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, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012 ("fiscal 2012"), as well as our consolidated financial statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1. 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.

We have revised the consolidated financial statements for fiscal 2012 interim periods to reflect the correction made in fiscal 2012 in our accounting for sale-leaseback transactions. See Note 2 for additional information.

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

BUSINESS OVERVIEW

General

CarMax is the nation's largest retailer of used vehicles. We pioneered the used car superstore concept, opening our first store in 1993. Our strategy is to revolutionize the auto retailing market by addressing the major sources of customer dissatisfaction with traditional auto retailers and to maximize operating efficiencies through the use of standardized operating procedures and store formats enhanced by sophisticated, proprietary management information systems. As of November 30, 2012, we operated 116 used car superstores in 58 markets, comprising 45 mid-sized markets, 12 large markets and 1 small market. We also operated four new car franchises. During fiscal 2012, we sold 408,080 used cars, representing 98% of the total 415,759 vehicles we sold at retail.

We believe the CarMax consumer offer is distinctive within the automobile retailing marketplace. Our offer provides customers the opportunity to shop for vehicles the same way they shop for items at other "big box" retailers. Our consumer offer features low, no-haggle prices; a broad selection of CarMax Quality Certified used vehicles and superior customer service. Our website, carmax.com, is a valuable tool for communicating the CarMax consumer offer, a sophisticated search engine and an efficient channel for customers who prefer to commence their shopping online. Our financial results are driven by retailing used vehicles and associated items including vehicle financing, extended service plans ("ESPs"), a guaranteed asset protection ("GAP") product and vehicle repair service. GAP is designed to cover the unpaid balance on an auto loan in the event of a total loss of the vehicle or unrecovered theft.

We also generate revenues, income and cash flows from the sale of vehicles purchased through our appraisal process that do not meet our retail standards. These vehicles are sold through on-site wholesale auctions. Wholesale auctions are generally held on a weekly or bi-weekly basis, and as of November 30, 2012, we conducted auctions at 55 used car superstores. During fiscal 2012, we sold 316,649 wholesale vehicles. On average, the vehicles we wholesale are approximately 10 years old and have more than 100,000 miles. Participation in our wholesale auctions is restricted to licensed automobile dealers, the majority of whom are independent dealers and licensed wholesalers.

CarMax provides financing to qualified retail customers through CarMax Auto Finance ("CAF"), our finance operation, and our arrangements with several industry-leading financial institutions. The third-party providers purchasing subprime finance contracts generally purchase these contracts at a discount, while providers purchasing prime and non-prime finance contracts generally pay us a fixed, prenegotiated fee per contract. We periodically test additional third-party providers. We have no recourse liability on retail installment contracts arranged with third-party providers.

We offer financing through CAF to qualified customers purchasing vehicles at CarMax. CAF utilizes proprietary customized scoring models based upon the credit history of the customer, along with CAF's historical experience, to predict the likelihood of customer repayment. CAF offers customers an array of competitive rates and terms, allowing them to choose the ones that best fit their needs. In addition, customers are permitted to refinance or pay off their contract with CAF or a third-party provider within three business days of a purchase without incurring any finance or related charges. We randomly test different credit offers and closely monitor acceptance rates and 3-day payoffs to assess market competitiveness. After the effect of 3?day payoffs and vehicle returns, CAF financed approximately 38% of our retail vehicle unit sales in the first nine months of fiscal 2013. As of November 30, 2012, CAF serviced more than 440,000 customer accounts in its $5.58 billion portfolio of managed receivables.

We sell ESPs and GAP on behalf of unrelated third parties who are the primary obligors. We have no contractual liability to the customer under these third-party plans. ESP revenue represents commissions received on the sale of ESPs and GAP from the unrelated third parties.

Over the long term, we believe the primary driver for earnings growth will be vehicle unit sales growth from both new stores and stores included in our comparable store base. We target a dollar range of gross profit per used unit sold. The gross profit dollar target for an individual vehicle is based on a variety of factors, including its 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 our inventory management practices 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 employ a volume-based strategy, and we systematically mark down individual vehicle prices based on proprietary pricing algorithms in order to appropriately balance sales trends, inventory turns and gross profit achievement.

