Home REITs Carvana, the 'Amazon of Car Dealers', Is in Deep Trouble

Carvana, the 'Amazon of Car Dealers', Is in Deep Trouble

by WOOWinvest
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Carvana, the 'Amazon of Car Dealers', Is in Deep Trouble

Caravana is now taking drastic steps to cut costs and generate cash flow.

When Ernie Garcia talks to analysts at Carvana (CVNA) – Get Carvana Co. Class A ReportOn an earnings call last month, the company’s CEO said the used car retailer’s first quarter has been “challenging.”

“Some places are more bumpy than others,” Garcia said, according to the call transcript. “Unfortunately, in the real world, they’re rarely a perfect straight line to anywhere.”

‘Confidence-shattering quarter’

The company just posted a “shattered quarter,” in JPMorgan’s words, as it reported a loss of $2.89 per share, well above the FactSet forecast of a loss of $1.44 per share.

Garcia cited factors such as omicron variants of Covid-19, used car prices and rising interest rates as contributing factors to the company’s disappointing quarter.

Shares of Carvana have fallen 83.4% since January to $38.40 at the time of writing. During this period, the market capitalization plummeted to $6.82 billion from $20.84 billion on Dec. 31. Basically, $14 billion in market cap has evaporated in less than five months.

Carvana, which went public in 2017 and is known as the “Amazon of car dealerships,” has been taking aggressive steps to turn things around, including laying off 2,500 employees, or about 12 percent of its workforce.

The company’s executive team will also forgo salaries for the rest of the year to cover severance packages for departing employees.

“We believe that these decisions, while extremely difficult, will result in Carvana restoring a better balance between its sales and staffing levels, and enabling Carvana to return to efficient growth in its mission of changing the way people buy and sell cars,” Carvana said in a statement. stated in the report. Regulatory filing.

The company announced on May 10 that it had acquired ADESA’s brick-and-mortar auction business for $2.2 billion. However, according to the Wall Street Journal, Apollo Global Management had to step in and put in $1.6 billion to salvage the deal.

“I think we feel good about the ADESA acquisition and the overall trajectory we’re in,” Garcia said on an analyst call.

On May 13, the company posted a slideshow on its website outlining its plans to cut costs and generate free cash flow.

Carvana said it will prioritize rapidly reducing selling, general and administrative expenses per retail unit “while being mindful of minimizing constraints on growth or impact on customer experience.”

‘Provide some clarity’

Wall Street initially appeared impressed with the plan as the stock climbed on May 16, but ended up gaining less than 1% to $38.23, 88% below its July 13, 2021, closing price of $323.07.

Several analysts, including Deutsche Bank’s Emmanuel Rosner, cut their price targets.

“We believe this report provides some needed clarity on the company’s operating plan that investors have been looking for beyond the first quarter, but execution will be key,” Rosner said, adding his price target Downgraded to $54 from $95 while maintaining hold. “We see significant upside if management can successfully achieve its goals, but it does not have a proven track record in cost reductions and needs to show tangible progress in the coming quarters.”

The company launched its first car vending machine in November 2013 and went on sale four years later.

Carvana is largely a family affair, as Garcia’s father, billionaire Ernest Garcia II, is a major shareholder in the battered company.

Garcia Sr. pleaded guilty to felony bank fraud charges in 1990 in connection with the collapse of Charles Keating’s Lincoln Savings and Loan Association and served three years of probation.

In 1991, he bought Ugly Duckling, a bankrupt car rental franchise, for $1 billion. Garcia II took the company public in 1996, took it private six years later, and renamed it DriveTime.

A young Garcia joined DriveTime in 2007 before co-founding Carvana with Ryan Keeton and Ben Huston. DriveTime is Carvana’s largest shareholder.

The father and son lost about 80% of their wealth in nine months.

Garcia Sr.’s total net worth is $5.23 billion, down $9.63 billion since the start of the year, according to the Bloomberg Billionaires Index.

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