Carvana Co., the debt-ridden automobile retailer, announced that it expects to report a profit in the second quarter after a string of losses. The company has struggled due to rebounding auto production and rising interest rates, which have weighed on the market for used vehicles. However, Carvana has sought to reduce its burdensome debt load after raising billions of dollars to grow early in the pandemic. The CEO, Ernest Garcia III, said the company reduced vehicle inventory, lowered advertising expenses, and cut overhead by $160 million. The company’s main objective is to achieve positive cash flow.
Carvana’s shares rose by 28% as of 5:04 p.m. after regular trading in New York. The stock had tumbled by 88% over the past 12 months. Nevertheless, Carvana's cash and debt positions remain challenging, with a cash balance of $488 million as of March 31 after a cash burn of about $98 million in the quarter, and total debt and leases of $8.7 billion, including operating leases.
According to Bloomberg Intelligence analyst Joel Levington, some of Carvana's cost-cutting measures may not be easily repeated, and there are a lot of one-time items that make you wonder about the repetitive nature of the cash flow. He added that usually, cost discipline alone is not enough to produce a consistently profitable company.
Carvana’s results offer more evidence that the used-car market, a closely watched barometer of consumer spending, may be stabilizing after prices declined for much of last year. Competitor CarMax Inc. also reported better-than-expected profit in its fiscal fourth quarter. However, Carvana still faces considerable debt, with creditors holding about 90% of its bonds recently proposing a debt-for-equity swap after rejecting the company's proposed debt exchange.
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