What happened
Shares of Cars.com (CARS 1.92%) are falling today, down by 15% as of 1:45 p.m. ET. That drop has only erased a small portion of shareholders' recent gains, though. The stock is up 20% so far in 2023 compared to a 6% increase in the wider market.
The slump came after some investors found reasons to be disappointed with the automotive retailing platform provider's Q1 earnings update.
So what
Cars.com achieved a 6% sales increase for the selling period that ended in late March, putting revenue exactly within management's short-term forecast from February. The boost reflected solid traffic growth along with rising average spending levels.
In a press release, management highlighted improvements across key areas like sales, adjusted earnings, and traffic. "We drove strong first quarter performance with year-over-year growth in key metrics," CEO Alex Vetter said.
Yet investors chose to focus on the company's wider 2023 outlook, which remained muted.
Now what
Cars.com executives still see sales rising by between 3% and 6% this year because revenue remains constrained by low supply. Listing levels were down 40% in late 2022, and there's no quick solution to this challenge. The 2023 outlook continues to assume that "historically low inventory levels will persist throughout the year" in the automotive industry, management said.
On the bright side, Cars.com believes it will steadily boost adjusted profit margins to about 30% of sales by late 2023 compared to the current 27% rate. Success here will lay the groundwork for sharp earnings growth when the industry returns to a more normal balance between supply and demand.
Still, today's update shows no evidence of this rebound starting yet. As a result, investors are a bit less optimistic about the short-term earnings prospects for this automotive platform business.
