CarMax has encountered resistance against ridiculous prices. Used car startups are facing an existential crisis. Vroom shares crashed 97%.
By Wolf Richter for WOLF STREET.
When it comes to publicly traded used car dealerships, CarMax is the adult in the room. Online-only used vehicle IPOs and SPACs Carvana, Vroom and Shift Technologies are losing money by hand and may never make money selling used cars because they don’t were not designed to be profitable. Their stocks totally crashed in a spectacular demonstration of how Wall Street systematically cleans up stock jockeys who have gotten themselves into this stuff either directly or indirectly.
But CarMax makes money. And yet, its earnings report today sent its already beaten shares down nearly 10% to $93.33, where it was first seen in 2019. They are down 40% from the peak in November. The earnings report pointed to the problem the industry itself created, while customers, befuddled by an inflationary mindset, accepted it: ridiculous prices. But enough customers are suddenly resisting. Before we get to CarMax, let’s take a look at the three used car dealerships whose stocks have totally crashed.
vroom [VRM] began trading after its highly publicized IPO in June 2020. Its shares have now crashed 97% from the September 2020 high and closed today at $2.08, another new all-time low (data via YCharts):
Technologies of change [SFT] went public via a merger with a SPAC in 2020. The deal was announced in June 2020 and completed in October of the same year. Its shares have crashed 87% from their highs on June 29, 2020, to $1.89 at the close today (data via YCharts):
caravan [CVNA], the first online-only used vehicle dealership, went public via IPO in April 2017, at an IPO price of $15 per share. The hype, despite the large and growing losses every year for the past six years, was such that it catapulted the stocks higher and higher. In August 2021, shares reached $376. And that was it. The great spirit of hype suddenly disappeared. Today they closed at $100.78, down 73% from the high, and back to February 2020 levels:
These tables are indictments shenanigans played out on Wall Street, and laments the confused stock jockeys who bought this stuff on a wing and a prayer, believing in FOMO, believing in BTFD, believing in YOLO and believing in all the other memes, and believing the heavy hype because they thought this time was different or because they didn’t understand at all and just bought.
But CarMax is an industry veteran. They know what they are doing. They have been making big profits for many years in the same industry where Vroom, Carvana and Shift are losing an arm and a leg.
CarMax said in its earnings report today that its used vehicle retail sales, in terms of the number of vehicles sold, fell 5.2% year-over-year in the quarter. ended Feb. 28, and fell 6.5% on a same-store basis. .
But its average retail price jumped 39.7%, or $8,300 per vehicle. In other words, his customers who bought paid on average $8,300 more for a vehicle than a year ago. That’s a gigantic price increase.
Thanks to these ridiculous price increases, its used-vehicle dollar revenue soared by 32.6% and its total revenue by 48.8%.
But this cannot be maintained. Enough consumers have had it. And their resistance is already making a dent – and that’s what CarMax hinted at today.
Industry-wide, the total number of vehicles sold in March by dealerships to retail customers fell 15% year-over-year, according to Cox Automotive estimates. This came despite a sharp year-over-year increase in tax refunds in March.
But wait.. that was March, which isn’t even included in CarMax’s earnings report today for the quarter ended Feb. 28. The decline in unit sales in the industry in March will be echoed by CarMax in its upcoming earnings report.
“We believe that a number of macroeconomic factors weighed on our fourth quarter unit sales performance, including declining consumer confidence, surging COVID cases fueled by Omicron, vehicle affordability and the recovery of stimulus benefits paid during the prior year period,” the company mentioned. Note the term “vehicle affordability”.
And the shares [KMX] have been hammered further and are down 40% from their November 2021 peak:
This term, “vehicle affordability” means the industry went totally wild raising prices, and consumers played along for a while, paying anything, confused as they had been by the inflationary mindset, and watered down by the various stimulus and liquidity measures. -retirement funds, remaining PPP loans, etc., which were all part of the trillions of dollars that had been put into motion by the government and the Fed.
Now there aren’t enough of those confused types of buyers, and there’s price resistance, and used vehicle prices are going down. This was also echoed by the CPI for used vehicles today, which fell 3.8% in March from February, after falling 0.25% the previous month. But the index was still up a ridiculous 35% year-over-year:
There’s a problem lurking on these car lots now. As retail prices go down because consumers have had it and are resisting these ridiculous prices, the inventory that was purchased at these ridiculous prices will reduce gross profit per unit. CarMax is profitable and has been around the block, and it won’t lead to an existential crisis.
But that can’t be said for Vroom, Carvana and Shift as they’ve already lost an arm and a leg every year, even during the best times when the industry as a whole made the biggest profits ever. But now they are facing overvalued inventory, falling retail prices, rising operating costs and price resistance among potential customers. Also, just in time, the Fed is tightening financial conditions for the next few years, which will make it more difficult for companies that are losing money to access financing.
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