Ernie Garcia has seen some rough days, when the long and winding road looked more like the highway to hell.
Two years ago the company he co-founded and leads as CEO, online used car retailer Carvana, (CVNA) was labeled a “zombie company” by the equity research firm New Constructs. That firm noted that Carvana had “failed to generate positive free cash flow in any year since going public in 2017.”
The company’s stock price tumbled and Carvana started laying off employees.
The Tempe, Ariz., company’s executive team said they would forgo their salaries for the remainder of 2022 to contribute to the severance pay for departing employees.
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It was time for an overhaul. In February CNBC reported that Carvana had spent the previous 18 months aggressively restructuring its operations and debt amid bankruptcy concerns to pivot from growth to cost-cutting.
Among other steps, the company lowered its head count by more than 4,000 people, removed $1.1 billion of annualized expenses from operations, and released a new proprietary software called “Carli” that enabled end-to-end processing of vehicle-reconditioning and other tasks that were previously manual.
Analysts revise their stock price targets for Carvana
Carvana cites ‘another landmark quarter’
And things turned around. The stock has tripled (up nearly 215%) from a year ago and at last check was trading around $145.
“We currently view ourselves as being in the very early stage of a many-year period of profitable growth,” Garcia and Chief Financial Officer Mark Jenkins said in the company’s second-quarter shareholders letter.
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“In this early stage, we are pursuing growth at a rate that seeks to balance the clear long-term benefits of growth with the continued opportunities we see for fundamental unit economics gains and enhanced customer experiences,” the letter said.
A year ago, the executives said, the company kicked off 22 projects that each had a $100-unit economic improvement goal.
“From the perspective of one year ago, it would have been very hard for a reasonable person to believe we had any realistic chance of hitting those goals,” they said. “Luckily, our team is ambitious enough to not be reasonable.”
Over the past four quarters, the company said that it delivered nearly $2,000 of fundamental unit economic gains.
“Some projects exceeded our expectations, others are still underway, but in aggregate the scale of our ambition and the intensity of our execution drove incredibly rapid progress,” the letter said.
Carvana beat Wall Street’s second-quarter earnings expectations, driven by retail sales of 101,440 units, up 33% year-over-year.
“The second quarter was another landmark quarter for Carvana,” the letter said. “As measured by unit growth and adjusted Ebitda margin, we were again the fastest growing and most profitable public automotive retailer, this time by a greater margin than in the first quarter.”
The company earned 14 cents a share in the quarter, beating the consensus analyst estimate of a loss of 7 cents a share. Revenue totaled $3.41 billion, which beat Wall Street’s forecast for $3.24 billion.
Analyst sees ‘unique’ industry positioning
“Looking forward, our business still has a lot of untapped potential,” the letter said. “And our team is still unreasonable. We see opportunities to improve significantly from here over time.”
Several analysts adjusted their price targets for Carvana following the earnings announcement.
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Needham raised the firm’s price target on Carvana to $200 from $160 and kept a buy rating on the shares following the second quarter report, according to The Fly.
Carvana is proving out the original bull thesis on the stock, with its “unique” industry positioning and physical and technology “moats set to drive a long runway of share gains,” the firm said.
Needham said the company was leveraging improved internal processes to drive industry-leading gross profit per unit.
Carvana guided to vehicle production growth supporting higher inventories, and supporting higher conversion and unit sales, as it begins to pivot toward growth, the investment firm said.
Needham said the next leg of Carvana’s growth is profitable unit growth.
Wells Fargo analyst David Lantz upgraded Carvana to overweight from equal weight with a price target of $175, more than double the previous $77, following the earnings report and a transfer of analyst coverage.
The company reported a “robust” second quarter, but the upgrade call is long-term in nature, reflecting Carvana’s ongoing share gains, a structurally improved cost base, and easing balance sheet concerns, Lantz said.
He said that despite lingering macro concerns and choppy category dynamics, Carvana’s fundamentals are “clearly improving.” The analyst said the company’s long-term opportunity is “too hard to ignore.”
DA Davidson raised the firm’s price target on Carvana to $155 from $110 and kept a neutral rating on the shares after its earnings beat and accelerating retail unit growth.
The company was the fastest growing retailer in the country and was seen as a disruptor that would change the used car buying market, the firm said.
While its performance faltered in 2022 and early 2023, in part due to the post-Covid demand slowdown against an aggressive infrastructure buildout, management has restructured the balance sheet, cut costs, massively improved efficiency, and spent more conservatively on inventory and marketing, DA Davidson said.
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