CarMax Auto Finance originations decline for second straight quarter

CarMax Auto Finance (CAF)’s originations fell 4.2% sequentially in the second quarter of fiscal year 2023 as used-vehicle sales slowed amid high vehicle prices and rising interest rates. The used-car retailer's stock plummeted 11.7% as of market close on reports of weakening consumer demand for vehicles. CAF’s net loans originated in the second quarter of fiscal year 2023 ending Aug. 31 came in at $2.3 billion, a decline of 1.7% year over year, according to the earnings report. Still, the lender’s total portfolio grew 10.2% YoY to $16.2 billion. CAF’s originations dipped on a YoY basis for the second consecutive quarter after falling 1.5% YoY to $2.4 billion in Q1 ending May 31, and after posting 17.2% YoY growth in originations in Q4 fiscal 2022 ending Feb. 28. [caption id="attachment_57331223" align="alignnone" width="2560"] © 2021 Bloomberg Finance LP [/caption] CAF's penetration rate in the second quarter fell to 41.2% compared with 43% during Q2 2021 and 39.3% in Q1 when factoring in three-day payoffs — in which CarMax allows consumers to replace their financing with another provider at no cost, Jon Daniels, senior vice president of CAF, said during today’s earnings call. The lender also raised its loan loss provision in anticipation of worsening performance. CAF’s Q2 loan loss provision totaled $76 million, ending in a reserve balance of $478 million, or 2.9% of managed receivables, Daniels said. “ Last year, our loan loss provision of $35 million was a significant tailwind as the overall performance of the consumer remained remarkably strong,” Daniels said. “ Although the lower credit consumer continues to show demand by actively shopping and applying for credit, they continue to be challenged with affordability and being able to complete the purchase .” The lender’s income also decreased 8.6% YoY to $182.9 million, largely due to an uptick in the provision for loan losses , which offset growth in the CAF’s net interest margin. The lender’s net interest margin improved 10 basis points YoY to 7.3% of average managed receivables, according to the report. Vehicle sales plummet CarMax’s retail used-vehicle sales fell 6.4% YoY to 216,939 units as of Aug. 31, according to the earnings report. “ This quarter reflects the widespread pressure the used-car industry is facing,” Chief Executive Bill Nash said during the call. “Macro factors, including vehicle affordability that stems from persistent and broad inflation, climbing interest rates and low consumer confidence, all led to a market - wide decline in used-auto sales.” Morgan Stanley also said in a research note the decrease is similar to 2020 levels of unit volume decline and it could be a telltale sign for the rest of the industry, adding the last two quarters are CarMax’s worst YoY unit volume decline on record outside of the 2008 financial crisis and COVID-19. The retailer also believes industry sales were affected by a shift in consumer spending that prioritized small , discretionary items over large purchases, Nash said. The retailer shifted supply to meet climbing demand for more affordable vehicles, he added. Wholesale vehicle unit sales fell 15.1% YoY to 159,677 units, according to the report. “Wholesale unit sales were down ... partially as a result of our deliberate decision to reallocate some older vehicles from wholesale to retail to meet consumer demand for lower-priced vehicles,” Nash said. “We estimate that without this shift, our wholesale units would have been down less than 10%.” Consumer demand is cooling off on the heels of the Federal Reserve raising interest rates to curb inflation, putting additional pressure on consumers who face already inflated sticker prices. Still, CarMax’s profitability remained strong as a result of high vehicle prices. Gross profit per unit increased 4.4% YoY to $2,282 in Q2 , according to the earnings report. CarMax’s available inventory in the second quarter stood at 342,731 units, an 8.1% YoY decrease. Shares of CarMax [NYSE: KMX] were trading down 11.7% from market open at $65.16 as of market close today. CarMax has a market capitalization of $10.4 billion. Auto Finance Summit, the premier industry event for auto lending and leasing, returns October 26-28 at the Wynn Las Vegas. To learn more about the 2022 event and register, visit www.AutoFinanceSummit.com .

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