Carvana will be in fight of its life in pivotal 2023


Mounting financial losses, a plunging stock price, nervous creditors and regulatory roadblocks in several states have online used-car giant Carvana Co. on the ropes as it enters 2023 with used-market conditions in decline and facing doubts about its ability to survive without major restructuring.

Carvana must tread carefully in the early months of 2023 as it tries to reduce cash burn, cut costs and squeeze more profit from each used car and truck it sells, say financial analysts closely watching the former stock market darling.

This year has marked a severe tumble for Carvana from the euphoric heights it reached in 2021, when its market valuation at one point topped $60 billion and investors were eager to go along for the ride. Now, Carvana’s market capitalization is below $1 billion after a year in which a slowing market, soaring inflation and interest rate spikes shackled its growth plans. The company made sweeping job cuts in May and again in November, when CEO Ernie Garcia acknowledged the retailer’s “tougher sledding” this year. And the company’s reputation continues to take hits from customer service snarls and regulators’ allegations of licensing and registration violations.

The retailer had charted an aggressive growth strategy for 2022 and expected strong used-car demand to carry over from 2020 and 2021, when Carvana and its auto e-commerce peers enjoyed rocketing interest and spending from consumers shopping beyond traditional dealerships during the coronavirus pandemic. But Carvana is now entrenched in cost-cutting mode and has posted quarterly net losses totaling more than $1.45 billion so far this year. It also is grappling with a large debt load that may be reworked in 2023.

While company watchers are weighing the possibility of bankruptcy, Carvana has some time to work on its problems, some analysts said.

“Bottom line is that odds are that there’s not a bankruptcy filing, Chapter 7 or 11, in the next couple of quarters,” Wedbush equity analyst Seth Basham told Automotive News. “Odds rise as we move closer to the end of 2023 if there are no other changes.”

Basham said he thinks Carvana will make further moves to avoid the possibility of bankruptcy.

Carvana, of Tempe, Ariz., declined to make Garcia or other executives available for an interview for this report. But Garcia talked about the retailer’s changing fortunes last month.

“Making sure that you kind of batten down the hatches and get ready for a time that might be difficult over the next 12 to 18 months and you focus on the things that you know you can do that make a positive contribution now, I think, is important,” Garcia said at an industry event a day before the company’s latest round of job cuts was announced.

Earlier in November, after Carvana reported a $508 million net loss for the third quarter, Garcia detailed the company’s revised plans to favor maximizing per-vehicle profits over increasing its sales volume.

That strategy is distinct from Carvana’s approach in earlier years, when it worked to expand much faster to grab share in the overall used-car market, said Daniel Imbro, a Stephens Inc. managing director covering Carvana, CarMax Inc. and other auto retailers.

Carvana, which was founded in 2012 and went public in 2017, already is a volume juggernaut. It ranks No. 2 on the Automotive News list of the top 100 retailers in used-vehicle sales, with retail sales of 425,237 used vehicles in 2021.

Alan Hoffman, Carvana’s head of external communications and government affairs, touted to Automotive News in a statement that “millions of satisfied customers have responded positively to Carvana’s e-commerce model,” making it the fastest-growing used-car retailer in U.S. history.

“Disrupting any industry is never easy, but especially one that has been around for 100 years,” Hoffman said.

But that growth is slowing. If Carvana sustains its sales pace over the first three quarters to finish this year, it would retail about 443,000 used vehicles in 2022. But its 8 percent volume decline in the third quarter suggests that even that may be unlikely. Either way, the retailer is underperforming its own estimate made early this year of 550,000 vehicles, and its sales are well behind those of its biggest competitor, the long-established No. 1 CarMax that retailed about 925,000 vehicles in its most recent fiscal year.

Still, if Carvana can deliver on its updated objectives, minimizing cash burn, trimming costs and harnessing more profit per vehicle sale, its runway remains “as long as ever,” Zachary Fadem, a Wells Fargo senior equity analyst, wrote in a research note.

Carvana had more than $4 billion in committed financing, unencumbered real estate and other assets at the end of September, said Sharon Zackfia, a consumer equity research analyst at William Blair who covers the retailer plus Vroom and Shift Technologies, its smaller online competitors.

