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CarMax Slumps as Subprime Lenders Tighten Credit Access

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Dec. 20 (Bloomberg) -- CarMax Inc. declined the most in more than two years after the largest U.S. seller of used cars reported quarterly profit that missed analysts’ estimates and said third-party lenders are getting stricter on subprime loans.

CarMax fell 9.4 percent to $48.08 at the close in New York, the steepest decline since September 2011. The stock has climbed 28 percent this year, outpacing the 27 percent rise in the Standard & Poor’s 500 Index.

CarMax plans to begin testing subprime auto loan originations through its finance unit after the Richmond, Virginia-based company said that its lending partners began to tighten their terms. Net income in the quarter ended Nov. 30 rose to $106.5 million, or 47 cents a share, from $94.7 million, or 41 cents, a year earlier. The average estimate of 14 analysts surveyed by Bloomberg was for a profit of 48 cents.

“Customers with challenged credit have become a meaningful part of our overall business, and they’re a meaningful part of the used car market,” Tom Reedy, CarMax’s chief financial officer, said on a conference call with analysts. “So we feel like we owe it to ourselves to get smarter about this space.”

CarMax plans to originate about $70 million of subprime loans in the next 12 months, according to the statement.

While surging sales of new cars and light trucks have been one of the bright spots in the U.S. economy, the auto market’s growth has increasingly been fueled by borrowers with imperfect credit. Such new-car buyers have been accounting for more than a quarter of loans for new vehicles, the highest proportion since Experian Automotive started tracking the data in 2007.

To contact the reporter on this story: Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net

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