CarMax's Dismal Quarter Means We've Reached a Used-Car Tipping Point

The used car retailer's net income sunk 86 percent during its fiscal third quarter, sending shares tumbling on Thursday.

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Image of CarMax dealership and parking lot
Image: Justin Sullivan (Getty Images)

CarMax is trying its best to cope with an unwilling used car market, Volvo’s promising it won’t nickel-and-dime anyone over software, and success hasn’t been quite as simple as one self-driving trucking startup would like. All that and more in The Morning Shift for Thursday, December 22, 2022.

1st Gear: Not a Great Year for CarMax

There comes a point where people just won’t take ever-increasing prices anymore. CarMax evidently found that point in 2022. The used car network underperformed relative to its quarterly earnings target, resulting in a 14 percent slide in its share price on Thursday morning. From Bloomberg:

“Vehicle affordability challenges continued to impact our third-quarter unit sales performance, as headwinds remain due to widespread inflationary pressures, climbing interest rates and low consumer confidence,” CarMax said in the statement.

Prices of used cars soared during the pandemic as new-vehicle production stalled due to supply issues. This year, they’ve been ratcheting down rapidly as shortages eased and buyers balked at high sticker prices.

Carvana has been hit by the same pressures, forcing the online automobile seller to explore ways to rework its debt amid solvency concerns. It also has heightened concerns about a spillover into the broader car market, something AutoNation Inc., the largest new-car dealer chain in the US, has warned about.

CarMax Chief Executive Officer Bill Nash in September warned that consumers had shifted their spending away from large purchases amid challenges around affordability. The company’s second-quarter profit miss weighed on the shares of peers, with rising interest rates and low consumer confidence adding further concerns.

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That’s borne out as a 28 percent reduction in overall sales year-over-year, and a 46 percent loss in wholesale vehicle gross profit. Net income plunged 86 percent. CarMax pumped the brakes on buying cars last quarter, Reuters adds, while also taking steps to reduce expenses in marketing. It’s paused stock buybacks as well.

Used car prices are falling, but don’t get any grandiose ideas. Wholesale prices have fallen about $3,000 on average since their 2021 peak, per J.D. Power, though at $25,000 they’re still about $10,000 higher than they were pre-pandemic.

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2nd Gear: Not a Great Year for Tesla

On Tuesday, Tesla’s share price fell to $137.80, its lowest since November 2020. In isolation that sounds like a big loss, but in context it’s much worse. Courtesy Bloomberg, via Automotive News:

The stock was never for the faint of heart, given its volatility and the mercurial style of its CEO, Elon Musk. Still, the magnitude of this year’s rout is staggering: It has lost more than 60 percent through Tuesday’s close, on pace for a record annual decline, and erasing about $626 billion of shareholder value.

Two years after Tesla joined the S&P 500 Index, investors are confronting a new reality. Competition from established major automakers is intensifying, threatening Tesla’s dominant market share. Analysts also see little in the pipeline to reignite the sort of rabid demand for the shares seen back in 2020. Meanwhile, the stock is some 40 percent below the level at which it joined the benchmark.

“This whole narrative about Tesla being a leader in everything they do is waning,” said Jeffrey Osborne, an analyst at Cowen & Co. who has the equivalent of a hold rating on the stock. “Tesla shares tend to work best when you can create a feverish narrative about something coming. It is unclear what is to be excited about it in the new year.”

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It’s a bit strange to read about “nothing coming” as a knock against Tesla, when the company has always existed in this cycle of making massive promises and underdelivering, or at least delivering very late. The brand has remained so strong in the face of everything, it’s odd to hear Tesla finally criticized and valued in the same way normal companies are: based on its products, or lack thereof. The company’s still worth $440 billion though, so it’ll probably be a-OK.

3rd Gear: Volvo Doesn’t Want People to Hate It

BMW and Mercedes-Benz have wasted no time charging owners subscription fees for features that really wouldn’t seem to constitute them. Even Honda is salivating at the premise. Volvo doesn’t want to be like that. Take it away one more time, Bloomberg:

“If you are to charge for software updates, it must be a step change in consumer benefit,” Volvo’s Chief Operating Officer Björn Annwall said in an interview this month. “We will not ask people who have bought a car for 1 million kronor ($96,500) to pay another 10 kronor to get extra heat in the seat.”

[...]

Annwall sees Volvo generating little additional revenue from software until mid-decade. Only if major upgrades become available — a self-driving mode, for example — would Volvo charge extra. “You don’t have to hold the steering wheel — now that’s a step change in user benefit.”

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The rest of the article concerns the state of Volvo’s software, its philosophy toward development, and the current supply-chain situation. It’s worth a read for those other reasons, as Volvo’s become a leader in software among automakers in recent years. But it’s just nice to hear someone say “fuck that” to recurring charges for things that were invented, perfected, and manufactured long before you get your car.

4th Gear: Speaking of the Supply Chain

Reuters has an illuminating story about where suppliers find themselves today in this long saga of limited product. The gist? Things seem better than they’ve been, but there’s still a long way to go.

Conditions have improved in recent months. The backup of ships waiting to unload at U.S. ports, for instance, has dwindled. The latest monthly survey by the Institute for Supply Management showed the percentage of respondents saying supplier delivery times were faster than the month before was the highest since 2009 and those saying they were slower had fallen back below historic trend levels from last year’s record highs. And many commodities have become more readily available.

But supply chains remain far from normal.

“To put it affectionately, I’m playing whack-a-mole every week with suppliers that aren’t delivering,” said [Calder Brothers Corp. vice president of operations Glen] Calder.

He’s not alone in this new game. A recent survey of 179 companies by the Association of Equipment Manufacturers found 98% said they faced continued supply chain problems. More ominously - and surprising, given recent reports like the ISM data about supplies flowing more freely - nearly 60% said they saw problems continuing to worsen.

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As usual, how things are going very much depends on who you ask.

5th Gear: Hard Times for TuSimple

TuSimple, the autonomous trucking startup with a history that has so far invited government scrutiny, will lose a quarter of its workforce, the company announced Thursday. Courtesy Reuters by way of Automotive News:

TuSimple Holdings Inc. said Wednesday it will lay off 25 percent of its workforce, or nearly 350 employees, as the self-driving truck company seeks to chart a course out of the economic upheaval that has been raging throughout the year.

The company said it expects to record a one-time charge of nearly $10 million to $11 million, most of which would be recorded in the fourth quarter.

The downsizing also follows the dramatic removal of CEO Xiaodi Hou in October after an investigation by the company’s board revealed that some employees spent paid hours last year working for Hydron Inc., a startup working on autonomous trucks mostly in China.

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In August, TuSimple also attracted a “safety compliance investigation” from the Department of Transportation in August after one of its self-driving semis self-drove itself into a cement median. People within the company have voiced their concerns to management, particularly over a lack of software review and monitoring, that have apparently fallen on deaf ears. It seems to be a pattern with self-driving startups, doesn’t it?

Reverse: The Best Backmarkers

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Say what you will about Super Aguri, Honda’s short-lived, half-hearted stab at a Formula 1 B-team tasked with trundling around in last year’s cars. Their liveries looked dope, though.

Neutral: Merry Christmas From Your Favorite Carolers

Credit: Fans of Sebastian Vettel via YouTube

Kimi’s like that one kid in the Christmas pageant who forgets how to move, but he’s still smiling through it, god bless him.