What happened

Shares of Carvana (CVNA 8.79%) were up by 40.4% as of the close of trading Wednesday, according to data provided by S&P Global Market Intelligence, after the online used car dealer announced better-than-feared second-quarter 2023 results and a favorable agreement with debtholders.

Though Carvana's quarterly revenue actually fell 23.6% year over year to $2.968 billion, that handily exceeded expectations for a much steeper 33% sales decline. On the bottom line, Carvana leveraged significant cost reductions to narrow its net loss to $105 million, or $0.55 per share -- crushing expectations for a loss of $1.15 per share. In the year-ago period, it booked a net loss of $439 million, or $2.35 per share.

So what

"Carvana performed exceptionally well in the second quarter and set company records for adjusted EBITDA and gross profit per unit, ... all while continuing to lower expenses," said founder and CEO Ernie Garcia. "Our strong execution has made the business fundamentally better, and combined with today's agreement with noteholders that reduces our cash interest expense and total debt outstanding, gives us great confidence that we are on the right path to complete our three-step plan and return to growth."

Indeed, Carvana simultaneously announced a favorable agreement with a group of its debtholders representing around 90% (or $5.2 billion) of its total outstanding senior unsecured notes. The deal not only lowers its required cash interest expense by more than $430 million over the next two years, but also reduces its total debt outstanding by over $1.2 billion. 

As a reminder, management has previously told investors that its three-step plan involves:

  1. Achieving sustained positive adjusted EBITDA -- a milestone it reached this quarter as the metric swung to positive $155 million from an adjusted EBITDA loss of $216 million a year ago.
  2. Driving the business to "significant positive unit economics" -- a step that's technically in progress now, given its more than $1.1 billion in annual cost reductions over the past year and its 94% year-over-year increase in gross profit per unit to $6,520.
  3. "After completing steps 1 and 2, return to growth."

Now what

In a letter to shareholders, Carvana management said it will continue to work on executing profitability initiatives "for at least several more quarters" before focusing on returning the business to sales growth.

In the meantime, Carvana expects adjusted EBITDA to remain positive in the third quarter, with a similar number of retail units sold to Q2 and adjusted gross profit per unit of above $5,000.

All things considered, this was as strong a quarter as Carvana shareholders could have hoped for, and the stock is understandably rallying hard in response.