A Carvana used car “vending machine” on May 11, 2022 in Miami, Florida.
Joe Raedle/Getty Images
Carvana
shares were rising Monday as investors reacted to the used car platform’s new operating plan, which aims to grow sales and profits while rapidly reducing expenses.
In the short term, Carvana (ticker: CVNA
) expects sequential reductions in selling, general, and administrative expenses (SG&A) per retail unit sold throughout the year, with a fourth-quarter goal of $4,000 per retail unit. In fiscal year 2021, the SG&A per unit was a little over $4,700. Midterm, the company is setting a goal of $3,000 SG&A expenses per unit sold.
The company believes optimizing SG&A is the most effective to generate positive free cash flow.
“We currently view SG&A expense per retail unit sold as our highest priority and intend to lower it in both the near and midterm while continuing to grow on the path toward our long-term goals,” the company said in its update, released Friday evening.
For example, in another bid to cut costs, the company reduced its total headcount by 12%, or 2,500 employees, in May. Executive team members will be forgoing their salaries for the remainder of the year to contribute to severance pay expenses. The staffing cuts are expected to create a $125 million reduction in annual payroll, but not before incurring a one-time expense of $20 million in the second quarter of 2022.
Carvana shares were up 9% to $41.75 on Monday.
“While this bullish plan may start to change sentiment on CVNA shares, it will take strong execution of this plan to reduce costs and increase unit sales before investors fully re-embrace the name,” wrote Wedbush analyst Seth Basham in a research note on Monday. Basham maintained an Outperform rating and a $90 price target on the stock.
RBC Capital Markets’ Brad Erickson agreed, writing that the update would be welcomed by shareholders given that the company now appears to be prioritizing profitability. But, he added, it will create further debate on whether and when the company can reach free cash flow. He kept a Sector Perform rating on the shares and an $85 price target.
“While this likely reduces some of the more draconian, liquidity-related concerns that exist out there, the question from here shifts back to what it’s largely been since CVNA went public: what’s the right [long-term] unit growth rate in light of the company’s updated push for Ebitda & [free cash flow] profitability,” he wrote.
Erickson estimated that it could take more than 1 million unit sales before the company reaches free cash flow profitability.
Monday’s rally is a welcome relief for the battered stock, which has lost 83% this year. On Friday, Carvana’s license to sell vehicles in Illinois was suspended over its practice of supplying in-state customers with out-of-state temporary licenses, as well as failure to transfer car titles in a timely manner. North Carolina, Florida, and Michigan have also sanctioned the company over similar issues in recent months, or have threatened to do so.
Write to Sabrina Escobar at [email protected]
