RICHMOND,
Va. — Eighteen percent of the used-vehicle units sales CarMax posted in the second quarter ending Aug.
31 were originated by third-party subprime finance providers, the
company said in its earnings release earlier this week.

This subprime
penetration is up from 15 percent in the same period of 2012.

In light of the contribution the subprime market made to CarMax's sales increase, an analyst posed a few questions to CarMax management during Tuesday's conference call. He inquired about whether and how the company is managing subprime growth, the risk-benefit relationship that comes with subprime growth and whether subprime finance providers have changed the way they are financing customers given slightly higher interest rates.

As posted in a transcript of the call from SeekingAlpha.com, CarMax chief executive officer, president and director Tom Folliard indicated that the subprime mix as a percentage of sales was actually down a bit from the prior quarter.

He also emphasized that as far as managing subprime growth, CarMax is "not controlling that at all." In fact, the subprime sales the company gets are entirely incremental.

Folliard explained that "the lenders that are approving those customers are only seeing those applications after they've been declined by CAF and all of our other lending partners.

"So as I've said in the past, our view is, at that moment, that is a 100-percent incremental sale," he continued. "It's a sale that we wouldn't have gotten otherwise to that consumer did not have an option for credit.

"So, although it's a lower profit deal for us at that moment, we believe it's 100-percent incremental. And what's been happening over the last few years, as we've said a number of times, it's just our lending partners, again, more and more comfortable with our origination channel," Folliard noted. "I think they've been more aggressive with their offers to our applicants, and it's been terrific for sales. Each individual deal at the moment that it's approved, we think it's a good decision for us. So we really haven't — we're not at a level that we're uncomfortable with."

Regarding the interest rate piece, CarMax chief financial officer and executive vice president Thomas Reedy said:  "As far as the rate environment up, during the quarter, we didn't see any change in our subprime partners' behavior, vis-à-vis what they were doing in the Q1 or across the quarter.

"But obviously, if we see significant changes in the interest rates, just like with CarMax Auto Finance, it impacts the overall math of their – the makeup of their returns, so we would expect them to change behavior in some way," he continued. "How that would be, we can't tell you until it starts to happen. But at this point, we have no reason to think that they are in the mode of change in their buy behavior."

Joe Overby can be reached at joverby@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.