(Adds CEO, CFO quote, analyst comment; updates shares)
By Mridhula Raghavan
Dec 20 CarMax Inc said it could start
lending to borrowers with weak credit records as it seeks to cut
its reliance on third-party subprime car loan providers that are
tightening their lending norms.
Shares of the largest used-car retailer in the United States
fell as much as 10 percent after it also reported a slightly
weaker-than-expected profit for the first time in five quarters.
CarMax already has a financing arm that lends to customers
with healthy credit records. The business, CarMax Auto Finance,
originated about $3.45 billion in loans during the fiscal year
ended Feb. 28.
The company pays $1,000 per car to third-party lenders to
own the risk of customers defaulting in its subprime business.
Subprime borrowers accounted for about 18 percent of CarMax's
business in the third quarter.
CarMax said on Friday it would roll out a pilot project this
quarter for lending to subprime borrowers with poor credit
Investors are concerned that CarMax's decision to lend to
subprime customers could likely make it too reliant on the risky
group to drive sales.
Excessive lending to people that did not have healthy credit
records partly led to the financial crisis of 2008-2010 in the
The market, however, was being too hard on CarMax, Stifel
Nicolaus analyst Jamie Albertine said.
"This is an opportunistic decision to improve finance
profitability (and) I continue to believe that the automotive
lending market remains healthy and lacks the overexuberance
characteristic of the market pre-recession," he said.
Shares of auto retailers have risen this year as easier
access to credit encouraged customers to buy more cars. Lending
to such borrowers had dried up after the start of the credit
crisis in 2008.
But Carmax said on Friday its lenders went back on the
changes they made in the last two years and tightened the terms
on down payment and ease of documentation.
CarMax Chief Financial Officer Tom Reedy said it was not
possible to forecast how much more lenders would tighten their
terms, but added that its decision to enter the subprime market
was not in response to the more difficult standards.
CarMax said it would lend about $70 million through the
subprime program over the next 12 months.
The company had cash and cash equivalents of $750 million as
of Aug. 31, according to a company filing.
"Customers with challenged credit have become a meaningful
part of our overall business ... so we feel like we owe it
ourselves to get smarter about this space," Chief Executive Tom
Folliard said on a post-earnings conference call.
Net income rose to $106.5 million, or 47 cents per share, in
the third quarter ended Nov. 30 from $94.7 million, or 41 cents
per share, a year earlier.
Analysts on average expected 48 cents per share, according
to Thomson Reuters I/B/E/S.
Revenue increased 13 percent to $2.94 billion, above the
average analyst estimate of $2.89 billion.
CarMax shares were down 9.7 percent at $47.88 in afternoon
trading on the New York Stock Exchange on Friday. They had risen
about 41 percent this year to Thursday's close.
(Editing by Saumyadeb Chakrabarty and Joyjeet Das)