Income at CarMax’s captive, CarMax Auto Finance, tumbled 7.7 percent to $100.8 million in the fiscal first quarter that ended on May 31.
The big, publicly traded used-vehicle retailer also noted a decrease in floor traffic and said sales to customers with low credit scores, which CarMax calls tier 3, declined to 12 percent of retail used unit sales from 15 percent in the same three month period last year.
The company attributed the decline to fewer applications from customers with lower credit scores and tighter lending by its third-party lender partners, particularly Santander Consumer USA. In April, Santander said it was pulling back on subprime lending.
“We do believe the decline in traffic is predominantly and disproportionately a result of the decrease in tier 3 sales given the fact that tier 3 conversion has historically been significantly lower than our non-tier 3 conversion,” CarMax President Tom Folliard, said during a conference call with analysts and journalists on Tuesday.
The company attributes the decline in income at CarMax Auto Finance to an increase in the provision for loan losses and a lower total interest margin percentage, partially offset by the effects of an increase in average managed receivables.
“The increase in the provision for loan losses reflected the combined effects of favorable loss experience in the prior year’s quarter, which reduced last year’s provision; some unfavorable loss experience in the current year’s quarter; and the growth in managed receivables,” the company said in a document detailing its captive’s quarterly results. “Average managed receivables grew 12.5 percent to $9.75 billion.”
CarMax CFO Tom Reedy said CarMax tests lenders from time to time but will not partner with a lender unless it is experienced and sustainable.
He also said CarMax Auto Finance is continuing the subprime lending experiment it began in January 2014. The pilot is designed to enable CarMax to learn more about the customers it had typically handed off to subprime lending partners.
CarMax Auto’s subprime financing continues to make up roughly 5 percent of the company’s tier 3 sales volume, Reedy said.
“There is really no news there,” he said, regarding the experiment. “I think the rationale for doing this program is still good, it still holds true. It’s not about driving additional sales, it’s more about knowledge, risk mitigation and some profitability.” c