UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended November 30, ~~2020~~2021


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

Commission File Number: 1-31420

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		23238
Richmond,	Virginia
(Address of Principal Executive Offices)		(Zip Code)

(804) 747-0422

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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


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 Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding as of December 31, ~~2020~~2021
Common Stock, par value $0.50						~~162,541,451~~161,679,866

Page 1

CARMAX, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


			Page No.
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Statements of Earnings (Unaudited) –
		Three and Nine Months Ended November 30, ~~2020~~2021 and ~~2019~~2020	3

		Consolidated Statements of Comprehensive Income (Unaudited) –
		Three and Nine Months Ended November 30, ~~2020~~2021 and ~~2019~~2020	4

		Consolidated Balance Sheets (Unaudited) –
		November 30, ~~2020~~2021 and February ~~29, 2020~~28, 2021	5

		Consolidated Statements of Cash Flows (Unaudited) –
		Nine Months Ended November 30, ~~2020~~2021 and ~~2019~~2020	6

		Consolidated Statements of Shareholders’ Equity (Unaudited) –
		Three and Nine Months Ended November 30, ~~2020~~2021 and ~~2019~~2020	7

		Notes to Consolidated Financial Statements (Unaudited)	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	2730

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4448

	Item 4.	Controls and Procedures	4448

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	4549

	Item 1A.	Risk Factors	4549

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4549

	Item 6.	Exhibits	4650

SIGNATURES			4751

Page 2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30						Nine Months Ended November 30
(In thousands except per share data)	(In thousands except per share data)	2020		%(1)	2019		%(1)	2020		%(1)	2019		%(1)	(In thousands except per share data)	2021		%(1)	2020		%(1)	2021		%(1)	2020		%(1)
SALES AND OPERATING REVENUES:	SALES AND OPERATING REVENUES:													SALES AND OPERATING REVENUES:
Used vehicle sales	Used vehicle sales	$	4,209,748	81.2	$	4,028,811	84.1	$	11,385,183	82.6	$	12,915,763	84.1	Used vehicle sales	$	6,435,590	75.5	$	4,209,748	81.2	$	18,697,300	77.2	$	11,385,183	82.6
Wholesale vehicle sales	Wholesale vehicle sales	828,362		16.0	610,983		12.8	1,990,296		14.4	1,951,718		12.7	Wholesale vehicle sales	1,922,283		22.5	828,362		16.0	4,998,212		20.6	1,990,296		14.4
Other sales and revenues	Other sales and revenues	146,834		2.8	150,234		3.1	410,413		3.0	490,016		3.2	Other sales and revenues	169,886		2.0	146,834		2.8	518,205		2.1	410,413		3.0
NET SALES AND OPERATING REVENUES	NET SALES AND OPERATING REVENUES	5,184,944		100.0	4,790,028		100.0	13,785,892		100.0	15,357,497		100.0	NET SALES AND OPERATING REVENUES	8,527,759		100.0	5,184,944		100.0	24,213,717		100.0	13,785,892		100.0
COST OF SALES:	COST OF SALES:													COST OF SALES:
Used vehicle cost of sales	Used vehicle cost of sales	3,791,134		73.1	3,615,704		75.5	10,223,875		74.2	11,549,445		75.2	Used vehicle cost of sales	5,927,237		69.5	3,791,134		73.1	17,085,416		70.6	10,223,875		74.2
Wholesale vehicle cost of sales	Wholesale vehicle cost of sales	713,961		13.8	504,177		10.5	1,669,595		12.1	1,601,573		10.4	Wholesale vehicle cost of sales	1,710,103		20.1	713,961		13.8	4,411,175		18.2	1,669,595		12.1
Other cost of sales	Other cost of sales	48,419		0.9	56,500		1.2	154,666		1.1	156,996		1.0	Other cost of sales	53,859		0.6	48,419		0.9	140,573		0.6	154,666		1.1
TOTAL COST OF SALES	TOTAL COST OF SALES	4,553,514		87.8	4,176,381		87.2	12,048,136		87.4	13,308,014		86.7	TOTAL COST OF SALES	7,691,199		90.2	4,553,514		87.8	21,637,164		89.4	12,048,136		87.4
GROSS PROFIT	GROSS PROFIT	631,430		12.2	613,647		12.8	1,737,756		12.6	2,049,483		13.3	GROSS PROFIT	836,560		9.8	631,430		12.2	2,576,553		10.6	1,737,756		12.6
CARMAX AUTO FINANCE INCOME	CARMAX AUTO FINANCE INCOME	176,445		3.4	114,033		2.4	374,590		2.7	344,123		2.2	CARMAX AUTO FINANCE INCOME	165,968		1.9	176,445		3.4	607,732		2.5	374,590		2.7
Selling, general and administrative expenses	Selling, general and administrative expenses	478,797		9.2	484,848		10.1	1,342,721		9.7	1,455,339		9.5	Selling, general and administrative expenses	575,930		6.8	430,781		8.3	1,704,285		7.0	1,197,595		8.7
Depreciation and amortization														Depreciation and amortization	54,428		0.6	48,016		0.9	157,107		0.6	145,126		1.1
Interest expense	Interest expense	19,462		0.4	21,843		0.5	65,889		0.5	60,700		0.4	Interest expense	24,303		0.3	19,462		0.4	67,247		0.3	65,889		0.5
Other (income) expense	Other (income) expense	(887)		0	(6,570)		(0.1)	728		0	(6,786)		0	Other (income) expense	(8,094)		(0.1)	(887)		—	(35,453)		(0.1)	728		—
Earnings before income taxes	Earnings before income taxes	310,503		6.0	227,559		4.8	703,008		5.1	884,353		5.8	Earnings before income taxes	355,961		4.2	310,503		6.0	1,291,099		5.3	703,008		5.1
Income tax provision	Income tax provision	75,203		1.5	54,403		1.1	166,034		1.2	210,854		1.4	Income tax provision	86,523		1.0	75,203		1.5	299,638		1.2	166,034		1.2
NET EARNINGS	NET EARNINGS	$	235,300	4.5	$	173,156	3.6	$	536,974	3.9	$	673,499	4.4	NET EARNINGS	$	269,438	3.2	$	235,300	4.5	$	991,461	4.1	$	536,974	3.9
WEIGHTED AVERAGE COMMON SHARES:	WEIGHTED AVERAGE COMMON SHARES:													WEIGHTED AVERAGE COMMON SHARES:
Basic	Basic	163,732			164,273			163,278			165,321			Basic	162,006			163,732			162,710			163,278
Diluted	Diluted	165,773			166,534			164,976			167,154			Diluted	164,873			165,773			165,606			164,976
NET EARNINGS PER SHARE:	NET EARNINGS PER SHARE:													NET EARNINGS PER SHARE:
Basic	Basic	$	1.44		$	1.05		$	3.29		$	4.07		Basic	$	1.66		$	1.44		$	6.09		$	3.29
Diluted	Diluted	$	1.42		$	1.04		$	3.25		$	4.03		Diluted	$	1.63		$	1.42		$	5.99		$	3.25

(1) Percents are calculated as a percentage of net sales and operating revenues and may not total due to rounding.

See accompanying notes to consolidated financial statements.

Page 3

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)


		Three Months Ended November 30				Nine Months Ended November 30					Three Months Ended November 30				Nine Months Ended November 30
(In thousands)	(In thousands)	2020		2019		2020		2019		(In thousands)	2021		2020		2021		2020
NET EARNINGS	NET EARNINGS	$	235,300	$	173,156	$	536,974	$	673,499	NET EARNINGS	$	269,438	$	235,300	$	991,461	$	536,974
Other comprehensive income (loss), net of taxes:	Other comprehensive income (loss), net of taxes:									Other comprehensive income (loss), net of taxes:
Net change in retirement benefit plan unrecognized actuarial losses	Net change in retirement benefit plan unrecognized actuarial losses	727		355		2,183		1,066		Net change in retirement benefit plan unrecognized actuarial losses	659		727		1,976		2,183
Net change in cash flow hedge unrecognized losses	Net change in cash flow hedge unrecognized losses	6,775		9,268		(5,036)		(15,063)		Net change in cash flow hedge unrecognized losses	11,383		6,775		16,414		(5,036)
Other comprehensive income (loss), net of taxes	Other comprehensive income (loss), net of taxes	7,502		9,623		(2,853)		(13,997)		Other comprehensive income (loss), net of taxes	12,042		7,502		18,390		(2,853)
TOTAL COMPREHENSIVE INCOME	TOTAL COMPREHENSIVE INCOME	$	242,802	$	182,779	$	534,121	$	659,502	TOTAL COMPREHENSIVE INCOME	$	281,480	$	242,802	$	1,009,851	$	534,121

See accompanying notes to consolidated financial statements.

Page 4

CARMAX, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


		As of November 30		As of February 29			As of November 30		As of February 28
(In thousands except share data)	(In thousands except share data)	2020		2020		(In thousands except share data)	2021		2021
ASSETS	ASSETS					ASSETS
CURRENT ASSETS:	CURRENT ASSETS:					CURRENT ASSETS:
Cash and cash equivalents	Cash and cash equivalents	$	236,643	$	58,211	Cash and cash equivalents	$	62,598	$	132,319
Restricted cash from collections on auto loans receivable	Restricted cash from collections on auto loans receivable	492,610		481,043		Restricted cash from collections on auto loans receivable	552,487		496,415
Accounts receivable, net	Accounts receivable, net	168,979		191,090		Accounts receivable, net	563,135		239,070
Inventory	Inventory	2,780,205		2,846,416		Inventory	4,659,460		3,157,159
Other current assets	Other current assets	58,660		86,927		Other current assets	117,390		91,833
TOTAL CURRENT ASSETS	TOTAL CURRENT ASSETS	3,737,097		3,663,687		TOTAL CURRENT ASSETS	5,955,070		4,116,796
Auto loans receivable, net of allowance for loan losses of $431,592 and $157,796 as of November 30, 2020 and February 29, 2020, respectively		13,267,364		13,551,711
Property and equipment, net of accumulated depreciation of $1,386,094 and $1,266,920 as of November 30, 2020 and February 29, 2020, respectively		3,043,345		3,069,102
Auto loans receivable, net of allowance for loan losses of $426,507 and $411,150 as of November 30, 2021 and February 28, 2021, respectively						Auto loans receivable, net of allowance for loan losses of $426,507 and $411,150 as of November 30, 2021 and February 28, 2021, respectively	15,167,170		13,489,819
Property and equipment, net of accumulated depreciation of $1,542,238 and $1,414,264 as of November 30, 2021 and February 28, 2021, respectively						Property and equipment, net of accumulated depreciation of $1,542,238 and $1,414,264 as of November 30, 2021 and February 28, 2021, respectively	3,175,577		3,055,563
Deferred income taxes	Deferred income taxes	159,209		89,842		Deferred income taxes	134,382		164,261
Operating lease assets	Operating lease assets	439,074		449,094		Operating lease assets	543,645		431,652
Goodwill						Goodwill	141,258		653
Other assets	Other assets	286,759		258,746		Other assets	458,117		282,797
TOTAL ASSETS	TOTAL ASSETS	$	20,932,848	$	21,082,182	TOTAL ASSETS	$	25,575,219	$	21,541,541

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:	CURRENT LIABILITIES:					CURRENT LIABILITIES:
Accounts payable	Accounts payable	$	570,174	$	737,144	Accounts payable	$	936,556	$	799,333
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	372,429		331,738		Accrued expenses and other current liabilities	530,592		415,465
Accrued income taxes	Accrued income taxes	18,322		1,389		Accrued income taxes	518		218
Current portion of operating lease liabilities	Current portion of operating lease liabilities	30,726		30,980		Current portion of operating lease liabilities	43,151		30,953
Short-term debt		1,008		40

Current portion of long-term debt	Current portion of long-term debt	10,228		9,251		Current portion of long-term debt	10,889		9,927
Current portion of non-recourse notes payable	Current portion of non-recourse notes payable	434,900		424,165		Current portion of non-recourse notes payable	535,146		442,652
TOTAL CURRENT LIABILITIES	TOTAL CURRENT LIABILITIES	1,437,787		1,534,707		TOTAL CURRENT LIABILITIES	2,056,852		1,698,548
Long-term debt, excluding current portion	Long-term debt, excluding current portion	1,319,496		1,778,672		Long-term debt, excluding current portion	2,602,598		1,322,415
Non-recourse notes payable, excluding current portion	Non-recourse notes payable, excluding current portion	13,161,504		13,165,384		Non-recourse notes payable, excluding current portion	14,856,266		13,297,504
Operating lease liabilities, excluding current portion	Operating lease liabilities, excluding current portion	431,068		440,671		Operating lease liabilities, excluding current portion	529,821		423,618
Other liabilities	Other liabilities	454,517		393,873		Other liabilities	419,886		434,843
TOTAL LIABILITIES	TOTAL LIABILITIES	16,804,372		17,313,307		TOTAL LIABILITIES	20,465,423		17,176,928

Commitments and contingent liabilities	Commitments and contingent liabilities	0		0		Commitments and contingent liabilities	0		0
SHAREHOLDERS’ EQUITY:	SHAREHOLDERS’ EQUITY:					SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 163,033,971 and 163,081,376 shares issued and outstanding as of November 30, 2020 and February 29, 2020, respectively		81,517		81,541
Common stock, $0.50 par value; 350,000,000 shares authorized; 161,871,923 and 163,172,333 shares issued and outstanding as of November 30, 2021 and February 28, 2021, respectively						Common stock, $0.50 par value; 350,000,000 shares authorized; 161,871,923 and 163,172,333 shares issued and outstanding as of November 30, 2021 and February 28, 2021, respectively	80,936		81,586
Capital in excess of par value	Capital in excess of par value	1,462,130		1,348,988		Capital in excess of par value	1,672,728		1,513,821
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(152,924)		(150,071)		Accumulated other comprehensive loss	(100,301)		(118,691)
Retained earnings	Retained earnings	2,737,753		2,488,417		Retained earnings	3,456,433		2,887,897
TOTAL SHAREHOLDERS’ EQUITY	TOTAL SHAREHOLDERS’ EQUITY	4,128,476		3,768,875		TOTAL SHAREHOLDERS’ EQUITY	5,109,796		4,364,613
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	20,932,848	$	21,082,182	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	25,575,219	$	21,541,541

See accompanying notes to consolidated financial statements.

Page 5

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


		Nine Months Ended November 30					Nine Months Ended November 30
(In thousands)	(In thousands)	2020		2019		(In thousands)	2021		2020
OPERATING ACTIVITIES:	OPERATING ACTIVITIES:					OPERATING ACTIVITIES:
Net earnings	Net earnings	$	536,974	$	673,499	Net earnings	$	991,461	$	536,974
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:						Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization	Depreciation and amortization	180,495		158,226		Depreciation and amortization	200,819		180,495
Share-based compensation expense	Share-based compensation expense	73,946		98,177		Share-based compensation expense	108,962		73,946
Provision for loan losses	Provision for loan losses	156,147		132,650		Provision for loan losses	87,342		156,147
Provision for cancellation reserves	Provision for cancellation reserves	53,511		65,166		Provision for cancellation reserves	91,607		53,511
Deferred income tax benefit		(19,529)		(744)
Deferred income tax provision (benefit)						Deferred income tax provision (benefit)	19,564		(19,529)
Other	Other	5,966		(72)		Other	(26,808)		5,966
Net decrease (increase) in:
Net (increase) decrease in:						Net (increase) decrease in:
Accounts receivable, net	Accounts receivable, net	22,111		(2,887)		Accounts receivable, net	(290,346)		22,111
Inventory	Inventory	66,211		(163,119)		Inventory	(1,502,323)		66,211
Other current assets	Other current assets	29,478		(41,869)		Other current assets	(13,615)		29,478
Auto loans receivable, net	Auto loans receivable, net	(73,827)		(980,817)		Auto loans receivable, net	(1,764,693)		(73,827)
Other assets	Other assets	(8,151)		10,185		Other assets	(18,309)		(8,151)
Net (decrease) increase in:
Net increase (decrease) in:						Net increase (decrease) in:
Accounts payable, accrued expenses and other	Accounts payable, accrued expenses and other					Accounts payable, accrued expenses and other
current liabilities and accrued income taxes	current liabilities and accrued income taxes	(124,092)		20,604		current liabilities and accrued income taxes	170,474		(124,092)
Other liabilities	Other liabilities	(30,854)		(86,905)		Other liabilities	(136,780)		(30,854)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		868,386		(117,906)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES						NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES	(2,082,645)		868,386
INVESTING ACTIVITIES:	INVESTING ACTIVITIES:					INVESTING ACTIVITIES:
Capital expenditures	Capital expenditures	(123,952)		(249,177)		Capital expenditures	(226,903)		(123,952)
Proceeds from disposal of property and equipment	Proceeds from disposal of property and equipment	1,846		3		Proceeds from disposal of property and equipment	260		1,846
Proceeds from sale of business						Proceeds from sale of business	12,284		—
Purchases of investments	Purchases of investments	(2,709)		(8,438)		Purchases of investments	(13,676)		(2,709)
Sales of investments		2,739		1,025
Sales and returns of investments						Sales and returns of investments	36,915		2,739
Business acquisition, net of cash acquired						Business acquisition, net of cash acquired	(241,563)		—
NET CASH USED IN INVESTING ACTIVITIES	NET CASH USED IN INVESTING ACTIVITIES	(122,076)		(256,587)		NET CASH USED IN INVESTING ACTIVITIES	(432,683)		(122,076)
FINANCING ACTIVITIES:	FINANCING ACTIVITIES:					FINANCING ACTIVITIES:
Increase (decrease) in short-term debt, net		968		(708)
Increase in short-term debt, net						Increase in short-term debt, net	—		968
Proceeds from issuances of long-term debt	Proceeds from issuances of long-term debt	1,562,300		4,707,500		Proceeds from issuances of long-term debt	5,804,200		1,562,300
Payments on long-term debt	Payments on long-term debt	(2,022,586)		(4,702,807)		Payments on long-term debt	(4,524,973)		(2,022,586)
Cash paid for debt issuance costs	Cash paid for debt issuance costs	(12,797)		(14,849)		Cash paid for debt issuance costs	(14,473)		(12,797)
Payments on finance lease obligations	Payments on finance lease obligations	(4,871)		(2,813)		Payments on finance lease obligations	(8,822)		(4,871)
Issuances of non-recourse notes payable	Issuances of non-recourse notes payable	7,947,313		8,596,000		Issuances of non-recourse notes payable	11,217,298		7,947,313
Payments on non-recourse notes payable	Payments on non-recourse notes payable	(7,940,254)		(7,810,958)		Payments on non-recourse notes payable	(9,565,649)		(7,940,254)
Repurchase and retirement of common stock	Repurchase and retirement of common stock	(158,625)		(458,587)		Repurchase and retirement of common stock	(475,950)		(158,625)
Equity issuances	Equity issuances	94,295		96,367		Equity issuances	76,310		94,295
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(534,257)		409,145
Increase in cash, cash equivalents, and restricted cash		212,053		34,652
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES						NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	2,507,941		(534,257)
(Decrease) increase in cash, cash equivalents, and restricted cash						(Decrease) increase in cash, cash equivalents, and restricted cash	(7,387)		212,053
Cash, cash equivalents, and restricted cash at beginning of year	Cash, cash equivalents, and restricted cash at beginning of year	656,390		595,377		Cash, cash equivalents, and restricted cash at beginning of year	771,947		656,390
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	868,443	$	630,029	CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	764,560	$	868,443

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:	RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:					RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents	Cash and cash equivalents	$	236,643	$	56,583	Cash and cash equivalents	$	62,598	$	236,643
Restricted cash from collections on auto loans receivable	Restricted cash from collections on auto loans receivable	492,610		458,493		Restricted cash from collections on auto loans receivable	552,487		492,610
Restricted cash included in other assets	Restricted cash included in other assets	139,190		114,953		Restricted cash included in other assets	149,475		139,190
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	868,443	$	630,029	CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	764,560	$	868,443

See accompanying notes to consolidated financial statements.

Page 6

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)


		Nine Months Ended November 30, 2020												Nine Months Ended November 30, 2021
									Accumulated												Accumulated
		Common			Capital in				Other					Common			Capital in				Other
		Shares	Common		Excess of		Retained		Comprehensive					Shares	Common		Excess of		Retained		Comprehensive
(In thousands)	(In thousands)	Outstanding	Stock		Par Value		Earnings		Loss		Total		(In thousands)	Outstanding	Stock		Par Value		Earnings		Loss		Total
Balance as of February 29, 2020		163,081	$	81,541	$	1,348,988	$	2,488,417	$	(150,071)	$	3,768,875
Balance as of February 28, 2021													Balance as of February 28, 2021	163,172	$	81,586	$	1,513,821	$	2,887,897	$	(118,691)	$	4,364,613
Net earnings	Net earnings	—	—		—		4,978		—		4,978		Net earnings	—	—		—		436,756		—		436,756
Other comprehensive loss		—	—		—		—		(15,334)		(15,334)
Other comprehensive income													Other comprehensive income	—	—		—		—		2,937		2,937
Share-based compensation expense	Share-based compensation expense	—	—		17,652		—		—		17,652		Share-based compensation expense	—	—		20,102		—		—		20,102

Repurchases of common stock	Repurchases of common stock	(515)	(258)		(4,271)		(36,180)		—		(40,709)		Repurchases of common stock	(998)	(499)		(9,348)		(114,695)		—		(124,542)
Exercise of common stock options	Exercise of common stock options	35	18		1,688		—		—		1,706		Exercise of common stock options	375	187		21,403		—		—		21,590
Stock incentive plans, net shares issued	Stock incentive plans, net shares issued	154	77		(5,629)		—		—		(5,552)		Stock incentive plans, net shares issued	254	127		(18,102)		—		—		(17,975)
Adoption of CECL		—	—		—		(153,306)		—		(153,306)
Balance as of May 31, 2020		162,755	$	81,378	$	1,358,428	$	2,303,909	$	(165,405)	$	3,578,310

Balance as of May 31, 2021													Balance as of May 31, 2021	162,803	$	81,401	$	1,527,876	$	3,209,958	$	(115,754)	$	4,703,481
Net earnings	Net earnings	—	—		—		296,696		—		296,696		Net earnings	—	—		—		285,267		—		285,267
Other comprehensive income	Other comprehensive income	—	—		—		—		4,979		4,979		Other comprehensive income	—	—		—		—		3,411		3,411
Share-based compensation expense	Share-based compensation expense	—	—		12,568		—		—		12,568		Share-based compensation expense	—	—		14,116		—		—		14,116
Shares issued for acquisition													Shares issued for acquisition	776	388		90,183		—		—		90,571
Repurchases of common stock	Repurchases of common stock	0	0		0		0		—		0		Repurchases of common stock	(1,754)	(877)		(17,164)		(202,004)		—		(220,045)
Exercise of common stock options	Exercise of common stock options	1,403	701		89,318		—		—		90,019		Exercise of common stock options	621	311		38,185		—		—		38,496
Stock incentive plans, net shares issued	Stock incentive plans, net shares issued	4	2		(14)		—		—		(12)		Stock incentive plans, net shares issued	24	12		(130)		—		—		(118)
Balance as of August 31, 2020		164,162	$	82,081	$	1,460,300	$	2,600,605	$	(160,426)	$	3,982,560
Balance as of August 31, 2021													Balance as of August 31, 2021	162,470	$	81,235	$	1,653,066	$	3,293,221	$	(112,343)	$	4,915,179
Net earnings	Net earnings	—	—		—		235,300		—		235,300		Net earnings	—	—		—		269,438		—		269,438
Other comprehensive income	Other comprehensive income	—	—		—		—		7,502		7,502		Other comprehensive income	—	—		—		—		12,042		12,042
Share-based compensation expense	Share-based compensation expense	—	—		9,942		—		—		9,942		Share-based compensation expense	—	—		12,347		—		—		12,347
Repurchases of common stock	Repurchases of common stock	(1,176)	(588)		(10,509)		(98,152)		—		(109,249)		Repurchases of common stock	(851)	(425)		(8,695)		(106,226)		—		(115,346)
Exercise of common stock options	Exercise of common stock options	43	21		2,549		—		—		2,570		Exercise of common stock options	253	126		16,097		—		—		16,223
Stock incentive plans, net shares issued	Stock incentive plans, net shares issued	5	3		(152)		—		—		(149)		Stock incentive plans, net shares issued	—	—		(87)		—		—		(87)

Balance as of November 30, 2020		163,034	$	81,517	$	1,462,130	$	2,737,753	$	(152,924)	$	4,128,476
Balance as of November 30, 2021													Balance as of November 30, 2021	161,872	$	80,936	$	1,672,728	$	3,456,433	$	(100,301)	$	5,109,796

See accompanying notes to consolidated financial statements.

