we consider future reversals of existing Insurance Liabilities
temporary differences and future taxable income. As of We use a combination of insurance and self-insurance for a
February 29, 2004, we believe that all of our recorded deferred number of risks including workers’ compensation, general
tax assets will more likely than not be realized. However, if a liability, and employee-related health care benefits, a portion of
change in circumstances results in a change in our ability to which is paid by our associates. We estimate the liabilities
realize our deferred tax assets, our tax provision would increase associated with these risks by considering historical claims
in the period when the change of circumstances occurs. experience, demographic factors, and other actuarial
In addition, the calculation of our tax liabilities involves assumptions. The estimated liabilities could be affected if future
dealing with uncertainties in the application of complex tax occurrences and claims differ from the current assumptions and
regulations. We recognize potential liabilities for anticipated tax historical trends. We do not believe that any significant changes
audit issues in the U.S. and other tax jurisdictions based on our in assumptions used to estimate insurance liabilities are likely to
estimate of whether, and the extent to which, additional taxes occur that would have a material impact on the company’s
will be due. If payments of these amounts ultimately prove to be financial position or results of operations.
unnecessary, the reversal of the liabilities would result in tax
benefits being recognized in the period when we determine the R E S U L T S O F O P E R AT I O N S
liabilities are no longer necessary. If our estimate of tax liabilities Certain prior year amounts have been reclassified to conform to
proves to be less than the ultimate assessment, a further charge the current year’s presentation.
to expense would result in the period of determination.
Net Sales and Operating Revenues
Total sales increased 16% in fiscal 2004 to $4.60 billion. In
Defined Benefit Retirement Plan
The plan obligations and related assets of our defined benefit fiscal 2003, total sales increased 12% to $3.97 billion from
retirement plan are presented in Note 8 to the company’s $3.53 billion in fiscal 2002. Net sales and operating revenues
consolidated financial statements. Plan assets, which consist components are shown in Table 1.
TABLE 1
Years Ended February 29 or 28
2004 % 2003 % 2002 %
(In millions)
Used vehicle sales $3,470.6 75.5 $2,912.1 73.4 $2,497.2 70.7
New vehicle sales 515.4 11.2 519.8 13.1 559.9 15.8
Total retail vehicle sales 3,986.0 86.7 3,431.9 86.4 3,057.1 86.5
Wholesale vehicle sales 440.6 9.6 366.6 9.2 325.6 9.2
Other sales and revenues:
Extended warranty revenues 77.1 1.7 68.1 1.7 55.3 1.6
Service department sales 69.1 1.5 58.6 1.5 55.9 1.6
Third-party finance fees 19.6 0.4 16.2 0.4 15.7 0.4
Appraisal purchase processing fees 5.3 0.1 28.5 0.7 24.2 0.7
Total other sales and revenues 171.1 3.7 171.4 4.3 151.1 4.3
Total net sales and operating revenues $4,597.7 100.0 $3,969.9 100.0 $3,533.8 100.0
CARMAX 2004 19