Recent news from used car retailers Carvana and CarMax tells the story of two car industries in one.
On the one hand, you have Carvana, the online retailer that allows you to buy or sell a vehicle nearly instantly.
Carvana reported record sales in the third quarter, selling 150,941 vehicles, a 44% year-over-year increase. A jump in revenue and net income also told the story of a healthy used car market.
Carvana Q3 results
- 150,941 retail units sold, +44%
- Revenue +55% to $5.65 billion
- Net Income $263 million, +$115 million year over year
- Record levels of retail units sold, revenue, adjusted EBITDA, and operating income
Source: Carvana
CEO Ernie Garcia says that while the expiration of the tax credits hurts, consumer demand for used cars in general remains strong, even if EV demand has faltered.
On the other hand, you have CarMax, the traditional brick-and-mortar used car retailer with a growing online presence.
On Thursday, CarMax announced some news that sent both stocks tumbling as investors questioned the health of the entire used car industry.
CarMax fires CEO, lowers outlook for the third quarter
On Thursday, CarMax announced that it had terminated the employment of William D. Nash as the company’s president and CEO, effective December 1.
Nash also resigned from the company’s board, and his seat will remain unfilled.
Related: Carvana CEO shares blunt truth about EVs
If that wasn’t bad enough, the company says the rest of the third quarter isn’t looking very good financially.
CarMax expects comparable store used unit sales to decrease between 8% and 12% year-over-year, with earnings per share between 18 cents and 36 cents. Analysts polled by Nasdaq were expecting EPS of 74 cents per share.
Interim CarMax CEO wants new direction
Nash called the company’s second quarter “challenging” in its earnings report, as it purchased only 293,000 vehicles, representing a 2.4% year-over-year decline, and unit sales fell 2.2% to 138,302 units.
Fewer unit sales mean less revenue from the higher margin Extended Protection Plan that its finance and insurance department offers.
CarMax says it is searching for a permanent CEO, but in the meantime, the board has appointed fellow member David McCreight as interim CEO and president.
“I am confident we can strengthen CarMax as the Board identifies a permanent CEO to successfully lead CarMax into its next phase of growth,” McCreight said.
CarMax closed Thursday’s trading session down 24.37% to $30.88. Yera to date, the stock has lost nearly 62% of its value.
CarMax, Carvana go different directions
More so than the change in leadership, CarMax’s bearish expectations for the third quarter are sinking Carvana, whose outlook on the near future of the used car industry is quite bullish.
Carvana shares dropped 6.3% Thursday, but the stock is still up more than 45% year to date.
Related: Carvana CEO’s message on used-car market raises eyebrows
Carvana set several records in the third quarter, and the company says it doesn’t see any signs of macroeconomic weakness in the near term.
Garcia said during the earnings call that while the company is “always paying attention,” “things feel relatively stable,” and the company says it doesn’t “see signs of macro weakness today.”
But even as it perceives strength in the industry today, Carvana sees itself as well-positioned “if the industry does take a downturn,” because it expects “at some point there will be cycles.”
Used car prices are rising, but it’s not all bad news
The used-car market is directly affected by new car market pricing, according to CarRight. Higher prices on new cars prompt more car buyers to consider used cars, which in turn increases prices in the used car market.
The average new car sold for more than $50,000 in September for the first time ever, according to Kelley Blue Book.
While the firm called the jump in prices a “blip, not a sign of things to come,” it also said that “if longer-term patterns hold, we’ll cross the $50K barrier for good sometime next year.”
While used-car prices are rising, they are increasing at a slower rate than those of new cars.
The average used car sold for $25,825 in September, according to KBB, just a 2% year-over-year increase.
KBB says the best predictor of used-car prices is the wholesale prices dealers pay for used cars at auction, and those prices have held relatively steady in recent weeks, “suggesting that used car shoppers might see a little predictability in the fall.”
And there is one bit of “great news” for shoppers: Inventories are slowly creeping back to pre-pandemic levels.
During the pandemic, automakers produced approximately 8 million fewer vehicles than they would have under normal circumstances in 2021 and 2022. Fewer cars mean a shorter supply, which means higher prices.
Dealers ended September with 10% more vehicles than they had a year ago.
