What happened
Shares of Carvana (CVNA 4.52%) were revving up once again this week, primarily on news that management now forecasts that the struggling online used car dealer's second-quarter adjusted earnings will come in above the analysts' consensus expectation.
For the week through 2 p.m. ET on Thursday, the stock was up 40.6%, according to data from S&P Global Market Intelligence.
Image source: Carvana.
So what
Ahead of an industry conference Thursday morning, Carvana updated its guidance.
The used car dealer said it now expects to generate adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $50 million in Q2, and total gross profit per unit of $6,000, which represents a 63% improvement compared to Q2 2022. The EBITDA guidance was far better than the consensus, as the average analyst was modeling for a $6 million EBITDA loss.
Carvana said loans sold or securitized quarter-to-date increased from $1.3 billion as of May 4 to approximately $2 billion, which seems to indicate a slowdown in sales growth, but the company has made a strategic decision to reduce inventory and sales in order to drive profitability.
"Our record-breaking 2023 first quarter is evidence that our strategy is working, and our updated Q2 2023 outlook demonstrates that our progress continues to positively impact the business even faster than expected," said CEO Ernie Garcia.
The news follows a better-than-expected first-quarter earnings report and shows the company is bringing costs into line and driving gross profitability faster than expected.
Carvana stock may also be benefiting from a short squeeze, as 69% of shares outstanding were sold short as of mid-May, and shares soared on high volume Thursday.
Now what
While Carvana is clearly making progress in its recovery, the company still faces a number of challenges that may be difficult to escape from, including a heavy debt burden of more than $6 billion.
In the first quarter, the company's sales fell by 25% as it reduced inventory to both save cash and improve profitability. Historically, the company had a pattern of overpaying for inventory in order to drive growth and meet customer demand, but it's now taking a different approach, and that's delivering results on the bottom line.
The improvement in gross profit per unit is certainly encouraging. We'll learn more when the company releases its second-quarter earnings report in August.
The stock is still down more than 90% from its peak in 2021, so there's considerable room for upside if the company can make progress on the bottom line.
