CarMax Auto Finance is one of the first auto lenders to record the adverse effects of the coronavirus pandemic on its book of business, with originations clocking in at $992.3 million as of May 31, down from $1.8 billion year over year, according to the retailer’s first-quarter fiscal year 2021 earnings presentation.
The captive’s penetration rate on vehicles sold at stores also dropped to 36.1% as of May 31, down from 41.4% in the previous year. The decline in originations was largely “due to the shift in the customer credit mix, some temporary underwriting adjustments focused on preserving our high-quality portfolio,” Tom Reedy, executive vice president of finance at CarMax, said during the company’s June 19 earnings call.
The captive’s outstandings, however, grew by about $1 billion to $13.4 billion, largely due to a lack of amortization.
In addition, CarMax increased its provision for loan losses to $122 million, up from $38 million year over year, according to the earnings report.
“The $122 million provision for loan losses in the current year’s quarter included an increase of $84 million in our estimate of lifetime losses on existing loans, which was a nearly 25% increase in our loss expectations, largely resulting from coronavirus-related turmoil and worsening economic factors,” the report read. “The remaining $38 million largely reflected our estimate of lifetime losses on current quarter originations.”
As of May 31, total allowance for loan losses sat at $437.2 million, or 3.32% of ending managed receivables, which is in the range of allowances seen during the Great Recession, according to Seth Basham, an analyst for Wedbush Securities. CarMax’s Reedy said the amount reflects the best estimate of how the company’s portfolio will pan out related to existing loans.
Looking forward, Reedy expects loan loss provisions to decline on new originations. “We’ve made some adjustments to our origination strategy and we expect that those should evolve to the higher end of our target range of 2% to 2.5%,” Reedy said.
Yet, despite the impact of the COVID-19 economic crisis, CarMax further boosted its liquidity by selling off inventory to be in line with current sales demand.
At the end of the first quarter, the used-car retailer had about $658 million in cash and cash equivalents on hand, down slightly from $700 million reported as of March 31, according to earnings reports. It also has $1.08 billion of unused capacity on its revolving credit facility, up from $300 million in the same reporting period. CarMax last year extended and increased its credit facility.
Vehicle sales saw an expected decline, but rebounded from April when sales were down 75%, in line with industry trends. Used-vehicle sales this quarter dropped by 39.8% YoY, and wholesale vehicle unit sales dropped by 47.6% YoY.
Despite the sales declines, there is an inventory concern in the new-vehicle market that CarMax is looking to address, largely due to the pandemic-related industry-wide halt in production.
“If you look at the sales demand, our inventory is lighter than where we want [it to be], but truthfully I’d rather be on this side of the equation than the other side of the equation,” said Bill Nash, president and chief executive at CarMax.
While the automotive retailer struggled in the first quarter due to coronavirus, Nash remains optimistic about the trajectory of the auto market. “Since hitting a trough in early April, we have seen our sales progressively improve as stores reopen, occupancy restrictions start to ease, and customers begin to reengage in car buying,” he said.
CarMax [NYSE: KMX] was trading at $92.09 per share as of 12:51 p.m. ET, down 2.10% since market open. CarMax has a market capitalization of $14.99 billion.
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