CarMax president and chief executive officer Bill Nash opened his comments during the company’s quarterly earnings call last week by noting that CarMax had “a significant number” of stores in Hurricane Ian’s path and that associates’ safety was the company’s top priority.

But continuing on with his comments during what was CarMax’s second quarter fiscal year 2023 Earnings Release Conference Call, Nash said the quarter results reflected “widespread pressure the used-car industry is facing.”

Total retail used units sold in the second quarter declined 6.4%, and used unit sales in comparable stores were down 8.3% versus the second quarter last year.

Total used-vehicle gross profits were at $495 million, a decrease of 2.3%. 

“Macro factors, including vehicle affordability, that stem from persistent and broad inflation, climbing interest rates and low consumer confidence, all led to a market-wide decline in used auto sales,” Nash said. “In addition, wholesale values were affected by steep depreciation in the quarter.”

Bringing up the positives

Other somewhat stormy news in the report was that wholesale unit sales declined 15.1% compared to the second quarter of last year, which Nash said was partially as a result of the company reallocating some older vehicles from wholesale to retail to meet consumer demand for lower-priced vehicles.

Wholesale gross profit per unit of $881 was a decline from $1,005 a year ago. Nash said that reflected softening market conditions and the company’s decision to retail a higher mix of older used vehicles.

But Nash put some positive spin on the report.

“Despite the impact of these factors on our results, we continued to grow market share,” he said.

He later said the company’s ability to source vehicles from consumers is a competitive advantage.

“But relative to younger vehicles, more of them fall out during the reconditioning process as they are not able to meet our standards for consumer sales. When that happens, we wholesale those vehicles, often at lower-than-normal margins,” Nash said.

He said buying vehicles at appropriate prices per market conditions is one of CarMax’s core competencies. The company bought approximately 343,000 vehicles from consumers and dealers during the second quarter. That was down 8.1% versus last year’s second quarter, but it was up approximately 50% as compared to the pre-instant offer launch in the second quarter of fiscal year 2021. Nash said that reflects customers’ responsiveness to “our nationwide online instant offer tool and our offers.”

In spite of the factors mentioned earlier such as inflation impacting vehicle affordability, higher interest rates and low consumer confidence, the company continues to make progress on initiatives that he said would “strengthen our competitive differentiation over time.”

One of those initiatives includes the use of data science, automation and AI to improve efficiency and effectiveness within the company’s customer experience centers. CarMax during the second quarter expanded its associate-facing guided action software from chat to phone calls and developed additional work streams for its consumer-facing digital assistant.

A “finance-based shopping experience” is another initiative, and it gives customers information to understand APRs and monthly payments across different contract terms and compare vehicles to ultimately secure the right financing options for them, Nash said.

Expanding the MaxOffer program to acquire vehicles is another initiative to help CarMax build on its “market-leading position as a buyer of cars.” MaxOffer is the company’s digital appraisal product.

“As a reminder, buying directly from consumers and dealers lowers our acquisition costs, enhances our inventory selection and provides profitable incremental wholesale volume,” Nash said. “We are currently live in over 40 markets and anticipate launching additional markets later this year.”

Upgrading its auction experience to improve user-friendliness is another CarMax initiative, and Nash said the company is testing a modernized vehicle detail page to be mobile-friendly and display relevant information to help dealers preview wholesale inventory, similar to how customers shop CarMax’s retail inventory. CarMax is also testing AI capabilities to improve its online vehicle condition reporting.

The company provided information on CarMax Auto Finance (CAF), which reported income of $183 million. That was a decline of 8.6% or $17 million from the same period last year. “As a reminder, last year's quarter benefited from a reduced provision coming out of the pandemic. We will continue to provide strong credit offers to our customers as we move rates with the market,” Nash said.

The company during the quarter expanded the prequalification product it launched in March. Jon Daniels, senior vice president of CarMax Auto Finance operations, reported that the multi-lender product, which is expected to go nationwide during the third quarter, results in no impact to a credit score. It generates customized real-time credit decisions on CarMax’s full inventory.

But back to those storm clouds

An analyst during the Q&A portion of the earnings call asked for more information to explain the slowdown in used vehicle unit sales. Nash said June showed some strength before a substantial drop-off in July. That softness continued into August.

“And there's not one single thing that I can point to that we can say, ‘Oh, because … this happened in July is why we saw the drop-off.’ I mean there's lots of, I think, pressures out there. I talked about the broad inflationary pressures,” Nash said.

He continued by saying grocery prices are higher than ever, interest rates are rising, and consumer confidence was down substantially during the quarter.

“So, I just think consumers are prioritizing their spend a little differently,” he said. “But there’s not one single thing that I can point to, like, oh, this happened, and that’s why we saw the decline. I think it’s just a continuation, kind of the deterioration of the overall consumer.”

The analyst during the Q&A also asked about September sales, and Nash said the company was seeing similar softness as in August. Hurricane Ian has caused additional softness, Nash said, noting that 22 stores were currently closed “and have been closed for varying amounts of time.”

The company has “weathered” difficult cycles in its history, Nash said.

“And each time we have successfully managed through them and have leveraged key learnings to further strengthen our operating model,” he said. “We remain on track to achieve our long-term strategy and goals.”

Nash said CarMax believes the challenging market conditions and consumer behaviors are transitory, and he said the company’s foundation remains strong.

“We are well-positioned to navigate this environment as we have during challenging times in the past and remain excited about the future of our diversified business.”