Used vehicles sales rose less-than-expected 9.3% and average transaction price slipped

By JOHN D. STOLL and CHELSEY DULANEY WSJ

A big used-car retailer said on Friday that its average selling prices slipped 1.6% in the fiscal first quarter, a caution flag for a U.S. auto industry that has relied on rising used-vehicle prices to prop up demand for new automobiles.

Virginia-based CarMax Inc. said its average transaction prices in the three months ending May 31 fell to $19,851, down from $20,173 in the same period a year ago. CarMax’s used-vehicle prices cooled in the latter part its fiscal year ending Feb. 28, and the first-quarter data signals the trend is continuing.

The softening in the used-vehicle market began earlier this year, and is closely watched by those who track the close correlation between used-vehicle prices and new-vehicle demand. If the spread between prices for new cars and used cars consistently widen, it raises the likelihood that buyers will be more interested in a pre-owned car.

In its May auto industry brief, the Manheim vehicle auction company said that although the used-vehicle retail market remains historically strong, wholesale pricing has been declining. Black Book, a pricing guide published daily by National Auto Research, reported earlier this week a $15,037 average price for a used vehicle from the 2009 through 2013 model years, down 1.2% in May compared with April and down 13.7% from a year earlier. It said the softening “picked up steam” near the end of the month.

Although auto makers have voiced little concern about the used-car pricing trend to date, the mood could darken as more vehicles come off leases in the coming 12 months and if interest rates rise.

“This could be the beginning of the bursting of the used-car pricing bubble that has been growing for years,” said Dan Hearsch, a director in the automotive practice at consultants AlixPartners. “And since the used- and new-car market are really just one market, that wouldn’t be good news for new-car prices, just compounded by the fact that the Fed appears to be getting serious about raising interest rates.”

At CarMax, annual average used-vehicle selling prices steadily gained since 2009—the last time the company saw a year-over-year pricing decline. New vehicle sales in the U.S. have soared during that stretch, from 10.4 million units in 2009 to a pace of at least 17 million in 2015, which is the strongest clip in well over a decade.

‘This could be the beginning of the bursting of the used-car pricing bubble… ’ —Dan Hearsch, AlixPartners
CarMax reported slightly weaker-than-expected sales growth in its May quarter, though profit met Wall Street expectations. Shares of CarMax, up 8% this year, fell 2.9% in midday trading on Friday.

In the latest quarter, the company reported that used vehicles sales rose 9.3%, while same-store used-car sales grew 4.9% on improved customer traffic and conversion.

CarMax has also been testing its own originations of subprime loans. Total income in its auto finance unit grew 15.3% to $109.1 million.

Overall, CarMax posted earnings of $182 million for the fiscal first quarter, or 86 cents a share, up from $169.7 million, or 76 cents a share, a year ago. Total sales and operating revenue rose 7.1% to $4.01 billion.

Analysts had projected earnings of 86 cents a share and revenue of $4.16 billion, according to Thomson Reuters.

Write to John D. Stoll at john.stoll@wsj.com and Chelsey Dulaney at Chelsey.Dulaney@wsj.com