Carvana (CVNA 1.09%) sends out a letter to shareholders each quarter filled with excellent information, including financial metrics per vehicle and a plethora of useful charts and graphs. You'll see a trend line of gross profit per unit and even a map showing locations of inspection centers and market reach.
But what you won't find -- and what is the elephant in the room -- is a graph showing you the soaring interest expense Carvana has from its large pile of debt. Let me show you what that looks like and how it got to this point.
The elephant
Chart by author. Information source: Carvana SEC filings. *Full year estimated using first-quarter numbers.
Let's start with the information for 2023, which we only have three months' data for. During the first quarter, interest expense increased by $95 million from the year-ago period, to $159 million. That large increase was mostly driven by the interest expense on senior notes issued by the company in May 2022.
Those notes were primarily issued to finance its $2.2 billion acquisition of the U.S. physical auction business ADESA, with the acquisition adding about 56 U.S. locations and 6.5 million square feet of buildings across 4,000 acres.
The acquisition gave Carvana the ability to reach deeper into markets, cut transportation costs, and offer a larger selection of vehicles with faster delivery. Those are all great things, but they came at a hefty cost: The debt it took on came with a higher than 10% interest rate. The rest of the company's debt is at significantly lower rates.
To get a handle on how much Carvana's interest payments might total for the year, I multiplied that first-quarter payment ($159 million) by four to get $636 million. The $636 million might be a high estimate, but I've seen other analysts ballparking the annual interest cost at around $600 million. It's a big number.
You can easily see the elephant in the room with the graphic above, but let's provide an added graphic to give a little more context to the situation.
The size of the problem
CVNA total long-term debt (quarterly). data by YCharts.
This chart shows three important things about Carvana's current financial situation. You can see the quick rise in total long-term debt, which includes the notes issued in May 2022, and the driving force behind its rising interest expense.
You can also see that the company is still burning through cash rapidly, even if it is making improvements on its cash flow.
And its cash and cash equivalents won't even cover the company's likely full-year interest expense for 2023.
Now, this isn't to say it can't cover its interest expense, but it makes it more clear how big a problem the interest expense is.
The bottom line
Carvana's rising interest expense is one huge reason the company has completely reversed course from expanding at any cost. It is now focusing on improving gross profit per unit; reducing costs; and improving adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Carvana has made progress on initiatives to improve its business; more details on exactly how much progress can be found here. One thing is clear: Interest expense is a big problem, and despite the many graphs management will show you, you won't see that in the next shareholder letter.
Until investors better understand how management will work through its interest expense, they might want to stay on the sidelines and take a look at other places to put their investing dollars.