Page 7

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)


		Nine Months Ended November 30, 2019												Nine Months Ended November 30, 2020
									Accumulated												Accumulated
		Common			Capital in				Other					Common			Capital in				Other
		Shares	Common		Excess of		Retained		Comprehensive					Shares	Common		Excess of		Retained		Comprehensive
(In thousands)	(In thousands)	Outstanding	Stock		Par Value		Earnings		Loss		Total		(In thousands)	Outstanding	Stock		Par Value		Earnings		Loss		Total
Balance as of February 28, 2019		167,479	$	83,739	$	1,237,153	$	2,104,146	$	(68,010)	$	3,357,028
Balance as of February 29, 2020													Balance as of February 29, 2020	163,081	$	81,541	$	1,348,988	$	2,488,417	$	(150,071)	$	3,768,875
Adoption of CECL													Adoption of CECL	—	—		—		(153,306)		—		(153,306)
Net earnings	Net earnings	—	—		—		266,744		—		266,744		Net earnings	—	—		—		4,978		—		4,978
Other comprehensive loss	Other comprehensive loss	—	—		—		—		(13,196)		(13,196)		Other comprehensive loss	—	—		—		—		(15,334)		(15,334)
Share-based compensation expense	Share-based compensation expense	—	—		18,912		—		—		18,912		Share-based compensation expense	—	—		17,652		—		—		17,652
Repurchases of common stock	Repurchases of common stock	(2,953)	(1,476)		(21,991)		(181,368)		—		(204,835)		Repurchases of common stock	(515)	(258)		(4,271)		(36,180)		—		(40,709)
Exercise of common stock options	Exercise of common stock options	727	363		32,888		—		—		33,251		Exercise of common stock options	35	18		1,688		—		—		1,706
Stock incentive plans, net shares issued	Stock incentive plans, net shares issued	142	71		(5,220)		—		—		(5,149)		Stock incentive plans, net shares issued	154	77		(5,629)		—		—		(5,552)

Balance as of May 31, 2019		165,395	$	82,697	$	1,261,742	$	2,189,522	$	(81,206)	$	3,452,755
Net earnings		—	—		—		233,599		—		233,599
Other comprehensive loss		—	—		—		—		(10,424)		(10,424)
Share-based compensation expense		—	—		10,757		—		—		10,757
Repurchases of common stock		(1,526)	(763)		(11,933)		(115,666)		—		(128,362)
Exercise of common stock options		1,008	504		52,766		—		—		53,270
Stock incentive plans, net shares issued		9	4		(42)		—		—		(38)

Balance as of August 31, 2019		164,886	$	82,442	$	1,313,290	$	2,307,455	$	(91,630)	$	3,611,557
Balance as of May 31, 2020													Balance as of May 31, 2020	162,755	$	81,378	$	1,358,428	$	2,303,909	$	(165,405)	$	3,578,310
Net earnings	Net earnings	—	—		—		173,156		—		173,156		Net earnings	—	—		—		296,696		—		296,696
Other comprehensive income	Other comprehensive income	—	—		—		—		9,623		9,623		Other comprehensive income	—	—		—		—		4,979		4,979
Share-based compensation expense	Share-based compensation expense	—	—		8,745		—		—		8,745		Share-based compensation expense	—	—		12,568		—		—		12,568
Repurchases of common stock	Repurchases of common stock	(1,270)	(635)		(10,170)		(104,015)		—		(114,820)		Repurchases of common stock	—	—		—		—		—		—
Exercise of common stock options	Exercise of common stock options	178	89		9,757		—		—		9,846		Exercise of common stock options	1,403	701		89,318		—		—		90,019
Stock incentive plans, net shares issued	Stock incentive plans, net shares issued	1	1		(55)		—		—		(54)		Stock incentive plans, net shares issued	4	2		(14)		—		—		(12)

Balance as of November 30, 2019		163,795	$	81,897	$	1,321,567	$	2,376,596	$	(82,007)	$	3,698,053
Balance as of August 31, 2020													Balance as of August 31, 2020	164,162	$	82,081	$	1,460,300	$	2,600,605	$	(160,426)	$	3,982,560
Net earnings													Net earnings	—	—		—		235,300		—		235,300
Other comprehensive income													Other comprehensive income	—	—		—		—		7,502		7,502
Share-based compensation expense													Share-based compensation expense	—	—		9,942		—		—		9,942
Repurchases of common stock													Repurchases of common stock	(1,176)	(588)		(10,509)		(98,152)		—		(109,249)
Exercise of common stock options													Exercise of common stock options	43	21		2,549		—		—		2,570
Stock incentive plans, net shares issued													Stock incentive plans, net shares issued	5	3		(152)		—		—		(149)

Balance as of November 30, 2020													Balance as of November 30, 2020	163,034	$	81,517	$	1,462,130	$	2,737,753	$	(152,924)	$	4,128,476

See accompanying notes to consolidated financial statements.

Page 8

CARMAX, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.Background

Business. CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”), including its wholly owned subsidiaries, is the nation’s largest and most profitable retailer of used vehicles. We operate in 2 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. On June 1, 2021, we completed the acquisition of Edmunds Holding Company (“Edmunds”), which does not meet the quantitative thresholds to be considered a reportable segment.See Note 17 for additional information on our reportable segments and Note 2 for additional information regarding our acquisition of Edmunds.

We deliver an unrivaled customer experience by offering a broad selection of quality used vehicles and related products and services at competitive, no-haggle prices using a customer-friendly sales process. Our omni-channel ~~experience,~~platform, which gives us the largest addressable market in the used car industry, empowers our retail customers to buy a car on their terms – online, in-store or a seamless combination of both. Customers can choose to complete the car-buying experience in-person at one of our stores; or buy the car online and receive delivery through ~~contactless curbside~~express pickup, available nationwide, or home delivery, available to most customers. We offer customers a range of related products and services, including the appraisal and purchase of vehicles directly from consumers; the financing of retail vehicle purchases through CAF and third-party finance providers; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service. Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers through on-site or virtual wholesale auctions.

Basis of Presentation and Use of Estimates. The accompanying interim unaudited consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such interim consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.

The accounting policies followed in the presentation of our interim financial results are consistent with those included in the company’s Annual Report on Form 10-K for the fiscal year ended February ~~29, 2020~~28, 2021 (the ~~“2020~~“2021 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal ~~year as disclosed in the company's Quarterly Report on Form 10-Q for the period ended May 31, 2020 (the “first quarter 2021 10-Q”).~~year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in ~~the 2020~~our 2021 Annual ~~Report and the unaudited consolidated financial statements and footnotes included in the first quarter 2021 10-Q.~~Report.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. In particular, the novel coronavirus (“COVID-19”) pandemic ~~and the resulting~~continues to have an adverse ~~impacts to~~impact on global economic conditions ~~as well as our operations,~~and may impact future estimates including, but not limited to, our allowance for loan losses, inventory valuations, fair value measurements, downward adjustments to investments in equity securities, asset impairment charges, the effectiveness of the company’s hedging instruments, deferred tax valuation allowances, cancellation reserves, actuarial losses on our retirement benefit plans and discount rate assumptions.

Depreciation and amortization previously included in selling, general, and administrative expenses is now separately presented on the consolidated statements of earnings. Prior period amounts have been reclassified to conform to the current period’s presentation. Depreciation and amortization related to other areas of our business, including cost of sales and CAF, is included in its respective line item on the consolidated statements of earnings. Certain other prior year amounts have been reclassified to conform to the current year’s presentation. Amounts and percentages may not total due to rounding.

Page 9

Recent Accounting Pronouncements.

Effective in Future Periods

In October 2021, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2021-08) related to accounting for acquired revenue contracts with customers in a business combination. The amendments in this update address diversity in practice and inconsistency related to recognition of an acquired contract liability and the effect of payment terms on subsequent revenue recognition for the acquirer. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2023, and we do not expect it to have a material effect on our consolidated financial statements.

In November 2021, the FASB issued an accounting pronouncement (ASU 2021-10) related to government assistance disclosures. The amendments in this update increase the transparency surrounding government assistance by requiring disclosure of 1) the types of assistance received, 2) an entity’s accounting for the assistance, and 3) the effect of the assistance on the entity’s financial statements. The update is effective for annual periods beginning after December 15, 2021. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2022, and we do not expect it to have a material effect on our consolidated financial statements.

2. Acquisition of Edmunds

On June 1, 2021, we completed the acquisition of Edmunds Holding Company, one of the most well established and trusted online guides for automotive information and a recognized leader in digital car shopping innovations. With this acquisition, CarMax has enhanced its digital capabilities and further strengthened its role and reach across the used auto ecosystem while adding exceptional technology and creative talent. Edmunds continues to operate independently and remains focused on delivering confidence to consumers and excellent value to its dealer and OEM clients. Additionally, this acquisition allows both businesses to accelerate their respective capabilities to deliver an enhanced digital experience to their customers by leveraging Edmunds’ compelling content and technology, CarMax’s unparalleled national scale and infrastructure, and the combined talent of both businesses.

The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and, accordingly, Edmunds’ results of operations have been consolidated in our financial statements since the date of acquisition. We recorded a preliminary allocation of the purchase price to assets acquired and liabilities assumed based on their estimated fair values as of June 1, 2021. The transaction costs associated with the acquisition were approximately $8.0 million and were expensed as incurred within selling, general and administrative expenses.

The following table summarizes the total purchase consideration:


(In thousands)
Total cash consideration for outstanding shares	$	251,047
Fair value of common stock (1)	90,571
Fair value of preexisting relationship	60,200
Total	$	401,818

(1) Represents the issuance of 776,097 shares of CarMax common stock to Edmunds equity holders, the fair value of which was based on the market value of CarMax common stock as of market close on the acquisition date (June 1, 2021).

In January 2020, we acquired a minority stake in Edmunds for $50 million. The noncontrolling equity investment in Edmunds was remeasured at a fair value of $60.2 million prior to the acquisition of the remaining ownership stake on June 1, 2021, which resulted in the recognition of a gain of $8.7 million. The gain is included in other income in the consolidated statements of earnings.

Page 910

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the date of the acquisition and is subject to final fair value determination:


(In thousands)	Fair Value
Cash	$	9,484
Accounts receivable, net	33,719
Other current assets	2,397
Property and equipment, net	20,741
Goodwill (1)	141,258
Intangible assets	218,000
Operating lease assets	97,250
Other assets	191
Total assets acquired	523,040

Accounts payable	5,063
Accrued expenses and other current liabilities	11,277
Current portion of operating lease liabilities	12,795
Deferred income taxes (1)	3,823
Operating lease liabilities, excluding current portion	88,264
Total liabilities assumed	121,222
Net assets acquired	$	401,818

(1) During the third quarter of fiscal 2022, we obtained new information about facts and circumstances that existed as of the acquisition date, which resulted in a change in the fair value of assets and liabilities recognized. The adjustments were primarily related to research and development tax credits, which resulted in a decrease in goodwill and a decrease in deferred income taxes of $8.4 million.

The excess of purchase consideration over the fair value of net identifiable assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to expected synergies and the assembled workforce of the acquired business and is not deductible for tax purposes. The fair values assigned to the net identifiable assets and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received. The primary areas that remain preliminary relate to the fair values of intangible assets acquired, certain identifiable assets and liabilities acquired, and income and non-income based taxes and residual goodwill. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

Identifiable intangible assets were recognized at their estimated acquisition date fair values. The preliminary fair value of identifiable intangible assets was determined by using certain estimates and assumptions that are not observable in the market. The preliminary fair values of the trade name asset and the internally developed software asset were determined using the relief-from-royalty method, and the preliminary fair value of the customer relationships asset was determined using the excess earnings method. These income-based approaches included significant assumptions such as the amount and timing of projected cash flows, growth rates, customer attrition rates, discount rates, and the assessment of the asset’s life cycle. The preliminary estimated fair value and estimated remaining useful lives of identifiable intangible assets are as follows:


		Preliminary
(In thousands)	Useful Life (Years)	Fair Value
Trade name	Indefinite	$	31,900
Internally developed software	7	52,900
Customer relationships	17	133,200
Identifiable intangible assets		$	218,000

The operating results of Edmunds have been included in our consolidated financial statements since the date of the acquisition. Net sales and operating revenues and net earnings attributable to Edmunds were not material for the reporting periods presented. Our pro forma results as if the acquisition had taken place on the first day of fiscal 2021 would not be materially different from the amounts reflected in the accompanying consolidated financial statements, and therefore are not presented.

Page 11

2.3. Revenue

We recognize revenue when control of the good or service has been transferred to the customer, generally either at the time of sale or upon delivery to a customer. Our contracts have a fixed contract price and revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. 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. We generally expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses. We do not have any significant payment terms as payment is received at or shortly after the point of sale.

Disaggregation of Revenue


		Three Months Ended November 30				Nine Months Ended November 30					Three Months Ended November 30				Nine Months Ended November 30
(In millions)	(In millions)	2020		2019		2020		2019		(In millions)	2021		2020		2021		2020
Used vehicle sales	Used vehicle sales	$	4,209.7	$	4,028.8	$	11,385.2	$	12,915.8	Used vehicle sales	$	6,435.6	$	4,209.7	$	18,697.3	$	11,385.2
Wholesale vehicle sales	Wholesale vehicle sales	828.4		611.0		1,990.3		1,951.7		Wholesale vehicle sales	1,922.3		828.4		4,998.2		1,990.3
Other sales and revenues:	Other sales and revenues:									Other sales and revenues:
Extended protection plan revenues	Extended protection plan revenues	101.7		97.0		294.5		321.7		Extended protection plan revenues	106.6		101.7		353.8		294.5
Third-party finance fees, net	Third-party finance fees, net	(10.6)		(9.4)		(36.7)		(35.2)		Third-party finance fees, net	1.6		(10.6)		(0.3)		(36.7)
Advertising & subscription revenues (1)										Advertising & subscription revenues (1)	33.3		—		67.9		—
Service revenues	Service revenues	24.6		28.9		70.6		96.3		Service revenues	19.7		24.6		62.9		70.6
Other	Other	31.1		33.7		82.0		107.2		Other	8.7		31.1		33.9		82.0
Total other sales and revenues	Total other sales and revenues	146.8		150.2		410.4		490.0		Total other sales and revenues	169.9		146.8		518.2		410.4
Total net sales and operating revenues	Total net sales and operating revenues	$	5,184.9	$	4,790.0	$	13,785.9	$	15,357.5	Total net sales and operating revenues	$	8,527.8	$	5,184.9	$	24,213.7	$	13,785.9

(1) Excludes intersegment revenues that have been eliminated in consolidation. See Note 17 for further details.

Used Vehicle Sales. Revenue from the sale of used vehicles is recognized upon transfer of control of the vehicle to the customer. As part of our customer service strategy, we guarantee the retail vehicles we sell with a ~~7-day,~~30-day/1,500 mile, money-back guarantee. We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities. We also guarantee the used vehicles we sell with a 90-day/4,000 mile limited warranty. These warranties are deemed assurance-type warranties and are accounted for as warranty obligations. See Note 1516 for additional information on this warranty and its related obligation.

Wholesale Vehicle Sales. Wholesale vehicles are sold at our auctions, and revenue from the sale of these vehicles is recognized upon transfer of control of the vehicle to the customer. Dealers also pay a fee to us based on the sale price of the vehicles they purchase. This fee is recognized as revenue at the time of sale. While we provide condition disclosures on each wholesale vehicle sold, the vehicles are subject to a limited right of return. We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities.

EPP Revenues. We also sell ESP and GAP products on behalf of unrelated third parties, who are primarily responsible for fulfilling the contract, 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 finance 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, including those related to changes in the coverage or term of the product. The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities. See Note 78 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

Page 12

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

~~Page 10~~

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. As of November 30, ~~2020~~2021 and February ~~29, 2020, 0~~28, 2021, no current or long-term contract asset was recognized related to cumulative profit-sharing payments to which we expect to be entitled.

Third-Party Finance Fees. 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.

Advertising and Subscription Revenues. Advertising and subscription revenues consist of revenues earned by our Edmunds business. Advertising revenues are derived from advertising contracts with automotive manufacturers based on fixed fees per impression and fees for certain activities completed by customers on the manufacturers' websites. These fees are recognized in the period the impressions are delivered or certain activities occurred. Subscription revenues are derived from packages sold to automotive dealers that include car leads, inventory listings and enhanced placement in Edmunds' dealer locator and are recognized over the period that the services are made available to the dealers. Subscription revenues also include a digital marketing subscription service, which allows dealers to gain exposure on third party partner websites. Revenues for this service are recognized on a net basis.

Service Revenues. Service revenue consists of labor and parts income related to vehicle repair service, including repairs of vehicles covered under an ESP we sell or warranty program. Service revenue is recognized at the time the work is completed.

Other Revenues. Other revenues consist primarily of new vehicle sales ~~at our two new car franchise locations~~ and sales of accessories. Revenue in this category is recognized upon transfer of control to the customer.

3.4. CarMax Auto Finance

CAF provides financing to qualified retail customers purchasing vehicles from CarMax. CAF provides us the opportunity to capture additional profits, cash flows and sales while managing our reliance on third-party finance sources. Management regularly analyzes CAF’s operating results by assessing profitability, the performance of the auto loans receivable, including trends in credit losses and delinquencies, and CAF direct expenses. This information is used to assess CAF’s performance and make operating decisions, including resource allocation.

We typically use securitizations or other funding arrangements to fund loans originated by CAF. 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 CAF expenses.

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. In addition, except for auto loans receivable, which are disclosed in Note 4,5, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.

Page 13

Components of CAF Income


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30						Nine Months Ended November 30
(In millions)	(In millions)	2020		% (1)	2019		% (1)	2020		% (1)	2019		% (1)	(In millions)	2021		% (1)	2020		% (1)	2021		% (1)	2020		% (1)
Interest margin:	Interest margin:													Interest margin:
Interest and fee income	Interest and fee income	$	288.5	8.5	$	278.9	8.4	$	851.1	8.5	$	820.8	8.4	Interest and fee income	$	330.0	8.6	$	288.5	8.5	$	964.4	8.7	$	851.1	8.5
Interest expense	Interest expense	(77.1)		(2.3)	(90.4)		(2.7)	(243.0)		(2.4)	(268.4)		(2.8)	Interest expense	(53.6)		(1.4)	(77.1)		(2.3)	(180.0)		(1.6)	(243.0)		(2.4)
Total interest margin	Total interest margin	211.4		6.3	188.5		5.7	608.1		6.1	552.4		5.7	Total interest margin	276.4		7.2	211.4		6.3	784.4		7.1	608.1		6.1
Provision for loan losses	Provision for loan losses	(8.2)		(0.2)	(49.0)		(1.5)	(156.1)		(1.6)	(132.7)		(1.4)	Provision for loan losses	(76.2)		(2.0)	(8.2)		(0.2)	(87.3)		(0.8)	(156.1)		(1.6)

Total interest margin after provision for loan losses	Total interest margin after provision for loan losses	203.2		6.0	139.5		4.2	452.0		4.5	419.7		4.3	Total interest margin after provision for loan losses	200.2		5.2	203.2		6.0	697.1		6.3	452.0		4.5

Total other expense	Total other expense	0		0	0		0	(2.2)		0	0		0	Total other expense	—		—	—		—	—		—	(2.2)		—

Direct expenses:	Direct expenses:													Direct expenses:
Payroll and fringe benefit expense	Payroll and fringe benefit expense	(11.6)		(0.3)	(10.8)		(0.3)	(34.2)		(0.3)	(31.3)		(0.3)	Payroll and fringe benefit expense	(12.7)		(0.3)	(11.6)		(0.3)	(37.7)		(0.3)	(34.2)		(0.3)
Depreciation and amortization														Depreciation and amortization	(2.4)		(0.1)	(0.2)		—	(2.8)		—	(0.6)		—
Other direct expenses	Other direct expenses	(15.2)		(0.4)	(14.7)		(0.4)	(41.0)		(0.4)	(44.3)		(0.5)	Other direct expenses	(19.2)		(0.5)	(15.0)		(0.4)	(48.9)		(0.4)	(40.4)		(0.4)
Total direct expenses	Total direct expenses	(26.8)		(0.8)	(25.5)		(0.8)	(75.2)		(0.7)	(75.6)		(0.8)	Total direct expenses	(34.3)		(0.9)	(26.8)		(0.8)	(89.4)		(0.8)	(75.2)		(0.7)
CarMax Auto Finance income	CarMax Auto Finance income	$	176.4	5.2	$	114.0	3.4	$	374.6	3.7	$	344.1	3.5	CarMax Auto Finance income	$	166.0	4.3	$	176.4	5.2	$	607.7	5.5	$	374.6	3.7

Total average managed receivables	Total average managed receivables	$	13,517.5		$	13,239.2		$	13,381.6		$	12,986.2		Total average managed receivables	$	15,288.8		$	13,517.5		$	14,706.9		$	13,381.6

(1) Annualized percentage of total average managed receivables.

~~Page 11~~

4.5. Auto Loans Receivable

Auto loans receivable include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses. These auto loans represent a large group of smaller-balance homogeneous loans, which we consider to be part of one class of financing receivable and one portfolio segment for purposes of determining our allowance for loan losses. We generally use warehouse facilities to fund auto loans receivable originated by CAF until we elect to fund them through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement. We recognize transfers of auto loans receivable into the warehouse facilities and asset-backed term funding transactions (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. The majority of the auto loans receivable serve as collateral for the related non-recourse notes payable of ~~$13.62~~$15.42 billion as of November 30, ~~2020~~2021 and ~~$13.61~~$13.76 billion as of February ~~29, 2020.~~28, 2021. See Note 910 for additional information on non-recourse notes payable.

Interest income and expenses related to auto loans are included in CAF income. Interest income on auto loans receivable is recognized when earned based on contractual loan terms. All loans continue to accrue interest until repayment or charge-off. When a charge-off occurs, accrued interest is written off by reversing interest income. Direct costs associated with loan originations are not considered material, and thus, are expensed as incurred. See Note 34 for additional information on CAF income.

