Share of CarMax sales financed with subprime loans declines

Photo credit: BLOOMBERG

The percentage of CarMax Inc. vehicles purchased with loans from lenders that specialize in subprime loans dropped almost 5 percentage points in the company’s fiscal quarter that ended Aug. 31, the company said.

Don’t read too much into that, the company implied.

In the three-month period, 13.8 percent of the vehicles sold at the nation’s largest used-vehicle retailer were purchased with loans from subprime lenders, down from 18.5 percent in the same quarter last year and from 16.1 percent in the previous quarter which ended May 31. That figure includes vehicles financed by CarMax’s lending arm, CarMax Auto Finance, under a subprime test program it started in January. The test is designed to allow CarMax to learn more about customers it typically hands off to its subprime lending partners.

CarMax CFO Tom Reedy said the decline has a lot to do with how lenders choose to manage their portfolios.

This year, lenders that specialize in nonprime loans -- so-called Tier 2 lenders in CarMax terminology -- are picking up some loans they would have declined in the past, Reedy said during the company’s quarterly earnings conference call on Tuesday, Sept. 23. Those loans typically would have been made by the lenders that CarMax refers to as Tier 3: those that specialize in subprime loans.

Changing mix

“Over time we’ve seen the mix of Tier 2 to Tier 3 change,” Reedy said. “Two years ago, Tier 2 was a bigger percentage of sales. Last year, Tier 3 was bigger. This year, we’ve seen Tier 2 pick up somewhat. So they’ve been picking up some of the penetration that Tier 3 lost.”

Added CarMax CEO Tom Folliard: “Tier 3 lenders don’t see an application until it’s declined by every other lender, so it’s a part of the business that’s going to come out the way it comes out, and we expect some volatility there. But we don’t have any view of where we expect it to shake out long term.”

In the quarter, CarMax originated $14.8 million in loans in its test, representing 0.6 percent of retail unit sales. As of Aug. 31, a total of $44.4 million in loans had been made under the program.

Income at CarMax Auto Finance in the quarter rose 10 percent to $92.6 million, driven by an increase in average managed receivables, partly offset by a lower total interest margin percentage, the company said.

More stores

In the latest quarter, CarMax’s used-vehicle sales increased 6 percent to 143,325 units from a year earlier. But that gain was driven largely by the company’s opening four stores in the quarter.

Same-store sales -- those at stores open for at least one year -- rose just 0.2 percent in the quarter. Folliard said there was one fewer Saturday in the quarter which, all other things being equal, would have trimmed same-store sales growth by about 1 percent. He said he was pleased with the results. “It’s the most cars we’ve ever sold,” he said.

In the quarter, CarMax’s overall net earnings grew 10 percent to $154.5 million. Operating revenues rose 11 percent to $3.6 billion.

You can reach Arlena Sawyers at

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