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Letter to the Editor

CarMax Lowers Earnings and Sales Targets

"We currently expect first quarter earnings per share to be at the low end of the range we anticipated on March 30 even though we now think we'll report lower-than-expected used unit comp growth of approximately six percent," said Austin Ligon, president and chief executive officer. "Our sales momentum has become less robust as we have progressed through the quarter. We suspect the higher gas prices we noted on March 30 are having some impact on consumer demand. Also as we pointed out on March 30, wholesale auction prices are rising faster than historical norms would indicate they should. We believe such an atypical price rise played a role in the sales softness we experienced last spring and summer, and it appears to be a factor again. We think we learned from last year's experience. Last year in the spring and summer, we kept our inventories higher than our sales rates, anticipating a stronger summer selling season than materialized. This year, we have begun reducing our inventories to get them in line with sales rates. We also are countering the unusually high wholesale market pricing by adjusting our purchase offers on cars that we buy in our stores. A result of our purchase pricing actions is higher margins on the wholesale cars we sell at our in-store auctions.

"We also have seen our DRIVE-financed sales return to normalized levels more rapidly than we had forecast," said Ligon. "We had expected the tax- refund seasonal increase in DRIVE sales to continue into April; they actually returned to normal levels in April. DRIVE-financed sales provide lower incremental margins than sales financed through our other lenders. Consequently, lower-than-expected DRIVE-financed sales have a smaller effect on earnings.

"In addition, CarMax Auto Finance's April public securitization benefited from the recent very strong market demand for asset-backed securities," Ligon said. "Consequently, the cost of funds for this securitization was lower than anticipated. Also, we expect to benefit from a favorable adjustment in the valuation of the retained interest in securitized receivables. We are lowering the loss assumptions on previously securitized receivables, reflecting favorable market conditions and the continued excellent performance of CAF's portfolio."

CarMax, a Fortune 500 company and one of the Fortune 2005 "100 Best Companies to Work For," is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 62 used car superstores in 28 markets. CarMax also operates seven new car franchises, all of which are integrated or co-located with its used car superstores. During the twelve month period ended February 28, 2005, the company retailed 253,168 used cars, which is 92 percent of the total 273,804 vehicles the company retailed during that period.

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