- Carvana shares are up more than 100% from recent lows.
- Like-for-like cash SG&A (ex. ADESA and one-time restructuring expenses) dropped from ~$690 million in 1Q’22 to $640 million in 2Q’22, a reduction of ~7.0%.
- I estimate the company will burn through the vast majority of its available cash by the end of the year, setting it up for a liquidity event in in early 2023.
The following segment was excerpted from this fund letter .
Carvana ( CVNA )
Carvana shares are up more than 100% from recent lows. The quarter was predictably poor: retail unit growth slowed to ~9% year/year and the company generated negative EBITDA of $230 million. What bulls saw in the report was growth in per-unit gross profit ((GPU)) and a reduction in per-unit SG&A which they interpreted as an inflection in the business and a sign that the march to profitability has resumed in earnest. I think they’re getting high on their own supply.
While there may be some continued improvement in the “metal margin” component of GPU, all-important finance GPU is unlikely to return to 2020/2021 levels in the absence of the ABS securitization market heating up again. At the same time, bulls have latched on to the company’s so-called “stretch-goal” of SG&A reaching $4,000/unit by the fourth quarter of the year.
Let me start by pointing out something that is being grossly mischaracterized: this “stretch goal” is being conflated with “guidance.” It is absolutely not guidance. I view “stretch goal” as a sort of squishy term management can use to offer some hope for the future while simultaneously protecting themselves from getting sued if ((when)) they don’t hit this target.
More importantly, I think there is a near-zero probability that the company comes anywhere close to this level of SG&A/unit. Notwithstanding all of the hype about cost cutting, like-for-like cash SG&A (ex. ADESA and one-time restructuring expenses) dropped from ~$690 million in 1Q’22 to $640 million in 2Q’22, a reduction of ~7.0%. Laudable, but nowhere near the levels required to reach the “stretch goal.”
The challenge is that CVNA has pulled in its horns with respect to retail unit volume growth in order to preserve liquidity, but the path to SG&A of $4,000/unit requires a reacceleration of unit growth in order to leverage fixed costs. This is a case of “the trend is not your friend,” with alternative data points indicating unit volumes declined sequentially in each month since March. And with the pending $1.0 billion reduction of the company’s floor plan facility by the end of September, the type of unit increases required to hit the target look increasingly unlikely.
What if there’s still fat to trim? Perhaps it’s plausible, but I think bulls need to be more intellectually honest about what would need to happen for CVNA to achieve its “stretch goal”. Let’s say the company successfully reduces like-for-like cash SG&A to $575 million, reflecting a 10% decline from 2Q’22. CVNA would need to sell an all-time high 143,750 retail units in 4Q’22, reflecting a reacceleration of year/year growth to ~27%. I’m not holding my breath.
And lastly – what happens if CVNA doesn’t hit its SG&A targets? I estimate the company will burn through the vast majority of its available cash by the end of the year, setting it up for a liquidity event in in early 2023. There’s a reason a majority of CVNA’s bonds trade at distressed levels. Bulls are whistling past the graveyard.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Steel City Capital - Carvana: Heading Toward A Liquidity Event