Car retailer Carvana adjusted its outlook for the second quarter to an adjusted gross profit per unit of $6,000, up from the previously projected $5,000. The company is also expecting $50M in EBITDA, which according to an analyst survey by FactSet, would get Carvana to break even. In Q1, the retailer reported an adjusted EBITDA of -$24M, improving from -$291M in Q4 and -$348M in Q1 2022. This is despite a gradual decline in vehicle unit sales from 105,185 in Q1 2022 to 79,240 in Q1 of this year as used car demand softened post-pandemic. Carvana CEO Ernie Garcia attributes the margin improvements to a refocus on profitability, savings, and efficiency. The outlook constitutes a change as the company also had a reputation for overpaying for inventory in order to meet demand.
Driven by a 57% YoY increase in sales in Q4 2021, Carvana sought to further scale its business through the acquisition of Kar Global's Adesa U.S. auction subsidiary for $2.2B in cash in February 2022. Carvana had also ramped up hiring prior to last year's layoffs, growing from 1,864 employees in 2017 to a peak of 21,000 in 2021, according to Pitchbook. In November, the company's vehicles were depreciating at a rate of $25 per day, up from the historical average of $10 per day. This, in part, led it to grow its debt from $5.7B in 2021 to the current amount of $8.7B. Carvana had been working to restructure its debt; however, earlier this month, it decided to cancel a $1B debt swap after creditors refused to exchange their notes. In order to reduce costs, Carvana laid off 4,000 employees in 2022, totaling approximately one-fifth of its workforce. The company also conducted quiet layoffs, reduced worker hours, and froze hiring for some positions in January 2023. Carvana is not the only company that grew its employee count to meet early pandemic demand, as CarMax went from 25,946 employees in 2019 to 35,610 this year. CarMax sales also dropped by 11.4% YoY to $160.6M in the three months preceding February 28. Its retail segment saw a total of 169,884 unit sales during the last quarter, decreasing by 12.6% YoY. CarMax attributes the decline to inflationary pressure, the climbing interest rate, and a drop in consumer confidence. The company also listed interest rates as part of its outlook risks, which also included the effect of the war in Ukraine on the economy.
Carvana stock has been subject to short-seller interest, given its debt situation, with a short ratio of 0.97. By early afternoon on Thursday, shares jumped 55% due to its revised outlook. However, by Friday afternoon, the stock was down 17.79%. Yet, $CVNA was still up 330.24% YTD, following the macro trend for 2023 (CarMax stock is up 29.73% YTD). Used vehicle retail sales were down across companies by 11% YoY in May, with the average used vehicle price increasing by 0.8%. |