In December 2008, we temporarily suspended store growth due to the weak economic and sales environment. We resumed store growth in fiscal 2011, opening three superstores that year, five superstores in fiscal 2012 and eight superstores in the first nine months of fiscal 2013. We plan to open a total of 10 superstores in fiscal 2013 and between 10 and 15 superstores in each of the following 3 fiscal years. While we have more than 100 superstores, we are still in the midst of the national rollout of our retail concept, and as of November 30, 2012, we had used car superstores located in markets that comprised approximately 53% of the U.S. population.

The principal challenges we face in expanding our store base include our ability to build our management bench strength to support our store growth and our ability to procure suitable real estate at favorable terms. We staff each newly opened store with associates who have extensive CarMax training. Therefore, we must recruit, train and develop managers and associates to fill the pipeline necessary to support future store openings.

Fiscal 2013 Third Quarter Highlights

§ Net sales and operating revenues increased 15% to $2.60 billion from $2.26 billion in the third quarter of fiscal 2012. Net earnings also grew 15% to $94.7 million, or $0.41 per share, compared with $82.1 million, or $0.36 per share, in the prior year period.

§ Total used vehicle revenues increased 17% to $2.07 billion from $1.77 billion in the third quarter of fiscal 2012. Total used vehicle unit sales rose 16%, reflecting the combination of a 12% increase in comparable store used unit sales together with sales from newer stores not yet included in the comparable store base.

§ Total wholesale vehicle revenues increased 10% to $427.7 million from $390.3 million in the third quarter of fiscal 2012. The growth in wholesale vehicle revenues resulted from a 10% increase in unit sales. Wholesale unit sales benefited from opening new stores and an increase in appraisal traffic at existing stores, while the appraisal buy rate was similar to the prior year period.

§ Total gross profit increased 14% to $345.2 million compared with $303.2 million in the third quarter of fiscal 2012, reflecting the increased used and wholesale vehicle unit sales, as well as higher other gross profit.

§ CAF income increased 16% to $72.5 million compared with $62.6 million in the third quarter of fiscal 2012. The improvement in CAF income was largely attributable to the 15% increase in average managed receivables.

§ Selling, general and administrative ("SG&A") expenses increased 14% to $257.3 million from $225.8 million in the third quarter of fiscal 2012. The increase in SG&A expenses primarily reflected the 9% increase in our store base since the beginning of last year's third quarter and higher variable costs resulting from the 12% increase in comparable store used unit sales. SG&A per retail unit declined $43 to $2,393 versus $2,436 in the prior year's quarter as the leverage resulting from the comparable store unit sales growth was partially offset by higher costs related to growing our store base.

§ In the first nine months of the fiscal year, $499.2 million of net cash was used in operating activities in fiscal 2013, while $6.3 million of net cash was provided by operating activities in fiscal 2012. These amounts included increases in auto loan receivables of $632.3 million and $512.1 million, respectively. The majority of the increases in auto loan receivables are accompanied by increases in non-recourse notes payable, which are reflected as cash provided by financing activities.

CRITICAL ACCOUNTING POLICIES

For information on critical accounting policies, see "Critical Accounting Policies" in MD&A included in Item 7 of the Annual Report on Form 10-K for the fiscal year ended February 29, 2012. These policies relate to financing and securitization transactions, revenue recognition and income taxes.

RESULTS OF OPERATIONS



Net Sales And Operating Revenues


                                   Three Months Ended                   Nine Months Ended
                                       November 30                         November 30
(In millions)                 2012         2011       Change       2012         2011       Change
Used vehicle sales         $ 2,068.7    $ 1,766.7      17.1  % $ 6,449.6    $ 5,853.2      10.2   %
New vehicle sales               45.7         46.0      (0.7) %     162.5        154.7       5.0   %
Wholesale vehicle sales        427.7        390.3       9.6  %   1,332.5      1,325.9       0.5   %
Other sales and revenues:
Extended service plan
revenues                        48.6         39.8      22.2  %     152.7        131.0      16.6   %
Service department sales        24.8         23.5       5.9  %      76.4         74.6       2.4   %
Third-party finance fees,
net                            (13.1)        (5.6)   (131.2) %     (38.9)       (11.8)   (229.8)  %
Total other sales and
revenues                        60.4         57.6       4.9  %     190.2        193.9      (1.9)  %
Total net sales and

