In each of the next three months, Carvana Co. will have to pay more in interest because car sales and earnings are going in the wrong direction.
Last quarter, the used-car retailer lost $7.61 per share, which was more than three times as much as analysts had predicted. Carvana’s retail unit sales were the lowest they had been in two years, and the company expects sales to drop again in the first three months of this year as it cuts its inventory and marketing spending.
A Bloomberg Intelligence auto analyst, Kevin Tynan, said in a note that the once-fast-growing retailer is “firmly in retreat mode” because it made a bad acquisition just as sales and prices for used cars changed.
At 9:39 a.m. Friday in New York, shares of Carvana fell 15%. The quarterly loss that was announced after the market closed on Thursday puts an end to a terrible year for Carvana, in which its stock fell 98%, wiping out almost $37 billion in market value. Even though the shares have more than doubled this year through Thursday, Joel Levington, a credit analyst at Bloomberg Intelligence, warned before the earnings that the move was similar to what happened to Hertz Global Holdings Inc. before it went bankrupt in 2020.
Levington says that Carvana’s biggest problem is that it owes more than $8 billion and will spend $2.4 billion in cash over the next two years.
He said in a phone interview
“They need to restructure their balance sheet”
“They probably need to shave off 85% of their debt, otherwise they will be a vulnerable company for years.”
If Carvana, which has credit ratings in the CCC category, were to try to sell more corporate bonds, it would confront a challenging environment because of its credit ratings. The amount of the company’s debt that is considered to be in a distressed state exceeds $5 billion, placing it among the largest piles of troubled securities in the world.
In preparation for the possibility of Carvana’s debt being restructured, a number of the company’s top creditors have banded together in an effort to obtain more favorable terms.
On a conference call with analysts, the Chairman and Chief Executive Officer, Ernie Garcia III, stated that the firm is now in a position to potentially avoid having to raise money or rework its debt due to the measures that have been put into place to decrease expenses and eventually lead to growth.
“We’ve got a real shot at not requiring additional capital,” Garcia said, citing the company’s real estate portfolio as one potential source of funds. “If we’re wrong, then we have lots of ways to go out and get additional capital.”
In its first deal since August, Carvana completed the sale of asset-backed bonds worth more than 360 million dollars last week. Even though the price paid by the company was more than it had been in past transactions, it demonstrated that Carvana still has access to certain financial markets.
On March 1st, the corporation must pay interest on its bonds that mature in 2029 and have a 4.875% interest rate. At the end of the year, Carvana had a total of $434 million in cash and equivalents, which is an increase from the $316 million it had on hand at the end of the third quarter.
Garcia described 2022 as a “particularly tough year” in a letter to the shareholders of the company. The number of vehicles sold during the fourth quarter decreased by 23% to approximately 87,000. The gross profit made off of each product fell by more than half.
The chief executive officer of Carvana stated that he anticipates gross profit per unit to return to prior levels of more than $4,000 per vehicle, and that the company also intends to grow into new areas including last-mile deliveries as well as repair and reconditioning of vehicles.
does not give us confidence in the long-term viability of the business model. John Colantuoni, a Jefferies analyst who has a hold rating on the shares, said in a note that Carvana’s current strategy to conserve cash by reducing inventory
“Does not give us confidence in the short-term viability of the business model.” “We think that views surrounding a prospective restructuring process will be the key determinant of the stock price, with fundamentals playing a much smaller role as a distant secondary factor.”
Analysts at JPMorgan Chase took an even more critical stance, reducing their price target on Carvana shares to reflect “no equity value at the current level of debt.” This move was taken in response to Carvana’s high amount of debt.