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 far beyond the reach of most people.
Even used cars are plagued by inflation for car buyers.
CarMax, the largest used car dealership in the United States, suffered a sharp drop in sales.
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.
Shares across the industry
On Thursday, shares of CarMax (KMX) plunged more than 24%.
They weren’t the only ones, though, as the shares of other auto dealers all fell.
Shares of rival Carvana (CVNA) fell 23%, while AutoNation (AN), the nation’s largest new car dealership, fell 10%.
Meanwhile, other automakers such as General Motors (GM), Ford (F) and Tesla (TSLA) also had lower shares.
Car prices have risen steadily over the past two years.
A shortage of parts, particularly computer chips, limited supply as consumer demand strengthened.
Rising prices have played a significant role in overall inflationary pressures, as around 40% of US households purchase a car each year.
Over the past few months, the Federal Reserve has been aggressively raising interest rates (at a historic rate) to rein in prices.
The central bank also tried to ease consumer demand and slow the economy.
Used car prices
According to the Consumer Price Index, a key gauge of inflation, used car prices fell 2% last month from January’s record high.
However, the numbers are still up 48% from August 2019.
Meanwhile, new car prices hit a record high in August this year, rising 30% from the past three years.
According to CarMax, the average car price of $ 28,657 over the three months ending in August was 9.6% higher than last year.
However, it was also a 1% drop from the previous quarter.
However, CarMax executives said it wasn’t just the cost of buying and financing a car that drove the sale.
The general pressure on household balance sheets due to 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 messages 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 increased 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, to $75.5 million at the end of its final quarter.