Carvana's Q4 net loss up to $806M

Online used-vehicle retailer Carvana Co. closed out a difficult 2022 by further pulling back on growth endeavors, choosing instead to prioritize cost cuts and trimming inventory, as it continues to work to bolster profits.

That cost-cutting, coupled with weaker used-vehicle market conditions in the fourth quarter, led the retailer to post results that fell short of several analysts' expectations.

Carvana, of Tempe, Ariz., recorded a larger-than-expected fourth-quarter loss attributable to the retailer of $806 million, bringing its total losses for the year to about $1.6 billion. The retailer sold 412,296 vehicles in 2022 — 12,941 fewer than 2021 — marking the first time in its 10-year history that its annual retail sales dropped.

Carvana in 2022 was impeded in a big way by soaring inflation, interest rate spikes and vehicle affordability concerns that caused consumers' demand for used vehicles to wane. Its stock price plunged 98 percent last year while concerns also bubbled about the company's debt load, which stands at more than $8 billion. That figure includes $1.5 billion of floorplan debt.

2022 marked "a massive change in priorities for the company," CEO Ernie Garcia said last week on Carvana's earnings call.

The company is aiming to reduce its selling, general and administrative expenses by about $100 million by the second quarter. Those reductions will be "broad based," but the company does not expect a work force reduction as part of that plan, Garcia said on the call.

Analysts who watch the company say it remains to be seen whether Carvana's course corrections will be enough to right the online retailer.

Carvana sold 86,977 vehicles in the fourth quarter, a 23 percent decline from the same period a year earlier, while the gross profit it made on each vehicle sale plunged by more than half to $2,219.

Carvana said it reduced its nationally pooled inventory to 63,992 as of Dec. 31, down 7,070 vehicles — nearly 10 percent — from 71,062 at the end of 2021, according to a regulatory filing. It said it slimmed its vehicle stocks in the fourth quarter to speed inventory turns and reduce vehicle depreciation.

Zachary Fadem, an analyst with Wells Fargo, wrote in a research note last week that Carvana's fourth-quarter results do contain some bright spots, especially if inventory reduction actions help it return to gleaning at least $4,000 gross profit per vehicle sold.

CFO Mark Jenkins told analysts and investors last week that the company aims "to manage the business to achieve over $4,000" gross profit per unit.

However, the timing for when Carvana may get back to that $4,000 mark is "cloudy," Fadem said.

Daniel Imbro, an analyst with Stephens Inc., said in a phone interview that his firm is not expecting Carvana to reach that $4,000 profit per vehicle mark through 2024. Carvana entered the fourth quarter with too much inventory and didn't turn it quickly enough as prices fell, ultimately causing the company to accept lower per-vehicle grosses to move sales, he said.

Company watchers are still weighing the possibility of Carvana filing for bankruptcy.

Alexander Potter, an analyst with Piper Sandler, wrote in a research note last week that Carvana's fourth quarter "did not offer slam-dunk evidence disproving the bankruptcy thesis," but that management still sounds convinced that raising additional capital may be unnecessary.

Some analysts have suggested debt restructuring as an option to improve Carvana's long-term financial prospects.

Last year, some of the company's largest creditors banded together in an effort to secure more favorable terms ahead of a possible debt restructuring, and Carvana consulted with lawyers and investment bankers about managing its debt.

On the earnings call, Garcia said the retailer doesn't currently anticipate having to rework its debt load or raise money.

"We've got a real shot at not requiring additional capital," he said. "If we're wrong, then we have lots of ways to go out and get additional capital."

Chris Pierce, an analyst with Needham & Co., wrote in a research note last week that Carvana's debt load following its $2.2 billion acquisition of the ADESA U.S. physical auction network a year ago is a concern.

Carvana could raise money to address a potential liquidity shortfall by selling real estate, Pierce said in a phone interview. In a fourth-quarter letter to shareholders, Carvana said it sold land initially intended for inspection and reconditioning use, which became duplicate after it bought the ADESA facilities, for a $7 million gain in the quarter.

"If I was looking for a silver lining, it would be that," Pierce said. "They outright sold one piece of property and they could repeat that for multiple pieces of property and that could be hundreds of millions of dollars they could bring in the door."

While Carvana shares rose in January and early this month amid reports of strengthened used-vehicle demand and prices, its stock fell nearly 21 percent Friday, Feb. 24 to close at $8.01 a share.

In its letter to shareholders, Carvana said it plans to target lower retail vehicle volumes in the first half of 2023.

The company said it averaged about 5,600 vehicles sold per week through the first seven weeks of the first quarter. The number of vehicles sold typically rises in March during tax refund season, Carvana said. However, it expects that historical increase to be "muted" in 2023 compared with previous years because it is decreasing advertising and inventory amid lower staffing levels, according to the letter.

Carvana is No. 2 on Automotive News' list of the top 100 retailers ranked by used-vehicle sales, selling 425,237 used vehicles in 2021.

Bloomberg contributed to this report.