Following up on last week’s piece on dealerships, CarMax reported quarterly results this week. As previewed, things softened for the company; by contrast, we expect results for Carvana (their used car dealership peer) and the large franchise dealers’ used business (Group 1, Lithia, etc.) to have strengthened in Q2 2024.
In last week’s article, we observed that CarMax was mixing into less affluent customers which would pressure their unit sales as this customer is having greater challenges affording a purchase given more a more difficult credit environment. We also see evidence of this shift in customer focus with their decision to push into more non-prime credit customers. (The company did their first non-prime securitization deal. SVP of CarMax Auto Finance Operations Jon Daniels said, “We are really excited about our non-prime securitization program. We think that's truly going to enable growth both in the lower end of the credit spectrum for us to take a larger percentage of sales, but also to expand what we do in the higher end in what we call our higher prime segment.”) Additionally, last week’s piece shared that there has been a secular change in the industry with the franchise dealers now looking to grow their used business, which results in fewer used vehicles (quality) being sold wholesale to the independents. For CarMax, this results in needing to work harder to secure in-demand, quality inventory, which in turn pressures units, average selling prices (ASPs), and gross profits.
CarMax reported a -3.8% decline in comparable units, which reflects a 390-basis-point deceleration quarter-over-quarter. ASPs of $26.5K were also down -2.7%, a 70-basis-point deceleration quarter-over-quarter and gross profit per unit down -0.6%. Importantly, the decline in ASP was far less than used cars overall at -9%, with the delta is explained by CarMax mixing into older vehicles (the result of the two factors mentioned above) as older vehicles have a far lower rate of depreciation than 2-4 year-old vehicles (where the depreciation and prices are down sharply). In terms of inventory, CarMax trade-in volume (units acquired from consumers) declined -13.7%, roughly in-line with last quarter’s trend. Fewer vehicles available for purchase results in fewer vehicles to sell and a lower gross profit dollars. All total, the quarterly financial results, yielded a -4% decline in gross profits.
On supply, Carmax CEO Bill Nash said, “If there's any supply issue, it's just if you're looking for an older vehicle, for us, we buy lots of older vehicles, but there's only so many of them that you can bring up to the quality standards. If we have any supply issue at all, it would be more in the older vehicles that meet the CarMax standards. But again, I mean, we've had roughly 1/3 of our cars are, let's call it, more than 6 years old. That's up a lot from where it was before.”
The results’ release repeated the paragraph, “In regard to our long-term financial targets: (1) We are maintaining our goal to sell more than 2M combined retail and wholesale units annually. However, we are extending the timeframe to between 2026 and 2030 due to uncertainty in the timing of market recovery and as we continue to focus on profitable market share growth. We intend to update the timeframe to achieve this goal when we have greater visibility into the industry’s pace of recovery; (2) Given higher average selling prices, we expect to achieve the $33B annual revenue target sooner than units; and (3) Similarly, we also expect to achieve more than 5% nationwide market share of age 0-10 used vehicles sooner than units, but given the recent volatility in vehicle values, we will provide an updated timeframe for our expected achievement at the end of 2025.” We emphasized “profitable market share growth” as this has been the challenge for the company over the past two years; last week’s piece stated that the market has changed for CarMax, which suggests that their business model and the expectations of returns for the business may need to change as well.