Page 14

Auto Loans Receivable, Net


		As of November 30		As of February 29			As of November 30		As of February 28
(In millions)	(In millions)	2020		2020		(In millions)	2021		2021
Asset-backed term funding	Asset-backed term funding	$	10,878.5	$	11,007.1	Asset-backed term funding	$	11,725.4	$	11,008.3
Warehouse facilities	Warehouse facilities	2,308.0		2,181.7		Warehouse facilities	3,155.9		2,314.1
Overcollateralization (1)	Overcollateralization (1)	337.0		289.0		Overcollateralization (1)	479.2		345.2
Other managed receivables (2)	Other managed receivables (2)	112.6		140.0		Other managed receivables (2)	163.5		179.6
Total ending managed receivables	Total ending managed receivables	13,636.1		13,617.8		Total ending managed receivables	15,524.0		13,847.2
Accrued interest and fees	Accrued interest and fees	61.9		56.2		Accrued interest and fees	73.7		57.4
Other	Other	1.0		35.5		Other	(4.0)		(3.7)
Less: allowance for loan losses	Less: allowance for loan losses	(431.6)		(157.8)		Less: allowance for loan losses	(426.5)		(411.1)
Auto loans receivable, net	Auto loans receivable, net	$	13,267.4	$	13,551.7	Auto loans receivable, net	$	15,167.2	$	13,489.8

(1) Represents receivables restricted as excess collateral for the non-recourse funding vehicles.

(2) Other managed receivables includes receivables not funded through the non-recourse funding vehicles.

Credit Quality. When customers apply for financing, CAF’s proprietary scoring models rely on the customers’ credit history and certain application information to evaluate and rank their risk. We obtain credit histories and other credit data that includes information such as number, age, type of and payment history for prior or existing credit accounts. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the relative likelihood of repayment. Customers with the highest probability of repayment are A-grade customers. Customers assigned a lower grade are determined to have a lower probability of repayment. For loans that are approved, the credit grade influences the terms of the agreement, such as the required loan-to-value ratio and interest rate. After origination, credit grades are generally not updated.

CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loans receivable on an ongoing basis. We validate the accuracy of the scoring models periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.

~~Page 12~~

Ending Managed Receivables by Major Credit Grade


		As of November 30, 2020																As of November 30, 2021
		Fiscal Year of Origination (1)																Fiscal Year of Origination (1)
(In millions)	(In millions)	2021		2020		2019		2018		2017		Prior to 2017		Total		% (2)	(In millions)	2022		2021		2020		2019		2018		Prior to 2018		Total		% (2)
A	A	$	2,081.9	$	2,393.0	$	1,316.6	$	686.7	$	271.8	$	53.8	$	6,803.8	49.9	A	$	3,172.3	$	1,999.2	$	1,454.6	$	693.7	$	275.2	$	57.6	$	7,652.6	49.3
B	B	1,507.9		1,571.3		977.8		554.1		246.1		77.2		4,934.4		36.2	B	2,306.4		1,446.1		977.3		556.2		260.0		80.4		5,626.4		36.2
C and other	C and other	564.4		594.2		357.6		209.6		122.3		49.8		1,897.9		13.9	C and other	922.4		583.2		374.8		210.4		103.9		50.3		2,245.0		14.5
Total ending managed receivables	Total ending managed receivables	$	4,154.2	$	4,558.5	$	2,652.0	$	1,450.4	$	640.2	$	180.8	$	13,636.1	100.0	Total ending managed receivables	$	6,401.1	$	4,028.5	$	2,806.7	$	1,460.3	$	639.1	$	188.3	$	15,524.0	100.0


						As of February 28, 2021
		As of February 29				Fiscal Year of Origination (1)
(In millions)	(In millions)	2020 (1)		% (2)	(In millions)	2021		2020		2019		2018		2017		Prior to 2017		Total		% (2)
A	A	$	6,915.9	50.8	A	$	2,782.0	$	2,146.5	$	1,146.7	$	568.9	$	199.6	$	30.4	$	6,874.1	49.6
B	B	4,841.2		35.6	B	1,993.6		1,424.5		870.1		476.0		195.5		49.2		5,008.9		36.2
C and other	C and other	1,860.7		13.6	C and other	786.1		541.6		320.4		182.0		99.8		34.3		1,964.2		14.2
Total ending managed receivables	Total ending managed receivables	$	13,617.8	100.0	Total ending managed receivables	$	5,561.7	$	4,112.6	$	2,337.2	$	1,226.9	$	494.9	$	113.9	$	13,847.2	100.0

(1) Classified based on credit grade assigned when customers were initially approved for financing.

(2) Percent of total ending managed receivables.

Page 15

Allowance for Loan Losses. The allowance for loan losses at November 30, ~~2020~~2021 represents the net credit losses expected over the remaining contractual life of our managed receivables. The allowance for loan losses is determined using a net loss timing curve, primarily based on the composition of the portfolio of managed receivables and historical gross loss and recovery trends. ~~For~~Due to the fact that losses for receivables ~~that have~~with less than 18 months of performance history ~~the~~can be volatile, our net loss estimate ~~takes into account the credit grades of the receivables and~~weights both historical losses by credit grade ~~to supplement~~at origination and actual loss data on the receivables to-date, along with forward loss curves, in estimating future performance. Once the receivables have 18 months of performance history, the net loss 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. The net loss estimate is calculated by applying the loss rates developed using the methods described above to the amortized cost basis of the managed receivables.

The output of the net loss timing curve is adjusted to take into account reasonable and supportable forecasts about the future. Specifically, the change in U.S. unemployment rates and the National Automobile Dealers Association (“NADA”) used vehicle price index are used to predict changes in gross loss and recovery rate, respectively. An economic adjustment factor, based upon a single macroeconomic scenario, is developed to capture the relationship between changes in these forecasts and changes in gross loss and recovery rates. This factor is applied to the output of the net loss timing curve for the reasonable and supportable forecast period of two years. After the end of this two-year period, ~~the impact of the economic factor is phased out of the allowance for loan loss calculation~~we revert to historical experience on a straight-line basis over a period of 12 months. We periodically consider whether the use of alternative metrics would result in improved model performance and revise the models when appropriate. We also consider whether qualitative adjustments are necessary for factors that are not reflected in the quantitative methods but impact the measurement of estimated credit losses. Such adjustments include the uncertainty of the impacts of recent economic trends on customer behavior. The ~~provision~~change in the allowance for loan losses is recognized through an adjustment to the ~~periodic expense of maintaining an adequate allowance.~~provision for loan losses.

~~Page 13~~

Allowance for Loan Losses


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30						Nine Months Ended November 30
(In millions)	(In millions)	2020		% (1)	2019 (2)		% (1)	2020		% (1)	2019 (2)		% (1)	(In millions)	2021		% (1)	2020		% (1)	2021		% (1)	2020		% (1)
Balance as of beginning of period	Balance as of beginning of period	$	432.5	3.23	$	150.4	1.15	$	157.8	1.16	$	138.2	1.10	Balance as of beginning of period	$	398.1	2.66	$	432.5	3.23	$	411.1	2.97	$	157.8	1.16
Adoption of CECL	Adoption of CECL	—			—			202.0			—			Adoption of CECL	—			—			—			202.0
Adjusted balance as of beginning of period	Adjusted balance as of beginning of period	432.5		3.23	150.4		1.15	359.8		2.64	138.2		1.10	Adjusted balance as of beginning of period	398.1		2.66	432.5		3.23	411.1		2.97	359.8		2.64
Charge-offs	Charge-offs	(49.9)			(81.2)			(174.5)			(223.4)			Charge-offs	(68.2)			(49.9)			(153.7)			(174.5)
Recoveries ~~(3)~~(2)	Recoveries ~~(3)~~(2)	40.8			35.4			90.2			106.1			Recoveries ~~(3)~~(2)	20.4			40.8			81.8			90.2
Provision for loan losses	Provision for loan losses	8.2			49.0			156.1			132.7			Provision for loan losses	76.2			8.2			87.3			156.1
Balance as of end of period(3)	Balance as of end of period(3)	$	431.6	3.17	$	153.6	1.15	$	431.6	3.17	$	153.6	1.15	Balance as of end of period(3)	$	426.5	2.75	$	431.6	3.17	$	426.5	2.75	$	431.6	3.17

(1) Percent of total ending managed receivables.

(2) ~~The comparative information has not been restated and continues to be reported under the accounting guidance in effect during fiscal 2020.~~

~~(3)~~ Net of costs incurred to recover vehicle.

~~During the first quarter of fiscal 2021, we adopted a new accounting pronouncement related to the measurement of credit losses on financial instruments (ASU 2016-13 or “CECL”).~~ (3) The ~~adoption of this pronouncement resulted in the recognition of a $202.0 million increase in the~~ allowance for loan losses primarily relates to estimated losses on CAF’s core receivables; $40.8 million and $31.8 million of the total allowance relates to the outstanding CAF Tier 3 loan balances as of ~~March 1, 2020, with a corresponding net-of-tax decrease of $153.3 million in retained earnings.~~ November 30, 2021 and February 28, 2021, respectively.

During the first nine months of fiscal ~~2021, we recorded a provision~~2022, the allowance for loan losses ~~of $156.1 million. The first quarter provision of $122.0~~increased $15.4 million, ~~included an increase~~primarily reflecting growth in ~~our estimate of lifetime losses on existing loans, largely resulting from worsening economic factors in response to COVID-19. In particular, the U.S. unemployment rate rose significantly~~receivables, partially offset by favorable loan loss performance during the year. Although net charge-offs remained low in the first ~~quarter. This rate is used in~~nine months of fiscal 2022, the future impact of the COVID-19 environment on credit losses remains uncertain. As a result, we determined that the quantitative loss ~~prediction~~rates should be qualitatively adjusted to ~~incorporate how current and forecasted economic conditions impact~~reflect future loss performance from potential customer hardship ~~or ability~~and to ~~pay. Changes in~~mitigate the ~~NADA used vehicle price index were not significant. During the second and third quarters~~quantitative impact of ~~fiscal 2021, we experienced~~recent favorable loss performance, ~~in comparison to~~as we do not believe the favorable loss performance this fiscal year is consistent with our loss expectations set at the end of the then previous quarter, resulting in favorable adjustments of $29.6 million and $55.8 million, respectively, for receivables then outstanding. These adjustments were more than offset by increases to the provision related to ourbest estimate of lifetime losses on originations of $55.6 million in the second quarter and $64.0 million in the third quarter. While we experienced some loss favorability during the second and third quarter of fiscal 2021, this favorability was tempered by economic adjustment factors and other qualitative considerations applied to the provision, particularly the uncertainty surrounding the COVID-19 pandemic.expected future losses. The allowance for loan losses as of November 30, ~~2020~~2021 reflects both the positive customer payment behavior compared to historical experience recently observed as well as the unpredictability of the current ~~environment and the uncertain consumer situation.~~macroeconomic environment.

Past Due Receivables. An account is considered delinquent when the related customer fails to make a substantial portion of a scheduled payment on or before the due date. In general, accounts are charged-off on the last business day of the month during which the earliest of the following occurs: the receivable is 120 days or more delinquent as of the last business day of the month, the related vehicle is repossessed and liquidated, or the receivable is otherwise deemed uncollectible. For purposes of determining impairment, auto loans are evaluated collectively, as they represent a large group of smaller-balance homogeneous loans, and therefore, are not individually evaluated for impairment.

Page 1416

Past Due Receivables


		As of November 30, 2020										As of November 30, 2021
		Major Credit Grade										Major Credit Grade
(In millions)	(In millions)	A		B		C & Other		Total		% (1)	(In millions)	A		B		C & Other		Total		% (1)
Current	Current	$	6,776.7	$	4,761.3	$	1,698.3	$	13,236.3	97.07	Current	$	7,617.6	$	5,373.2	$	1,938.8	$	14,929.6	96.17
Delinquent loans:	Delinquent loans:										Delinquent loans:
31-60 days past due	31-60 days past due	17.5		112.8		121.7		252.0		1.85	31-60 days past due	23.0		160.4		179.7		363.1		2.34
61-90 days past due	61-90 days past due	7.2		49.0		65.6		121.8		0.89	61-90 days past due	9.2		74.5		102.3		186.0		1.20
Greater than 90 days past due	Greater than 90 days past due	2.4		11.3		12.3		26.0		0.19	Greater than 90 days past due	2.8		18.3		24.2		45.3		0.29
Total past due	Total past due	27.1		173.1		199.6		399.8		2.93	Total past due	35.0		253.2		306.2		594.4		3.83
Total ending managed receivables	Total ending managed receivables	$	6,803.8	$	4,934.4	$	1,897.9	$	13,636.1	100.00	Total ending managed receivables	$	7,652.6	$	5,626.4	$	2,245.0	$	15,524.0	100.00


						As of February 28, 2021
		As of February 29				Major Credit Grade
(In millions)	(In millions)	2020		% (1)	(In millions)	A		B		C & Other		Total		% (1)
Total ending managed receivables		$	13,617.8	100.00
Current					Current	$	6,847.2	$	4,840.3	$	1,767.2	$	13,454.7	97.17
Delinquent loans:	Delinquent loans:				Delinquent loans:
31-60 days past due	31-60 days past due	$	296.4	2.18	31-60 days past due	17.3		108.9		120.0		246.2		1.78
61-90 days past due	61-90 days past due	138.3		1.01	61-90 days past due	7.0		48.4		64.5		119.9		0.86
Greater than 90 days past due	Greater than 90 days past due	34.2		0.25	Greater than 90 days past due	2.6		11.3		12.5		26.4		0.19
Total past due	Total past due	$	468.9	3.44	Total past due	26.9		168.6		197.0		392.5		2.83
Total ending managed receivables					Total ending managed receivables	$	6,874.1	$	5,008.9	$	1,964.2	$	13,847.2	100.00

(1) Percent of total ending managed receivables.

5.6. Derivative Instruments and Hedging Activities

We use derivatives to manage certain risks arising from both our business operations and economic conditions, particularly with regard to issuances of debt. Primary exposures include LIBOR and other rates used as benchmarks in our securitizations and other debt financing. We enter into derivative instruments to manage exposures related to the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates, and generally designate these derivative instruments as cash flow hedges for accounting purposes. In certain cases, we may choose not to designate a derivative instrument as a cash flow hedge for accounting purposes due to uncertainty around the probability that future hedged transactions will occur. Our derivative instruments are used to manage (i) differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loans receivable, and (ii) exposure to variable interest rates associated with our term loan.

For the derivatives associated with our non-recourse funding vehicles that are designated as cash flow hedges, the changes in fair value are initially recorded in accumulated other comprehensive loss (“AOCL”). For the majority of these derivatives, the amounts are subsequently reclassified into CAF income in the period that the hedged forecasted transaction affects earnings, which occurs as interest expense is recognized on those future issuances of debt. During the next 12 months, we estimate that an additional ~~$19.8~~$9.0 million will be reclassified in AOCL as a decrease to CAF income. Changes in fair value related to derivatives that have not been designated as cash flow hedges for accounting purposes are recognized in the income statement in the period in which the change occurs. For the three and nine months ended November 30, ~~2020,~~2021, we recognized income of ~~$0.1~~$3.4 million and ~~a loss of $2.1~~$3.2 million, respectively, in CAF income representing these changes in fair value.

As of November 30, ~~2020~~2021 and February ~~29, 2020,~~28, 2021, we had interest rate swaps outstanding with a combined notional amount of ~~$2.41~~$4.03 billion and ~~$2.62~~$2.43 billion, respectively, that were designated as cash flow hedges of interest rate risk. As of November 30, ~~2020,~~2021 and February 28, 2021, we had an interest rate ~~swap~~swaps outstanding with a notional ~~amount~~amounts of ~~$0.17 billion outstanding~~$644.2 million and $255.2 million, respectively, that ~~was~~were not designated as a cash flow ~~hedge.~~hedges.

See Note 67 for discussion of fair values of financial instruments and Note 1213 for the effect on comprehensive income.

Page 1517

6.7. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or, if none exists, the most advantageous market, for the specific asset or liability at the measurement date (referred to as the “exit price”). The fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.

We assess the inputs used to measure fair value using the three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market.

Level 1 Inputs include unadjusted quoted prices in active markets for identical assets or liabilities that we can access at the measurement date.

Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets in active markets, quoted prices from identical or similar assets in inactive markets and observable inputs such as interest rates and yield curves.

Level 3 Inputs that are significant to the measurement that are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk).

Our fair value processes include controls that are designed to ensure that fair values are appropriate. Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations and reviews by senior management.

Valuation Methodologies

Money Market Securities. Money market securities are cash equivalents, which are included in cash and cash equivalents, restricted cash from collections on auto loans receivable and other assets. They consist of highly liquid investments with original maturities of three months or less and are classified as Level 1.

Mutual Fund Investments. Mutual fund investments consist of publicly traded mutual funds that primarily include diversified equity investments in large-, mid- and small-cap domestic and international companies or investment grade debt securities. The investments, which are included in other assets, are held in a rabbi trust established to fund informally our executive deferred compensation plan and are classified as Level 1.

Derivative Instruments. The fair values of our derivative instruments are included in either other current assets, other assets, accounts payable or other liabilities. Our derivatives are not exchange-traded and are over-the-counter customized derivative instruments. All of our derivative exposures are with highly rated bank counterparties.

We measure derivative fair values assuming that the unit of account is an individual derivative instrument and that derivatives are sold or transferred on a stand-alone basis. We estimate the fair value of our derivatives using quotes determined by the derivative counterparties and third-party valuation services. Quotes from third-party valuation services and quotes received from bank counterparties project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates and the contractual terms of the derivative instruments. The models do not require significant judgment and model inputs can typically be observed in a liquid market; however, because the models include inputs other than quoted prices in active markets, all derivatives are classified as Level 2.

Our derivative fair value measurements consider assumptions about counterparty and our own nonperformance risk. We monitor counterparty and our own nonperformance risk and, in the event that we determine that a party is unlikely to perform under terms of the contract, we would adjust the derivative fair value to reflect the nonperformance risk.

Page 1618

Items Measured at Fair Value on a Recurring Basis


		As of November 30, 2020										As of November 30, 2021
(In thousands)	(In thousands)	Level 1			Level 2			Total			(In thousands)	Level 1			Level 2			Total
Assets:	Assets:										Assets:
Money market securities	Money market securities	$	524,297		$	0		$	524,297		Money market securities	$	705,326		$	—		$	705,326
Mutual fund investments	Mutual fund investments	21,978			0			21,978			Mutual fund investments	25,650			—			25,650

Derivative instruments designated as hedges	Derivative instruments designated as hedges	0			1,189			1,189			Derivative instruments designated as hedges	—			10,566			10,566
Derivative instruments not designated as hedges	Derivative instruments not designated as hedges	0			65			65			Derivative instruments not designated as hedges	—			3,671			3,671
Total assets at fair value	Total assets at fair value	$	546,275		$	1,254		$	547,529		Total assets at fair value	$	730,976		$	14,237		$	745,213

Percent of total assets at fair value	Percent of total assets at fair value	99.8		%	0.2		%	100.0		%	Percent of total assets at fair value	98.1		%	1.9		%	100.0		%
Percent of total assets	Percent of total assets	2.6		%	0		%	2.6		%	Percent of total assets	2.9		%	0.1		%	2.9		%

Liabilities:	Liabilities:										Liabilities:
Derivative instruments designated as hedges	Derivative instruments designated as hedges	$	0		$	(7,164)		$	(7,164)		Derivative instruments designated as hedges	$	—		$	(4,561)		$	(4,561)

Total liabilities at fair value	Total liabilities at fair value	$	0		$	(7,164)		$	(7,164)		Total liabilities at fair value	$	—		$	(4,561)		$	(4,561)

Percent of total liabilities	Percent of total liabilities	0		%	0		%	0		%	Percent of total liabilities	—		%	—		%	—		%


		As of February 29, 2020										As of February 28, 2021
(In thousands)	(In thousands)	Level 1			Level 2			Total			(In thousands)	Level 1			Level 2			Total
Assets:	Assets:										Assets:
Money market securities	Money market securities	$	273,203		$	0		$	273,203		Money market securities	$	685,585		$	—		$	685,585
Mutual fund investments	Mutual fund investments	22,668			0			22,668			Mutual fund investments	24,049			—			24,049

Derivative instruments designated as hedges											Derivative instruments designated as hedges	—			4,061			4,061
Derivative instruments not designated as hedges											Derivative instruments not designated as hedges	—			501			501
Total assets at fair value	Total assets at fair value	$	295,871		$	0		$	295,871		Total assets at fair value	$	709,634		$	4,562		$	714,196

Percent of total assets at fair value	Percent of total assets at fair value	100.0		%	0		%	100.0		%	Percent of total assets at fair value	99.4		%	0.6		%	100.0		%
Percent of total assets	Percent of total assets	1.4		%	0		%	1.4		%	Percent of total assets	3.3		%	—		%	3.3		%

Liabilities:	Liabilities:										Liabilities:
Derivative instruments designated as hedges	Derivative instruments designated as hedges	$	0		$	(23,992)		$	(23,992)		Derivative instruments designated as hedges	$	—		$	(6,024)		$	(6,024)
Total liabilities at fair value	Total liabilities at fair value	$	0		$	(23,992)		$	(23,992)		Total liabilities at fair value	$	—		$	(6,024)		$	(6,024)

Percent of total liabilities	Percent of total liabilities	0		%	0.1		%	0.1		%	Percent of total liabilities	—		%	—		%	—		%

Fair Value of Financial Instruments

The carrying value of our cash and cash equivalents, accounts receivable, other restricted cash deposits and accounts payable approximates fair value due to the short-term nature and/or variable rates associated with these financial instruments. Auto loans receivable are presented net of an allowance for estimated loan losses. We believe that the carrying value of our revolving credit facility and term loan approximates fair value due to the variable rates associated with these obligations. The fair value of our senior unsecured notes, which are not carried at fair value on our consolidated balance sheets, was determined using Level 2 inputs based on quoted market prices. The carrying value and fair value of the senior unsecured notes as of November 30, ~~2020~~2021 and February ~~29, 2020,~~28, 2021, respectively, are as follows:


(In thousands)	(In thousands)	As of November 30, 2020		As of February 29, 2020		(In thousands)	As of November 30, 2021		As of February 28, 2021
Carrying value	Carrying value	$	500,000	$	500,000	Carrying value	$	500,000	$	500,000
Fair value	Fair value	$	560,115	$	546,197	Fair value	$	542,176	$	556,993

Page 1719

7.8. Cancellation Reserves

We recognize revenue for EPP products, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations. Cancellations of these services may result from early termination by the customer, or default or prepayment on the finance contract. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and the credit mix of the customer base.

Cancellation Reserves


		Three Months Ended November 30				Nine Months Ended November 30					Three Months Ended November 30				Nine Months Ended November 30
(In millions)	(In millions)	2020		2019		2020		2019		(In millions)	2021		2020		2021		2020
Balance as of beginning of period	Balance as of beginning of period	$	122.6	$	111.6	$	117.9	$	102.8	Balance as of beginning of period	$	144.3	$	122.6	$	124.5	$	117.9
Cancellations	Cancellations	(17.4)		(18.4)		(48.3)		(55.1)		Cancellations	(25.2)		(17.4)		(68.3)		(48.3)
Provision for future cancellations	Provision for future cancellations	17.9		19.6		53.5		65.1		Provision for future cancellations	28.7		17.9		91.6		53.5
Balance as of end of period	Balance as of end of period	$	123.1	$	112.8	$	123.1	$	112.8	Balance as of end of period	$	147.8	$	123.1	$	147.8	$	123.1

The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities. As of November 30, ~~2020~~2021 and February ~~29, 2020,~~28, 2021, the current portion of cancellation reserves was ~~$66.2~~$79.8 million and ~~$63.5~~$58.7 million, respectively.

8.9. Income Taxes

We had ~~$28.7~~$29.5 million of gross unrecognized tax benefits as of November 30, ~~2020,~~2021, and ~~$30.9~~$29.0 million as of February ~~29, 2020.~~28, 2021. There were no significant changes to the gross unrecognized tax benefits as reported for the fiscal year ended February ~~29, 2020.~~28, 2021.