That is “certainly enough to sustain near-term operations,” meaning there is “likely no imminent Chapter 11 restructuring necessary,” Zackfia told Automotive News via email.

The bigger questions, Zackfia said, are how long a sluggish used-car sales environment sticks around and how long it takes for softening retail used-car prices to stabilize at a level that brings shoppers put off by recent high prices back to the market.

Zackfia and Imbro both say Carvana has enough liquidity to make it through 2023. But Zackfia’s model also banks on used-market trends improving early next year; the actual likelihood of that could be imperiled by higher interest rates and greater consumer fragility, she said.

Basham said three events could independently or simultaneously play out soon at Carvana: The retailer could go through a debt restructuring, sell assets to bring in cash or undertake a capital infusion in the form of an equity offering led by Garcia and his father, Ernest Garcia II.

Any of these scenarios could happen in the next few months, Basham said. He is basing that timeline partly off a Bloomberg report this month indicating that some of Carvana’s largest creditors have signed an agreement binding them to act together for a minimum of three months in negotiations with the company in the event of a debt restructuring.

Creditors have no leverage to force Carvana to do anything as long as it keeps making interest payments on its debt and retains cash flow, Basham said.

He, too, estimated Carvana has the cash reserves to make its interest payments through the end of 2023 — but not any longer if it doesn’t address its liquidity situation by then.

The largest chunk of Carvana’s long-term debt — $3.3 billion at an interest rate of 10.25 percent — matures in May 2030.

Basham in a research note described Carvana’s $2.2 billion acquisition of the large ADESA U.S. physical auction business in May as “ill-timed.” That deal added $336 million in annual interest expense for the company and saddled it with more vehicle reconditioning capacity than it needs, Basham wrote.

If necessary, Carvana could raise money by selling real estate, including certain ADESA U.S. locations or other vehicle inspection and reconditioning centers. Both Basham and Zackfia estimated Carvana has roughly $2 billion in unencumbered real estate that could be sold. Basham said Carvana doesn’t need all its current reconditioning capacity, which covers about 1.2 million vehicles annually.

Carvana also must navigate more regulatory scrutiny in 2023.

Multiple state agencies in 2022 cited Carvana for violations about how it processes motor vehicle title and registration paperwork after receiving consumer complaints. The company remains embroiled in several legal battles including in Michigan and in Illinois, two states that actively sought to suspend or restrict Carvana’s ability to operate its vending machine-like locations.

Garcia in an August conference call said he believed Carvana was executing paperwork processing better than ever and at a level “we’re proud of, but certainly not satisfied with.”

Carvana’s leap to prominence before the pandemic was driven in part by robust word-of-mouth recommendations between consumers. The retailer’s customer service and regulatory snags in recent years threaten its image as offering an easier way to buy a car. Many consumers who have purchased from Carvana have taken to social media forums, like Reddit and Facebook, to discuss weekslong or monthslong delays in paperwork processing and vehicle delivery.

Basham told Automotive News the legal actions — plus ensuing negative word-of-mouth and media headlines — have at least partially dinged the company’s image.

Zackfia said that cuts the company is making to bolster profitability “could be impacting the customer experience.”

Chris Pierce, a Needham and Co. senior analyst covering Internet services, told Automotive News he does not believe state-level snafus have meaningfully affected Carvana or harmed its image on a national level.

While the timing of a used-car market rebound remains uncertain, it seems clear that Carvana’s growing pains will stick around if macroeconomic conditions don’t improve quickly in early 2023, and if consumers continue to delay big purchases such as used cars because of affordability concerns.

Carvana could report an increased cash balance early next year — the result of fourth-quarter inventory reductions it planned to make to improve per-vehicle profits, Pierce said. But it also is likely to post another net loss amid low vehicle sales, he said.

But the start of tax refund season — a sweet spot for used-car retailers when consumers are more flush with cash and willing to spend it on vehicles — is coming. A lift from that, combined with Carvana’s cost cuts, could lead to better results in next year’s second quarter, Pierce said.

For Carvana, such a spring awakening would be a welcome turnabout from the winter doldrums it finds itself in today.