Maybe they figure that Carmax's cost of financing will remain high with prevailing interest rates, but they won't ever be able to pass that along?

I happen to work for a captive. We mostly finance things bigger than cars but some things are similar no matter what you're financing. It's like working for a poorly run bank with high funding costs and the primary directive to help the parent company move units. To me it looks like CAF profited nicely during the ultra low rate environment and tight used vehicle supply in their fiscal 2021 and 2022 and that has started to revert back to more normal profitability levels starting in their fiscal 2023.

Looking at the numbers for CAF, their finance income as a % of total managed receivables was unusually high in 2022 at 5.4% compared to a more normal ~3.5% in 2020 and prior. Even the 3.2% through the first quarter of 2024 isn't all that unusual for them looking back to history. Over half of their 2021 business and all of their 2022 would have been funded at extremely low funding costs so no surprise they were highly profitable I would say. Things changed drastically starting in the first quarter of their fiscal 2023 as funding costs skyrocketed at the fastest pace since the credit crisis but their very profitable legacy portfolio probably held up the numbers for last year. I think the mid to low 3s is likely where they end up by year end.

Looking at the same finance income to total used vehicle sales revenue I see a long history of 2.9% up to their fiscal 2020 with a peak up in 2021 to 3.6% and 3.3% in 2022 and back to a normal 2.9% in 2023. That aligns with their pretty constant finance penetration of ~45%.

All that leads me to the opinion that CAF isn't that big of a concern going forward. KMX needs to flow about 4,000 used units through every store like they averaged for ten years up to 2021 and currently they are only flowing about 3,000 units over the last 12 months per store. Their fixed SGA expenses are hurting at those levels and they are doing their best to scale back but still support their growth ambitions. They continued to spend heavily on capex in 2023 and into Q1 which indicates they are committed to their growth plans, primarily through new retail locations. It might take another 12-18mo for the full pipeline of new and used vehicles to normalize but I don't see any reason they can't get back to their normal business by then.

Of course, the world could prove me very wrong.

Jeff