CarMax Auto Finance originations drop 9%

CarMax Auto Finance ’s originations fell in the company’s fiscal third quarter amid rising inventory prices and slowing demand from some customer segments. CarMax Auto Finance (CAF)’s originations decreased 9.3% year over year to $1.8 billion in the its third quarter of fiscal year 2026, which ended Nov. 30, according to today’s earnings release. Outstandings fell 5.4% YoY to $16.8 billion. Used-vehicle sales were down 8% YoY to 169,557 units. Gross profit per unit was $2,235, down 3.1% YoY. “Recent results have been unacceptable and do not reflect the company's potential,” Tom Folliard , interim executive chair of the board, said during today’s earnings call. “We are operating with a renewed sense of urgency to drive the business forward.” Average selling price climbed about 1% YoY to $26,383, according to the release. “Based on recent results, it is clear CarMax needs change ... our average selling prices have drifted upward and appear to be less attractive to customers.” -- David McCreight, interim President and Chief Executive, CarMax “Based on recent results, it is clear CarMax needs change ... our average selling prices have drifted upward and appear to be less attractive to customers,” interim President and Chief Executive David McCreight said on the call. McCreight assumed the position of interim CEO on Dec. 1, replacing nine-year former CEO and board member Bill Nash . “To ensure that CarMax is a preferred choice, we will work to shrink the gap between our offering and the marketplace,” he added. [caption id="attachment_58330803" align="aligncenter" width="1024"] (Courtesy/Bloomberg)[/caption] Falling sales CAF has identified consumer segments with waning interest and unpopular vehicle segments as leading contributors to the slowing sales. CarMax has seen a dip in sales and application volume in its “tier two” segment, which includes consumers with FICO scores between 650 to 750, John Daniels , executive vice president at CAF, said during the call. It “feels like we've lost volume there. We can track that through application volume coming through the door, and then progression further on,” he said. “There [are] places across the spectrum that we're looking to improve and grow sales.” Older vehicle sales also outpaced more recent model year cars, Executive Vice President and Chief Financial Officer Enrique Mayor-Mora said on the call. “Pressure performance across our age zero to five inventory was partially offset by increased sales of older, higher-mileage vehicles, which represented over 40% of our sales for the quarter, an increase of approximately five percentage points compared to the second quarter and last year's third quarter,” he said. According to the CAF earnings release: Average interest rate on loans originated in the quarter fell 20 basis points (bps) YoY to 11%; Net finance penetration rate fell 50 bps YoY to 42.6%; Provision for loan losses ticked up 1.1% YoY to $73.4 million; and Allowance for loan losses sat at $474.8 million, or a coverage ratio of 2.9%, down 15 bps YoY. [caption id="attachment_58357692" align="alignnone" width="697"] (Courtesy/CarMax)[/caption] Changes on the horizon The company is making several changes, including a goal of reducing selling, general and administrative expenses by $150 million by the end of fiscal 2027, according to the release. Other efforts, according to McCreight, include: Lowering margins; Increasing marketing spend; Examining sales closing process; Emphasizing customer insights decision making; and Improving the digital shopping experience. “While we have spent several years building out capabilities for customers to shop how they want and where they want, we must now focus our energies on making the digital shopping experience easier and shift our digital voice from one that earnestly delivers abundant information to one that focuses on delivering sales,” he said. “This will drive conversion and further improve customer satisfaction.” These changes are expected to improve future earnings, Mayor-Mora said. “We are optimistic the actions of lowering margins and increasing marketing will improve our sales performance trends, but may pressure near-term earnings,” he said. “We expect marketing spend on a total unit basis to be up year over year in the fourth quarter, though to a lesser degree than during the third quarter, with a focus on investing in acquisition to drive buys and sales.” Service margins are also expected to be pressured by “seasonal sales and as we annualized over cost coverage levers taken last year,” he said. Shares of CarMax [NYSE: KMX] were $39.30 at market close today, down 1% from market open. CarMax has a market cap of $5.8 billion.

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