Carvana Sinks on Earnings Miss, Bleak Outlook on Used-Car Demand

(Bloomberg) — Carvana Co., the online platform for used-car sales, reported third-quarter results that missed Wall Street expectations, citing a deteriorating economy and softening demand for pre-owned vehicles.

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The wider-than-expected loss came as the auto industry struggles to deal with falling used-car prices and surging expenses, including higher depreciation and interest rates, as car buyers balk at fast-rising financing costs.

“Cars are extremely expensive, and they’re extremely sensitive to interest rates,” Ernie Garcia, Carvana’s chief executive officer, said on a conference call with analysts, adding he was hopeful rates might be close to peaking. “Interest rates have moved up materially, and most customers use financing to buy a car.”

The Tempe, Arizona-based company’s loss widened to $2.67 a share excluding some items, it said Thursday in a statement. Analysts were projecting a loss of $1.91. Sales fell to $3.39 billion, below analysts’ projections for $3.71 billion.

Carvana shares fell 10% in the postmarket to $12.90 as of 7:11 p.m. in New York. They’re down 94% for the year as of the market close Thursday and traded as high as $376.83 in August of 2021.

“Overall, not a shocker but there doesn’t seem an easy way out with self-help initiatives not enough to offset macro pressures,” analyst Rajat Gupta of JPMorgan Chase & Co. wrote in a research note Thursday.

Worse Before Better

Carvana said things would likely get worse before they get better. It has shifted strategies from focusing on growth to focusing on profitability and said it will continue to cut expenses.

The company reduced advertising and inventory by double digits, but that wasn’t enough to counter the decline in profit from lower sales volumes and higher depreciation. Gross profit per unit declined to $3,500 in the most recent three months, down more than $1,000 per vehicle from a year ago and more than $100 per unit in the second quarter, Carvana said.

“The environment has continued to get increasingly difficult since the end of the quarter and it is probable things will continue to get more difficult before they get easier,” Garcia and Mark Jenkins, the chief financial officer, wrote in a letter to shareholders.

Read more: Carvana’s 10.25% bond slumps as earnings miss

Rising interest rates have stoked investor concerns that dealers might have to mark down vehicles to avoid getting stuck with a lot of unsold inventory. Roughly 40 million Americans buy used cars every year.

Carvana’s sales of used cars in the latest quarter fell to 102,570 vehicles, down 8% from a year earlier and below an estimated 114,073.

The company said it won’t provide an outlook for 2023. “We believe forecasting the environment over the coming months and quarters is difficult,” the shareholder letter said.

(Updates with CEO’s conference call comments from third paragraph.)