The used-cars online dealer, Carvana Co. (CVNA) has been facing multiple blows since its glory days amid the pandemic have ended, which caused it to become the third-fastest company to reach the Fortune 500. The dealer’s stock is down over a huge 83% year to date and has wiped out all of its pandemic-fueled gains as concerns over the impact of higher inflation and peaking borrowing costs continue to rise. The recent disappointing earnings led the company to struggle with raising funds for acquiring ADESA’s physical auction unit and the borrowing on onerous terms for the deal led it to lay off 12% of its workforce following the expansion in order to curb expenses.
At the latest, late registrations and improper tags from the dealer caused Illinois to suspend its license. However, the reports were overlooked by investors as the company shared its plan for becoming adjusted EBITDA positive by 2023, with significant core earnings. CVNA investors have long been battered, and the news brought them a much-needed ray of hope for the stock. Thus, following the investor presentation on Friday, May 13, 2022, the stock rose by a nice 14.07% in late trading, after being down over 17.5% in the past five days alone. Cheerful investors had the stock trading at a price of $43.70 a share in the after-hours session following a gain of 2.43% in the prior trading.
License Suspension in Illinois
According to Barron’s, Illinois has suspended CVNA’s dealer’s license as it had been supplying customers with out-of-state temporary plates improperly and failed to have the titles transferred to cars sold there in the given time. Customers’ complaints led the state authorities to conduct an investigation which resulted in the license suspension on Thursday. But luckily, investors were more than excited about the company’s plan (as disclosed on Friday in an investor presentation), than to pay heed to one more negative news regarding the company.
CVNA’s Investor Presentation
According to the company’s latest investor presentation, CVNA sees significant core earnings for 2023 as it plans to curb SG&A expenses while generating positive free cash flow and attaining profitability. For generating a sportive free cash flow, the company plans to better manage its capital expenditure and attain self-funding without any need for equity or debt funding. GPU, SG&A, and retail unit efficiencies are also part of the plan.
The company’s recent 2500 employee lay-off (12%) was also a part of reducing the expenses and better matching staff levels with sales volume. CVNA plans to further align the two through in-sourcing in operational groups, better optimization, as well as lower payroll. Additionally, the company also plans to reduce its advertising and dollar spend up ahead. To achieve a “significant” positive EBITDA for 2023, the company plans to slash the capital expenditure budget on a quarterly basis.
ADESA’s Acquisition and the Blows
The car dealership recently acquired ADESA’s U.S. physical auction business from KAR Global. While the acquisition bought it 56 ADES U.S. locations, the deal went through after a fair share of troubles and hurdles. After posting worse-than-expected earnings, the company’s financial crisis spilled over into debt markets as it struggled to sell bonds to raise funds for the $2.2 billion ADESA deal. Thus, the company was then forced to turn to Apollo Global Management, Inc. for $1.6 billion to save the deal. Apollo bought half of the company’s debt, but the new bonds fell, leaving the company with a vulnerable balance sheet at costly financing that kicked the liquidity can down the road.
With borrowing on onerous terms, CVNA was then forced to let go of roughly 12% of its employees to help manage expenses amid its costly expansion. While the lay-off was taken negatively in itself, how it was done was another whole story. Claims suggest employees were shocked as they were let go through a mere email.
While ADESA and CVNA are enthusiastic about the collaboration expecting to bolster growth, volatility and uncertainty have been battering the care market as supply chain bottlenecks continue amid the peaking inflation and rising interest rates on top of the wider economic instability.
A Quick Peek at CVNA’s Latest Earnings
In the latest earnings report for the March quarter of 2022, CVNA came out with its first sales dip since 2014. The quarterly loss expanded to $2.89 a share against the prior year’s 0.46 per share, while analysts were expecting $1.72 per share.
Moreover, the gross profit went down by 12% to $298 million while revenue was $3.4 billion just above the analysts’ expectations with a YOY increase of 56%.
While previously, the company said that it expects to achieve above $4,000 GPU and approximate EBITDA breakeven in the last three quarters of 2022; it has now pushed the outlook back a few quarters.
Demand has been waning for used cars (new as well) amid the semiconductor chip shortages on top of spiking inflation and rising interest rates as the economy continues its downfall and recession looms overhead. Contributing to the downfall have been impacts from the war in Ukraine, the omicron variant, and the wider geopolitical and economic instability. Consequently, the fan-favorite and pandemic darling, CVNA has plunged exponentially as the used-car market has taken a hit altogether. The car boom has become a car bust, leaving CVNA in a vulnerable financial position, and forcing it to lay off employees even. But the company remains hopeful as it shared a detailed plan for how it intends to achieve profitability by 2023.