Unit Sales


                      Three Months Ended        Nine Months Ended
                         November 30               November 30
                       2012        2011         2012         2011
Used vehicles        105,815      90,975      329,422      302,311
New vehicles           1,705       1,719        6,164        5,952
Wholesale vehicles    79,747      72,805      246,059      242,752

Average Selling Prices


                     Three Months Ended       Nine Months Ended
                         November 30             November 30
                      2012        2011        2012        2011
Used vehicles      $ 19,344    $ 19,221    $ 19,375    $ 19,170
New vehicles       $ 26,681    $ 26,611    $ 26,241    $ 25,863
Wholesale vehicles $  5,214    $  5,215    $  5,267    $  5,316

Used Vehicle Sales Changes


                        Three Months Ended      Nine Months Ended
                           November 30             November 30
                         2012        2011         2012       2011
Used vehicle units         16  %        (1) %        9  %       2  %
Used vehicle dollars       17  %         5  %       10  %       8  %

Comparable store used unit sales growth is one of the key drivers of our profitability. A store is included in comparable store retail sales in the store's fourteenth full month of operation.

Comparable Store Used Vehicle Sales Changes


                        Three Months Ended      Nine Months Ended
                           November 30             November 30
                         2012        2011         2012        2011
Used vehicle units         12  %        (3) %        5  %       0  %
Used vehicle dollars       13  %         3  %        6  %       7  %

Change in Used Car Superstore Base


                                             Three Months Ended      Nine Months Ended
                                                November 30             November 30
                                              2012        2011         2012       2011
Used car superstores, beginning of period      113          106         108        103
Superstore openings                              3            1           8          4
Used car superstores, end of period            116          107         116        107

Used Vehicle Sales. The 17% increase in used vehicle revenues in the third quarter of fiscal 2013 resulted from a 16% increase in used unit sales and a 1% increase in average retail selling price. The increase in used unit sales included a 12% increase in comparable store used unit sales, together with sales from newer stores not yet included in the comparable store base. The comparable store unit growth was driven by improved conversion, which we believe benefited from a variety of factors, including more compelling credit offers from third-party finance providers and CAF, increased inventory selection, improved customer sentiment and continued strong in-store execution. The increase in used vehicle average retail selling price primarily reflected the net effect of shifts in our sales mix by vehicle age and type. Our sales mix will vary from period to period, reflecting changing consumer preferences.

The 10% increase in used vehicle revenues in the first nine months of fiscal 2013 resulted from a 9% increase in used unit sales and a 1% increase in average retail selling price. The increase in used unit sales included a 5% increase in comparable store used unit sales, together with sales from newer stores not yet included in the comparable store base. Similar to the third quarter, the improvement in comparable store unit growth was driven by improved conversion.

The overall supply of late-model used vehicles being remarketed has remained constrained following three years of new car industry sales at rates significantly below pre-recession levels. During most of the last three years, wholesale vehicle industry values rose, which increased our vehicle acquisition costs and average selling prices compared with pre-recession periods. We believe the constrained supply of late-model used vehicles and the resulting increase in selling prices has had an adverse effect on our used vehicle sales in recent years. As new car industry sales return to historical levels, the supply of late-model used vehicles should gradually improve, which we believe will benefit our business.

Wholesale Vehicle Sales. We seek to build customer satisfaction by offering high-quality retail vehicles. Fewer than half of the vehicles acquired from consumers through the appraisal purchase process meet our standards for reconditioning and subsequent retail sale. Those vehicles that do not meet our standards are sold through our on-site wholesale auctions. 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 sold.

The 10% increase in wholesale vehicle revenues in the third quarter of fiscal 2013 resulted from a 10% increase in wholesale unit sales. The wholesale vehicle average selling price was consistent with the prior year period. Wholesale unit sales benefited from opening new stores and an increase in appraisal traffic at existing stores, while the appraisal buy rate was similar to the prior year's quarter.

