CarMax's third-quarter profits rise on higher used-car volume, financing
Retailer to test lending to subprime borrowers with poor credit history
CarMax credited the rise in its third-quarter unit sales on “improved execution in our stores and an attractive consumer credit environment, as well as a modest increase in store traffic.”
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CarMax Inc.’s third-quarter net profits rose on increased used-car sales and higher income at its captive finance company.
The nation’s largest used-car retailer today reported net income rose 12 percent to $106.5 million in the quarter ending Nov. 30 from $94.7 million a year earlier.
Revenues increased 13 percent to $2.94 billion from $2.60 billion in the year-ago period.
Income at CarMax Auto Finance jumped to $83.9 million from $72.5 million a year earlier.
“The earnings growth was driven by double digit increases in total used unit and CAF income,” CarMax CEO Tom Folliard said in a statement.
Used-vehicle unit sales rose to 122,065 from 105,815 a year ago, the company said.
CarMax said the rise in unit sales was the result of “improved execution in our stores and an attractive consumer credit environment, as well as a modest increase in store traffic.”
Wholesale vehicle unit sales grew by about 4 percent to 82,743 compared with last year’s quarter of 79,747, reflecting the growth in store base, the company said.
“Other sales and revenues” declined 5 percent year-over-year, CarMax said.
For example, extended service plan revenues were $48.8 million, about flat with the prior year results of $48.6 million.
The company said growth in retail vehicle sales was offset by an increase in its allowance for extended service plan returns. The rise in that allowance reflected increases in extended service plan cancellations prior to the end of their contract term, the company said.
Net third-party finance fees declined by $4.6 million as third-party subprime providers originated 18 percent of used-vehicle unit sales in the current quarter vs. 15 percent in the year-ago period.
Over the last two years, the volume of this financing has increased, as third-party subprime providers have been making more attractive offers, CarMax said. But late in the quarter, CarMax subprime lenders began to tighten credit terms.
The company said it could start lending to borrowers with weak credit records as it seeks to cut its reliance on third-party subprime car loan providers that are tightening lending standards.
CarMax pays $1,000 per car to third-party lenders to own the risk of customers defaulting in its subprime business. Subprime borrowers accounted for about 18 percent of CarMax's business in the third quarter.
CarMax said today it would roll out a pilot project this quarter for lending to subprime borrowers with poor credit history.
Investors are concerned that CarMax's decision to lend to subprime customers could likely make it too reliant on the risky group to drive sales.
Excessive lending to people that did not have healthy credit records partly led to the financial crisis of 2008-10 in the United States.
The market, however, was being too hard on CarMax, Stifel Nicolaus analyst Jamie Albertine said.
"This is an opportunistic decision to improve finance profitability (and) I continue to believe that the automotive lending market remains healthy and lacks the overexuberance characteristic of the market pre-recession," he said.
Shares of auto retailers have risen this year as easier access to credit encouraged customers to buy more cars. Lending to such borrowers had dried up after the start of the credit crisis in 2008.
But Carmax said on Friday its lenders went back on the changes they made in the last two years and tightened the terms on down payment and ease of documentation.
CarMax CFO Tom Reedy said it was not possible to forecast how much more lenders would tighten their terms, but added that its decision to enter the subprime market was not in response to the more difficult standards.
CarMax said it would lend about $70 million through the subprime program over the next 12 months.
The company had cash and cash equivalents of $750 million as of Aug. 31, according to a company filing.
"Customers with challenged credit have become a meaningful part of our overall business ... so we feel like we owe it ourselves to get smarter about this space," Folliard said on a post-earnings conference call.
During the third quarter of its 2014 fiscal year, CarMax opened stores in Jackson, Tenn., Brandywine, Md., and one in St. Louis.
Subsequent to the end of the quarter, CarMax opened another store in St. Louis and entered the Philadelphia market with two stores.
As of Nov. 30, CarMax has 113 stores in the United States.
Reuters contributed to this report.
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