Carvana: The Disconnect
The market isn't ready to believe management's guidance.
Last week, Carvana announced an exchange offer to its existing noteholders. I’ll get to the details in a bit, but probably more interesting was management’s release of preliminary first-quarter results in conjunction with the offer.
Preliminary first-quarter results, specifically regarding SG&A and adjusted EBITDA, meaningfully exceeded expectations. This was roughly consistent with the thesis I outlined in Carvana: Groupthink, although first-quarter adjusted EBITDA will beat my prior estimate as well. Here are the highlights.
On retail units:
It was well-understood that retail units are down a lot due to the affordability environment and management’s aggressive cost cutting efforts—cutting inventory roughly in half, slashing advertising spending, and several other profitability initiatives. There are alternative data sources that were estimating retail units within this range, so this no surprise.
On non-GAAP GPU:
$4,100-$4,400 is a nice bounce back from 4Q’s $2,667, which was depressed primarily due to the inventory write-down and loan sales that were deferred into the first quarter. In Carvana: Groupthink, I had estimated slightly higher first-quarter non-GAAP GPU because I assumed the unusually high amount of loans held for sale would normalize to around $400 million in the first quarter. But as you can see here, they are actually going to end the first quarter with $1.6 billion of loans held for sale, up from $1.3 billion at the end of December.
Essentially, this defers the realization of Other GPU. The large backlog of loans to sell should boost future GPU sooner or later. How quickly this balance returns to more normalized levels remains to be seen. If it’s more quickly, we’ll see a big increase in GPU in a short period of time; if it’s over a longer period of time, we’ll probably see a smaller benefit but perhaps for a longer stretch. In the meantime, Carvana will receive more interest and principal payments on the larger than usual amount of loans held for sale. Management certainly wants to monetize these loans but is willing to wait for more favorable market conditions.
On non-GAAP SG&A:
Non-GAAP SG&A is well ahead of the expectations management set on their fourth-quarter call on February 23. At the time, Ernie said non-GAAP SG&A should decline by $100 million from the fourth quarter to the second quarter. That would be a decline from $523 million to $423 million. As I showed in Carvana: Groupthink, I took that at face value and guessed we’d see $468 million in 1Q and then $423 million in 2Q. Now it’s clear they are on track for $400-$440 million in 1Q, which at the mid-point means they are essentially getting to the second-quarter target a full quarter early.
It’s noteworthy that the fourth-quarter call on February 23 was almost 8 weeks into the 13 week quarter. One would think they would have had a pretty good idea that non-GAAP SG&A was shaping up be in that range a full quarter sooner than they expressed. If so, what motivated them to be that conservative with SG&A guidance? One might think a company in Carvana’s position might be incentivized to talk things up to try to get the stock up due to the potential for reflexivity. But the opposite seems to have occurred. There were no disclosed insider buys after this call, so being conservative ahead of insider buying doesn’t seem to have been the reason. Were they hoping to keep a lid on the bond prices so creditors would be more receptive to an exchange offer at a premium? That might be the best explanation.
On adjusted EBITDA:
This is the highlight. Previously, consensus adjusted EBITDA was -$604 million for 2023, including -$204 million for the first quarter.
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