CarMax’s tough Q2 results set off alarms

CarMax Inc.’s soft fiscal second-quarter financial results paint a grim picture: Persisting inflation, high retail prices and climbing interest rates are prompting consumers to put off buying used cars and trucks. The challenges have the used-car giant cutting costs to better match sales levels.

The retailer‘s volume and profit drop stoked fears of a more prolonged demand deterioration in the used-car market. CarMax’s share price dropped 25 percent on Thursday, Sept. 29, the day it reported earnings, and stock prices for competitor Carvana Co. and other public retailers also tumbled. It marks a significant reversal from just one year ago, when retailers were reporting sustained high demand and robust profits for used vehicles and enjoying high share prices.

CarMax retailed 457,889 used vehicles in the six months ended Aug. 31, down 8.9 percent from the year-earlier period. Company leaders said vehicle affordability pressure that bubbled up at the start of 2022 appeared to strengthen and sustain throughout the summer.

CarMax reported net income dropped 56 percent to $125.9 million.

Industry sales have been hurt by “a shift in consumer spending prioritization from large purchases to smaller discretionary items,” CarMax CEO Bill Nash said after the company reported results.

CarMax’s same-store vehicle sales fell 8.3 percent year over year during the summer months, dropping at a low single-digit rate in June but accelerating in July to sharper drops that underperformed expectations.

The demand drop occurred “almost solely because of the affordability issues,” said Daniel Imbro, a Stephens Inc. managing director covering CarMax and other auto retailers.

Retail ‘mismatch’

CarMax leaders said the company is trying to respond to consumers’ shifted preferences by offering a higher mix of lower-priced vehicles. Affordability woes mean CarMax likely will continue that strategy over the near-to-intermediate term, Imbro said.

“That’s where I think the mismatch on the retail side has been: There’s still demand for used vehicles; it’s just demand for cheaper vehicles, and right now there’s a dearth of affordable used inventory,” Imbro told Automotive News.

Demand for used vehicles has been softening for a few months, and investors are concerned that new-vehicle demand will also deteriorate as part of a larger consumer pullback, Imbro said. But he isn’t seeing that yet. New-vehicle inventories are still lean, and demand remains, he said.

Cost cuts

CarMax moved to better align its expenses to its sales levels in its second quarter, CFO Enrique Mayor-Mora said.

That included “reducing staffing through attrition” in the company’s stores and customer experience centers, hitting pause on a portion of hiring and contractor utilization in its corporate offices, and reexamining its marketing spend, Mayor-Mora said. The company didn’t provide a dollar number for the cost cuts, nor did leaders say how many staff positions were or are being eliminated.

If employees leave critical positions, CarMax will replace them, Nash said. But the company will first reassess vacant positions to make sure they would still support near-term initiatives if filled, he said.

Nash said CarMax’s wholesale volume was hurt in the quarter by the company’s decision to shift some vehicles from its wholesale channel to its retail business. The company also slowed vehicle purchasing for inventory in reaction to the shifting market conditions that included steep depreciation in wholesale values.

CarMax ranks No. 1 on Automotive News‘ list of the top 100 retailers ranked by used-vehicle sales, with retail sales of 924,338 used vehicles in 2021.

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New Mercedes-Benz coupe concept is designed for the virtual world

Mercedes-Benz this week unveiled a concept celebrating a partnership with “League of Legends” and the video game’s Riot Games publisher.

The concept is strictly for the virtual world, and as a result the design team, led by Mercedes design chief Gorden Wagener, could create elements not possible in the real world.

“Because of the virtual space, there are no limits to what we can do, which means we can push boundaries and give our creativity the space for the unexpected,” Wagener said in a statement.

The concept is a dramatic coupe that looks like it is made from glass, including the wheels which are perhaps protected by some protective shield. The concealed wheel design may or may not be a nod to Audi’s RSQ concept from 2004, whose proportions are somewhat similar to the Mercedes.

While the Audi RSQ appeared in the 2004 sci-fi film “I, Robot,” Mercedes’ concept features in a music video tied with the 2022 “League of Legends” World Championship tournament which runs in North America from Oct. 29 to Nov. 5.

