Carvana’s Losses Widen on First Sales Decline

Carvana said it sold 105,185 cars to retail customers during the first quarter, or about 7,800 fewer than the prior quarter, though up from a year earlier. Its net loss widened to $260 million, compared with $36 million a year earlier. Gross profit per unit—one of the company’s preferred earnings metrics—fell to $2,833 from $3,656 a year earlier.

In the past six months, the tailwinds that propelled the company to rapid growth have turned to headwinds. Rising interest rates, falling used-car prices, inflation-wary consumers and a declining appetite for its debt have upended Carvana’s ambitious growth targets.

The retailer, which has just over $3 billion in long-term debt, said it’s no longer providing financial guidance for the year due to rising interest rates, rising fuel prices and macroeconomic uncertainty—all affecting the used-car market. It said in February that it expected retail sales of over 550,000 cars for the full year.

“Over the next several quarters, we expect to better align sales with expense levels through a combination of higher sales and expense efficiencies,” the company said.

Analysts had cast doubt on whether the company could still meet its sales targets. Missing them could further squeeze Carvana’s cash position. The company is still burning cash after about 10 years in business.

Tempe, Ariz.-based Carvana has expanded rapidly over the past two years, roughly doubling its quarterly sales volume since the spring of 2020 as more consumers shopped online. But the company in recent months has struggled with backlogs in its logistics network and reconditioning centers, due in part to labor shortages stemming from the Covid-19 wave caused by the Omicron variant. In response, it cut purchases of vehicles from consumers and limited the availability inventory on its website.

Inflationary pressures put a damper on sales industrywide during the quarter, analysts said. Rising car prices, which over the past year have bolstered used-car dealer profits, have become a burden for some consumers who are also spending more on gas and other household items.

“It’s not just a supply situation for these guys that’s hampering their growth. It’s also the demand situation, and that’s not something that every investor appreciates at this point,” Seth Basham, an analyst at Wedbush Securities, said.

The Manheim index of used-car prices pulled back 3.3% in March from February, adjusted for seasonality, but was still 24.8% higher than it was a year earlier. Vehicle prices are expected to remain elevated throughout 2022, as the industry works through inventory constraints including a semiconductor shortage.

Potential customers seeking to sell their cars to Carvana told The Wall Street Journal that the company had recently reneged on offers they had already accepted for their cars, in several cases lowering them by several thousand dollars while citing a glitch in their pricing algorithm. The company said it remains committed to “continuous improvement” and to enhancing customer experience.

Carvana typically reports later in the earnings season, but said last week it had decided to report on Wednesday to facilitate the closing of its planned $2.2 billion acquisition of used-car auction business ADESA U.S. The deal is expected to close in May, the company said.

One reason Carvana is getting hit is the way it accounts for sales of the auto loans that it packages into securities. Carvana books immediate gains, unlike competitors that book them over time. Such accounting has helped the company turbocharge its revenue when consumer credit—and investor demand for securities backed by auto loans—was particularly strong.

But conditions in the securitization market have recently shifted. Investors are demanding higher yields for securities backed by riskier consumer loans. They are beginning to worry that rising rates and inflation will affect borrowers’ ability to make their payments.

Carvana in March issued two securitizations—one backed by prime auto loans, the other backed by subprime loans—with a combined value of about $1.49 billion, according to Finsight, a financial data provider. In both cases, Carvana booked less profit on the deals than in the past because investors demanded higher yields compared with deals Carvana did in the fourth quarter, according to data provided by Wedbush.

Clayton Triick, senior portfolio manager at Angel Oak Capital Advisors, said his firm has grown more cautious on subprime auto securitizations in recent months, requiring higher yields and assuming higher delinquencies. Angel Oak invested in one of Carvana’s securitizations during the first quarter, he said.

Overall, Angel Oak has focused more on buying asset-backed securities in the secondary market, rather than directly from issuers, Mr. Triick said. That’s because the auto loans that underpin those bonds are older, meaning they were issued when car prices were lower and also have an established record of repayment, he said.

Rising investor caution in the securitization market weighed on Carvana’s revenue during the quarter. JPMorgan Chase & Co. analyst Rajat Gupta estimated in March that the company’s gain-on-sale margin from loan securitizations—a metric that compares proceeds received to the total value of loans sold—declined to 4.4% in the first quarter from 9.1% in the prior quarter.

The offering of stock was a surprise to investors because Carvana had said it had received committed financing for the ADESA deal. Chief Executive Ernie Garcia III and his father, Ernie Garcia II, said they would buy some of the newly issued stock.

The acquisition of ADESA, a used-car auction company that is an industry stalwart, was a surprise for Carvana, which has said it aims to upend auto sales. Carvana executives said in February that the deal would increase its capacity to process vehicles and expand its logistics network, in addition to adding auction capabilities.

Write to Kristin Broughton at [email protected] and Ben Foldy at [email protected]