Carvana, “the Amazon of car dealerships”, is fighting its biggest battle

In the eyes of Ernie Garcia III, the problem is not existential.

Garcia, Founder and CEO of Carvana (CVNA) – Get the Class A report from Carvana Co.the online used-car retailer, gave an overview of its company’s financial situation during a June 7 presentation at William Blair’s annual stock growth conference.

Carvana, which has been dubbed “the Amazon of car dealerships,” hasn’t seen much growth lately as its stock value has fallen dramatically.

An existential crisis?

On Aug. 10, 2021, shares of the Tempe, Arizona-based company 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 problems reflect an industry-wide problem, or “are you facing an existential crisis where your competitive advantage has somehow been exaggerated during the pandemic and there’s has a reassessment of your ultimate growth characteristics and competitive profile?”

“I would go and look at the market share curves for our cohort which I think have been growing pretty steadily across many environments and I think they provide a very clear path to at least 1.4 million sales with significant growth still ongoing in our oldest cohort,” he said.

“I think unless you think something has materially changed post-pandemic that will be different from pre-pandemic in a persistent way, I think it’s like kind of a pretty compelling path to material growth. “, continued Garcia.

Nevertheless, there was cause for concern for Carvana, which went public in 2017.

In April, the company, known for its vehicle vending machines, reported what JP Morgan described as a “confidence-shattering quarter” as it posted a bigger-than-expected loss of $2.89 per share, although higher than the expected loss of $1.44 per FactSet. sharing.

The following month, Carvana completed the $2.2 billion acquisition of Adesa US, KAR Auction Services’ (BECAUSE) – Get KAR Auction Services Inc report wholesale vehicle auctions.

‘Matrix Driven Telephony Center’

The transaction includes 56 Adesa locations in the United States comprising 6.5 million square feet of buildings and over 4,000 acres.

At the time, Garcia said “we aim to use this alignment of Adesa both to improve the experiences of Adesa’s physical auction customers and to focus on meaningful and sustainable efficiencies, and unit economic improvements, for Carvana to resume rapid profitable growth as the industry inevitably rebounds.”

At the Blair event, Garcia said that “we wholesaled 50,000 cars last quarter and many of those cars were shipped such great distances that they won’t need to be shipped to future as we open these sites in the United States”.

“Then there are a lot of logistics savings on the retail side as well,” he said. “We put out a number that says if you look at sales that were 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.”

Everything is fine. However, on the same day in May that Carvana announced the acquisition of Adesa, the company laid off 2,500 employees, or around 12% of its workforce, many of whom received the bad news via Zoom.

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“I just got fired in a zoom with 600 other people because they accidentally hired too many people for the year,” one person said. tweeted May 10. “[email protected] carvana”.

“I was on the same zoom, it was so fake and pre-recorded!” another person said. “Sorry Carvana peeps! It feels like your pain has been there for 1.4 years. The business has changed so much from a people business to an awful matrix driven call center.”

“People on the phone are nice but…”

The company said its executives would forgo their salaries for the rest of the year to help with severance pay for departing employees.

“Carvana’s core business is originating and securitizing auto loans, as well as subprime loans,” said Daniel Taylor, accounting professor at the Wharton School. “As a result, the business model is very sensitive to interest rate risk. As the Fed’s zero interest rate policies come to an end and the economy begins to falter, subprime loans will be priced with a steep discount.”

The state of Illinois revoked Carvana’s license to sell cars last month due to delays in processing titles and vehicle registration. Florida consumers had similar complaints.

Carvana’s was allowed to resume operations in Illinois two weeks later, but with significant restrictions.

The company’s problems have generated very strong feelings on social networks.

“Warning… I had an absolutely horrible experience buying a car @Carvana“, Dan Abrams, legal commentator and television host tweeted earlier this month. “They didn’t deliver it, then the car had problems, then they ‘lost’ it. People on the phone are nice but when you need service it was a disaster.”

“Carvana is awful!” a person replied. “They tried to delay our delivery for a week just because the car needed a new battery. We canceled and went elsewhere.”

“While every employee of @Carvana was nice and as helpful as possible, but this is the 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 also tweets of praise for the company.

“Growed Up Too Fast”

“I’m sorry you had a bad experience” one person said. “I think the business grew too quickly and now they are in huge trouble. My experience in Utah was phenomenal. I waited about 3 months for my plates and registration but no complaints.”

“We were really lucky with Carvana last year… Sorry to hear you weren’t so lucky!” another person said.

Last month, Bank of America analyst Nat Schindler slashed his price target on Carvana to $80 from $225, saying the change in market sentiment has “been driven by some things that are completely beyond our control. business”, such as Covid and supply chain impacts. to the auto market which caused used car prices to skyrocket and then slowly come back down.

But the analyst also saw some things “that were clearly within his control”, such as the outsized growth in employees and compensation in 2021, leading to a dramatic increase in operating expenses per retail unit and the decision to acquire Adesa and the resulting increase in costly debt.

Schindler retained his buy rating on the stock as he still believes in Carvana and its desirability given that he believes it provides consumers with a fundamentally better way to shop and buy cars. opportunity.

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