Two weeks ago, we provided an update on the new car market and the transition to electric vehicles (EV) and the increase in competition between makers. (Relatedly, Tesla announced a 10% force reduction this week.) Last week, we got quarterly results from Carmax, the largest used auto retailer (4% vehicle sales market share) which offers additional perspective. Carmax’s earnings release read, “We believe vehicle affordability challenges continued to impact our ...quarter unit sales performance, with ongoing headwinds due to widespread inflationary pressures, higher interest rates, tightened lending standards and low consumer confidence. Total retail used vehicle revenues decreased 0.7% compared with the prior year’s fourth quarter, driven by the decrease in average retail selling price, which declined approximately $600 per unit, or -2.3%, partially offset by the increase in retail used units sold.” However, the unit increase was a notable improvement in trend, both on a one-year and two-year basis, where for the prior three quarters these were down -8% and -22%, respectively. Traffic also improved on a two-year basis as shown below.
Carmax CFO Enrique Mayor-Mora noted, “Web traffic was up again this quarter, year-over-year. Finance applications were up again this quarter. So there's demand signals that we're seeing out there just boils down to...the affordability question.”
Of note, Carmax isn’t just dealing with a challenging macro environment, it also faces a large and growing Carvana, which is now 62% of its size compared to 27% in 2019. While comparing Carvana to Carmax visits is a little apples-and-oranges as Carvana’s sales are only done remotely and online, and home deliveries of sold vehicles is common. Additionally, Carmax does offer limited vehicle service at its dealerships. By contrast, visitors to Carvana are only visiting to take possession of a purchased vehicle. (The number of Carvana venues is even year-over-year.) And so, we believe that the accelerating trend shown below foretells of a strong Q1 for the company, where it took market share.
Used auto prices had been large driver of overall inflation (see last week's CPI report) and prices are still up +31% from 2019, which is pushing up auto insurance costs, another material contributor to CPI inflation. Carmax runs its business as units sold and gross profits per unit. (Its gross profit per unit is only up 5% versus 2019.) We expect Carmax to keep pushing for unit market share by pushing downward on average selling price (ASP), especially as Carvana has upped the level of competition in the market. That, and the increased supply of new vehicles, will work as continued dampeners to used car prices overall and inflation.
On its earnings call, Carmax CEO Bill Nash said, “I would just remind everybody on market share is, historically, we have always grown market share. It's just when there's been unusual events, if you go back to the great financial crisis, if you go to COVID, and I would say now in this period, we've got these very, very steep depreciations. I mean, we saw two this year, we saw one last year. We've just never seen these before. And so I think working through these, we'll get through them. Then like always, we'll continue to grow market share." We have two takeaways here: (1) used vehicle prices are declining which is a positive for inflation; and (2) consumer demand for big-ticket spend is showing some signs of stabilizing after a soft 2023.