9.10. Debt


(In thousands)	(In thousands)		As of November 30		As of February 29		(In thousands)		As of November 30		As of February 28
Debt Description (1)	Debt Description (1)	Maturity Date	2020		2020		Debt Description (1)	Maturity Date	2021		2021
Revolving credit facility (2)	Revolving credit facility (2)	June 2024	$	1,008	$	452,740	Revolving credit facility (2)	June 2024	$	588,100	$	—
Term loan		June 2024	300,000		300,000
Term loan (2)							Term loan (2)	June 2024	300,000		300,000
Term loan (2)							Term loan (2)	October 2026	699,318		—
3.86% Senior notes	3.86% Senior notes	April 2023	100,000		100,000		3.86% Senior notes	April 2023	100,000		100,000
4.17% Senior notes	4.17% Senior notes	April 2026	200,000		200,000		4.17% Senior notes	April 2026	200,000		200,000
4.27% Senior notes	4.27% Senior notes	April 2028	200,000		200,000		4.27% Senior notes	April 2028	200,000		200,000
Financing obligations	Financing obligations	Various dates through February 2059	531,030		536,739		Financing obligations	Various dates through February 2059	527,260		533,578
Non-recourse notes payable	Non-recourse notes payable	Various dates through September 2027	13,620,332		13,613,272		Non-recourse notes payable	Various dates through August 2028	15,416,457		13,764,808
Total debt	Total debt		14,952,370		15,402,751		Total debt		18,031,135		15,098,386
Less: current portion	Less: current portion		(446,136)		(433,456)		Less: current portion		(546,035)		(452,579)
Less: unamortized debt issuance costs	Less: unamortized debt issuance costs		(25,234)		(25,240)		Less: unamortized debt issuance costs		(26,236)		(25,888)
Long-term debt, net	Long-term debt, net		$	14,481,000	$	14,944,055	Long-term debt, net		$	17,458,864	$	14,619,919

(1) Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually.

(2) Borrowings accrue interest at variable rates based on the Eurodollar rate (LIBOR), or the successor benchmark rate, the federal funds rate, or the prime rate, depending on the type of borrowing.

Revolving Credit Facility. Borrowings under our $1.45 billion unsecured revolving credit facility (the “credit facility”) are available for working capital and general corporate purposes. We pay a commitment fee on unused portions of the available funds. Borrowings under the credit facility are either due “on demand” or at maturity depending on the type of borrowing. Borrowings with “on demand” repayment terms are presented as short-term debt, while amounts due at maturity are presented as long-term debt. As of November 30, ~~2020,~~2021, the unused capacity of ~~$1.45 billion~~$861.9 million was fully available to us. In December 2021, we exercised the accordion feature to increase the credit limit of this facility to $2.00 billion with no other material changes to the terms of the agreement.

Page 20

Term ~~Loan.~~Loans. On October 15, 2021, we entered into a term loan agreement for an aggregate principal amount of $700 million, which will mature on October 15, 2026. Borrowings under both our $300 million and $700 million term ~~loan~~loans are available for working capital and general corporate purposes. ~~The~~Both term ~~loan was~~loans were classified as long-term debt, as no repayments are scheduled to be made within the next 12 months.

~~Page 18~~

Senior Notes. Borrowings under our unsecured senior notes totaling $500 million are available for working capital and general corporate purposes. These notes were classified as long-term debt as no repayments are scheduled to be made within the next 12 months.

Financing Obligations. Financing obligations relate to stores subject to sale-leaseback transactions that did not qualify for sale accounting. The financing obligations were structured at varying interest rates and generally have initial lease terms ranging from 15 to 20 years with payments made monthly. We have not entered into any new sale-leaseback transactions since fiscal 2009. In the event the agreements are modified or extended beyond their original term, the related obligation is adjusted based on the present value of the revised future payments, with a corresponding change to the assets subject to these transactions. Upon modification, the amortization of the obligation is reset, resulting in more of the payments being applied to interest expense in the initial years following the modification.

Non-Recourse Notes Payable. The non-recourse notes payable relate to auto loans receivable funded through non-recourse funding vehicles. The timing of principal payments on the non-recourse notes payable is based on the timing of principal collections and defaults on the related auto loans receivable. The current portion of non-recourse notes payable represents principal payments that are due to be distributed in the following period.

Notes payable related to our asset-backed term funding transactions accrue interest predominantly at fixed rates and have scheduled maturities through ~~September 2027,~~August 2028, but may mature earlier, depending upon the repayment rate of the underlying auto loans receivable.

Information on our funding vehicles for non-recourse notes payable as of November 30, ~~2020,~~2021, are as follows:


(In billions)	Capacity
Warehouse facilities:
~~February~~December 2021 expiration	$	~~1.95~~0.18
February 2022 expiration	2.35
August ~~2021~~2022 expiration	~~1.40~~
~~September 2021 expiration~~	~~0.18~~2.30
Combined warehouse facility limit	$	~~3.53~~4.83
Unused capacity	$	~~1.22~~1.67

Non-recourse notes payable outstanding:
Warehouse facilities	$	~~2.31~~3.16
Asset-backed term funding transactions	~~11.31~~12.26
Non-recourse notes payable	$	~~13.62~~15.42

We generally enter into warehouse facility agreements for one-year terms and typically renew the agreements annually. The return requirements of warehouse facility investors could fluctuate significantly depending on market conditions. At renewal, the cost, structure and capacity of the facilities could change. These changes could have a significant impact on our funding costs.

See Note 45 for additional information on the related auto loans receivable.

Capitalized Interest. We capitalize interest in connection with the construction of certain facilities. For the nine months ended November 30, ~~2020~~2021 and ~~2019,~~2020, we capitalized interest of ~~$2.1~~$5.0 million and ~~$5.0~~$2.1 million, respectively.

Financial Covenants. The credit facility, term ~~loan~~loans and senior note agreements contain representations and warranties, conditions and covenants. We must also meet financial covenants in conjunction with certain financing obligations. The agreements governing our non-recourse funding vehicles contain representations and warranties, financial covenants and performance triggers. As of November 30, ~~2020,~~2021, we were in compliance with all financial covenants and our non-recourse funding vehicles were in compliance with the related performance triggers.

Page 1921

~~10.~~11. Stock and Stock-Based Incentive Plans

(A) Share Repurchase Program

As of November 30, ~~2020,~~2021, a total of $2.0 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which ~~$1.40 billion~~$876.2 million remained available for repurchase. ~~In March 2020, our current stock repurchase program was suspended. The repurchase authorization remained effective and the program resumed in September 2020.~~

Common Stock Repurchases


		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		November 30				November 30					November 30				November 30
		2020		2019		2020		2019			2021		2020		2021		2020
Number of shares repurchased (in thousands)	Number of shares repurchased (in thousands)	1,175.8		1,270.3		1,691.3		5,748.9		Number of shares repurchased (in thousands)	851.1		1,175.8		3,602.8		1,691.3
Average cost per share	Average cost per share	$	92.90	$	90.38	$	88.65	$	77.92	Average cost per share	$	135.52	$	92.90	$	127.65	$	88.65
Available for repurchase, as of end of period (in millions)	Available for repurchase, as of end of period (in millions)	$	1,402.4	$	1,666.0	$	1,402.4	$	1,666.0	Available for repurchase, as of end of period (in millions)	$	876.2	$	1,402.4	$	876.2	$	1,402.4

(B)Share-Based Compensation

Composition of Share-Based Compensation Expense


		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		November 30				November 30					November 30				November 30
(In thousands)	(In thousands)	2020		2019		2020		2019		(In thousands)	2021		2020		2021		2020
Cost of sales	Cost of sales	$	11	$	2,128	$	3,202	$	6,293	Cost of sales	$	1,896	$	11	$	5,719	$	3,202
CarMax Auto Finance income	CarMax Auto Finance income	938		1,317		3,750		4,166		CarMax Auto Finance income	1,560		938		4,749		3,750
Selling, general and administrative expenses	Selling, general and administrative expenses	10,728		26,251		68,680		89,047		Selling, general and administrative expenses	33,328		10,728		100,453		68,680
Share-based compensation expense, before income taxes	Share-based compensation expense, before income taxes	$	11,677	$	29,696	$	75,632	$	99,506	Share-based compensation expense, before income taxes	$	36,784	$	11,677	$	110,921	$	75,632

Composition of Share-Based Compensation Expense – By Grant Type


		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		November 30				November 30					November 30				November 30
(In thousands)	(In thousands)	2020		2019		2020		2019		(In thousands)	2021		2020		2021		2020
Nonqualified stock options	Nonqualified stock options	$	6,630	$	6,151	$	25,237	$	24,314	Nonqualified stock options	$	7,846	$	6,630	$	27,375	$	25,237
Cash-settled restricted stock units (RSUs)	Cash-settled restricted stock units (RSUs)	1,210		20,545		33,784		59,763		Cash-settled restricted stock units (RSUs)	23,836		1,210		62,398		33,784
Stock-settled market stock units (MSUs)	Stock-settled market stock units (MSUs)	3,161		2,837		12,516		10,298		Stock-settled market stock units (MSUs)	3,171		3,161		11,260		12,516
Other share-based incentives:	Other share-based incentives:									Other share-based incentives:
Stock-settled performance stock units (PSUs)	Stock-settled performance stock units (PSUs)	112		(244)		378		1,389		Stock-settled performance stock units (PSUs)	964		112		5,334		378
Restricted stock (RSAs)	Restricted stock (RSAs)	39		0		106		0		Restricted stock (RSAs)	365		39		670		106
Stock-settled deferred stock units (DSUs)	Stock-settled deferred stock units (DSUs)	0		0		1,925		2,412		Stock-settled deferred stock units (DSUs)	—		—		1,925		1,925
Employee stock purchase plan	Employee stock purchase plan	525		407		1,686		1,330		Employee stock purchase plan	602		525		1,959		1,686
Total other share-based incentives	Total other share-based incentives	$	676	$	163	$	4,095	$	5,131	Total other share-based incentives	$	1,931	$	676	$	9,888	$	4,095
Share-based compensation expense, before income taxes	Share-based compensation expense, before income taxes	$	11,677	$	29,696	$	75,632	$	99,506	Share-based compensation expense, before income taxes	$	36,784	$	11,677	$	110,921	$	75,632

Page 2022

~~Share/Unit Activity~~


Share/Unit Activity										Share/Unit Activity
		Nine Months Ended November 30, 2020									Nine Months Ended November 30, 2021
		Equity Classified						Liability Classified			Equity Classified						Liability Classified
(Shares/units in thousands)	(Shares/units in thousands)	Options		MSUs		Other		RSUs		(Shares/units in thousands)	Options		MSUs		Other		RSUs
Outstanding as of February 29, 2020		6,994		477		130		1,557
Outstanding as of February 28, 2021										Outstanding as of February 28, 2021	6,266		520		84		1,606
Granted	Granted	1,602		199		23		670		Granted	922		82		89		377
Exercised or vested and converted	Exercised or vested and converted	(1,481)		(148)		(69)		(512)		Exercised or vested and converted	(1,249)		(197)		(2)		(715)
Cancelled	Cancelled	(29)		(8)		0		(72)		Cancelled	(78)		(11)		(2)		(78)
Outstanding as of November 30, 2020		7,086		520		84		1,643
Outstanding as of November 30, 2021										Outstanding as of November 30, 2021	5,861		394		169		1,190

Weighted average grant date fair value per share/unit:	Weighted average grant date fair value per share/unit:									Weighted average grant date fair value per share/unit:

Granted	Granted	$	22.77	$	93.70	$	86.88	$	71.08	Granted	$	42.31	$	178.16	$	132.96	$	136.48
Ending outstanding	Ending outstanding	$	19.41	$	90.46	$	81.80	$	70.86	Ending outstanding	$	23.75	$	112.21	$	108.30	$	93.44

		As of November 30, 2020									As of November 30, 2021
Unrecognized compensation (in millions)	Unrecognized compensation (in millions)	$	49.8	$	17.8	$	1.0			Unrecognized compensation (in millions)	$	54.4	$	17.5	$	4.8

~~11.~~12. Net Earnings Per Share

Basic net earnings per share is computed by dividing net earnings available for basic common shares by the weighted average number of shares of common stock outstanding. Diluted net earnings per share is computed by dividing net earnings available for diluted common shares by the sum of weighted average number of shares of common stock outstanding and dilutive potential common stock. Diluted net earnings per share is calculated using the “if-converted” treasury stock method.

Basic and Dilutive Net Earnings Per Share Reconciliations


		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		November 30				November 30					November 30				November 30
(In thousands except per share data)	(In thousands except per share data)	2020		2019		2020		2019		(In thousands except per share data)	2021		2020		2021		2020
Net earnings	Net earnings	$	235,300	$	173,156	$	536,974	$	673,499	Net earnings	$	269,438	$	235,300	$	991,461	$	536,974

Weighted average common shares outstanding	Weighted average common shares outstanding	163,732		164,273		163,278		165,321		Weighted average common shares outstanding	162,006		163,732		162,710		163,278
Dilutive potential common shares:	Dilutive potential common shares:									Dilutive potential common shares:
Stock options	Stock options	1,636		1,820		1,341		1,466		Stock options	2,373		1,636		2,391		1,341
Stock-settled stock units and awards	Stock-settled stock units and awards	405		441		357		367		Stock-settled stock units and awards	494		405		505		357
Weighted average common shares and dilutive potential common shares	Weighted average common shares and dilutive potential common shares	165,773		166,534		164,976		167,154		Weighted average common shares and dilutive potential common shares	164,873		165,773		165,606		164,976

Basic net earnings per share	Basic net earnings per share	$	1.44	$	1.05	$	3.29	$	4.07	Basic net earnings per share	$	1.66	$	1.44	$	6.09	$	3.29
Diluted net earnings per share	Diluted net earnings per share	$	1.42	$	1.04	$	3.25	$	4.03	Diluted net earnings per share	$	1.63	$	1.42	$	5.99	$	3.25

Certain options to purchase shares of common stock were outstanding and not included in the calculation of diluted net earnings per share because their inclusion would have been antidilutive. On a weighted average basis, for the three months ended November 30, ~~2020~~2021 and ~~2019,~~2020, options to purchase ~~115,509~~776,853 shares and ~~1,235,575~~115,509 shares of common stock, respectively, were not included. For the nine months ended November 30, ~~2020~~2021 and ~~2019,~~2020, options to purchase ~~2,158,503~~701,970 shares and ~~1,272,429~~2,158,503 shares of common stock, respectively, were not included.

Page 2123

~~12.~~13. Accumulated Other Comprehensive Loss

Changes in Accumulated Other Comprehensive Loss By Component

Total
Net Net Accumulated
Unrecognized Unrecognized Other
Actuarial Hedge Comprehensive
(In thousands, net of income taxes) Losses Losses Loss
Balance as of February 29, 2020 $ (121,302) $ (28,769) $ (150,071)
Other comprehensive loss before reclassifications 0 (16,113) (16,113)
Amounts reclassified from accumulated other comprehensive loss 2,183 11,077 13,260
Other comprehensive income (loss) 2,183 (5,036) (2,853)
Balance as of November 30, 2020 $ (119,119) $ (33,805) $ (152,924)


					Total
	Net		Net		Accumulated
	Unrecognized		Unrecognized		Other
	Actuarial		Hedge		Comprehensive
(In thousands, net of income taxes)	Losses		Losses		Loss
Balance as of February 28, 2021	$	(92,662)	$	(26,029)	$	(118,691)
Other comprehensive income before reclassifications	—		6,386		6,386
Amounts reclassified from accumulated other comprehensive loss	1,976		10,028		12,004
Other comprehensive income	1,976		16,414		18,390
Balance as of November 30, 2021	$	(90,686)	$	(9,615)	$	(100,301)

Changes In and Reclassifications Out of Accumulated Other Comprehensive Loss


		Three Months Ended November 30				Nine Months Ended November 30					Three Months Ended November 30				Nine Months Ended November 30
(In thousands)	(In thousands)	2020		2019		2020		2019		(In thousands)	2021		2020		2021		2020
Retirement Benefit Plans:	Retirement Benefit Plans:									Retirement Benefit Plans:
Actuarial loss amortization reclassifications recognized in net pension expense:	Actuarial loss amortization reclassifications recognized in net pension expense:									Actuarial loss amortization reclassifications recognized in net pension expense:
Cost of sales	Cost of sales	$	402	$	203	$	1,212	$	601	Cost of sales	$	367	$	402	$	1,083	$	1,212
CarMax Auto Finance income	CarMax Auto Finance income	27		12		83		36		CarMax Auto Finance income	21		27		64		83
Selling, general and administrative expenses	Selling, general and administrative expenses	530		253		1,583		768		Selling, general and administrative expenses	481		530		1,458		1,583
Total amortization reclassifications recognized in net pension expense	Total amortization reclassifications recognized in net pension expense	959		468		2,878		1,405		Total amortization reclassifications recognized in net pension expense	869		959		2,605		2,878
Tax expense	Tax expense	(232)		(113)		(695)		(339)		Tax expense	(210)		(232)		(629)		(695)
Amortization reclassifications recognized in net pension expense, net of tax	Amortization reclassifications recognized in net pension expense, net of tax	727		355		2,183		1,066		Amortization reclassifications recognized in net pension expense, net of tax	659		727		1,976		2,183
Net change in retirement benefit plan unrecognized actuarial losses, net of tax	Net change in retirement benefit plan unrecognized actuarial losses, net of tax	727		355		2,183		1,066		Net change in retirement benefit plan unrecognized actuarial losses, net of tax	659		727		1,976		2,183

Cash Flow Hedges (Note 5):
Cash Flow Hedges (Note 6):										Cash Flow Hedges (Note 6):
Changes in fair value	Changes in fair value	2,877		10,529		(21,906)		(22,844)		Changes in fair value	11,339		2,877		8,668		(21,906)
Tax (expense) benefit	Tax (expense) benefit	(761)		(2,782)		5,793		6,037		Tax (expense) benefit	(2,985)		(761)		(2,282)		5,793
Changes in fair value, net of tax	Changes in fair value, net of tax	2,116		7,747		(16,113)		(16,807)		Changes in fair value, net of tax	8,354		2,116		6,386		(16,113)
Reclassifications to CarMax Auto Finance income	Reclassifications to CarMax Auto Finance income	6,334		2,067		15,060		2,370		Reclassifications to CarMax Auto Finance income	4,111		6,334		13,610		15,060
Tax expense	Tax expense	(1,675)		(546)		(3,983)		(626)		Tax expense	(1,082)		(1,675)		(3,582)		(3,983)
Reclassification of hedge losses, net of tax	Reclassification of hedge losses, net of tax	4,659		1,521		11,077		1,744		Reclassification of hedge losses, net of tax	3,029		4,659		10,028		11,077
Net change in cash flow hedge unrecognized losses, net of tax	Net change in cash flow hedge unrecognized losses, net of tax	6,775		9,268		(5,036)		(15,063)		Net change in cash flow hedge unrecognized losses, net of tax	11,383		6,775		16,414		(5,036)
Total other comprehensive income (loss), net of tax	Total other comprehensive income (loss), net of tax	$	7,502	$	9,623	$	(2,853)	$	(13,997)	Total other comprehensive income (loss), net of tax	$	12,042	$	7,502	$	18,390	$	(2,853)

Changes in the funded status of our retirement plans and changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in accumulated other comprehensive loss. The cumulative balances are net of deferred taxes of ~~$49.9~~$32.2 million as of November 30, ~~2020~~2021 and ~~$48.8~~$38.7 million as of February ~~29, 2020.~~28, 2021.

Page 2224

~~13.~~14. Leases

Our leases primarily consist of operating and finance leases related to retail stores, office space, land and equipment. We also have stores subject to sale-leaseback transactions that did not qualify for sale accounting and are accounted for as financing obligations. For more information on these financing obligations see Note 9.10.

The initial term for real property leases is typically 5 to 20 years. For equipment leases, the initial term generally ranges from 3 to 8 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 20 years or more. We include options to renew (or terminate) in our lease term, and as part of our right-of-use (“ROU”) assets and lease liabilities, when it is reasonably certain that we will exercise that option.

ROU assets and the related lease liabilities are initially measured at the present value of future lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We include variable lease payments in the initial measurement of ROU assets and lease liabilities only to the extent they depend on an index or rate. Changes in such indices or rates are accounted for in the period the change occurs, and do not result in the remeasurement of the ROU asset or liability. We are also responsible for payment of certain real estate taxes, insurance and other expenses on our leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. We generally account for non-lease components, such as maintenance, separately from lease components. For certain equipment leases, we apply a portfolio approach to account for the lease assets and liabilities.

Our lease agreements do not contain any material residual value guarantees or material restricted covenants. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

The components of lease expense were as follows:


		Three Months Ended November 30				Nine Months Ended November 30					Three Months Ended November 30				Nine Months Ended November 30
(In thousands)	(In thousands)	2020		2019		2020		2019		(In thousands)	2021		2020		2021		2020
Operating lease cost (1)	Operating lease cost (1)	$	14,340	$	14,262	$	43,075	$	43,074	Operating lease cost (1)	$	20,581	$	14,340	$	53,631	$	43,075
Finance lease cost:	Finance lease cost:									Finance lease cost:
Depreciation of lease assets	Depreciation of lease assets	2,149		1,563		5,523		4,114		Depreciation of lease assets	3,383		2,149		9,784		5,523
Interest on lease liabilities	Interest on lease liabilities	2,680		2,053		7,328		5,499		Interest on lease liabilities	4,257		2,680		12,531		7,328
Total finance lease cost	Total finance lease cost	4,829		3,616		12,851		9,613		Total finance lease cost	7,640		4,829		22,315		12,851
Total lease cost	Total lease cost	$	19,169	$	17,878	$	55,926	$	52,687	Total lease cost	$	28,221	$	19,169	$	75,946	$	55,926

(1) Includes short-term leases and variable lease costs, which are immaterial.

Page 2325

Supplemental balance sheet information related to leases was as follows:


			As of November 30		As of February 29				As of November 30		As of February 28
(In thousands)	(In thousands)	Classification	2020		2020		(In thousands)	Classification	2021		2021
Assets:	Assets:						Assets:
Operating lease assets	Operating lease assets	Operating lease assets	$	439,074	$	449,094	Operating lease assets	Operating lease assets	$	543,645	$	431,652
Finance lease assets	Finance lease assets	Property and equipment, net (1)	97,281		75,320		Finance lease assets	Property and equipment, net (1)	123,347		109,665
Total lease assets	Total lease assets		$	536,355	$	524,414	Total lease assets		$	666,992	$	541,317
Liabilities:	Liabilities:						Liabilities:
Current:	Current:						Current:
Operating leases	Operating leases	Current portion of operating lease liabilities	$	30,726	$	30,980	Operating leases	Current portion of operating lease liabilities	$	43,151	$	30,953
Finance leases	Finance leases	Accrued expenses and other current liabilities	9,520		5,066		Finance leases	Accrued expenses and other current liabilities	9,696		9,422
Long-term:	Long-term:						Long-term:
Operating leases	Operating leases	Operating lease liabilities, excluding current portion	431,068		440,671		Operating leases	Operating lease liabilities, excluding current portion	529,821		423,618
Finance leases	Finance leases	Other liabilities	102,154		79,327		Finance leases	Other liabilities	140,215		120,094
Total lease liabilities	Total lease liabilities		$	573,468	$	556,044	Total lease liabilities		$	722,883	$	584,087

(1) Finance lease assets are recorded net of accumulated depreciation of ~~$14.6~~$27.3 million as of November 30, ~~2020~~2021 and ~~$9.1~~$17.5 million as of February ~~29, 2020.~~28, 2021.

