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

The company is now resorting to tough measures to cut costs and generate cash flow.
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When Ernie Garcia spoke with analysts during Carvana's (CVNA) - Get Carvana Co. Class A Report earnings call last month, the company's chief executive officer said the used-car retailer's first-quarter had been "challenging." 

"Some quarters are bumpier than others," Garcia said, according to a transcript of the call. "Unfortunately, in the real world, they are rarely perfectly straight lines to anywhere."

'A Confidence Shattering Quarter'

The company had just posted a "confidence shattering quarter," in the words of J.P. Morgan, as it reported a wider-than-expected loss of $2.89 a share, much higher than the FactSet's expected loss of $1.44 a share.

Garcia cited such factors as Covid-19's omicron variant, used vehicle prices, and interest rate rises as contributing factors to the company's disappointing quarter.

Since January, Carvana shares have fallen 83.4% to $38.40 at the time of writing. Market capitalization collapsed over the period to $6.82 billion from $20.84 billion on December 31. Basically, $14 billion of market cap has been wiped out in less than five months.

Carvana, which went public in 2017 and had been described as "the Amazon of car dealers", has been taking aggressive measures to turn things around, including laying off 2,500 employees, or about 12% of its workforce.

The company's executive team will also forgo their salaries for the remainder of the year to contribute to the severance pay for departing employees.

"We believe these decisions, while extremely difficult, will result in Carvana restoring a better balance between its sales volumes and staffing levels and facilitate Carvana returning to efficient growth on its mission to change the way people buy and sell cars," Carvana said in a regulatory filing.

The company announced on May 10 announced it had closed on the $2.2 billion acquisition of ADESA's physical auction business. However, Apollo Global Management had to step in and put up $1.6 billion to salvage the deal, according to the Wall Street Journal.

"I think we feel great about the ADESA acquisition and the overall trajectory that places us on," Garcia said during the analysts call.

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

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Carvana said it would prioritize rapidly reducing SG&A--selling, general and administrative--expense per retail unit sold "while taking care to minimize constraints on growth or impacts to customer experience."

'Providing Some Clarity'

Wall Street seemed initially impressed with the plan as shares climbed on May 16, but they ended up less than 1% higher at $38.23--88% lower than the July 13, 2021 closing price of $323.07. 

Several analysts slashed their price targets, including Deutsche Bank's Emmanuel Rosner.

"We believe the presentation provides some needed clarity on the company’s operational plan, which investors have been looking for post Q1, but execution will be key," said Rosner, who cut his price target to $54 from $95 while keeping a hold rating. "We see significant upside if management can successfully deliver on its targets, but it does not have a strong track record in terms of cost reduction and will need to demonstrate tangible progress in the quarters ahead."

The company, which opened its first iteration of a car vending machine in November 2013, went public four years later. 

Carvana is very much a family affair, as Garcia's father, billionaire Ernest Garcia II is a major shareholder of the battered company.

The elder Garcia pled guilty in 1990 to a felony bank fraud charge related to the collapse of Charles Keating's Lincoln Savings and Loan Association, and spent three years on probation.

In 1991, he  bought Ugly Duckling, a bankrupt rent-a-car franchise for $1 billion. Garcia II took the company public in 1996 and then took it private 6 years later and renamed it DriveTime.

The younger Garcia joined DriveTime in 2007 before co-founding Carvana with Ryan Keeton and Ben Huston. DriveTime is Carvana's largest shareholder.

Father and son have lost an estimated 80% of their wealth in nine months. 

The elder Garcia has a total net worth of $5.23 billion, according to the Bloomberg Billionaire Index, down $9.63 billion since the beginning of the year.