Carvana strikes deal to cut debt by $1.2 billion; net losses narrow in Q2

After months of bad news, Carvana celebrated a couple of victories Wednesday.

The online used-vehicle retailer announced a deal to reduce its total debt by more than $1.2 billion. And the company said its second-quarter adjusted earnings before taxes and other expenses swung to $155 million compared with a $216 million loss in the same quarter last year.

Carvana shares surged 40 percent when the market closed Wednesday, closing at $56.

Carvana's agreement with a group of note holders will eliminate more than 83 percent of its unsecured notes maturing in 2025 and 2027 and lower required cash interest expense by more than $430 million per year for the next two years.

"This transaction significantly increases our financial flexibility by reducing our total debt, extending maturities and lowering near-term cash interest expense as we continue to execute our plan of driving significant profitability and returning to growth," CFO Mark Jenkins said in a statement.

The deal largely eliminates 2025 and 2027 maturities.

“After completing this exchange, we don’t have a meaningful note maturity until December 2028,” Jenkins said during a call with analysts. “I think that’s really great from a flexibility standpoint.”

Carvana said its total gross profit per unit, or GPU, surged 94 percent to $6,520 — exceeding the company’s previous best quarter by 27 percent.

“This retail GPU in quarter two was driven by several fundamental improvements in our business as well as some seasonal and market tailwinds,” Jenkins said.

The macroeconomic and industry environment remain uncertain, Jenkins said on the company's earnings call, but Carvana expects to be able to perform similarly in the third quarter as it did in the second quarter.

Despite notching its best quarter ever, the company remains in the red. Carvana reported second-quarter total revenue of $2.97 billion Wednesday, a drop of 23 percent, with a net loss of $105 million. This is a significant improvement from the $439 million net loss a year ago.

The used-vehicle giant struggled in 2022; struck by inflation and a weakening used-vehicle market, the company's stock plummeted 98 percent, erasing almost $37 billion of market capitalization.

A reduction of growth initiatives and inventory size in early 2023 saw the company sell fewer cars but ultimately perform better, with improved total per-vehicle profit and a slimmer net loss.

That trend continued in the second quarter. Carvana sold 76,530 vehicles — even less than in the first quarter — but gross profits per unit improved again, climbing to $6,520, nearly double what it was in the second quarter last year.

Doing more with less

"It was a great quarter for Carvana," CEO Ernie Garcia said on a conference call Wednesday. "Today the company is functioning better than it ever has."

The second quarter's relative success was driven by higher-than-normal volume of loans held and sold, successful reduction in inventory, seasonal strength of the used-vehicle market and lower-than-expected used-vehicle price depreciation.

The company reduced inventory by 12 percent sequentially and 55 percent year over year, according to a statement from the company. Going forward, the company plans to keep inventory size at approximately current levels, which Jenkins said is now at a healthy ratio to sales volume.

"Our inventory size now, relative to sales volume, is back to normalized volumes," he said.

The company also has significantly reduced its selling, general and administrative (SG&A) expenses in the last year, from $649 million in the second quarter of 2022 to $383 million in the second quarter of 2023.

"We believe the cost reductions we have achieved are long lasting and sustainable, and we believe we have further efficiencies to realize," Jenkins said Wednesday.

“We continue to make progress at reducing SG&A expenses,” Jenkins said. “Primarily driven by continued reductions in non-advertising expenses.”

The company still has room to trim expenses over time, according to Jenkins, with primary expense reduction drivers including automating manual work, increasing funnel conversion rate and trimming corporate, tech and facilities costs.

Analysts' reaction

Deutsche Bank Research analysts said Carvana’s second quarter EBITDA results were “noticeably better than expected” at $155 million, compared with guidance of $50 million. That positive result was enabled by the cuts in expenses, the firm said.

Stephens Inc. analyst Daniel Imbro said Carvana has been signaling it wanted to do a debt exchange, but after an attempt to do so failed this spring, many investors wondered whether the company would be able to revisit that option.

Imbro said Carvana’s restructuring decision is a reflection of the current market and the company's hopes for the future.

“They recognize it’s still a challenged used (car) market out there,” Imbro said. “I do think it’s prudent to get themselves flexibility in case this downturn lasts longer.” The deal is “definitely a positive for the cash burn outlook for the next couple of years,” Imbro said.

He expects the used-car market to stay challenging well into 2024, with affordability remaining a key issue, but eventually improve.