Lease term and discount rate information related to leases was as follows:


		As of November 30		As of February 29			As of November 30		As of February 28
Lease Term and Discount Rate	Lease Term and Discount Rate	2020		2020		Lease Term and Discount Rate	2021		2021
Weighted Average Remaining Lease Term (in years)	Weighted Average Remaining Lease Term (in years)					Weighted Average Remaining Lease Term (in years)
Operating leases	Operating leases	19.49		19.98		Operating leases	17.45		19.37
Finance leases	Finance leases	12.72		13.55		Finance leases	12.78		13.56

Weighted Average Discount Rate	Weighted Average Discount Rate					Weighted Average Discount Rate
Operating leases	Operating leases	5.37	%	5.40	%	Operating leases	4.80	%	5.36	%
Finance leases	Finance leases	11.34	%	10.32	%	Finance leases	14.48	%	15.09	%

Supplemental cash flow information related to leases was as follows:


		Nine Months Ended November 30					Nine Months Ended November 30
(In thousands)	(In thousands)	2020		2019		(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:					Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	42,711	$	42,712	Operating cash flows from operating leases	$	51,527	$	42,711
Operating cash flows from finance leases	Operating cash flows from finance leases	$	5,972	$	2,572	Operating cash flows from finance leases	$	8,086	$	5,972
Financing cash flows from finance leases	Financing cash flows from finance leases	$	4,871	$	2,813	Financing cash flows from finance leases	$	8,822	$	4,871

Lease assets obtained in exchange for lease obligations:	Lease assets obtained in exchange for lease obligations:					Lease assets obtained in exchange for lease obligations:
Operating leases	Operating leases	$	13,650	$	25,029	Operating leases	$	45,491	$	13,650
Finance leases	Finance leases	$	30,596	$	52,102	Finance leases	$	24,772	$	30,596

Page 2426

Maturities of lease liabilities were as follows:

As of November 30, 2020
(In thousands)
Operating Leases (1)
Finance Leases (1)
Fiscal 2021, remaining $ 13,411 $ 5,071
Fiscal 2022 53,101 20,803
Fiscal 2023 50,891 18,902
Fiscal 2024 50,017 21,647
Fiscal 2025 48,920 17,964
Thereafter 574,547 130,878
Total lease payments 790,887 215,265
Less: interest (329,093) (103,591)
Present value of lease liabilities $ 461,794 $ 111,674


	As of November 30, 2021
(In thousands)	Operating Leases (1)		Finance Leases (1)
Fiscal 2022, remaining	$	17,382	$	6,142
Fiscal 2023	69,570		25,633
Fiscal 2024	69,053		30,569
Fiscal 2025	68,544		27,316
Fiscal 2026	63,015		27,925
Thereafter	626,442		212,443
Total lease payments	914,006		330,028
Less: interest	(341,034)		(180,117)
Present value of lease liabilities	$	572,972	$	149,911

(1) Lease payments exclude ~~$112.1~~$13.4 million of legally binding minimum lease payments for leases signed but not yet commenced.

~~14.~~15. Supplemental Cash Flow Information

Supplemental disclosures of cash flow information:


		Nine Months Ended November 30					Nine Months Ended November 30
(In thousands)	(In thousands)	2020		2019		(In thousands)	2021		2020
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
(Decrease) increase in accrued capital expenditures		$	(28,862)	$	4,603
Increase in financing obligations		$	0	$	47,930
Increase (decrease) in accrued capital expenditures						Increase (decrease) in accrued capital expenditures	$	9,933	$	(28,862)

See Note 1314 for supplemental cash flow information related to leases.

~~15.~~16. Contingent Liabilities

Litigation. On October 31, 2017, Joshua Sabanovich v. CarMax ~~entities are defendants~~Superstores California, LLC et al., a putative class action, was filed in ~~four proceedings~~the Superior Court of California, County of Stanislaus asserting wage and hour claims with respect to CarMax sales consultants and non-exempt employees in California. The asserted claims include failure to pay minimum wage; provide meal periods and rest breaks; pay statutory/contractual wages; reimburse for work-related expenses and provide accurate itemized wage statements; unfair competition; and Private ~~Attorney~~Attorneys General Act (“PAGA”) claims. On September 4, 2015, Craig Weiss et al., v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of California, County of Placer. The ~~Weiss~~Sabanovich lawsuit seeks civil penalties, fines, cost of suit, and the recovery of attorneys’ fees. On June 29, 2016, Ryan Gomez et al. v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of the State of California, Los Angeles. The Gomez lawsuit seeks declaratory relief, unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees. Based upon our evaluation of information currently available, we believe that the ultimate resolution of the Sabanovich lawsuit will not have a material adverse effect on our financial condition, results of operations or cash flows.

CarMax entities are defendants in three proceedings asserting wage and hour claims with respect to non-exempt CarMax employees in California. The asserted claims include failure to provide meal periods and rest breaks; pay statutory or contractual wages; reimburse for work-related expenses; and PAGA claims. Two of these claims have been filed in court, whereas one has yet to be filed in court. On ~~October 31, 2017, Joshua Sabanovich~~July 9, 2021, Daniel Bendure v. CarMax Auto Superstores California, LLC et al., a putative class action, was filed in the Superior Court of California, County of ~~Stanislaus.~~San Bernardino. The ~~Sabanovich~~Bendure lawsuit seeks ~~unspecified~~civil penalties for violation of the Labor Code, attorneys’ fees, costs, restitution of unpaid wages, interest, injunctive and equitable relief, general damages, ~~restitution, statutory penalties, interest, cost~~ and ~~attorneys’ fees.~~special damages. On ~~November 21, 2018, Derek McElhannon et al.~~August 12, 2021, Jordon Miller v. CarMax Auto Superstores California, LLC ~~and CarMax Auto Superstores West Coast, Inc.~~et al., a putative class action, was filed in Superior Court of California, County of Alameda. On February 1, 2019, the McElhannon lawsuit was removed to the U.S. District Court, Northern District of California, San Francisco Division. The lawsuit was remanded back to the Superior Court of California, County of ~~Alameda on June 4, 2019.~~Riverside. The ~~McElhannon~~Miller lawsuit also seeks ~~unspecified damages, restitution, statutory and/or~~ civil penalties ~~interest, cost and attorneys’ fees.~~

CarMax has reached a global agreement settling the Weiss, Gomez and McElhannon lawsuits on a class basis. The settlement agreement was approved by the Superior Court of California, County of Placer on December 10, 2020. In anticipationfor violation of the ~~consolidation~~Labor Code, attorneys’ fees, costs, restitution of ~~claims under~~unpaid wages, interest, injunctive and equitable relief, general damages, and special damages. On August 3, 2021, Charles Walker filed a notice with the ~~global settlement agreement, on March 11, 2020, the Gomez and McElhannon lawsuits were dismissed, as the claims~~California Labor Workforce Development Agency, which is a prerequisite to filing a PAGA action in court. To date, Walker has not yet filed a lawsuit. We are unable to make a reasonable estimate of the ~~plaintiffs are addressed~~amount or range of loss that could result from an unfavorable outcome in ~~the global settlement. The monetary settlement under this agreement is for an immaterial amount that has been fully accrued.~~

~~Page 25~~

The Sabanovich lawsuit is not included in the global settlement agreement. Based upon our evaluation of information currently available, we believe that the ultimate resolution of the foregoing proceedings will not have a material adverse effect, either individually or in the aggregate, on our financial condition, results of operations or cash flows.

As previously reported, the company has cooperated with representatives from multiple California municipality district attorney offices in an inquiry by those offices into the handling, storage and disposal of certain types of hazardous waste at our store locations in those municipalities. CarMax and the district attorney offices have reached a settlement agreement, which was entered and approved by the Superior Court of California, County of Orange on June 8, 2020. The settlement includes an immaterial monetary payment covering penalties, costs, and supplemental environmental projects as well as certain injunctive relief.these matters.

The company iswas a class member in a consolidated and settled class action lawsuit (In re: Takata Airbag Product Liability Litigation (U.S. District Court, Southern District of Florida)) against Toyota, Mazda, Subaru, BMW, Honda, Nissan and Ford related to the economic loss associated with defective Takata airbags installed as original equipment in certain model vehicles from model years 2000-2018. On April 15, 2020, CarMax received $40.3 million in net recoveries from the Toyota, Mazda, Subaru, BMW, Honda and Nissan settlement funds. CarMax remains a class member for the Ford settlement fund. We are

Page 27

unable to make a reasonable estimate of the amount or range of gain that could result from CarMax’s participation in the Ford settlement fund.

The company is a class member in a consolidated and settled class action lawsuit (In re: General Motors Ignition Switch Litigation (U.S. District Court, Southern District of New York)) against General Motors related to the economic loss associated with certain model vehicles previously subject to recall for ignition switches, electronic power steering, and side impact airbags, for model years 1997-2014. On November 30, 2021, CarMax received $22.6 million in net recoveries from the GM settlement fund.

We are involved in various other legal proceedings in the normal course of business. Based upon our evaluation of information currently available, we believe that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on our financial condition, results of operations or cash flows.

Other Matters. In accordance with the terms of real estate lease agreements, we generally agree to indemnify the lessor from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities and repairs to leased property upon termination of the lease. Additionally, in accordance with the terms of agreements entered into for the sale of properties, we generally agree to indemnify the buyer from certain liabilities and costs arising subsequent to the date of the sale, including environmental liabilities and liabilities resulting from the breach of representations or warranties made in accordance with the agreements. We do not have any known material environmental commitments, contingencies or other indemnification issues arising from these arrangements.

As part of our customer service strategy, we guarantee the used vehicles we retail with a 90-day/4,000 mile limited warranty. A vehicle in need of repair within this period will be repaired free of charge. As a result, each vehicle sold has an implied liability associated with it. Accordingly, based on historical trends, we record a provision for estimated future repairs during the guarantee period for each vehicle sold. The liability for this guarantee was ~~$13.6~~$19.3 million as of November 30, ~~2020,~~2021, and ~~$10.5~~$15.2 million as of February ~~29, 2020,~~28, 2021, and is included in accrued expenses and other current liabilities.

17. Segment Information

We operate in two reportable segments: CarMax Sales Operations and 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.

We also have a non-reportable operating segment related to our recently acquired Edmunds business, which is reflected as “Other” in the segment tables below. Revenue generated by Edmunds primarily represents advertising and subscription revenues as discussed in Note 3. Edmunds also generates intersegment revenue as a result of transactions between Edmunds and CarMax Sales Operations, which represent arm’s length transactions at prevailing market prices. Such amounts are eliminated in consolidation.

The performance of our CarMax Sales Operations segment is reviewed by our chief operating decision maker at the gross profit level, the components of which are presented in the tables below. Required segment information related to our CAF segment is presented in Note 4. Additionally, asset information by segment is not utilized for purposes of assessing performance or allocating resources and, as a result, such information has not been presented.

Page 2628

Segment Information


	Three Months Ended November 30, 2021
(In thousands)	CarMax Sales Operations		Other		Eliminations		Total
Sales and operating revenues	$	8,494,437	$	33,322	$	—	$	8,527,759
Intersegment sales and operating revenues	—		7,973		(7,973)		—
Total sales and operating revenues	$	8,494,437	$	41,295	$	(7,973)	$	8,527,759
Depreciation and amortization (1)	$	226	$	2,489	$	—	$	2,715
Gross profit	$	809,998	$	28,275	$	(1,713)	$	836,560
Reconciliation to Consolidated Earnings Before Taxes:
CAF Income							165,968
Selling, general and administrative expenses							(575,930)
Depreciation and amortization (2)							(54,428)
Interest expense							(24,303)
Other income (expense)							8,094
Earnings before income taxes							$	355,961


	Nine Months Ended November 30, 2021
(In thousands)	CarMax Sales Operations		Other		Eliminations		Total
Sales and operating revenues	$	24,145,847	$	67,870	$	—	$	24,213,717
Intersegment sales and operating revenues	—		14,981		(14,981)		—
Total sales and operating revenues	$	24,145,847	$	82,851	$	(14,981)	$	24,213,717
Depreciation and amortization (1)	$	526	$	4,698	$	—	$	5,224
Gross profit	$	2,522,595	$	57,348	$	(3,390)	$	2,576,553
Reconciliation to Consolidated Earnings Before Taxes:
CAF Income							607,732
Selling, general and administrative expenses							(1,704,285)
Depreciation and amortization (2)							(157,107)
Interest expense							(67,247)
Other income (expense)							35,453
Earnings before income taxes							$	1,291,099

(1) Represents only the portion of depreciation and amortization recorded within Cost of sales, and thus included in the calculation of Gross profit.

(2) Exclusive of depreciation and amortization recorded within Cost of sales.

Page 29

ITEM 2.

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, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended February ~~29, 2020~~28, 2021 (“fiscal ~~2020”~~2021”), 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. All references to net earnings per share are to diluted net earnings per share. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Amounts and percentages may not total due to rounding.

OVERVIEW

CarMax is the nation’s largest and most profitable 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. Our consolidated financial statements include the financial results related to our Edmunds Holding Company (“Edmunds”) business, which does not meet the definition of a reportable segment. For purposes of our MD&A discussion, amounts related to that business are discussed in combination with our CarMax Sales Operations segment. Separate discussion of these amounts is not considered meaningful for the purpose of gaining an understanding of our business, as the significant drivers of these operations in total are consistent with those of our CarMax Sales Operations segment. Where appropriate, specific amounts related to non-reportable segments have been disclosed for informational purposes.

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 omni-channel ~~experience,~~platform, which gives us the largest addressable market in the used car industry, empowers our retail customers to buy a car on their terms – online, in-store or a seamless combination of both. Customers can choose to complete the car-buying experience in-person at one of our stores; or buy the car online and receive delivery through ~~contactless curbside~~express pickup, available nationwide, or home delivery, available to most customers.

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 November 30, ~~2020,~~2021, we operated ~~220~~226 used car stores in ~~106~~107 U.S. television ~~markets, as well as 2 new car franchises.~~markets. As of that date, wholesale auctions previously held at 74 of our used car stores were being conducted virtually. During the third quarter of fiscal 2022, we sold our remaining new car franchise.

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 ~~42.1%~~43.0% of our retail used vehicle unit sales in the first nine months of fiscal ~~2021.~~2022. As of November 30, ~~2020,~~2021, CAF serviced approximately ~~1,041,000~~1,090,000 customer accounts in its ~~$13.64~~$15.52 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.

~~Impact of COVID-19~~

~~In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”~~) as a global pandemic. In the following weeks, many U.S. states and localities issued shelter-in-place orders impacting the operations of our stores and consumer demand. We followed mandates from public health officials and government agencies, including implementation of enhanced cleaning measures and social distancing guidelines and, in many localities, the closing of stores and wholesale auctions. As a result of these store closures and lower consumer demand, we announced in April 2020 that more than 15,000 associates had been placed on furlough. We provided associates with at least 14 days of pay continuity upon store

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closure or quarantine, along with continuing medical benefits for associates who were furloughed. During the second quarter of fiscal 2021, we began to call back associates from furlough and by the end of July 2020, we no longer had any associates on furlough. During the first half of fiscal 2021, we spent approximately $30 million supporting associates impacted by COVID-19, store closures and furloughs.

We have implemented robust plans to reduce the risk of exposure and further spread of the virus in our stores and continue to follow the mandates of public health officials and government agencies. We also launched contactless curbside pickup nationwide to better serve our customers in alignment with enhanced safety practices. In addition, we quickly shifted our wholesale business from in-person to online auctions, and we continue to keep our appraisal lanes open for customers who want or need to sell their cars. During the second quarter of fiscal 2021, we completed the rollout of our omni-channel experience, which gives us the largest addressable market in the used car industry. This offering gives customers the option to seamlessly do as much, or as little, online and in-person as they prefer.

In early April, due to the mandates of public health officials and government agencies, approximately half of our stores were closed or under limited operations. Limited operations means the stores could sell cars but were limited to appointment-only, curbside pickup, home delivery or some combination of all three. As a result, used vehicle sales were down more than 75% during that period. Further, pricing and margin was pressured by sharp declines in industry wholesale valuations due to a steep depreciation environment. During this period, we reduced inventory levels to align with sales.

We experienced negative comparable used unit sales in the first quarter of fiscal 2021, which continued into June when we experienced high single digit negative comparable used unit sales. The June results were more than offset by mid-single digit positive comparable used unit sales in both July and August, a trend that continued into September. However, as the election approached and there was another surge in COVID-19 cases, which resulted in tightened occupancy restrictions and shelter-in-place orders from state and local governments, we saw demand soften. As a result, sales trended down in the latter part of the third quarter. This trend continued into the first two weeks of December, with same store sales down approximately 4% versus the prior year. We believe the trends experienced in the latter part of the quarter and into December are shorter-term in nature.

As of the end of December 2020, approximately half of our stores have occupancy restrictions in place due to state and local government mandates. Of these, more than 40 stores had mandates limiting capacity to 25% or less. Despite the challenges associated with the COVID-19 pandemic, our omni-channel experience is allowing customers to connect and transact with us in more ways than ever. We have seen a favorable response to our omni-channel experience with the majority of customers progressing more of their transactions online.

The impact of COVID-19 on CAF loan origination volume has been consistent with our retail sales performance noted above. Beginning in the first quarter of fiscal 2021, as the pandemic escalated, we saw an increase in delinquencies and greater demand for payment extensions. In response, we implemented a variety of measures to support our customers through this difficult time and to maximize the long-term collectability of the portfolio. This included temporarily suspending repossessions, waiving late fees, and providing loan payment extensions where appropriate. In addition to pausing our in-house Tier 3 lending, we also made temporary underwriting adjustments focused on preserving CAF's high-quality portfolio and tested certain loan routing to our third-party providers.

Payment extensions spiked in April and have declined significantly since then as customers have exhibited the ability and willingness to pay. During the first nine months of fiscal 2021, delinquency rates were lower year-over-year. During the back half of the second quarter of fiscal 2021, we ceased CAF's underwriting adjustments noted above, and in September we resumed our in-house Tier 3 lending.

During the first quarter of fiscal 2021, new legislation was enacted, and new IRS guidance was issued to provide relief to businesses in response to the COVID-19 pandemic. We have evaluated the tax provisions included in legislation such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as well as recent IRS guidance. While the most significant impacts to the company include the employee retention tax credit and payroll tax deferral provisions of the CARES Act, we do not expect recent IRS guidance or the CARES Act to have a material impact on our results of operations.

The COVID-19 pandemic remains a rapidly evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our associates, customers and shareholders. The duration and severity of the COVID-19 outbreak are uncertain, and we are unable to determine the full impact that social distancing protocols, the availability and efficacy of vaccines, or potential subsequent outbreaks, will ultimately have on our operations or consumer demand. As such, the full impact on our revenues, profitability, financial position and liquidity remains uncertain at this time.

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Revenues and Profitability

The sources of revenue and gross profit from the CarMax Sales Operations segment and other non-reportable segments for the first nine months of fiscal ~~2021~~2022 are as follows:


			Net Sales and Operating Revenues			Gross Profit

A high-level summary of our financial results for the third quarter and first nine months of fiscal ~~2021~~2022 as compared to the third quarter and first nine months of fiscal ~~2020~~2021 is as ~~follows:~~follows(1):


(Dollars in millions except per share or per unit data)	(Dollars in millions except per share or per unit data)	Three Months Ended November 30, 2020			Change from Three Months Ended November 30, 2019		Nine Months Ended November 30, 2020			Change from Nine Months Ended November 30, 2019		(Dollars in millions except per share or per unit data)	Three Months Ended November 30, 2021			Change from Three Months Ended November 30, 2020		Nine Months Ended November 30, 2021			Change from Nine Months Ended November 30, 2020
Income statement information	Income statement information											Income statement information
Net sales and operating revenues	Net sales and operating revenues	$	5,184.9		8.2	%	$	13,785.9		(10.2)	%	Net sales and operating revenues	$	8,527.8		64.5	%	$	24,213.7		75.6	%
Gross profit	Gross profit	$	631.4		2.9	%	$	1,737.8		(15.2)	%	Gross profit	$	836.6		32.5	%	$	2,576.6		48.3	%
CAF income	CAF income	$	176.4		54.7	%	$	374.6		8.9	%	CAF income	$	166.0		(5.9)	%	$	607.7		62.2	%
Selling, general and administrative expenses	Selling, general and administrative expenses	$	478.8		(1.2)	%	$	1,342.7		(7.7)	%	Selling, general and administrative expenses	$	575.9		33.7	%	$	1,704.3		42.3	%
Net earnings	Net earnings	$	235.3		35.9	%	$	537.0		(20.3)	%	Net earnings	$	269.4		14.5	%	$	991.5		84.6	%
Unit sales information	Unit sales information											Unit sales information
Used unit sales	Used unit sales	194,576			1.0	%	546,934			(12.6)	%	Used unit sales	227,424			16.9	%	730,020			33.5	%
Change in used unit sales in comparable stores	Change in used unit sales in comparable stores	(0.8)		%	N/A		(14.8)		%	N/A		Change in used unit sales in comparable stores	15.8		%	N/A		32.5		%	N/A
Wholesale unit sales	Wholesale unit sales	126,317			10.8	%	322,592			(10.7)	%	Wholesale unit sales	187,630			48.5	%	557,117			72.7	%
Per unit information	Per unit information											Per unit information
Used gross profit per unit	Used gross profit per unit	$	2,151		0.3	%	$	2,123		(2.7)	%	Used gross profit per unit	$	2,235		3.9	%	$	2,208		4.0	%
Wholesale gross profit per unit	Wholesale gross profit per unit	$	906		(3.3)	%	$	994		2.6	%	Wholesale gross profit per unit	$	1,131		24.8	%	$	1,054		6.0	%
SG&A per used vehicle unit		$	2,461		(2.3)	%	$	2,455		5.6	%
SG&A as % of gross profit												SG&A as % of gross profit	68.8		%	0.6	%	66.1		%	(2.8)	%
Per share information	Per share information											Per share information
Net earnings per diluted share	Net earnings per diluted share	$	1.42		36.5	%	$	3.25		(19.4)	%	Net earnings per diluted share	$	1.63		14.8	%	$	5.99		84.3	%

(1) Where applicable, amounts are net of intercompany eliminations.

Net earnings per diluted share during the third quarter and first nine months of fiscal 2022 included a one-time benefit of $0.10 in connection with the receipt of settlement proceeds in November 2021 related to a class action lawsuit. Net earnings per diluted share during the first nine months of fiscal 2021 included a one-time benefit of $0.18 in connection with our receipt of settlement proceeds in April 2020 related to a previously disclosed class action lawsuit.

Page 31

As noted on the December 22, 2021 earnings call, we were pleased with our performance during the third quarter of fiscal 2022 and into the fourth quarter through that date. Refer to “Results of Operations” for further details on our revenues and profitability.

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic. Throughout fiscal 2021, many U.S. states and localities had shelter-in-place orders and occupancy restrictions, impacting the operations of our stores and consumer demand. As a result, our fiscal 2021 results were significantly impacted by the COVID-19 pandemic, primarily during the first quarter.

Although the immediate impact of COVID-19 has subsided, uncertainty continues. During the first nine months of fiscal 2022, states and localities were in the midst of a vaccine distribution program and easing certain state-mandated restrictions; however, the continued spread and impact of COVID-19 persists, particularly as it relates to the emergence of new variants of the virus. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our associates, customers, communities and shareholders.

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. In addition to funding our operations,

~~Page 29~~

this liquidity was used to fund the repurchase of common stock under our share repurchase program, ~~and~~ our store ~~growth.~~ growth and the Edmunds acquisition, which was completed during the second quarter of fiscal 2022.

