Summary
- Carvana's innovative business model has experienced financial stress in 2022.
- Cost pressures have led to deep financial losses.
- A look at the company's debt prices gives insight to lender confidence in the company's viability.
Carvana ( CVNA ) shares have experienced a significant rally over the past month, rising by more than 90%. Despite the rise, the stock remains down an astonishing 95% from a year ago. While I would like to think the innovative automobile reseller is on the road to recovery, the company's financial performance combined with the attitude of institutional investors paints a rather dire picture.
Unlike many of the distressed companies I've written about, Carvana has seen an increase in revenue compared to last year. Net sales in the nine-month period of 2022 were $1.7 billion higher than in the same period of 2021. Unfortunately, the company's cost of sales has grown by more than $2 billion, leaving the gross margin down by more than $350 million. SG&A, along with interest expenses on debt, has also risen dramatically. The result is a net loss of $1.45 billion, which is 14 times higher than the net loss in the first nine months of 2021.
Carvana's balance sheet shows the accelerated growth execution that the company took in 2022. In nine months, the company added $3.4 billion in long-term debt, $1.7 billion of which was used to increase property plant and equipment. The remainder was used to reduce the balance on the short-term revolving facility by $1.5 billion. Cash (including restricted cash) did decrease by $150 million during this time. It's important to note that the company's vehicle inventory has declined, which could be an omen for future sales if they are unable to finance future inventory purchases.
Carvana's statement of cash flows shows an improvement, but with an important caveat. The company still burned over a billion dollars in the first nine months of 2022 in operations and capital expenditures. While this was an improvement compared to a $1.7 billion burn last year, the main driver is the company drawing down its inventory. If Carvana wants to increase inventory (and consequently sales), it will need a funding mechanism to do so, as operating cash flow is still negative.
Carvana attempted to alleviate fears by placing a note on liquidity in its most recent 10-Q. The note acknowledges the equity offering and debt issuance earlier in 2022 but failed to acknowledge that those moves did not enhance liquidity, as the cash raised has already been spent. Carvana goes on to mention that it does have finance receivable agreements in place, which is good, but that only covers financing of sales.
When it comes to inventory, Carvana does have a floor plan facility that can be used to purchase inventory, and that facility currently only has $575 million drawn out of $2.2 billion. Unfortunately, the interest rate on the facility is variable and is set at prime plus 1%, which would currently be 8.50%. The interest rate on its senior notes is no less forgiving. The 2030 maturing notes, which raised $3.2 billion to buy capital assets and pay down the floor plan facilities, carry an interest rate of 10.25%.
Most of Carvana's debt is not available to retail investors, especially the 10.25% coupon 2030 maturing senior notes. While the company's stock has seen a bounce, the price of its debt remains distressed. In fact, the price of its 2030 notes is currently trading at 49 cents on the dollar, not far from their 40-cent bottom. The low price of Carvana's debt is an expression by its lenders that they are very concerned about the company's future.
Carvana does have the financing in place to purchase inventory, and it has had recent success with sales, but the company appears to not have a path towards profitability. Even if the company reduces headcount by 20% and consequently SG&A, that would represent $400 million in savings, far from the over $1 billion needed to break even.
For further details see:
Carvana Bondholders Are Bailing