What happened
On Friday, used-car company Carvana (CVNA -0.17%) released a 53-slide presentation outlining how it intends to cut costs and generate free cash flow (FCF) and apparently the market is a big fan. As of 10:30 a.m. ET Monday, Carvana stock was up 15%.
So what
According to Carvana management, factors in the used-car industry, the economy, and the financial markets are all compelling it to prioritize profitability over growth right now. This is in line with its previously stated goal of being "the largest and most profitable automotive retailer." But this is a clear deviation from its previous priority of selling more cars and generating more revenue.
As part of the plan, Carvana laid off around 2,500 members of its workforce on May 10. Keep in mind that this is a quick reversal of its hiring activity in 2021. At the end of 2020, it had 10,400 part-time and full-time employees. It ended 2021 with over 21,000 employees -- in other words, it hired more people in 2021 than it had in 2020 to begin with. That means it laid off 12% of its total workforce.
Now what
Retail investors seem excited about Carvana's plan, judging by today's stock price. But Wall Street analysts don't seem as enthused. Most are lowering their price targets for Carvana stock today. And one lingering concern is Carvana's recent acquisition of auction business ADESA. In Friday's presentation, Carvana management outlined how it issued $2.275 billion in senior notes to buy ADESA and another $1 billion in senior notes to improve ADESA. These notes come with a hefty interest rate and will cost the company $336 million in annual interest expenses alone.
Carvana management defends the purchase, saying ADESA's business will help it achieve its long-term profitability targets. Investors will certainly hope that's the case considering the ADESA acquisition comes with a high price tag at a time preserving capital seems to be at a premium. Shareholders should look for evidence in coming quarters that ADESA's business is indeed helping Carvana move toward its goals.