Our current capital allocation strategy is to ~~remain focused on growing the business while maintaining the appropriate amount of caution given the uncertainty that remains in the economic environment.~~

As previously disclosed, in response to the COVID-19 pandemic, we took certain measures in the first quarter of fiscal 2021 to enhance our liquidity position and provide additional financial flexibility, including drawing down additional fundsfocus on our ~~revolving credit facility, pausing our stock repurchase program, pausing~~core business, including investing in digital capabilities and the strategic expansion of our store ~~expansion strategy~~footprint, pursue new growth opportunities through investments, partnerships and ~~remodels~~acquisitions and ~~actively aligning operating expenses~~return excess capital to the current state of the business, including the previously discussed furlough. We strengthened our overall financial position by selling through inventory and quickly aligning costs to lower sales volumes. We have continued to adjust inventory levels throughout the pandemic to align with sales trends. During the third quarter, we fully paid down the outstanding balance on our revolving credit facility and resumed our store expansion strategy and share repurchase program.shareholders. Given the ~~turnaround~~year-over-year improvement in our business and overall macroeconomic conditions, the strength of the credit markets and our solid balance sheet, we believe we have the appropriate liquidity, access to capital and financial strength to support our operations and continue investing in our ~~omni and digital~~strategic initiatives for the foreseeable future.

Strategic Update and Future Outlook

~~The COVID-19 pandemic has created an unprecedented~~Since completing our omni-channel rollout in the second quarter of fiscal 2021, we now have a common platform across all of CarMax that leverages our scale, nationwide footprint and ~~challenging time. As discussed above, we have taken several steps~~infrastructure and empowers our customers to ~~ensure~~buy a strong liquidity position and enable our stores to operate amidst the current health and safety concerns. We will continue to monitor the ongoing effects of the COVID-19 pandemic and make any further decisions necessary to position the company for a strong recovery as we emerge from this crisis.

vehicle on their terms. We recognize ~~the current environment~~that there has been an accelerated a shift in consumer buying behavior. Customers are seeking safety, personalization and convenience in how they shop for and buy a vehicle more than ever. Our omni-channel ~~experience~~platform 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. Our diversified business model, combined with our ~~emerging~~ omni-channel experience, is a unique advantage in the used car industry that firmly positions us to continue growing our market share while creating shareholder value over the long-term. ~~We completed~~

With the completion of our omni-channel platform rollout, in the second quarter of fiscal 2021. We now have a common platform across all of CarMax that leverages our scale, nationwide footprint and infrastructure and empowers our customers to buy a vehicle on their terms. Wewe are now focusing our efforts on optimizing and enhancing the customer experience. In particular, we are focused on completing the roll out of our self-service ~~for all components of the sale and plan to deliver significant improvements over the next two quarters. We are on track for most~~experience. Currently, more than two-thirds of our customers are eligible to ~~have the ability to buy a vehicle~~complete an online retail sale independently if they choose, byup from slightly more than 50% in the ~~middle~~previous quarter. In the third quarter of ~~next~~ fiscal ~~year.~~

~~We first launched~~2022, online retail sales accounted for 9% of retail unit sales, consistent with the previous quarter and up from 5% in the prior year quarter. An online retail sale is defined as a sale where the customer completes all four of the following activities remotely: reserving the vehicle; financing the vehicle, if needed; trading-in or opting out of a trade-in; and creating an online sales order. Omni sales, defined as sales where customers complete at least one of the four activities listed above online, represented approximately 57% of retail sales, up from 55% in the previous quarter and 49% in the prior year quarter. The growing rate of customer adoption versus the prior year reinforces our belief in our omni-channel ~~experience in~~strategy.

Revenue from online transactions, defined as revenue from retail sales that qualify as an online retail sale, as well as any related EPP and third-party finance contribution, wholesale sales where the ~~Atlanta market in December 2018. Now, two years later after continued testing on pricing~~winning bid was taken from an online bid and ~~advertising, our omni-channel experience is delivering sustained growth in this competitive market. The Atlanta market has outperformed the company with high single-digit comparable used unit sales~~all revenue earned by Edmunds, was $2.5 billion, or approximately 30% of net revenues in the third quarter of fiscal ~~2021 and two-year stacked comparable used unit sales of approximately 20%. In addition, the number of alternative deliveries~~2022, up from 28% in the ~~Atlanta market, including curbside pickup~~previous quarter and ~~home delivery, has increased by 45% when compared with~~20% in the prior year quarter.

We continue to see success from our online instant appraisal offer, which quickly provides customers an offer on their vehicle. This innovative experience allowed us to purchase approximately 194,000 vehicles online from consumers during the third quarter ~~although this remains a small portion~~of fiscal 2022, representing approximately half of our ~~overall sales.~~total buys from consumers. The buy rate for customers who engage with us after first receiving an online instant appraisal offer is typically higher than through our traditional appraisal

Page 32

lane. This offering supports our belief that we have become and are further expanding our position as the largest online buyer of used vehicles from consumers in the US.

~~Building~~Historically, our annual self-sufficiency rate has been between 36% and 41%. For the first quarter of fiscal 2022, our self-sufficiency rate was between 45% and 50%, and for both the second and third quarter of fiscal 2022 we achieved record self-sufficiency rates above 70%. In the third quarter of fiscal 2022, total vehicles purchased from consumers was approximately 383,000, a 5% increase versus the prior quarter and a 91% increase versus the prior year quarter, strengthening our leadership position as the largest used vehicle buyer from consumers.

At the end of the fourth quarter of fiscal 2021, we also launched a financing offer product in our online checkout process. With this enhancement, eligible customers can apply and accept finance offers without needing the assistance of an associate to submit a credit application over the phone or in store; we continue to enhance and further expand this product. Nearly 65% of our finance customers start their loan process online with a pre-approval application. In the third quarter, we expanded our finance based shopping capability, which enables our customers to see personalized finance terms from multiple lenders across the full inventory of vehicles on our ~~experiences in~~website. This experience is currently available to approximately 75% of our customers and we are working towards adding the ~~Atlanta market, our~~remaining customers and integrating additional lenders to this experience.

Our strategic investments in the near term will focus on our customer experience, vehicle acquisition and marketing. As we continue enhancing our online experience and offerings, we believe it is important to educate customers onabout our omni-channel ~~experience~~platform and to differentiate and elevate our brand. ~~We have~~During the fourth quarter of fiscal 2021, we introduced the next phase of our national multi-media marketing ~~campaign that began last year, and we plan~~campaign. As a result, marketing spend increased year-over-year in the first nine months of fiscal 2022. We expect our marketing spend to ~~increase our year-over-year marketing spend~~remain elevated for the remainder of fiscal 2022 with per unit expenses similar to those experienced in the second half of fiscal 2021. ~~For~~We believe we are well positioned to gain market share through the promotion of our omni-channel platform and new product offerings such as our Love Your Car Guarantee.

Our strategic investments include the acquisition of Edmunds, which we completed on June 1, 2021. The acquisition was the first in CarMax history, and added one of the most well established and trusted online guides for automotive information and a recognized industry leader in digital car shopping innovations to the CarMax family. With this acquisition, CarMax has enhanced its digital capabilities and further strengthened its role and reach across the used auto ecosystem while adding exceptional technology and creative talent. Edmunds continues to operate independently and remains focused on delivering confidence to consumers and excellent value to its dealer and OEM clients. Additionally, this acquisition allows both businesses to accelerate their respective capabilities to deliver an enhanced digital experience to their customers by leveraging Edmunds’ compelling content and technology, CarMax's unparalleled national scale and infrastructure, and the combined talent of both businesses. Edmunds has been slightly accretive to our profitability since the acquisition. We expect Edmunds’ financial results to have an immaterial impact to CarMax’s earnings per share in fiscal ~~2021,~~2022, with potential for significant shareholder value creation over the longer term.

In order to execute our long-term strategy, we ~~anticipate advertising~~plan to continue to invest in various strategic initiatives to increase innovation, specifically with regards to customer-facing and customer-enabling technologies, as well as marketing. We are also focused on ensuring we are efficient in our spend, ~~will~~targeting specific areas where we expect to achieve more efficiencies and leverage, such as our CECs. 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 ~~approximately $25 million compared with fiscal 2020. We will incur~~operational efficiencies.

During the ~~vast majority of this increase~~third quarter, we saw solid improvements in the ~~fourth quarter, driven primarily by heavier broadcasting in support of the next evolution~~service levels of our ~~brand campaign.~~

InCECs related to web and phone lead response and conversion rates while also handling a record level of volume. This improvement was due to a combination ~~with~~of staffing increases and ongoing utilization of our artificial intelligence and machine learning processes that drove the ~~improvements and enhancements~~right work to the right associates. From an efficiency perspective, we ~~are making~~continue to see gains in our ~~omni-channel experience,~~buying organization. The combination of our instant offer program along with the ~~increase~~investments we have made in ~~advertising spending noted above~~data science, automation and ~~also building on~~artificial intelligence continue to materially reduce our ~~experience in Atlanta,~~costs per buy.

For fiscal 2022, we ~~are implementing pricing and marketing tests in select markets during the fourth quarter~~would expect to lever SG&A as a percentage of ~~fiscal 2021 in an effort to proactively drive sales volume. While we expect~~ gross profit ~~per used unit for~~when our gross profit growth is in the ~~fourth quarter~~range of 5% to ~~continue~~8% on a two-year stacked basis. In periods of investment, like fiscal 2022, we will need to be ~~above $2,000, we anticipate~~at the ~~year over year change in~~higher end of this ~~metric will be larger than what we have experienced in recent years.~~

~~We also continue~~two-year range to ~~focus on driving effectiveness through our centralized Customer Experience Centers (“CECs”), improving our core buying channels, opening new buying channels and modernizing our wholesale auction platforms. Approximately 70% of our customers interacted with our CECs during~~lever against the third quarter. Additionally, more than 50% of our customers chose to progress their sale remotely. In addition, we are seeing those customers progress more of the transaction online, while still preferring to take ownership of their vehicle at one of our stores. For the third quarter, alternative deliveries, including home delivery and curbside pickup, were less than 10% of our sales.previous fiscal year.

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~~Our long-term strategy continues to be focused on completing~~Over the ~~rollout~~next five years, we expect our diversified model, the scale of our ~~retail concept~~operations, our investments and ~~improving and enhancing our~~ omni-channel ~~experience, with~~strategy to provide a solid foundation for further growth. As such, we have set the ~~goal of increasing our~~following long-term targets, which we are currently on track to achieve:

•Grow national market share of 0- to 10-year old vehicles to more than 5% by the end of calendar year 2025.

•Sell two million used ~~vehicle unit sales~~vehicles per year by fiscal 2026 through our retail and wholesale channels combined.

•Generate net revenue of approximately $33 billion in each of the markets in which we operate. At the same time, we are identifying and investing in new initiatives that we believe will also be solid contributors to our earnings growth. We believe, over the long term, used vehicle unit sales are the primary driver for earnings growth. We also believe increased used vehicle unit sales will drive increased sales of wholesale vehicles and ancillary products and, over time, increased CAF income.fiscal 2026.

In calendar ~~2019,~~2020, we estimate we sold approximately ~~4.7%~~4.3% of the age 0- to 10-year old vehicles sold in the comparable store markets in which we were operating 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 and achieve our other long-term targets includes focusing on:

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

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

•Hiring and developing an engaged and skilled workforce.

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

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

•

~~In order~~Utilizing advertising to ~~execute~~educate customers about our ~~long-term strategy, we have invested in various strategic initiatives~~omni-channel platform and to ~~increase innovation, specifically with regards to customer-facing~~differentiate and ~~customer-enabling technologies. We are also developing and implementing tools that help~~elevate our associates be more efficient and effective. Additionally, we have centralized customer support in our CECs, which we believe provides a more seamless combination 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. While in any individual period conditions may vary, in periods of elevated investment in our strategic initiatives, we would expect to leverage our SG&A expenses when comparable store used unit sales growth is in the range of 5% to 8% on an annual basis. While we continue to invest in our growth initiatives, we will continue to act on opportunities to become leaner, more agile and a more cost-effective organization over the long term.brand.

As of November 30, ~~2020,~~2021, we had used car stores located in ~~106~~107 U.S. television markets, which covered approximately 78% of the U.S. population. The format and operating models utilized in our stores are continuously evaluated and may change or evolve over time based upon market and consumer expectations. During the first nine months of fiscal ~~2021,~~2022, we opened six stores, and during the remainder of the fiscal year we plan to open four stores. In response to COVID-19, we paused our store expansion strategy in the first quarter of fiscal 2021. We are resuming new store growth and anticipate opening between eight and ten stores in fiscal 2022.

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 the Annual Report on Form 10-K for the fiscal year ended February ~~29, 2020.~~28, 2021.

CRITICAL ACCOUNTING POLICIES

For information on critical accounting policies, see "Critical Accounting Policies" in the MD&A included in Item 7 of the Annual Report on Form 10-K for the fiscal year ended February ~~29, 2020 and Part I, Item 2 of the Quarterly Report on Form 10-Q for the period ended May 31, 2020.~~28, 2021.

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RESULTS OF OPERATIONS – CARMAX SALES OPERATIONS AND OTHER NON-REPORTABLE SEGMENTS

NET SALES AND OPERATING REVENUES


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30						Nine Months Ended November 30
(In millions)	(In millions)	2020		2019		Change		2020		2019		Change		(In millions)	2021		2020		Change		2021		2020		Change
Used vehicle sales	Used vehicle sales	$	4,209.7	$	4,028.8	4.5	%	$	11,385.2	$	12,915.8	(11.9)	%	Used vehicle sales	$	6,435.6	$	4,209.7	52.9	%	$	18,697.3	$	11,385.2	64.2	%
Wholesale vehicle sales	Wholesale vehicle sales	828.4		611.0		35.6	%	1,990.3		1,951.7		2.0	%	Wholesale vehicle sales	1,922.3		828.4		132.1	%	4,998.2		1,990.3		151.1	%
Other sales and revenues:	Other sales and revenues:													Other sales and revenues:
Extended protection plan revenues	Extended protection plan revenues	101.7		97.0		4.8	%	294.5		321.7		(8.5)	%	Extended protection plan revenues	106.6		101.7		4.8	%	353.8		294.5		20.2	%
Third-party finance fees, net	Third-party finance fees, net	(10.6)		(9.4)		(12.4)	%	(36.7)		(35.2)		(4.3)	%	Third-party finance fees, net	1.6		(10.6)		114.7	%	(0.3)		(36.7)		99.3	%
Advertising & subscription revenues (1)														Advertising & subscription revenues (1)	33.3		—		100.0	%	67.9		—		100.0	%
Other	Other	55.7		62.6		(11.0)	%	152.6		203.5		(25.0)	%	Other	28.4		55.7		(49.0)	%	96.8		152.6		(36.6)	%
Total other sales and revenues	Total other sales and revenues	146.8		150.2		(2.3)	%	410.4		490.0		(16.2)	%	Total other sales and revenues	169.9		146.8		15.7	%	518.2		410.4		26.3	%
Total net sales and operating revenues	Total net sales and operating revenues	$	5,184.9	$	4,790.0	8.2	%	$	13,785.9	$	15,357.5	(10.2)	%	Total net sales and operating revenues	$	8,527.8	$	5,184.9	64.5	%	$	24,213.7	$	13,785.9	75.6	%

(1) Excludes intersegment revenues that have been eliminated in consolidation. See Note 17 for further details.

UNIT SALES


		Three Months Ended November 30				Nine Months Ended November 30					Three Months Ended November 30				Nine Months Ended November 30
		2020	2019	Change		2020	2019	Change			2021	2020	Change		2021	2020	Change
Used vehicles	Used vehicles	194,576	192,563	1.0	%	546,934	625,922	(12.6)	%	Used vehicles	227,424	194,576	16.9	%	730,020	546,934	33.5	%
Wholesale vehicles	Wholesale vehicles	126,317	113,996	10.8	%	322,592	361,277	(10.7)	%	Wholesale vehicles	187,630	126,317	48.5	%	557,117	322,592	72.7	%

AVERAGE SELLING PRICES


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30						Nine Months Ended November 30
		2020		2019		Change		2020		2019		Change			2021		2020		Change		2021		2020		Change
Used vehicles	Used vehicles	$	21,402	$	20,710	3.3	%	$	20,581	$	20,431	0.7	%	Used vehicles	$	27,995	$	21,402	30.8	%	$	25,380	$	20,581	23.3	%
Wholesale vehicles	Wholesale vehicles	$	6,245	$	5,079	23.0	%	$	5,877	$	5,128	14.6	%	Wholesale vehicles	$	9,890	$	6,245	58.4	%	$	8,634	$	5,877	46.9	%

COMPARABLE STORE USED VEHICLE SALES CHANGES


		Three Months Ended November 30 (1)				Nine Months Ended November 30 (1)					Three Months Ended November 30 (1)				Nine Months Ended November 30 (1)
		2020		2019		2020		2019			2021		2020		2021		2020
Used vehicle units	Used vehicle units	(0.8)	%	7.5	%	(14.8)	%	6.7	%	Used vehicle units	15.8	%	(0.8)	%	32.5	%	(14.8)	%
Used vehicle revenues	Used vehicle revenues	2.5	%	10.0	%	(14.1)	%	8.5	%	Used vehicle revenues	51.4	%	2.5	%	63.4	%	(14.1)	%

(1) 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


		Three Months Ended November 30				Nine Months Ended November 30					Three Months Ended November 30				Nine Months Ended November 30
		2020		2019		2020		2019			2021		2020		2021		2020
Used vehicle units	Used vehicle units	1.0	%	11.0	%	(12.6)	%	10.1	%	Used vehicle units	16.9	%	1.0	%	33.5	%	(12.6)	%
Used vehicle revenues	Used vehicle revenues	4.5	%	13.6	%	(11.9)	%	11.9	%	Used vehicle revenues	52.9	%	4.5	%	64.2	%	(11.9)	%

Wholesale vehicle units	Wholesale vehicle units	10.8	%	3.3	%	(10.7)	%	4.8	%	Wholesale vehicle units	48.5	%	10.8	%	72.7	%	(10.7)	%
Wholesale vehicle revenues	Wholesale vehicle revenues	35.6	%	1.2	%	2.0	%	5.5	%	Wholesale vehicle revenues	132.1	%	35.6	%	151.1	%	2.0	%

Page 3235

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


		Three Months Ended November 30 (1)				Nine Months Ended November 30 (1)					Three Months Ended November 30 (1)				Nine Months Ended November 30 (1)
		2020		2019		2020		2019			2021		2020		2021		2020
CAF (2)	CAF (2)	48.9	%	47.2	%	45.0	%	46.7	%	CAF (2)	46.1	%	48.9	%	46.6	%	45.0	%
Tier 2 (3)	Tier 2 (3)	19.5	%	20.4	%	22.8	%	20.1	%	Tier 2 (3)	22.2	%	19.5	%	22.2	%	22.8	%
Tier 3 (4)	Tier 3 (4)	9.7	%	9.5	%	11.5	%	10.3	%	Tier 3 (4)	6.5	%	9.7	%	8.0	%	11.5	%
Other (5)	Other (5)	21.9	%	22.9	%	20.7	%	22.9	%	Other (5)	25.2	%	21.9	%	23.2	%	20.7	%
Total	Total	100.0	%	100.0	%	100.0	%	100.0	%	Total	100.0	%	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


		Three Months Ended November 30		Nine Months Ended November 30			Three Months Ended November 30		Nine Months Ended November 30
		2020	2019	2020	2019		2021	2020	2021	2020
Used car stores, beginning of period	Used car stores, beginning of period	220	209	216	203	Used car stores, beginning of period	225	220	220	216
Store openings	Store openings	—	4	4	10	Store openings	1	—	6	4
Used car stores, end of period	Used car stores, end of period	220	213	220	213	Used car stores, end of period	226	220	226	220

During the first nine months of fiscal ~~2021,~~2022, we opened ~~four~~six stores ~~all in existing television markets (Tampa,~~(Miami, FL; ~~Philadelphia, PA; New Orleans, LA; and~~Tampa, FL; Gainesville, FL; Los Angeles, ~~CA)~~CA; Greenville, NC; and Springfield, MO).

Used Vehicle Sales. The ~~4.5%~~52.9% increase in used vehicle revenues in the third quarter of fiscal ~~2021~~2022 was primarily driven by a ~~3.3%~~16.9% increase in used unit sales and a 30.8% increase in average retail selling price. ~~This increase largely reflected higher vehicle acquisition costs resulting from strong wholesale industry valuations.~~ The increase in used units included a 15.8% increase in comparable store used unit sales. For the first nine months of fiscal 2022, used vehicle revenues ~~was also due to~~increased 64.2%, driven by a ~~1.0%~~33.5% increase in used unit sales ~~driven by sales from newer stores not yet~~and a 23.3% increase in average selling price. The increase in used units included a 32.5% increase in ~~the~~ comparable store ~~base. Comparable~~used unit sales. Online retail sales, as defined previously, accounted for 9% of used unit sales for both the third quarter and first nine months of fiscal 2022, compared with 5% and 4% for the third quarter and first nine months of fiscal 2021, respectively.

We believe our strong comparable store used unit sales ~~declined 0.8% in~~growth for both the third ~~quarter. During the~~quarter and first ~~part~~nine months of ~~the quarter, we achieved mid-single digit comparable store sales growth, continuing the positive momentum from the second quarter. However,~~fiscal 2022 was driven by solid execution, growing demand ~~softened~~for our online offerings and ~~sales trended down in the latter part of the quarter. We believe the surge in COVID-19 cases, which constrained demand~~macroeconomic factors. Ramping inventory and ~~tightened occupancy restrictions and shelter-in-place orders from state and local governments,~~staffing levels during fiscal 2022 as well as the ~~uncertainty around the election and future stimulus programs,~~continued success of vehicle sourcing directly from consumers were ~~some of the factors that impacted sales during this time.~~

~~The 11.9% decrease in used vehicle revenues in~~also contributing factors. Our results for the first nine months of fiscal 2021 ~~was primarily due to a 12.6% decrease in used unit sales, driven~~were significantly impacted by ~~the decline in the first quarter. The decrease in used units included a 14.8% decrease in comparable store used unit sales. This reflected the combined effects of~~ COVID-19, ~~related store closures and restrictions on operations, as well as reduced customer traffic resulting from the economic impact of the pandemic and nationwide shelter-in-place orders,~~ primarily during the first ~~quarter as well as the latter part of the third quarter of fiscal 2021.~~ quarter.

The increase in average retail selling price in both the third quarter and first nine months of fiscal ~~2021~~2022 reflected higher vehicle acquisition costs driven by market ~~appreciation, partially offset by shifts in the mix of our sales by vehicle age.~~appreciation.

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 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. During fiscal 2021, o~~Our~~ur wholesale auctions were moved to an online format in response to ~~the~~ COVID-19 ~~pandemic~~ and continue to operate completely online.

The ~~35.6%~~132.1% increase in wholesale vehicle revenues in the third quarter of fiscal ~~2021~~2022 was primarily due to a ~~23.0%~~48.5% increase in unit sales as well as a 58.4% increase in average selling ~~price~~price. For the first nine months of fiscal 2022, wholesale vehicle revenues increased 151.1%, driven by a 72.7% increase in unit sales as well as a ~~10.8%~~46.9% increase in average selling price. The wholesale unit ~~sales.~~growth for both the third quarter and first nine months of fiscal 2022 was largely driven by increased appraisal volume from online offerings and an increased appraisal buy rate aided by macroeconomic factors. The increase in average ~~selling price was primarily due to increased acquisition costs. The wholesale unit growth was largely driven by a record third quarter appraisal buy rate, partially offset by lower appraisal traffic.~~

Page 3336

~~The 2.0% increase~~selling price in ~~wholesale vehicle revenues in~~both the third quarter and first nine months of fiscal ~~2021 was primarily due to a 14.6% increase in average selling price, partially offset by a 10.7% decline in unit sales, driven by the first quarter decline. The increase in average selling price~~2022 was primarily due to increased acquisition costs driven by market appreciation. ~~The decline in wholesale units was largely driven by lower appraisal traffic, partially offset by an increase in our appraisal buy rate.~~

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, advertising and subscription revenues earned by our Edmunds business, 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.

