Carvana (CVNA 1.36%) shares have soared 157% year to date as of this writing, and during the first quarter, the used car retailer posted its best first-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin in company history, improved its total gross profit per unit (GPU) and reduced costs.
That means the company is well on the road to recovery, right?
Not so fast. Let's dig into a couple of key metrics and figure out how much progress Carvana really made during the first quarter.
Total GPU
One major target for management was to push the total GPU back above $4,000. Indeed, in the first quarter, Carvana's total GPU jumped to $4,303 compared to the prior year's $2,833 -- a seemingly solid improvement.
While the improvement in total GPU is welcomed and touted by management, the figure doesn't tell the full story.
NYSE: CVNA
Key Data Points
Investors have to realize that one major factor contributing to rising total GPU was a $643 per retail unit sold benefit from inventory allowance adjustments as the company continued to sell off inventory.
It could be argued the inventory reduction was not only necessary but that the company took on too much inventory in the first place due to its aggressive growth strategy. Returning to more appropriate levels of inventory to grow more profitably isn't necessarily a bad thing, even if it inflates total GPU at the moment.
A more positive takeaway was that within total GPU is a segment of wholesale GPU, and the latter jumped to $883 per unit compared to $219 during the prior year. Part of that improvement was also due to inventory allowance, but another $150 per unit was from what management called "abnormal appreciation" during the first quarter -- essentially, better-than-expected prices.
However, on a more positive note, Carvana was able to boost its wholesale GPU by roughly $200 per unit thanks to lower transport costs as it incorporates its ADESA acquisition locations.
Ultimately, Carvana did make some meaningful progress in total GPU, but it's also not as great as it appears, thanks to gains from inventory allowance -- although this benefit will likely continue in the second quarter.
Adjusted EBITDA
One of the biggest headlines was Carvana recording its best first-quarter adjusted EBITDA in company history -- from (10.3%) to (0.9%), sequentially from the fourth quarter of 2022. Management also expects to be adjusted EBITDA-positive during the second quarter. It's true that Carvana improved the metric significantly, but again, there's a little more to the story.
Let's start with the positive aspect of its improving adjusted EBITDA: cost reduction.
During the third quarter of 2022, Carvana reduced its non-GAAP (adjusted) SG&A by $66 million, sequentially from the second quarter. The fourth quarter of 2022 showed a $60 million reduction sequentially, and then the first quarter of 2023 showed a significant improvement with a $119 reduction.
In other words, Carvana reduced its SG&A expenses for three consecutive quarters by significantly pulling back on advertising -- the first quarter was the lowest advertising expense per unit in company history -- reducing corporate headcount and lowering warranty expenses.
While investors should applaud those cost reductions, there's also a very important figure that adjusted EBITDA leaves out: interest expense.
Normally, it's OK for investors to keep interest expense on the back burner, but Carvana isn't a normal case. It has a mountain of debt, and a large chunk of its senior notes -- issued to help fund its acquisition of ADESA -- are at over 10% interest rates.
During the first quarter, Carvana's interest expense ballooned to $159 million, up from $64 million during the prior year. Part of the reason for this increase is that Carvana's payments on its latest round of high-interest senior notes are bi-annual, and it only made one payment in 2022.
2023 will be the first year it feels the full pain of its interest expense, which is likely to exceed $600 million for the full year. That's not a number investors should keep on the back burner.
Bottom line
Carvana's stock has soared nearly 160% year to date, but its still down over 64% over the past year and down 96% from its high in
August of 2021. And while the company has made some progress, it hasn't made as much progress as the headline figures would indicate. Moreover, its interest expense is a figure most investors don't hear about but should absolutely be focused on going forward.
Make no mistake, investing in Carvana currently is highly speculative, don't let the 160% pop in stock price fool you -- there are plenty of stable options in the auto industry. Carvana has made a little progress, but it needs to make much more progress before it becomes an option for investors eyeing a serious turnaround and long-term investment.