For the first nine months of the year, wholesale vehicle revenues were similar in fiscal 2013 and fiscal 2012, as a 1% increase in wholesale unit sales in fiscal 2013 was offset by a 1% decline in wholesale vehicle average selling price. The minimal growth in wholesale unit sales reflected a challenging year-over-year comparison, following increases of 23% and 31% in the first nine months of fiscal 2012 and fiscal 2011, respectively. Appraisal traffic in the first nine months of fiscal 2013 was higher than in the prior year; however, our appraisal buy rate was lower, which we believe reflected the effect of moderating wholesale vehicle valuations in the current year period.

Other Sales and Revenues. Other sales and revenues include commissions on the sale of ESPs and GAP (reported in ESP revenues), service department sales and third-party finance fees, net. For third-party finance providers who pay us a fixed fee per vehicle financed, this fee varies reflecting the differing levels of credit risk exposure. Those providers who purchase subprime finance contracts generally purchase these contracts at a discount, which is reflected as an offset to finance fee revenues received on other third-party finance contracts.

Other sales and revenues increased 5% in the third quarter of fiscal 2013 compared with the prior year period, as an increase in ESP revenues was largely offset by a reduction in net third-party finance fees caused by a mix shift among providers. Third party subprime providers originated 14% of used vehicle unit sales in the current quarter compared with 9% in the prior year's third quarter. ESP revenues climbed 22% due to both the growth in used vehicle sales and an increase in ESP penetration.

Other sales and revenues declined 2% in the first nine months of fiscal 2013 compared with the prior year period. During this period, growth in ESP revenues was more than offset by a reduction in net third-party finance fees. Third-party subprime finance providers originated 14% of used vehicle unit sales in the first nine months of fiscal 2013 compared with 8% in the prior year period. ESP revenues increased 17% in the first nine months of the year primarily reflecting the growth in our retail vehicle unit sales and an increase in ESP penetration, as well as a payment from a third-party ESP administrator based on favorable claims experience.

Seasonality. Historically, our business has been seasonal. Typically, our superstores experience their strongest traffic and sales in the spring and summer quarters. Sales are typically slowest in the fall quarter, when customer traffic generally tends to slow as the weather changes and as customers shift their spending priorities. Used vehicles also generally experience proportionately more of their annual depreciation in the fall quarter, which we believe reflects the decline in customer traffic and discounts on new car model year closeouts that can pressure pricing for late-model used vehicles. We typically experience an increase in subprime traffic and sales in February and March, coincident with tax refund season.

Gross Profit


                                          Three Months Ended                 Nine Months Ended
                                             November 30                        November 30
(In millions)                         2012       2011      Change       2012         2011       Change
Used vehicle gross profit          $ 227.0    $ 197.5       15.0  % $   718.2    $   662.7        8.4  %
New vehicle gross profit               0.9        2.0      (55.9) %       4.1          5.1      (21.1) %
Wholesale vehicle gross profit        73.6       66.5       10.6  %     230.5        231.6       (0.4) %
Other gross profit                    43.7       37.2       17.5  %     142.3        141.2        0.8  %

Gross Profit Per Unit


                                              Three Months Ended                                 Nine Months Ended
                                                  November 30                                       November 30
                                         2012                     2011                     2012                     2011
                                $ per unit(1)    %(2)    $ per unit(1)    %(2)    $ per unit(1)    %(2)    $ per unit(1)    %(2)
Used vehicle gross profit      $      2,146     11.0    $      2,171     11.2    $      2,180     11.1    $      2,192     11.3
New vehicle gross profit       $        518      1.9    $      1,164      4.4    $        659      2.5    $        865      3.3
Wholesale vehicle gross profit $        923     17.2    $        914     17.0    $        937     17.3    $        954     17.5
Other gross profit             $        407     72.4    $        401     64.6    $        424     74.8    $        458     72.8
Total gross profit             $      3,211     13.3    $      3,271     13.4    $      3,263     13.5    $      3,376     13.8