Other sales and revenues ~~declined 2.3%~~increased 15.7% in the third quarter of fiscal ~~2021,~~2022, reflecting ~~a decrease~~the addition of Edmunds' revenue and an improvement in ~~other revenues, including new car and service department sales,~~net third-party finance fees, partially offset by ~~growth~~a decline in ~~EPP revenues. EPP revenues increased 4.8%, largely reflecting~~new vehicles sales. Net third-party finance fees improved as a ~~$5.0 million increase from~~result of favorable adjustments ~~to cancellation reserves and profit sharing revenue recognized~~ in the ~~current quarter.~~fee agreements with our Tier 2 and Tier 3 providers made during the fourth quarter of fiscal 2021 and lower Tier 3 originations. The decline in new car sales was driven by the divestiture of our remaining new car franchises since the third quarter of fiscal 2021.

Other sales and revenues ~~declined 16.2%~~increased 26.3% in the first nine months of fiscal ~~2021,~~2022, reflecting ~~decreases~~the addition of Edmunds' revenue, growth in ~~other revenues, including new car and service department sales, and EPP revenues.~~ EPP revenues ~~declined 8.5%, largely reflecting the~~and a reduction in ~~our used unit sales driven by the decline in the first quarter,~~net third-party finance fees, partially offset by a ~~$12.3 million~~decline in new vehicle sales. EPP revenues increased 20.2%, reflecting the increase ~~from~~in our retail unit volume partially offset by unfavorable year-over-year changes in cancellation reserves and profit sharing ~~revenue~~revenues recognized during the prior year period. Net third-party finance fees improved as a result of favorable adjustments in the ~~current period~~fee agreements with our Tier 2 and ~~favorable adjustments to cancellation reserves.~~Tier 3 providers made during the fourth quarter of fiscal 2021 as well as shifts in our sales mix by finance channel, partially offset by increased sales. The decline in new car ~~and service department~~ sales ~~declines reflected both store closures and reduced customer traffic.~~was driven by the divestiture of our remaining new car franchises, as noted above.

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 refund season. Sales are typically slowest in the fall. In fiscal 2021, traffic and sales were impacted by COVID-19 during periods of the year when we have historically experienced strong traffic and sales, and it remains unclear how the continuing impact of COVID-19, including the emergence of new variants, will affect the seasonality of our business.

Page 37

GROSS PROFIT


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30 (1)						Nine Months Ended November 30 (1)
(In millions)	(In millions)	2020		2019		Change		2020		2019		Change		(In millions)	2021		2020		Change		2021		2020		Change
Used vehicle gross profit	Used vehicle gross profit	$	418.6	$	413.1	1.3	%	$	1,161.3	$	1,366.3	(15.0)	%	Used vehicle gross profit	$	508.4	$	418.6	21.4	%	$	1,611.9	$	1,161.3	38.8	%
Wholesale vehicle gross profit	Wholesale vehicle gross profit	114.4		106.8		7.1	%	320.7		350.1		(8.4)	%	Wholesale vehicle gross profit	212.2		114.4		85.5	%	587.0		320.7		83.0	%
Other gross profit	Other gross profit	98.4		93.7		5.0	%	255.8		333.1		(23.2)	%	Other gross profit	116.0		98.4		17.9	%	377.7		255.8		47.7	%
Total	Total	$	631.4	$	613.6	2.9	%	$	1,737.8	$	2,049.5	(15.2)	%	Total	$	836.6	$	631.4	32.5	%	$	2,576.6	$	1,737.8	48.3	%

(1) Amounts are net of intercompany eliminations.

GROSS PROFIT PER UNIT


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30 (1)						Nine Months Ended November 30 (1)
		2020			2019			2020			2019				2021			2020			2021			2020
		$ per unit(1)		%(2)	$ per unit(1)		%(2)	$ per unit(1)		%(2)	$ per unit(1)		%(2)		$ per unit(2)		%(3)	$ per unit(2)		%(3)	$ per unit(2)		%(3)	$ per unit(2)		%(3)
Used vehicle gross profit	Used vehicle gross profit	$	2,151	9.9	$	2,145	10.3	$	2,123	10.2	$	2,183	10.6	Used vehicle gross profit	$	2,235	7.9	$	2,151	9.9	$	2,208	8.6	$	2,123	10.2
Wholesale vehicle gross profit	Wholesale vehicle gross profit	$	906	13.8	$	937	17.5	$	994	16.1	$	969	17.9	Wholesale vehicle gross profit	$	1,131	11.0	$	906	13.8	$	1,054	11.7	$	994	16.1
Other gross profit	Other gross profit	$	506	67.0	$	487	62.4	$	468	62.3	$	532	68.0	Other gross profit	$	510	68.3	$	506	67.0	$	517	72.9	$	468	62.3
Total gross profit	Total gross profit	$	3,245	12.2	$	3,187	12.8	$	3,177	12.6	$	3,274	13.3	Total gross profit	$	3,678	9.8	$	3,245	12.2	$	3,529	10.6	$	3,177	12.6

(1)Amounts are net of intercompany eliminations. Those eliminations had the effect of increasing used vehicle gross profit per unit and wholesale vehicle gross profit per unit and decreasing other gross profit per unit by immaterial amounts.

(2) 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)~~(3) 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. Gross profit per used unit is consistent across our omni-channel platform.

~~Page 34~~

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~~generally have a lower cost per unit compared with vehicles purchased at auction or through other ~~channels.~~channels, which may generate more gross profit per unit. We monitor macroeconomic factors and pricing elasticity and adjust our pricing accordingly to optimize unit sales and profitability while also maintaining a competitively priced inventory.

Used vehicle gross profit increased ~~1.3%~~21.4% in the third quarter of fiscal ~~2021, reflecting~~2022, driven by the ~~1.0%~~16.9% increase in total used unit ~~sales.~~sales as well as the $84 increase in used vehicle gross profit per unit. Used vehicle gross profit ~~per unit remained steady compared with the prior year quarter. Used vehicle gross profit declined 15.0%~~increased 38.8% in the first nine months of fiscal ~~2021, reflecting~~2022, driven by the ~~12.6% decline~~33.5% increase in total used unit sales ~~driven by the decline in the first quarter,~~ as well as the ~~$60 decline~~$85 increase in used vehicle gross profit per unit. ~~During~~With used car prices at all time highs, we chose to pass along the ~~first quarter~~majority of ~~fiscal 2021,~~ our ~~used vehicle gross profit per unit was pressured~~self-sufficiency driven acquisition cost savings to consumers by ~~pricing adjustments made~~way of lower prices to ~~better align inventory levels with sales in response to COVID-19.~~

~~We believe we can manage to a~~make our vehicles more accessible, while balancing targeted gross profit per unit dollar range, subject to future changes to our business or pricing strategy. In combination with the improvements and enhancements we are making to our omni-channel experience, we are also implementing pricing and marketing tests in select markets during the fourth quarter of fiscal 2021. While we expect gross profit per used unit for the fourth quarter to continue to be above $2,000, we anticipate the year over year change in this metric will be larger than what we have experienced in recent years.margin increases.

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.

Wholesale vehicle gross profit increased ~~7.1%~~85.5% in the third quarter of fiscal ~~2021, largely reflecting~~2022, driven by the ~~10.8%~~48.5% increase in wholesale unit sales ~~partially offset by~~as well as a ~~modest decline~~$225 increase in wholesale vehicle gross profit per unit. Wholesale vehicle gross profit ~~decreased 8.4%~~ increased 83.0%

Page 38

in the first nine months of fiscal ~~2021,~~2022, driven by the ~~10.7% decrease~~72.7% increase in wholesale unit sales ~~driven by the decline in the first quarter, partially offset by~~as well as a ~~modest~~$60 increase in wholesale vehicle gross profit per unit. Wholesale gross profit per unit was under significant pressure early in the current year’s first quarter, reflecting sharp declines in industry wholesale valuations; however, wholesale gross profit per unit had fully recovered by the end of the first quarter. During the second quarter of fiscal 2021, performance was supported by strong appreciation in the market. By the end of the second quarter, depreciation had returned to the wholesale market, and steep depreciation continued during the third quarter.

Other Gross Profit. Other gross profit includes profits related to EPP revenues, net third-party finance fees, advertising and subscription profits earned by our Edmunds business, and other revenues. Other revenues 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.

Other gross profit increased ~~5.0%~~17.9% in the third quarter of fiscal ~~2021,~~2022, reflecting the addition of Edmunds' gross profit, favorability in net third-party finance fees, as discussed above, and an increase in EPP revenues, partially offset by a decline in service department profits. The increase in EPP revenues reflected the increase in ~~EPP revenues.~~ our retail unit volume, largely offset by an unfavorable year-over-year change in cancellation reserves. The decline in service department profits was the result of our efforts to support our higher level of retail sales, including growing technician staffing and shifting retail service capacity to support vehicle reconditioning. Service department profits versus the prior year improved in each month during the quarter, and we anticipate that results will continue to improve into the fourth quarter.

Other gross profit ~~decreased 23.2%~~increased 47.7% in the first nine months of fiscal ~~2021,~~2022, reflecting ~~a decline~~the growth in ~~service department profits~~EPP revenues and ~~EPP revenues. Service results~~reduction in ~~the first nine months of fiscal 2021 reflected the overhead deleverage resulting from our decline in used car sales, driven by the decline in the first quarter,~~net third-party finance fees, as discussed above, as well as ~~pay continuity for our technicians and other service personnel during periods~~the addition of reduced vehicle reconditioning activity in the first quarter. Service results for the nine-month period also continued to be adversely affected by the increase in our post-sale warranty period from 30 to 90 days implemented in May 2019.

~~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~~Edmunds' 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 can also impact CAF income, to the extent the average amount financed also changes.profit.

Page 3539

SG&A Expenses

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

Three Months Ended November 30, ~~2020~~2021 Nine Months Ended November 30, ~~2020~~2021

COMPONENTS OF SG&A EXPENSES COMPARED WITH PRIOR PERIOD(1) (2)


		Three Months Ended November 30							Nine Months Ended November 30								Three Months Ended November 30								Nine Months Ended November 30
(In millions except per unit data)	(In millions except per unit data)	2020		2019		Change			2020		2019		Change			(In millions except per unit data)	2021			2020			Change		2021			2020			Change
Compensation and benefits:	Compensation and benefits:															Compensation and benefits:
Compensation and benefits, excluding share-based compensation expense	Compensation and benefits, excluding share-based compensation expense	$	230.8	$	217.2	6.2		%	$	661.3	$	674.7	(2.0)		%	Compensation and benefits, excluding share-based compensation expense	$	308.3		$	230.8		33.6	%	$	891.8		$	661.3		34.9	%
Share-based compensation expense	Share-based compensation expense	10.7		26.3		(59.1)		%	68.7		89.0		(22.9)		%	Share-based compensation expense	33.3			10.7			210.7	%	100.5			68.7			46.3	%
Total compensation and benefits ~~(1)~~(3)	Total compensation and benefits ~~(1)~~(3)	$	241.5	$	243.5	(0.8)		%	$	730.0	$	763.7	(4.4)		%	Total compensation and benefits ~~(1)~~(3)	$	341.6		$	241.5		41.4	%	$	992.3		$	730.0		35.9	%
Store occupancy costs		101.8		98.0		3.9		%	297.5		291.2		2.1		%
Occupancy costs																Occupancy costs	59.3			53.8			10.3	%	165.0			152.4			8.3	%
Advertising expense	Advertising expense	58.8		51.8		13.4		%	143.8		140.6		2.3		%	Advertising expense	76.1			58.8			29.4	%	233.6			143.8			62.5	%
Other overhead costs ~~(2)~~(4)	Other overhead costs ~~(2)~~(4)	76.7		91.5		(16.2)		%	171.4		259.8		(34.0)		%	Other overhead costs ~~(2)~~(4)	98.9			76.7			29.1	%	313.4			171.4			82.8	%
Total SG&A expenses	Total SG&A expenses	$	478.8	$	484.8	(1.2)		%	$	1,342.7	$	1,455.3	(7.7)		%	Total SG&A expenses	$	575.9		$	430.8		33.7	%	$	1,704.3		$	1,197.6		42.3	%
SG&A per used vehicle unit (3)		$	2,461	$	2,518	$	(57)		$	2,455	$	2,325	$	130
SG&A as % of gross profit																SG&A as % of gross profit	68.8		%	68.2		%	0.6	%	66.1		%	68.9		%	(2.8)	%

(1)Depreciation and amortization previously included in SG&A expenses is now separately presented and is excluded from this table. Prior period amounts have been reclassified to conform to the current period’s presentation.

(2) Amounts are net of intercompany eliminations.

(3) Excludes compensation and benefits related to reconditioning and vehicle repair service, which are included in cost of sales. See Note 1011 for details of share-based compensation expense by grant type.

~~(2)~~(4) Includes IT expenses, non-CAF bad debt, insurance, preopening and relocation costs, ~~insurance, non-CAF bad debt, travel,~~ charitable contributions, travel and other administrative expenses.

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

SG&A expenses ~~decreased 1.2%~~increased 33.7% in the third quarter of fiscal ~~2021. In addition~~2022. Factors contributing to the 5% growth in our store base since the beginning of last year's third quarter (representing the addition of 11 stores) and continued spending to advance our technology platforms and support strategic initiatives, the net decrease reflectedincrease include the following:

•$~~15.6~~77.5 million ~~decrease~~increase in ~~share-based~~ compensation ~~expense. The decrease in~~and benefits expense, excluding share-based compensation expense, ~~was~~driven by increased staffing and sales growth as well as the inclusion of Edmunds in the current quarter.

•$22.6 million increase in stock-based compensation expense, primarily 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.

•$~~14.8~~17.3 million ~~decrease~~increase in advertising expense driven by our previously communicated investment in advertising spend.

•$22.2 million increase in other overhead costs, ~~driven by pandemic-related cost reductions as well as reduced litigation-related expenses.~~

•~~$7.0 million increase in advertising expense. We plan to increase our year-over-year advertising expense during the remainder of the current year.~~

~~SG&A expenses decreased 7.7% in the first nine months of fiscal 2021. This decrease reflected~~which included a reduction in costs associated with our decline in sales volume in the first quarter and actions taken in response to the COVID-19 pandemic to reduce costs, partially offset by an increase in costs as a result of the 8% growth in our store base since the beginning of fiscal 2020

~~Page 36~~

~~(representing the addition of 17 stores) and continued spending to advance our technology platforms and support strategic initiatives. The decrease also included the following:~~

•~~$40.3~~$22.6 million one-time benefit ~~representing our~~related to the receipt of settlement proceeds in a class action lawsuit ~~related~~during the current quarter. The remainder of the change reflects investments to advance our technology platforms and support our strategic initiatives as well as cost-reduction actions taken in response to the ~~economic loss associated with vehicles containing Takata airbags.~~pandemic in the prior year quarter.

Page 40

SG&A expenses increased 42.3% in the first nine months of fiscal 2022. Factors contributing to the increase include the following:

•$230.5 million increase in compensation and benefits expense, excluding share-based compensation expense, driven by increased staffing, sales growth and the addition of Edmunds during the current year as well as cost-reduction actions taken in response to the pandemic in the prior year period.

•$~~20.3~~31.8 million ~~decrease~~increase in ~~share-based~~stock-based compensation ~~expense. The decrease in share-based compensation~~ expense, ~~was~~ primarily 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.

•$~~3.2~~89.8 million increase in advertising ~~expense. We plan~~expense driven by our previously communicated investment in advertising spend.

•$142.0 million increase in other overhead costs, primarily reflecting investments to ~~increase~~advance our ~~year-over-year advertising expense during~~technology platforms and support our strategic initiatives as well as cost-reduction actions taken in response to the ~~remainder~~pandemic in the prior year period. The current year period included a $22.6 million one-time benefit related to the receipt of settlement proceeds in a class action lawsuit while the ~~current year.~~prior year period included a one-time benefit of $40.3 million related to the receipt of settlement proceeds in a class action lawsuit.

Our intention is to lever SG&A as a percentage of gross profit for both the full year and fourth quarter of fiscal 2022.

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.

Interest expense ~~decreased to $19.5~~of $24.3 million and $67.2 million in the third quarter and first nine months of fiscal ~~2021 compared~~2022, respectively, was relatively consistent with ~~$21.8~~$19.5 million and $65.9 million in the third quarter ~~of fiscal 2020. The decrease primarily reflected a lower outstanding revolver balance in the current quarter as well as lower interest rates. Interest expense increased to $65.9 million in the~~and first nine months of fiscal 2021, ~~from $60.7~~respectively.

Other (Income) Expense. Other income was $8.1 million and $35.5 million in the third quarter and first nine months of fiscal ~~2020.~~2022, respectively, compared with $0.9 million and expense of $0.7 million in the third quarter and first nine months of fiscal 2021, respectively. The increase for the nine-month period was primarily reflected increased expense for our financing obligations and finance leases as well as a higher outstanding average revolver balance in the current year period, partially offset by lower interest rates.due to net gains on an equity investment recorded during fiscal 2022.

Income Taxes. The effective income tax rate was 24.3% in the third quarter of fiscal 2022 and 23.2% in the first nine months of fiscal 2022 versus 24.2% in the third quarter of fiscal 2021 and 23.6% in the first nine months of fiscal ~~2021 versus 23.9% in the third quarter of fiscal 2020 and 23.8% in the first nine months of fiscal 2020.~~2021.

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 changes in loss and delinquency experience and economic factors on our outlook for net losses expected to occur over the remaining contractual life of the loans receivable.

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. Historically, we have ~~strived~~sought to originate loans with an underlying risk profile that we believe will, in the aggregate and excluding CAF’s Tier 2 and 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 effects of ~~the COVID-19 outbreak)~~COVID-19) and wholesale recovery rates. Based on underwriting adjustments made during the first quarter of fiscal 2021, in response to higher anticipated losses related to COVID-19, we targeted new loans toward the higher end of this range. In the second quarter of fiscal 2021, we ceased the underwriting adjustments made during the previous quarter and loans originated continue to be targeted at the higher end, or slightly above, this range. 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. Loans originated in a given fiscal period impact CAF income over time, as we recognize income over the life of the underlying auto loan.

See Note 34 for additional information on CAF income and Note 45 for information on auto loans receivable, including credit quality.

Page 3741

SELECTED CAF FINANCIAL INFORMATION


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30						Nine Months Ended November 30
(In millions)	(In millions)	2020		% (1)	2019		% (1)	2020		% (1)	2019		% (1)	(In millions)	2021		% (1)	2020		% (1)	2021		% (1)	2020		% (1)
Interest margin:	Interest margin:													Interest margin:
Interest and fee income	Interest and fee income	$	288.5	8.5	$	278.9	8.4	$	851.1	8.5	$	820.8	8.4	Interest and fee income	$	330.0	8.6	$	288.5	8.5	$	964.4	8.7	$	851.1	8.5
Interest expense	Interest expense	(77.1)		(2.3)	(90.4)		(2.7)	(243.0)		(2.4)	(268.4)		(2.8)	Interest expense	(53.6)		(1.4)	(77.1)		(2.3)	(180.0)		(1.6)	(243.0)		(2.4)
Total interest margin	Total interest margin	$	211.4	6.3	$	188.5	5.7	$	608.1	6.1	$	552.4	5.7	Total interest margin	$	276.4	7.2	$	211.4	6.3	$	784.4	7.1	$	608.1	6.1
Provision for loan losses	Provision for loan losses	$	(8.2)	(0.2)	$	(49.0)	(1.5)	$	(156.1)	(1.6)	$	(132.7)	(1.4)	Provision for loan losses	$	(76.2)	(2.0)	$	(8.2)	(0.2)	$	(87.3)	(0.8)	$	(156.1)	(1.6)
CarMax Auto Finance income	CarMax Auto Finance income	$	176.4	5.2	$	114.0	3.4	$	374.6	3.7	$	344.1	3.5	CarMax Auto Finance income	$	166.0	4.3	$	176.4	5.2	$	607.7	5.5	$	374.6	3.7

(1) Annualized percentage of total average managed receivables.

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


		Three Months Ended November 30						Nine Months Ended November 30							Three Months Ended November 30						Nine Months Ended November 30
		2020			2019			2020			2019				2021			2020			2021			2020
Net loans originated (in millions)	Net loans originated (in millions)	$	1,824.9		$	1,698.2		$	4,607.8		$	5,297.1		Net loans originated (in millions)	$	2,420.3		$	1,824.9		$	7,276.1		$	4,607.8
Vehicle units financed	Vehicle units financed	88,952			83,448			230,296			264,691			Vehicle units financed	95,997			88,952			314,031			230,296
Net penetration rate (1)	Net penetration rate (1)	45.7		%	43.3		%	42.1		%	42.3��		%	Net penetration rate (1)	42.2		%	45.7		%	43.0		%	42.1		%
Weighted average contract rate	Weighted average contract rate	8.6		%	8.1		%	8.4		%	8.5		%	Weighted average contract rate	8.3		%	8.6		%	8.6		%	8.4		%
Weighted average credit score (2)	Weighted average credit score (2)	702			712			706			708			Weighted average credit score (2)	706			702			702			706
Weighted average loan-to-value (LTV) (3)	Weighted average loan-to-value (LTV) (3)	92.0		%	94.4		%	92.1		%	94.5		%	Weighted average loan-to-value (LTV) (3)	88.0		%	92.0		%	89.2		%	92.1		%
Weighted average term (in months)	Weighted average term (in months)	66.2			66.0			66.0			66.2			Weighted average term (in months)	66.0			66.2			66.5			66.0

(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 4.5. 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 Three Months Ended November 30						As of and for the Nine Months Ended November 30							As of and for the Three Months Ended November 30						As of and for the Nine Months Ended November 30
(In millions)	(In millions)	2020			2019			2020			2019			(In millions)	2021			2020			2021			2020
Total ending managed receivables	Total ending managed receivables	$	13,636.1		$	13,352.6		$	13,636.1		$	13,352.6		Total ending managed receivables	$	15,524.0		$	13,636.1		$	15,524.0		$	13,636.1
Total average managed receivables	Total average managed receivables	$	13,517.5		$	13,239.2		$	13,381.6		$	12,986.2		Total average managed receivables	$	15,288.8		$	13,517.5		$	14,706.9		$	13,381.6
Allowance for loan losses ~~(1)~~	Allowance for loan losses ~~(1)~~	$	431.6		$	153.6		$	431.6		$	153.6		Allowance for loan losses ~~(1)~~	$	426.5		$	431.6		$	426.5		$	431.6
Allowance for loan losses as a percentage of ending managed receivables	Allowance for loan losses as a percentage of ending managed receivables	3.17		%	1.15		%	3.17		%	1.15		%	Allowance for loan losses as a percentage of ending managed receivables	2.75		%	3.17		%	2.75		%	3.17		%
Net credit losses on managed receivables	Net credit losses on managed receivables	$	9.1		$	45.8		$	84.3		$	117.3		Net credit losses on managed receivables	$	47.8		$	9.1		$	71.9		$	84.3
Annualized net credit losses as a percentage of total average managed receivables	Annualized net credit losses as a percentage of total average managed receivables	0.27		%	1.38		%	0.84		%	1.20		%	Annualized net credit losses as a percentage of total average managed receivables	1.25		%	0.27		%	0.65		%	0.84		%
Past due accounts as a percentage of ending managed receivables	Past due accounts as a percentage of ending managed receivables	2.93		%	3.83		%	2.93		%	3.83		%	Past due accounts as a percentage of ending managed receivables	3.83		%	2.93		%	3.83		%	2.93		%
Average recovery rate ~~(2)~~(1)	Average recovery rate ~~(2)~~(1)	55.6		%	47.5		%	53.2		%	48.4		%	Average recovery rate ~~(2)~~(1)	71.9		%	55.6		%	67.3		%	53.2		%

(1)~~The allowance for loan losses as of November 30, 2020, includes a $202.0 million increase as a result of our adoption of CECL during the first quarter of fiscal 2021.~~

~~(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 the wholesale market environment.

