Carvana rose to prominence but is now falling behind car dealership rivals

Carvana co

CVNA -10.91%

joined the post-pandemic cast of Losers, which includes Netflix inc

and Peloton Interactive inc

when investors scrapped the company’s ambitious growth targets and sold its shares.

Shares of the online used-car dealership are down 20% in the past two days and nearly 80% from their peak last summer. Carvana’s earnings on Wednesday exposed its failure to prop up the used-car market even as it borrowed billions of dollars to generate growth.

“We built for more than we showed,” said Ernie Garcia III, the company’s chief executive officer, during a earnings call on Wednesday.

A pricey deal for a used-car auction company forced Carvana to announce the sale of $2 billion in common and preferred stock at the current low price. Analysts likened the move to tearing off a band-aid to improve the shaky record. Carvana has burned money in the 10 years it’s been in business.

Chief Financial Officer Mark Jenkins said on the earnings call that raising so much capital will allow the company to keep expanding and “stop having conversations about liquidity and what’s going on in a deep recession and a prolonged recession and all of that.” things happened. ”

Carvana’s sales for the last three months declined compared to the fourth quarter of last year, and its net loss increased to $260 million from $36 million in the prior year.

The company blamed hard economic factors – rising interest rates, higher gas prices and inflation-wearied consumers. Analysts criticized it for spending too much on marketing and labor without anticipating the possibility of a slowdown, which Mr Garcia acknowledged.

“The constant pressure to grow often dominates our priorities and slows our progress,” Mr. Garcia said on the conference call.

This growth obsession puts Carvana in the same league as Netflix and Peloton, which are now valued at much slower growth rates. Having failed to disrupt its industry, Carvana now faces serious competition from established players that are performing well despite macro headwinds.

As new car inventories were impacted by the challenges of factory production, many buyers flocked to used cars, creating a seller’s market for dealers, leading them to charge more.

According to JD Power, the average dealer profit on a used car in the first quarter was about $3,600. That’s about 39% higher than average earnings from the first quarter of 2021, the research firm’s data shows.

AutoNation inc

on Thursday reported net income of $362 million in the first quarter, up 51% from the same period last year. Used car revenue increased 47% for the quarter, lifting total sales to $6.75 billion. Still, gross profit on used vehicles fell to $1,566 per vehicle, down 10% from the year-ago period.

lithium engines inc,

an aggressive dealership acquirer, said profits more than doubled from a year earlier to $342.2 million. Average gross profit per unit for used vehicles increased 32% to $3,037.

Tina Miller, Lithia’s chief financial officer, said her company sidestepped the affordability issue by selling vehicles that are up to 20 years old. That means it can lead customers to cheaper options if they can’t afford the model they want. “It’s something you really need to invest in with your business,” Ms. Miller said.

Carvana is working on plans to increase customer choice of more affordable vehicles, Mr Garcia said on Wednesday’s call.

The company has gone haywire with its $2.2 billion acquisition of auction company ADESA US, which is expected to close next month.

Carvana told investors in February that it had about $3.3 billion in committed debt financing from JPMorgan Chase & Co. and Citigroup Inc. Investors feared that the debt burden would be too high and expected interest rates on the borrowings to be far higher than what the company is paying. The company currently has just over $3 billion in long-term debt on its books.

Selling shares will help Carvana control its interest expenses, said John McClain, portfolio manager at Brandywine Global Investment Management, one of the company’s debt investors. “If you’re an unsecured bondholder, breathe a sigh of relief,” he said.

write to Kristin Broughton at

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