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The way Ernie Garcia III sees it, the problem is not existential.
Garcia, founder and CEO of Carvana (CVNA) – Get Carvana Co. Class A Report, the online used car retailer, gave a run down of his company’s financial position during a June 7 presentation at the William Blair Annual Stock Growth Conference.
Carvana, which has been dubbed “the Amazon of car dealers,” have’t seen much in the way of growth lately, as its share value have dropped dramatically.
An Existential Crisis?
On Aug. 10, 2021, the Tempe, Arizona’s company’s stock hit a high of $370.10. On June 9–less than a year later–shares closed at $23.13.
Garcia was asked if the company’s troubles reflected an industry-wide problem, or “are you facing an existential crisis where your competitive advantage was somehow exaggerated during the pandemic and there is a re-rating of your ultimate growth characteristics and your competitive profile?”
“I would go and look at our cohort market share curves that I think have grown pretty consistently across many environments and I think offer a very clear pathway to at least 1.4 million sales with significant growth still happening in our oldest cohort,” he said.
“I think that unless you think that something has materially changed post-pandemic that’ll be different from a pre-pandemic in a persistent way I think that that’s like a pretty compelling kind of pathway to material growth,” Garcia continued.
Nevertheless there have been reasons to be concerned about Carvana, which went public in 2017.
In April, the company, known for its vehicular vending machines, reported what J.P. Morgan described as a “confidence shattering quarter,” as it posted a wider-than-expected loss of $2.89 a share, much higher than the FactSet’s expected loss of $1.44 a share.
The following month, Carvana finalized the $2.2 billion acquisition of Adesa US, KAR Auction Services’ (KAR) – Get KAR Auction Services Inc Report wholesale vehicle auction unit.
‘Matrix Driven Phone Center’
The transaction includes 56 Adesa U.S. locations comprising 6.5 million square feet of buildings and 4,000-plus acres.
At the time, Garcia said “we aim to use this Adesa alignment to both improve the experiences of the Adesa physical auction customers and to focus on significant and sustainable efficiencies, and unit economic improvements, for Carvana to catapult back into rapid profitable growth as the industry inevitably rebounds.”
During the Blair event, Garcia said that “we sold 50,000 wholesale cars last quarter and many of those cars were shipped very large distances that they won’t need to be shipped in the future as we go open up those US locations.”
“Then there’s also on the retail side of a lot of logistics savings,” he said. “We put out a number that says if you look at sales that occurred within 200 miles of the customer, where the car was within 200 miles of where the customer was, we spent about $750 less in total than our average sale today.”
All well and good. However, on the very same day in May that Carvana announced the Adesa acquisition, the company laid off 2,500 employees, or about 12% of its workforce, many of whom received the bad news via Zoom.
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“I was on the same zoom it was so fake and prerecorded!” another person said. “Sorry Carvana peeps! I feel your pain been there for 1.4 years. The company changed so much from a people company to awful matrix driven phone center.”
‘People on Phone are Nice But…’
The company said its executives would forgo their salaries for the remainder of the year to contribute to the severance pay for departing employees.
“Carvana’s primary business is originating and securitizing car loans, and subprime loans at that,” said Daniel Taylor, an accounting professor at the Wharton School. “Consequently the business model is highly sensitive to interest rate risk. As the zero interest rate policies of the Fed come to an end, and the economy begins to teeter subprime loans will be priced at a large discount.”
The state of Illinois revoked Carvana’s license to sell cars last month because of delays in processing vehicle titles and registration. Consumers in Florida had similar complaints.
Carvana’s was allowed to resume business in Illinois two weeks later, but with significant restrictions.
The company’s problems have stirred up some very strong feelings on social media.
“Beware…I had an absolutely horrendous experience buying a car @Carvana,” Dan Abrams, the legal commentator and TV show host tweeted earlier this month. “They didn’t deliver it, then car had issues, then they ‘lost’ it. People on phone are nice but when you need service it was a disaster.”
“Carvana is terrible!” one person responded. “They tried to delay our delivery a week just because the car needed a new battery. We cancelled and went elsewhere.”
“While every individual employee at @Carvana has been kind and as helpful as they can be but this is been the single worst customer experience I’ve had in my life and it’s been going on for *months*,” another person tweeted.
Carvana did not respond to a request for comment, but there were some tweets of praise for the company as well.
‘Grew Too Quickly’
“I’m sorry you had a bad experience,” one person said. “I think the company grew too quickly & now they have huge issues. My experience in Utah was phenomenal. Waited about 3 months for my plates and registration, but no complaints.”
“We had really good luck with Carvana last year… Sorry to hear that you weren’t as fortunate!” another person said.
Last month, Bank of America analyst Nat Schindler cut his price target on Carvana to $80 from $225, saying that the market’s change of opinion has “been driven by some things completely out of the company’s control,” such as the Covid and supply chain impacts to the auto market that caused used car prices to skyrocket and then slowly come down again.
But the analyst also saw some things “that clearly were within its control,” such as outsized employee and compensation growth in 2021 causing operating expenses per retail unit to jump dramatically and the move to acquire Adesa and the resulting expensive debt raise.
Schindler kept his buy rating on the shares as he still believes in Carvana and its opportunity given his view that it offers a fundamentally better way for consumers to shop for and buy used cars.