Page 3842

•CAF Income ~~(Increase~~(Decrease of ~~$62.4~~$10.4 million, or ~~54.7%~~5.9%, and increase of $233.1 million, or 62.2%, in the third quarter and first nine months of fiscal 2022, respectively)

◦The decrease in CAF income for the third quarter of fiscal ~~2021)~~

◦~~The~~2022 reflects an increase ~~in CAF income reflects a decrease~~ in the provision for loan losses, ~~as well as~~partially offset by increases in the total interest margin percentage and average managed receivables.

◦The increase in ~~net loan originations largely resulted from the increase in CAF’s net penetration rate.~~

•CAF ~~Income (Increase of $30.5 million or 8.9% in~~income for the first nine months of fiscal ~~2021)~~

◦~~The increase in CAF income~~2022 reflects increases in the total interest margin percentage and average managed receivables ~~partially offset by an increase~~as well as a decrease in the provision for loan losses.

◦During the third quarter of fiscal 2022, CAF completed the conversion of its auto-loan servicing system, resulting in approximately $5 million of conversion-related costs incurred during the quarter.

◦The ~~decrease~~increase in net loan originations ~~largely~~in both the third quarter and first nine months of fiscal 2022 resulted from an increase in the average amount financed as well as our used ~~vehicle~~unit sales ~~decline, driven by the decline in the first quarter.~~growth.

•Provision for Loan Losses ~~(Decrease of $40.8~~($76.2 million and $87.3 million in the third quarter and first nine months of fiscal ~~2021)~~2022, respectively, compared with $8.2 million and $156.1 million in the third quarter and first nine months of fiscal 2021, respectively)

◦The ~~decrease in~~current quarter provision primarily reflected the expected lifetime losses on loans originated during the quarter, while the prior year quarter provision ~~for loan losses~~reflected the continued reduction of the reserve that was ~~primarily due to favorable loss experience in comparison to our loss expectations set~~established at the ~~end~~start of the COVID-19 pandemic. This reduction continued into the fourth quarter of fiscal 2021 as well as the first quarter and, to a lesser extent, the second quarter ~~resulting in a $55.8 million favorable adjustment for receivables then outstanding.~~of fiscal 2022.

◦~~This adjustment was more than offset by a $64.0 million increase to the provision related to our estimate of lifetime losses on originations during the third quarter.~~

◦~~While we experienced some loss favorability during the third quarter, this favorability was tempered by economic adjustment factors applied to the provision.~~ The allowance for loan losses as a percentage of ending managed receivables was 2.75% as of November 30, 2021, compared with 3.17% as of November 30, 2020 ~~reflects the unpredictability~~and 2.66% as of ~~the current environment and the highly uncertain consumer situation.~~

•~~Provision for Loan Losses (Increase of $23.4 million in the first nine months of fiscal 2021)~~August 31, 2021.

◦The current quarter provision ~~largely reflected~~also included a six basis point adjustment for added Tier 2 and Tier 3 originations. The adjustment was primarily driven by the implementation of our ~~initial estimate of lifetime losses on loans originated in each quarter of the current fiscal year.~~Tier 2 origination test described below.

◦The change in the provision ~~also included an increase in our estimate of lifetime losses made~~for the nine-month period was primarily driven by reserve increases during the first quarter of fiscal 2021 ~~largely~~associated with deterioration in the macroeconomic environment resulting from the COVID-19 ~~turmoil and worsened economic factors, which was largely offset by favorable loss experience in comparison to our expectations during the second and third quarters.~~pandemic.

•Total Interest Margin (Increased to ~~6.3%~~7.2% and 7.1% in the third quarter and first nine months of fiscal ~~2021~~2022, respectively, from ~~5.7% in the prior year quarter~~6.3% and 6.1% in the third quarter and first nine months of fiscal 2021, ~~from 5.7% in the prior year period)~~respectively)

◦The increase in the total interest margin percentage ~~for both the third quarter and first nine months of fiscal 2021~~ was primarily the result of lower funding ~~costs.~~

◦~~The increase in the weighted average contract rate for the third quarter of fiscal 2021 was primarily driven by changes in customer mix.~~costs as well as higher interest and fees from consumers.

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.~~volume. During the first quarter of fiscal ~~2021,~~2022, we ~~paused our CAF Tier 3 lending given the current economic outlook and uncertainty surrounding the COVID-19 outbreak. Early in the third quarter, we resumed~~began to increase our Tier 3 loan volume beyond our target of 5% of total Tier 3 loan volume to 10% by the end of the first quarter of fiscal 2022. Additionally, in the second quarter of fiscal 2022 CAF began to test loan originations in the Tier 2 space. Any future adjustments in Tier 2 and Tier 3 will consider the broader lending ~~program.~~environment along with the long-term sustainability of the change. A total of ~~$145.7~~$177.4 million and ~~$167.5~~$147.7 million in CAF Tier 3 receivables were outstanding as of November 30, ~~2020~~2021 and February ~~29, 2020,~~28, 2021, respectively. These loans have higher loss and delinquency rates than the remainder of the CAF portfolio, as well as higher contract rates. As of November 30, ~~2020~~2021 and February ~~29, 2020,~~28, 2021, approximately 10% of the total allowance for loan losses related to the outstanding CAF Tier 3 loan balances.

PLANNED FUTURE ACTIVITIES

~~In the first quarter of fiscal 2021, we paused our store expansion strategy in response to the COVID-19 situation.~~ We ~~are resuming new store growth and~~ anticipate opening ~~between eight and~~a total of ten stores in fiscal 2022.

These stores will predominantly be cross functional stores that have a smaller footprint and can leverage our scale and the presence of our larger format stores in nearby markets. We currently estimate capital expenditures will total approximately $350 million in fiscal 2022. We expect nearly $100 million of this spend will be focused on investments in technology.

~~Page 39~~

FINANCIAL CONDITION

Liquidity and Capital Resources

Our primary ongoing cash requirements are to fund our existing operations, store expansion and improvement, CAF and strategic growth initiatives. 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.

During the first quarter of fiscal 2021, in response to the COVID-19 crisis, we took 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. Those measures included drawing down additional funds on our revolving credit facility, pausing our stock repurchase program, pausing our store expansion strategy and actively aligning operating expenses to the current state of the business. We strengthened our overall financial position by selling through inventory and quickly aligning costs to lower sales volumes. We have continued to adjust inventory levels throughout the pandemic to align with sales trends. During the third quarter, we fully paid down the outstanding balance on our revolving credit facility and resumed our store expansion strategy and share repurchase program.

Page 43

Our current capital allocation strategy is to ~~continue~~focus on our core business, including investing in digital capabilities and the strategic expansion of our store footprint, pursue new growth opportunities through investments, partnerships and acquisitions and return excess capital to ~~fund our growth initiatives while maintaining an appropriate amount of caution given the uncertainty that remains in the economic environment.~~shareholders. Given the ~~turnaround~~year-over-year improvement in our business and overall macroeconomic conditions, the strength of the credit markets and our solid balance sheet, we believe we have the appropriate liquidity, access to capital and financial strength to support our operations and continue investing in our strategic initiatives for the foreseeable future. ~~We continue to monitor the COVID-19 situation and will make any further decisions necessary to position the company~~

On June 1, 2021, we completed our acquisition of Edmunds for a ~~strong recovery as we emerge from this crisis.~~total purchase price of $401.8 million, inclusive of our initial investment. The consideration paid at closing included a combination of cash and shares of CarMax common stock. See Note 2 for additional information.

We currently target an adjusted debt-to-total capital ratio in a range of 35% to 45%. Our adjusted debt to capital ratio, net of cash on hand, was ~~modestly below~~at the middle of our targeted range for the third quarter of fiscal ~~2021.~~2022. 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.

Operating Activities. During the first nine months of fiscal ~~2021,~~2022, net cash used in operating activities totaled $2.08 billion, compared with cash provided by operating activities ~~totaled~~of $868.4 ~~million, compared with cash used in operating activities of $117.9~~ million in the prior year period. Our operating cash flows are significantly impacted by changes in auto loans receivable, which increased ~~$73.8 million~~$1.76 billion in the current year period compared with ~~$980.8~~$73.8 million in the prior year period.

The majority of the changes in auto loans receivable are accompanied by changes in non-recourse notes payable, which are issued to fund auto loans originated by CAF. Net issuances of non-recourse notes payable were ~~$7.1 million~~$1.65 billion in the current year period compared with ~~$785.0 million~~$7 thousand in the prior year period and are separately reflected as cash from financing activities. Due to the presentation differences between auto loans receivable and non-recourse notes payable on the consolidated statements of cash flows, fluctuations in these amounts can have a significant impact on our operating and financing cash flows without affecting our overall liquidity, working capital or cash flows.

As of November 30, ~~2020,~~2021, total inventory was ~~$2.78~~$4.66 billion, representing ~~a decrease~~an increase of ~~$66.2 million~~$1.50 billion compared with the balance as of the start of the fiscal year. The ~~decrease~~increase was primarily due to ~~a decline in vehicle units in response to the impact of COVID-19 on customer demand and our effort to align inventory levels with sales. The decrease in units was largely offset by~~ an increase in the average carrying cost of inventory as a result of higher acquisition costs, driven by market ~~appreciation.~~appreciation, as well as an increase in vehicle units. Saleable inventory levels have been below our targets throughout the current fiscal year as a result of temporary production slowdowns experienced in the fourth quarter of fiscal 2021 and strong demand experienced during the first nine months of fiscal 2022. We made substantial progress in building our inventory position during the second quarter of fiscal 2022, and we achieved sequential growth in saleable inventory each month during the third quarter, which continued early into the fourth quarter. Although retail demand will determine the pace of our inventory build, we believe we have the resources we need to build inventory ahead of the tax refund season.

The change in net cash (used in) provided by ~~(used in)~~ operating activities for the first nine months of the current fiscal year compared with the prior year period reflected the changes in auto loans receivable and inventory, as discussed above, ~~and timing-related changes to other current assets,~~ partially offset by ~~a decrease~~an increase in net earnings when excluding non-cash expenses, which include depreciation and amortization, share-based compensation expense and the provisions for loan losses and cancellation ~~reserves,~~reserves. Our results for the first nine months of fiscal 2021 were significantly impacted by COVID-19, primarily during the first quarter. In response, we took proactive measures to strengthen our liquidity position, including reducing our inventory levels and ~~timing-related changes~~aligning our costs to ~~accounts payable.~~lower sales volumes.

Investing Activities. During the first nine months of the fiscal year, net cash used in investing activities totaled $432.7 million in fiscal 2022 compared with $122.1 million in fiscal ~~2021 compared with $256.6~~2021. For fiscal 2022, this included $241.6 million in ~~fiscal 2020.~~cash paid in connection with the Edmunds acquisition, net of cash acquired. Capital expenditures were ~~$124.0~~$226.9 million in the current year period versus ~~$249.2~~$124.0 million in the prior year period. Capital expenditures primarily included store construction costs and store remodeling ~~expenses.~~expenses as well as investments in technology. We maintain a multi-year pipeline of sites to support our store growth, so portions of capital spending in one year may relate to stores that we open in subsequent fiscal years. ~~In response to COVID-19, we paused our store expansion and remodel strategy during the first quarter of fiscal 2021. We have since resumed these activities.~~

~~Page 40~~

As of November 30, ~~2020, 141~~2021, 147 of our ~~220~~226 used car stores were located on owned sites and 79 were located on leased sites, including 23 land-only leases and 56 land and building leases.

Page 44

Financing Activities. During the first nine months of fiscal ~~2021,~~2022, net cash provided by financing activities totaled $2.51 billion compared with net cash used in financing activities ~~totaled~~of $534.3 ~~million compared with net cash provided by financing activities of $409.1~~ million in the prior year period. Included in these amounts were net issuances of non-recourse notes payable of ~~$7.1 million~~$1.65 billion compared with ~~$785.0 million~~$7 thousand in the prior year period. Non-recourse notes payable are typically used to fund changes in auto loans receivable (see “Operating Activities”).

During the first nine months of fiscal 2022, cash provided by financing activities was impacted by stock repurchases of $476.0 million as well as net borrowings on our long-term debt of $1.28 billion, including a new $700 million term loan entered into during the third quarter of fiscal 2022. During the first nine months of fiscal 2021, cash used in financing activities was impacted by stock repurchases of $158.6 million as well as net payments on our long-term debt of $460.3 million. ~~During the first nine months of fiscal 2020, cash provided by financing activities was impacted by stock repurchases of $458.6 million as well as net borrowings on our long-term debt of $4.7 million.~~

TOTAL DEBT AND CASH AND CASH EQUIVALENTS


(In thousands)	(In thousands)		As of November 30		As of February 29		(In thousands)		As of November 30		As of February 28
Debt Description (1)	Debt Description (1)	Maturity Date	2020				Debt Description (1)	Maturity Date	2021
Revolving credit facility (2)	Revolving credit facility (2)	June 2024	$	1,008	$	452,740	Revolving credit facility (2)	June 2024	$	588,100	$	—
Term loan		June 2024	300,000		300,000
Term loan (2)							Term loan (2)	June 2024	300,000		300,000
Term loan (2)							Term loan (2)	October 2026	699,318		—
3.86% Senior notes	3.86% Senior notes	April 2023	100,000		100,000		3.86% Senior notes	April 2023	100,000		100,000
4.17% Senior notes	4.17% Senior notes	April 2026	200,000		200,000		4.17% Senior notes	April 2026	200,000		200,000
4.27% Senior notes	4.27% Senior notes	April 2028	200,000		200,000		4.27% Senior notes	April 2028	200,000		200,000
Financing obligations	Financing obligations	Various dates through February 2059	531,030		536,739		Financing obligations	Various dates through February 2059	527,260		533,578
Non-recourse notes payable	Non-recourse notes payable	Various dates through September 2027	13,620,332		13,613,272		Non-recourse notes payable	Various dates through August 2028	15,416,457		13,764,808
Total debt (3)	Total debt (3)		14,952,370		15,402,751		Total debt (3)		18,031,135		15,098,386
Cash and cash equivalents	Cash and cash equivalents		$	236,643	$	58,211	Cash and cash equivalents		$	62,598	$	132,319

(1) Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually.

(2) Borrowings accrue interest at variable rates based on the Eurodollar rate (LIBOR), or successor benchmark rate, the federal funds rate, or the prime rate, depending on the type of borrowing.

(3) Total debt excludes unamortized debt issuance costs. See Note 910 for additional information.

Borrowings under our $1.45 billion unsecured revolving credit facility are available for working capital and general corporate purposes, and the unused portion is fully available to us. In December 2021, we exercised the accordion feature to increase the credit limit of this facility to $2.00 billion with no other material changes to the terms of the agreement. The credit facility, term ~~loan~~loans and senior note agreements contain representations and warranties, conditions and covenants. If these requirements are not met, all amounts outstanding or otherwise owed could become due and payable immediately and other limitations could be placed on our ability to use any available borrowing capacity. As of November 30, ~~2020,~~2021, we were in compliance with these financial covenants.

See Note 910 for additional information on our revolving credit facility, term ~~loan,~~loans, senior notes and financing obligations.

CAF auto loans receivable are primarily funded through our warehouse facilities and asset-backed term funding transactions. These non-recourse funding vehicles are structured to legally isolate the auto loans receivable, and we would not expect to be able to access the assets of our non-recourse funding vehicles, even in insolvency, receivership or conservatorship proceedings. Similarly, the investors in the non-recourse notes payable have no recourse to our assets beyond the related receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loans receivable. We do, however, continue to have the rights associated with the interest we retain in these non-recourse funding vehicles.

As of November 30, ~~2020, $11.31~~2021, $12.26 billion and ~~$2.31~~$3.16 billion of non-recourse notes payable were outstanding related to asset-backed term funding transactions and our warehouse facilities, respectively. During the first nine months of fiscal ~~2021,~~2022, we funded a total of ~~$4.17~~$5.72 billion in asset-backed term funding transactions. As of November 30, ~~2020,~~2021, we had ~~$1.22~~$1.67 billion of unused capacity in our warehouse facilities.

We have periodically increased our warehouse facility limit over time, as our store base, sales and CAF loan originations have grown. See Note 910 for additional information on the warehouse facilities.

We generally repurchase the receivables funded through our warehouse facilities when we enter into an asset-backed term funding transaction. If our counterparties were to refuse to permit these repurchases it could impact our ability to execute on

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our funding program. Additionally, the agreements related to the warehouse facilities include various representations and warranties, covenants and performance triggers. If these requirements are not met, we could be unable to continue to fund receivables through the warehouse facilities. In addition, warehouse facility investors could charge us a higher rate of interest and could have us replaced as servicer. Further, we could be required to deposit collections on the related receivables with the warehouse facility agents on a daily basis and deliver executed lockbox agreements to the warehouse facility agents.

The timing and amount of stock repurchases are determined based on stock price, market conditions, legal requirements and other factors. Shares repurchased are deemed authorized but unissued shares of common stock. As of November 30, ~~2020,~~2021, a total of $2 billion of board authorizations for repurchases was outstanding, with no expiration date, of which ~~$1.40 billion~~$876.2 million remained available for repurchase. ~~In March 2020, our current stock repurchase program was suspended. The repurchase authorization remained effective and the program resumed in September 2020.~~ See Note 1011 for more information on share repurchase activity.

Fair Value Measurements

We recognize money market securities, mutual fund investments, certain equity investments and derivative instruments at fair value. See Note 67 for more information on fair value measurements.

FORWARD-LOOKING STATEMENTS

We caution readers that the statements contained in this report about our future business plans, operations, capital structure, opportunities, or prospects, including without limitation any statements or factors regarding expected operating capacity, sales, inventory, market share, online purchases of vehicles from consumers, gross profit per used unit, revenue, margins, expenditures, liquidity, loan originations, CAF income, stock repurchases, indebtedness, ~~tax rates,~~ earnings, market conditions or expectations with regards to the continued impact of the COVID-19 pandemic are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “positioned,” “predict,” “target,” “should,” “will” and other similar expressions, whether in the negative or affirmative. Such forward-looking statements are based upon 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. We disclaim any intent or obligation to update these statements. Among the factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements are the following:

•The effect and consequences of COVID-19 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.

•Changes in general or regional U.S. economic conditions.

•Changes in the availability or cost of capital and working capital financing, including changes related to the asset-backed securitization market.

•Changes in the competitive landscape and/or our failure to successfully adjust to such changes.

•Events that damage our reputation or harm the perception of the quality of our brand.

•Our inability to realize the benefits associated with our omni-channel initiatives.

•Our inability to realize the expected benefits of strategic transactions, including our acquisition of Edmunds.

•Our inability to recruit, develop and retain associates and maintain positive associate relations.

•The loss of key associates from our store, regional or corporate management teams or a significant increase in labor costs.

•Security breaches or other events that result in the misappropriation, loss or other unauthorized disclosure of confidential customer, associate or corporate information.

•Significant changes in prices of new and used vehicles.

•Changes in economic conditions or other factors that result in greater credit losses for CAF’s portfolio of auto loans receivable than anticipated.

•A reduction in the availability of or access to sources of inventory or a failure to expeditiously liquidate inventory.

•Changes in consumer credit availability provided by our third-party finance providers.

•Changes in the availability of extended protection plan products from third-party providers.

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•Factors related to the regulatory and legislative environment in which we operate.

~~Page 42~~

•Factors related to geographic and sales growth, including the inability to effectively manage our growth.

•The failure of or inability to sufficiently enhance key information systems.

•The performance of third-party vendors we rely on for key components of our business.

•The effect of various litigation matters.

•Adverse conditions affecting one or more automotive manufacturers, and manufacturer recalls.

•The failure or inability to realize the benefits associated with our strategic investments.

•The inaccuracy of estimates and assumptions used in the preparation of our financial statements, or the effect of new accounting requirements or changes to U.S. generally accepted accounting principles.

•The volatility in the market price for our common stock.

•The failure or inability to adequately protect our intellectual property.

•The occurrence of severe weather events.

•Factors related to the geographic concentration of our stores.

For more details on factors that could affect expectations, see Part II, Item 1A, “Risk Factors” on Page 4549 of this report, our Annual Report on Form 10-K for the fiscal year ended February ~~29, 2020,~~28, 2021, and our quarterly or current reports as filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). Our filings are publicly available on our investor information home page at investors.carmax.com. Requests for information may also be made to our Investor Relations Department by email to investor_relations@carmax.com or by calling 1-804-747-0422, ext. ~~4391.~~7865. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to our market risk since February ~~29, 2020.~~28, 2021. For information on our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended February ~~29, 2020.~~28, 2021.

Item 4. Controls and Procedures

Disclosure. We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that this information is accumulated and communicated to management, including the chief executive officer (“CEO”) and the chief financial officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, with the participation of the CEO and CFO, we evaluated the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period.

Internal Control over Financial Reporting. During the third quarter of fiscal 2022, we implemented a new consumer auto loan accounting system and updated our business processes and internal controls as a result. There ~~was~~were no ~~change~~other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended November 30, ~~2020,~~2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Page 4448

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a discussion of certain legal proceedings, see Note 1516 to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

In connection with information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Form 10-K for fiscal year ended February ~~29, 2020,~~28, 2021, should be considered. These risks could materially and adversely affect our business, financial condition, and results of operations. There have been no material changes to the factors discussed in our Form 10‑~~K other than the updated information related to the impact on our business from the COVID-19 outbreak included in this Form 10-Q.~~K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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 stock price, market conditions, legal requirements and other factors. Shares repurchased are deemed authorized but unissued shares of common stock.

The following table provides information relating to the company's repurchase of common stock for the third quarter of fiscal ~~2021.~~2022. The table does not include transactions related to employee equity awards or 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 Program the Program
September 1 - 30, 2020 83,900 $ 93.64 83,900 $ 1,503,778,789
October 1 - 31, 2020 598,003 $ 91.82 598,003 $ 1,448,871,895
November 1 - 30, 2020 493,898 $ 94.09 493,898 $ 1,402,401,202
Total 1,175,801 1,175,801


					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 Program	the Program
September 1 - 30, 2021	448,500	$	134.75	448,500	$	931,090,293
October 1 - 31, 2021	284,480	$	131.78	284,480	$	893,602,019
November 1 - 30, 2021	118,098	$	147.46	118,098	$	876,187,778
Total	851,078			851,078

Page 4549

Item 6. Exhibits


~~10.1~~			~~Consulting Agreement, dated December 21, 2020, between CarMax, Inc. and Thomas W. Reedy, filed herewith.~~

31.1			Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.

31.2			Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.

32.1			Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.

32.2			Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.

101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			XBRL Taxonomy Extension Label Linkbase Document

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

104			Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

Page 4650

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



CARMAX, INC.


By:			/s/ William D. Nash
			William D. Nash
			President and
			Chief Executive Officer


By:			/s/ Enrique N. Mayor-Mora
			Enrique N. Mayor-Mora
			Senior Vice President and
			Chief Financial Officer

January 6, ~~2021~~2022

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