Carvana targets redemption after bankruptcy concerns, restructuring

PHOENIX – As layoffs and cost cuts roil Wall Street, from retail and shipping to tech and media, embattled online used car sales giant Carvana says its own restructuring is in the rear view.

Carvana over the last 18 months aggressively restructured its operations and debt amid bankruptcy concerns to pivot from growth to cost-cutting. They were crucial moves for the company and its largest shareholders, including CEO and Chairman Ernie Garcia III and his father, Ernie Garcia II. The two control 88% of Carvana through special voting shares.

The efforts thus far have been successful, propelling Carvana’s stock last year from less than $5 per share to more than $55 to begin 2024 – marking a significant turnaround for the company, but still a far cry from the stock’s all-time high of more than $370 per share reached during the coronavirus pandemic in 2021. Shares closed Thursday at $42.53.

“We have every intention of continuing to make progress and don’t expect to return to a situation like that,” the younger Garcia told CNBC about the company’s dire circumstances. “I think the pressure of the last two years caused us to really focus on the most important things.”

The Tempe, Arizona-based company has taken $1.1 billion of annualized expenses out of the business; reduced headcounts by more than 4,000 people; and launched a new proprietary “Carli” software platform for end-to-end processing of vehicle reconditioning as well as other “AI,” or machine learning, systems for pricing and sales. The systems replaced previous processes that involved manually inputting data into separate systems or spreadsheets. 

The result, Carvana hopes, is better footing to navigate an automotive industry that’s shifting and normalizing from a supply-constrained environment to one with less favorable pricing power for dealers.

Carvana has been a growth story since its initial public offering in 2017. It posted growing sales every year from its 2012 founding through 2022, when restructuring began.

The business concept of Carvana is simple: buy and sell used cars. But the process behind it is extremely complicated, labor-intensive and expensive.

Carvana puts each vehicle it intends to sell through a lengthy inspection, repair and sale preparation process. It ranges from fixing scratches, dents and other imperfections to engine and powertrain components. There’s also significant logistical costs and processes for delivering vehicles to consumers’ homes and the company’s signature car vending machines across the country.

In 2022, retail sales declined roughly 3%. Headed into the fourth quarter of last year, they were down a further 27%.

Carvana is currently in the “middle of step two” of a three-step restructuring that Garcia initially laid out to investors roughly a year ago.

Step 1: Drive the business to break even on an adjusted EBITDA basis. Step 2: Drive the business to significant positive unit economics, including positive free cash flow. Step 3: Return to growth.

“We’re trying to stay really focused on just building the business as best we can,” Garcia said during a rare, wide-ranging interview at a Carvana vehicle reconditioning center near Phoenix in mid-January.

The CEO, sitting under a “Don’t be a Richard” poster featuring former President Richard “Dick” Nixon (it’s one of Carvana’s six core values), says the company is largely done with taking fixed costs out of the business, but he believes there’s more room for reductions in variable costs to increase profits before returning to a growth-focused company again.

Wall Street largely agrees.

“We walked away confident that CVNA has room to further improve its cost structure and drive additional operational efficiencies. These efficiencies would come from three main areas: the further development of internal software, standardized processes, and improved training and career pathing,” said JPMorgan analyst Rajat Gupta in a December analyst note following an investor briefing and tour of a Carvana reconditioning center in Florida.

At the end of the third quarter, Carvana had $544 million in cash and cash equivalents on hand, up $228 million from the end of the previous year. The company reported total liquidity, including additional secured debt capacity and other factors, of $3.18 billion.

It recorded a record third-quarter gross profit per unit sold of $5,952, while cutting selling, general, and administrative expenses by more than $400 per unit sold compared to the prior quarter.

The company reports its fourth-quarter results on Feb. 22.

Guan, who started at Carvana in 2020, is among a new group of hires from a variety of backgrounds that range from Silicon Valley tech startups to more traditional vehicle operations such as CarMax, Ford Motor and Nissan Motor.

Carvana’s march hasn’t always been in a straight line: The company was a darling stock of the coronavirus pandemic, as it was lightyears ahead of traditional auto retailers in selling vehicles online – a process that surged during the global health crisis and, in some states, became the only way businesses could operate due to stay-at-home orders.

But it couldn’t keep up with demand, pushing Carvana to invest billions in growth opportunities, including an acquisition of used car auction business ADESA.

Then the used vehicle market shifted and Carvana’s aggressive growth plans — which included buying thousands of vehicles from auctions and consumers at hefty premiums compared to traditional auto dealers to build inventory — became a major liability when prices declined.

Carvana’s debt grew, including the debt-funded ADESA deal, and its stock became the most shorted in the country as fears of bankruptcy and a creditor fight grew. The stock lost nearly all of its value in 2022, causing some to speculate bankruptcy may be ahead.

Garcia is adamant that he never believed bankruptcy would happen, saying “absolutely not” when asked about it. His confidence was fueled by a belief that the service Carvana offers – selling and buying used vehicles online and streamlining the tedious process of car purchasing is something consumers need and want.

He also said taking the company private – which scared some stakeholders and investors – was never a viable option: “I would say it was a thought in the sense that other people thought about it. It was never something that we considered,” Garcia said.

But Carvana’s debt load is still very much a factor.

A deal between Carvana and a group of investors who collectively owned $5.2 billion of its outstanding unsecured bonds reduced the used car retailer’s total debt outstanding by more than $1.2 billion but also kicked much of the debt to later this decade, at largely higher interest rates.

Marc Spizzirri, a senior managing director of B. Riley Advisory Services, said every restructuring is unique but in general companies need to take action quickly after taking on debt to ensure they don’t land in the same circumstances that drove the debt in the first place.

“They have to be able to service that debt,” said Spizzirri, a former franchised dealer. “It’s a classic pre-bankruptcy process and in [many companies’] minds that’s not an option for them … But they can’t keep repeating what they’ve done before.”

Carvana’s new notes will mature in 2028; the old notes, which carry interest rates ranging from just under 5% to more than 10%, are due between 2025 and 2030. The old and new notes make up roughly 78% of Carvana’s nearly $6 billion total debt.

For now, the march continues for Carvana.