June 4, 2023

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Carvana shares bounced back despite the “unique challenging environment” that hurt profits

Carvana shares bounced back despite the "unique challenging environment" that hurt profits

Shares of Carvana Co. made a rebound in after-hours trading on Wednesday after the used-car retailer admitted that industry-wide and company-specific issues affected its business in the first quarter, but said it had plans to address its challenges.

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In its letter to shareholders, it noted that the omicron variable and used car prices were among the factors affecting the broader industry this quarter, while the company also dealt with some of its own issues around “renewal and logistics network disruptions.”

“We are generally preparing for volume 6 to 12 months in advance, which means we have built capacity in most of our business functions for much greater volume than we achieved in the first quarter,” the company said in its letter. “Given our relatively fixed costs in the short term, lower retail unit volume has resulted in higher cost of goods sold per unit.”

CEO Ernie Garcia III said on the company’s earnings call that Carvana is trying to overcome its challenges. He told investors that the company’s “logistics team has clear plans in several key areas” to bring its metrics back to where they were and then “significantly overtaken”. In addition, Carvana intends to build its own selection of affordable cars.

Shares fell as much as 25.7% earlier in after-hours trading on Wednesday, according to market data from Dow Jones, but returned to close the extended session 4.6% higher. They were down about 9% in the regular Wednesday session.

Carvana posted a net loss of $506 million last quarter, compared to a loss of $82 million a year earlier. It recorded a net loss of $260 million attributable to the company, while it caused a loss of $36 million on the same scale in the previous year.

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Carvana lost $2.89 a share in the quarter, compared to 46 cents a year earlier. The consensus of FactSet was a loss of $1.58 per share.

Revenue rose to $3.5 billion from $2.2 billion, while analysts tracked by FactSet were modeling at $3.4 billion.

“While we faced a uniquely challenging environment in the first quarter, we are already seeing positive trends across our key metrics,” the company said in the shareholder letter.

However, due to “current industry trends affecting customer affordability, higher used car prices, rapid movements in interest rates, rapid increases in fuel prices, and other macroeconomic uncertainties affecting the used car market.” Carvana said it would not provide a “definitive” near-term numerical guidance for the 2022 balance.

Carvana was candid in its shareholder letter, acknowledging that the quarter was “difficult,” but noted that the company also sees an “opportunity” to improve business in part due to “weaknesses” revealed amid the current environment.

“While the quarter was undoubtedly a step back in our financial results, we will work diligently to make it mark an even larger step forward in achieving our goal of becoming the largest and most profitable auto retailer,” the letter read.

Separately, the company announced that it intends to offer $1 billion in a new series of perpetual preferred stock, in addition to $1 billion in Class A common stock. The company said in a statement that Ernest Garcia II and CEO Ernie Garcia III, along with the entities they control, have expressed interest in acquiring up to $432 million in total Class A common stock.

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