Mercedes since 2020 has been the exclusive automotive partner of Riot Games, and in 2021 Wagener and his team designed the championship ring for the “League of Legends” Championship. The ring features tiny Mercedes stars, as well as a synthetic diamond made from CO2 captured from the atmosphere.

“Winning the hearts of gaming fans is an exciting challenge,” Britta Seeger, Mercedes’ head of sales and marketing, said in a statement. “Together with Riot Games we are in the best condition to inspire the community and to successfully shape the future of esports.”

EV startup Arrival in talks on funds to launch in U.S. market

Electric-vehicle startup Arrival SA‘s shares surged after it said it’s in talks to raise capital to build and sell its products in the U.S.

The company, which is primarily UK-based, also said it’s a step closer to operating so-called microfactories to produce battery-powered vans. The shares rose more than 15 percent in premarket U.S. trading Friday morning.

Arrival said it reached a key milestone Thursday with a first production verification vehicle completed at its Bicester facility. Denis Sverdlov, founder and chief executive officer, says the step proves that the microfactory concept, using autonomous robots instead of a production line, works.

The next step for Arrival is the U.S., where President Joe Biden’s Inflation Reduction Act offers massive rebates on electric vans. To cash in on an expected surge of demand, Sverdlov says Arrival plans to build multiple microfactories in the U.S. However, it needs to raise capital for that — Sverdlov estimates the cost of a plant at $50 million, with a further $50 million needed for working capital.

Arrival declined to comment on how much capital it was seeking. It has multiple avenues, including loans under the U.S. government’s Advanced Technology Vehicles Manufacturing Loan Program, strategic partnerships, and licensing its intellectual property, said Avinash Rugoobur, Arrival’s president.

Sverdlov said he wasn’t concerned about interest dropping off due to recent economic uncertainty across the world. Demand is many times more than supply, with few to no competitors in the large van space, he said.

Arrival has an order from United Parcel Service Inc. to supply 10,000 vans, and Rugoobur said the company will begin road tests with UPS in London shortly.

The company, which listed via a reverse merger with a special purpose acquisition company, has seen its shares plunge 94 percent in the last 12 months.

The stock is currently trading near an all-time low, yet Sverdlov says he doesn’t regret taking the company public.

“I will not say we regret this because we raised $1.4 billion from the public markets,” he said. “Raising that through the private markets at that time was almost impossible.”

New York state plans to adopt California 2035 EV rules

New York state plans to adopt California’s rules approved in August that would require all new vehicles sold in the state by 2035 to be either electric or plug-in electric hybrids, Governor Kathy Hochul said Thursday.
Hochul said in a statement that she has directed a state environmental agency to propose and finalize rules adopting California’s plan setting yearly rising zero-emission vehicle rules starting in 2026 that phases out gasoline-only new car sales by 2035.
The agency will hold a public hearing before the rules are finalized.
The California Air Resources Board (CARB) adopted its rules after Governor Gavin Newsom issued a 2020 executive order directing the move. CARB said the rules will reduce smog-causing pollution from light-duty vehicles by 25 percent by 2037 and result in 9.5 million fewer conventional vehicles sold by 2035.
Automakers must sell 68 percent of sales by 2030 as EVs or plug-ins and by 2035 can sell no more than 20 percent of models as plug-in hybrids.
“With sustained state and federal investments, our actions are incentivizing New Yorkers, local governments, and businesses to make the transition to electric vehicles,” Hochul said.
California needs a waiver from the U.S. Environmental Protection Agency to adopt the 2035 rules.
President Joe Biden has called for 50 percent of all new vehicle sales by 2030 to be EVs or plug-in hybrids but not endorsed a phase-out date.
Some states that previously adopted California’s zero emission vehicle rules have not yet signed on for the tougher 2035 phase-out date.
A spokesman for Colorado’s environmental agency told Reuters, “Colorado is certainly not California and Colorado has our own plan.”
CARB chair Liane Randolph told Reuters this month “some states are ready right now” to adopt 2035 rules while others will “get more comfortable as the models continue to roll out.”