Image source: WBUR
With higher prices and rising interest rates amid inflation, shoppers find it hard to dream of big purchases.
Homes, cars, and even gadgets have become luxuries beyond the reach of most people.
Used cars are also plagued by inflation for car buyers.
CarMax, the largest used car dealership in the United States, saw its sales drop sharply.
On Thursday, the company said its profits fell 54% as the number of cars sold in the quarter fell 6.4% from 2021.
CarMax attributes the decline to “vehicle affordability challenges” resulting from inflationary pressures, rising interest rates, and low consumer confidence.
Although higher prices boosted the company’s overall sales, the results lagged analysts polled via Refinitiv.
The figures alarmed investors.
Stocks across the industry
On Thursday, shares of CarMax (KMX) plunged more than 24%.
However, they weren’t the only ones, as the shares of other auto dealers all fell.
Shares of competitor Carvana (CVNA) fell 23%, while AutoNation (AN), the nation’s largest new car dealer, fell 10%.
Meanwhile, other automakers such as General Motors (GM), Ford (F) and Tesla (TSLA) also had lower stakes.
Car prices have risen steadily over the past two years.
The shortage of parts, especially computer chips, has limited supply due to increased consumer demand.
Rising prices have played a major role in general inflationary pressures, as roughly 40% of US households buy a car every year.
In recent months, the Federal Reserve has aggressively raised interest rates (at a historic pace) to keep prices in check.
The central bank has also tried to reduce consumer demand and slow the economy.
Used car prices
According to the Consumer Price Index, a key measure of inflation, used car prices fell 2% from a record high in January last month.
However, the numbers are still 48% higher than in August 2019.
Meanwhile, new car prices hit an all-time high in August this year, rising 30% over the past three years.
According to CarMax, the average car price of $28,657 for the three months ending in August was 9.6% higher than last year.
However, it was also a decrease of 1% from the previous quarter.
However, CarMax executives said it wasn’t just the cost of buying and financing a car that dragged the sales.
General pressure on household balance sheets as a result of the general price increase was also a problem.
William Nash, the CEO of CarMax, was in talks with investors when he pointed out that the posts were higher than before.
“Consumer confidence, certainly during the quarter, [reached] all-time low as far as recent history, I mean even lower than the height of the pandemic,” he said.
“So I think consumers are prioritizing their spending a little differently.”
Due to the increase in reserves to cover any credit losses in the financial sector, CarMax’s results also suffered.
The company more than doubled the $ 35.5 million it had in reserve a year ago, reaching $ 75.5 million at the end of the final quarter.