Carvana cuts costs as demand for used cars remains under pressure

Online used car dealer

Carvana a company

It said it is cutting costs significantly as consumer demand remains under pressure and the company faces the possibility of an economic slowdown.

Carvana – an early epidemic star Struggle during recovery– pledged in April to rein in expenditures after it was reported Its first ever quarterly decline She will not provide guidance for the year. The company said it miscalculated customer demand, planning for growth while high interest rates and high inflation exhausted business and made car buying unaffordable for many consumers. in the next month She laid off 12% of her workforce.

Carvana said Thursday it is cutting costs and improving efficiency across the business, including in its logistics, delivery, advertising and technology divisions. In May, the company set a short-term goal of reducing sales and general and administrative expenses for its retail units sold to $4,000 by the fourth quarter. That number — which does not include stock-based compensation, depreciation and amortization, as well as its recent acquisition of Adesa US, a used-car auction network — was $5,333 as of June 30.

Selling, general and administrative expenses were down about 1% as of June 30 compared to the previous quarter, to $721 million. Carvana, which has focused for years on strong sales growth, said in a letter to shareholders Thursday that cutting expenses is its number one financial goal.

Total retail sales increased 9% in the second quarter from a year earlier, to 117,564. The company recorded a net loss of $238 million, compared to a profit of $22 million in the previous year. Gross profit per unit – one of my favorite metrics – was $3,368 compared to $5,120 over the last year period.

Analysts said rising prices for used cars are weighing on demand across the industry, particularly among lower-income consumers. The Mannheim Index of used car values ​​fell 1.3% in June from the previous month, but was still 9.7% higher than it was a year ago. Consumers also face higher costs in other areas of their budgets With inflation rising to its highest level in four decades. Michael Baker, managing director at DA Davidson & Co.

Expenses are an aspect of the business that Carvana can control as it faces an uncertain economic outlook, said Daniel Imbro, managing director of Stevens, and “Cost reductions are in focus until demand stabilizes.”

During the second quarter, investors demanded Karvana loans-An important source of company revenue– Cool with higher interest rates. The company typically bundles most of its loans and sells them to investors through a process called securitization. But during the second quarter, it did not bring to market an expected securitization of its non-quality loans to riskier borrowers.

Carvana includes revenue from loan sales under a measure called gross profit per unit. That number is down 27% from the previous year, to $1,854.

The company said in a shareholder letter that it expects to sell entire loans during the third quarter rather than splitting them into securities. Carvana has an agreement with

Financial Ally a company ,

Detroit-based lender, to sell up to $5 billion in loans originating from Carvana through March 2023.

Carvana, which is still burning cash after 10 years in the business, has boosted its cash flow. The company had just over $1 billion in cash and cash equivalents on its balance sheet as of June 30, up from $201 million a year earlier.

Carvana raised capital during the quarter, including $1.2 billion through a sale of common stock in late April. At about the same time the company had problems selling debt to fund it Acquisition of Adesa for $2.2 billion. In the end received a lifeline From

Apollo Global Management a company ,

That agreed to buy half of $3.275 billion of bonds with a 10.25% coupon.

Carvana had about $6.6 billion of long-term debt on its balance sheet as of June 30, up from just over $3 billion in the previous quarter, before the Adesa deal closed.

write to Kristin Broughton at Kristin.Broughton@wsj.com

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