Carvana Lost $500 Million Last Quarter

Carvana – the used vehicle retailer with giant automotive vending machines – has reported that it suffered a $508 million net loss for the third quarter of 2022. Combined with the $945 million it bled through the first half of the year, the business is upside down for nearly $1.5 billion and we’ve still got three months left. 

Obviously, this isn’t an ideal market and Carvana was keen to remind investors of that fact. It cited dwindling sales, which it blamed on economic inflation, rising interest rates, and elevated vehicle pricing. While that last item helped dealers turn record profits starting in 2021, the bottom 50 percent of consumers have seen their buying power dwindle since 1970. North American income equality has gotten so wide that some people are being bounced out of the market altogether.

This seems to be reflected in Carvana’s sales figures, with the business seeing an 8-percent decline against Q3 of 2021. Still, that managed to generate $3.4 billion in revenue. Whatever your opinion on the legal practices of the Arizona-based company, that’s a lot of business to do in just three months. Translated into actual vehicles sold, Carvana said it moved 102,570 units off its many lots between July and October. 

While that certainly represents a healthy bit of trade, the prognosis could be better. According to Automotive News, per-vehicle profits fell to $3,500. That’s down from $4,672 during Q3 of 2021, back when there were more financial masochists browsing the secondhand market. 

Keep that the uptick in pricing that came last year resulted in the average dealership seeing a 180-percent increase in per-vehicle profit between the end of 2019 and the beginning of 2022. Though some estimates are substantially higher. Earlier this year, Haig Partners estimated that publicly-owned car dealerships scored an average profit of $7.1 million over the 12-month period ending in March of 2022. While companies focusing exclusively on used models aren’t assumed to have done quite as well, just about everyone who didn’t go under in 2020 was seeing record-breaking profits the following year. 

Consolidation was also a common theme over the last 24 months, with Carvana being just as growth-focused as anybody. The business is presently merging itself with ADESA U.S. – a large auction network, with over 50 physical sites, it purchased from KAR Global last May. The deal required an investment of $2.2 billion in exchange for ADESA auction sales, operations, and staff. This was supposed to aid the business by expanding Carvana’s ability to recondition the vehicles it sells while also giving it more direct control over the wholesale used car market. But like a lot of other businesses targeting explosive growth, rather than profit (e.g. Uber), it’s running into some trouble. 

Despite the company’s share price exploding at the start of the pandemic, relentless spending meant it still hadn’t achieved GAAP profitability. Carvana’s no-contact online sales model and heavy reliance on lending also worked a lot better during the pandemic, when nobody was leaving their homes and rates were more favorable. But those items are starting to become less lucrative and the absolutely insane used-vehicle prices that were giving all dealers a leg up are starting to look wildly unsustainable. Meanwhile, the business has begun to encounter some legal trouble in various states and investors have lost confidence. Despite the business’ revenue and stock valuation exploding in 2020, things started moving backward going into 2022. 

This effectively nullified sudden gains on the stock market and put the company into crisis mode. Carvana had increased average vehicle pricing by 30 percent over the last year and consumers were already tapping out of the market and was growing so fast that it was seeing severe operational problems. This resulted in some class-action lawsuits and a deluge of customer complaints – neither of which helped its sales or share price.

In its latest report, Carvana told investors that it had reduced expenses by $90 million (quarter-over-quarter) and would like to continue streamlining its expenses where possible. It’s also announced it would be laying off roughly 12 percent of its existing workforce going into the summer, meaning 2,500 fewer paychecks to hand out. Executives are also alleged to be going without salaried pay for the rest of 2022. But the road to redemption is likely to be a lot longer than Cavana’s swift fall from grace.

[Image: Ken Wolter/Shutterstock]

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