Investors have had a gloomy outlook about the stock market in the first part of the week, and Wall Street looked poised to suffer a third straight day of declines based on early morning performance. Stock index futures were down across the board, with market participants pointing to economic pressures around the world as the root cause.
Adding to the uncertainty was negative news from a pair of stocks that investors have been keeping an eye on lately. Both Carvana (CVNA 1.16%) and Ollie's Bargain Outlet Holdings (OLLI -0.72%) rely on a healthy consumer economy, and both companies saw their share prices fall significantly in premarket trading on Wednesday. Their declines are representative of the lack of confidence a lot of investors have about consumer behavior more broadly.
Carvana deals with creditors
Shares of Carvana plunged more than 25% in premarket trading on Wednesday. The ailing online used car specialist has recently faced substantial financial challenges, and now, some of the companies involved in having provided capital to Carvana are working together to try to keep things orderly as they work toward a potential debt restructuring.
Major holders of unsecured Carvana debt, which include Apollo Global Management, BlackRock, and the bond giant PIMCO, have signed on to an agreement that will have them cooperating in negotiations with the car dealer concerning outstanding financial obligations, according to reports from Bloomberg. The idea behind the agreement is to ensure that creditors don't end up fighting among themselves in costly legal battles that can end up siphoning away substantial amounts of potentially recoverable funds to litigation.
Carvana stock has already fallen precipitously over the course of 2022, but the real bad news is that the company's bonds trade at a huge discount of more than 50% below their par value. That indicates an overwhelming belief that Carvana will default on its bonds, due in part to rapidly changing macroeconomic conditions and the impact of rising interest rates on its highly leveraged balance sheet.
When creditors start gathering, it can be difficult for any company, and Carvana's situation is particularly difficult. With conditions in the used vehicle market only likely to get worse following an extremely strong period for the industry, Carvana isn't negotiating from a position of strength.
Ollie's sees strains in discount retail
Ollie's Bargain Outlet Holdings didn't see quite the same level of declines as Carvana, but its stock fell 9% in premarket trading. The discount retailer's third-quarter results for the period ending Oct. 29 failed to inspire shareholders about the company heading into the key holiday shopping season.
Ollie's financial numbers were mixed. Revenue rose 9% year over year to $418 million, with comparable store sales climbing by just 1.9%. Operating income fell from year-ago levels due to margin pressures, although Ollie's did manage to eke out a 4.5% rise in adjusted net income to $23 million. That worked out to $0.37 per share.
Investors seemed to respond most negatively to comments from CEO John Swygert, who noted that sales trends have been volatile recently. After business softness in late October, sales trends have improved somewhat, but the combination of high inflation and an unusual amount of promotional activity could weigh on the company's holiday performance.
Ollie's had to adjust its full-year numbers, now expecting sales of $1.817 billion to $1.827 billion and adjusted earnings of $1.57 to $1.62 per share. With Ollie's now expecting comparable-store sales to decline between 3.3% and 3.8%, it's clear that even the often-resilient discount niche of the retail industry isn't immune to macroeconomic pressures.
