As a result, CarMax said it reduced its used vehicle inventory by 9,500 units, or about $150 million, during those two months and adjusted the vehicle mix to reflect changes in consumer preferences. Management did not disclose the amount of asset charge-offs to be expected from the forced inventory reduction.
Moving the bloated inventory of trucks and SUVs on its used car lots will undoubtedly force the company to lower retail prices, too, further eroding profit margins of those vehicles.
Auto Loan Issues
In addition, the 10Q Detective alerts investors that problems brewing at consumer loan originator CarMax Auto Finance (CAF) will adversely affect margins in fiscal 2009.
In the first quarter of fiscal 2009 ended May 31, CAF segment income declined 74 percent year-on-year to $9.8 million, hurt by higher funding costs.
Past due accounts as a percentage of ending managed receivables rose 44 basis points to 2.41 percent. And, the recovery rate, which represents the average percentage of the outstanding principal balance received when a vehicle is repossessed and liquidated at wholesale auction, hovered at about 47 percent.
As the economy sinks further into a recession, we expect delinquencies and losses to accelerate at CAF.
CarMax has a healthy balance sheet, with only $315.4 million in long-term debt (20 percent of stockholder equity), and can weather the current economic storm better than its retailing peers, Penske Auto Group and Group 1 Automotive, with respective total debt –to- equity ratios of 182.5% and 216.3 percent.
Furthermore, existing operations penetrate 41 metropolitan markets, comprising approximately 43 percent of the U.S. population. A national brand that leverages a website as a marketing tool helps turn traffic into customers, too.
Nonetheless, we are still window-shopping, not sold that the worst is behind CarMax and its stock price.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.