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

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

Used Vehicle Gross Profit. Used vehicle gross profit increased 15% in the third quarter and 8% in the first nine months of fiscal 2013. In both periods, the improvement was driven by increases in used unit sales, which rose 16% and 9%, respectively. On a year-over-year basis, used vehicle gross profit per unit was similar, at $2,146 per unit in the third quarter of fiscal 2013 compared with $2,171 per unit in the prior year quarter, and at $2,180 per unit in the first nine months of fiscal 2013 compared with $2,192 per unit in the corresponding period of fiscal 2012. We have been able to manage to a relatively consistent gross profit per unit over the last several years.

Wholesale Vehicle Gross Profit. In the third quarter of fiscal 2013, wholesale vehicle gross profit increased 11%, while for the first nine months wholesale vehicle gross profit was similar to the prior year. The change in wholesale unit sales, which increased 10% in the third quarter and 1% in the nine-month period, was the primary driver of the change in wholesale gross profit. On a year-over-year basis, wholesale gross profit per unit remained relatively stable, changing by less than $20 in both the quarter and the nine-month period.

Other Gross Profit. Other gross profit includes profits related to ESP and GAP revenues, net third-party finance fees and service department sales. We have no cost of sales related to ESP and GAP revenues or net third-party finance fees, as these represent commissions paid to us by certain third-party providers, net of the discount associated with the finance contracts purchased by subprime providers. Accordingly, changes in the relative mix of sales of these other gross profit components can affect the overall composition and amount of other gross profit.

Other gross profit increased 18% in the third quarter and 1% in the first nine months of fiscal 2013, as improved ESP and service department profits were largely offset by the lower net third-party finance fees.

Impact of Inflation. Historically, inflation has not been a significant contributor to 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 selling prices. However, increases in average vehicle selling prices benefit CAF income, to the extent the average amount financed also increases.

During the last three fiscal years, we experienced a period of appreciation in used vehicle wholesale pricing. We believe the appreciation resulted, in part, from the reduced supply of late-model used vehicles in the market that was caused by the dramatic decline in new car industry sales and the associated slow down in used vehicle trade-in activity, compared with pre-recession periods. The higher wholesale values increased both our vehicle acquisition costs and our average selling prices for used and wholesale vehicles. In fiscal 2013 and fiscal 2012, we also experienced inflationary increases in reconditioning costs.

CarMax Auto Finance Income. CAF provides financing for a portion of our used and new car retail sales. Because the purchase of a vehicle is generally reliant on the consumer's ability to obtain on-the-spot financing, it is important to our business that financing be available to creditworthy customers. While financing can also be obtained from third-party sources, we believe that total reliance on third parties can create unacceptable volatility and business risk. Furthermore, we believe that our processes and systems, the transparency of our pricing and our vehicle quality provide a unique and ideal environment in which to procure high-quality auto loans, both for CAF and for the third-party financing providers. Generally, CAF has provided us the opportunity to realize additional profits and cash flows from auto loan receivables while managing our reliance on third-party financing sources. We also believe CAF enables us to capture additional sales.

CAF provides financing for qualified customers at competitive market rates of interest. CAF income primarily reflects the interest and fee income generated by the auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.

Components of CAF Income


                                  Three Months Ended November 30             Nine Months Ended November 30
(In millions)                    2012      %  (1)      2011      % (1)      2012      %  (1)      2011      % (1)
Interest margin:
Interest and fee income       $   125.1      9.1    $   114.3     9.6    $   368.9      9.3    $   334.0     9.7
Interest expense                  (23.3)    (1.7)       (25.6)   (2.2)       (72.4)    (1.8)       (80.3)   (2.3)
Total interest margin             101.8      7.4         88.7     7.4        296.5      7.5        253.7     7.4
Provision for loan losses         (18.1)    (1.3)       (15.1)   (1.3)       (40.2)    (1.0)       (24.9)   (0.7)
Total interest margin after
provision for loan losses          83.7      6.1         73.6     6.2        256.3      6.5        228.8     6.7

Other income                        0.2         ?         0.3        ?            ?        ?         1.4        ?

. . .