Carvana to add prep centers to turn cars

Online used-vehicle retailer Carvana Co., which last week said demand continues to eclipse its vehicle-preparation abilities, plans to add 10 inspection and reconditioning centers over the next two years to double annual reconditioning capacity to more than 1.25 million vehicles.

Carvana has 11 reconditioning centers, up from seven at the end of 2019, which grew its production capacity to 617,000 vehicles a year. It will add two centers this year and eight more in 2022, the company said last week as it announced a widened fourth-quarter loss, even as revenue, retail sales and vehicles sourced from consumers soared.

"The demand that we're seeing, I want to reiterate, is very, very strong," Carvana CEO Ernie Garcia told analysts and investors in a fourth-quarter earnings call last week. "We're clearly seeing materially more demand than we're going to be able to satisfy this quarter and probably for the remainder of the entire year, and we're going to work very hard to try to catch back up."

Garcia said Carvana's January sales surged 80 percent amid outstripped demand and as inventory was halved from January 2020. Carvana said it had just 9,500 vehicles immediately ready for customers in January, down from 12,800 in the fourth quarter and 25,300 in April 2020.

The company, in its fourth-quarter letter to shareholders, blamed the decrease on "significant COVID-19-related constraints in our inspection and reconditioning centers."

The company also said in its letter that its growth surge in December and January also "exacerbated constraints in our logistics network, leading to increased average delivery times."

But Garcia said reconditioning capacity improving early this year has helped generate some additional inventory, which then quickly sold. Carvana added two reconditioning centers in the fourth quarter.

"While we still are constrained, I think what we saw in January is we saw the benefit of this 40 percent increase in production that happened from December to now that has been very helpful," Garcia told analysts. He said February so far "looked a lot like January" and that "we've got a lot more demand than we're able to satisfy given our limited inventory."

Following Carvana's earnings report, its shares on Friday, Feb. 26, rose 7.5 percent to $283.50.

Some analysts see Carvana's capacity issues continuing.

"Capacity constraints are a bottleneck to serve the strong demand and unlikely to ease quickly," J.P. Morgan Securities analyst Rajat Gupta wrote in a note to investors last week.

Garcia said Carvana's vehicle supply woes lie in its reconditioning centers. They generally have "ready access" to vehicles and are sourcing more vehicles from consumers, he said.
The company bought 204,000 vehicles from customers last year, up 95 percent.

Carvana entered 120 markets last year to end 2020 operating in 266 U.S. markets, covering nearly 74 percent of the nation's population. It expects to grow to more than 300 markets this year, reaching up to 80 percent of the country's population. As of Dec. 31, Carvana had 27 vending machines operating, up from 23 a year earlier.

The company, which reported a bigger net loss in 2020, grew its sales by 37 percent to 244,111, which it said makes Carvana the second-largest used-vehicle seller in the U.S. behind CarMax Inc.

Carvana, of Tempe, Ariz., ranked No. 4 on Automotive News' list of the top 100 retailers based in the U.S. in used-vehicle sales, retailing 177,549 in 2019.