Jan 4, 2024 - Business

How Carvana avoided catastrophe in 2023

Data: Yahoo Finance; Chart: Axios Visuals
Data: Yahoo Finance; Chart: Axios Visuals

Carvana escaped 2023 with newfound momentum after navigating a crisis that tarnished its status as a high-flying retailer reinventing a stodgy industry.

The big picture: Today, the company's focus is on its bottom line, CEO Ernie Garcia tells Axios. And the business once hailed as the "Amazon of used cars" will soon have to fend off Amazon itself.

Flashback: Carvana attracted loads of attention in recent years with its "car vending machines" and its willingness to deliver vehicles to customers from locations across the country.

  • But the business plunged deeply into debt during the pandemic as it prioritized rapid growth over profitability, positioning itself as more of a tech disruptor than a traditional retailer. And the bottom line suffered when selling conditions took a turn for the worse in 2022.

State of play: Given new life this past year with a debt restructuring deal completed over the summer, Carvana's stock soared more than 10-fold in 2023, rising from less than $5 to more than $55.

What they're saying: "We went heavily in the wrong direction because we were positioned for another year of tremendous growth," Garcia tells Axios.

  • He said the company had to pivot from emphasizing growth to disciplined cost management.
  • Consequently, 2023 was "about shifting the company's focus in response to a macro environment that changed dramatically," he says.

Garcia says that meant improving "unit economics," including:

  • Reducing marketing spending.
  • Introducing a fee for vehicles that need to be transported from far away.

Be smart: The restructuring deal — which cut the company's debt by more than $1.325 billion — was a key catalyst to Carvana's stock surge in 2023.

  • The plan qualified as a "distressed debt exchange," Fitch senior director David Silverman tells Axios. "They had obligations to lenders. They didn't end up meeting those obligations."
  • But Garcia says the company never considered filing for bankruptcy protection: "I don't think it was even close."

Yes, but: Despite the reduced debt, the company still faces significant, albeit delayed, debt payments to come.

  • "The company has been a money losing startup since its infancy," Silverman says. "Longer term, it's unclear to us whether this company has the ability to stabilize market share while generating positive" earnings before interest, taxes, appreciation and amortization.
  • Carvana's stock has relinquished some of its 2023 gains, closing trading Thursday down 7% over the first three sessions of the year.

What we're watching: While the company says it's made "significant progress on its path to profitability," Carvana is facing a new threat in the form of Amazon, which will begin selling cars for the first time when it allows Hyundai dealers to list new vehicles on the platform.

  • Garcia says he's not worried: Selling vehicles online is "hard" and it's "not a thing that companies spin up quickly," but "having someone as impressive as Amazon entering this market just demonstrates it's something that customers want."

The bottom line: "The two outstanding questions that we're left with ... is can revenue stabilize at some point and can the company begin to grow again?" Silverman says.

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