Carvana to cut 2,500 staff as it struggles with overcapacity

Advertisements

In the United States, Carvana, a used-car reseller that acquired at least $9 million in venture financing before going public, stated today that it would be laying off 2,500 employees. This is part of the company’s “previously stated intentions to better match employment and expenditure levels with sales volumes,” according to Carvana, which confirmed the layoffs in an SEC filing.

Image Credits: Carvana

Additionally, “impacted team members” will get “four weeks of compensation plus an extra week for every year they have been with Carvana,” as well as “the possibility to acquire extended healthcare,” among other things, as stated in the same filing.

To assist out with severance compensation for leaving employees, Carvana said that its “leadership team is forgoing its salary till year-end.”

Advertisements

The company’s recent financial results don’t surprise us that it’s making personnel reductions, but the sheer magnitude of the cuts is startling. What brought Carvana to where it is today?

After all, there’s no more shine!

In the first quarter of this year, Carvana lost money even on a heavily-adjusted profit figure, EBITDA.

Advertisements

Carvana reported Q1 sales of $3.497 billion, an increase of 56 percent over the same period last year. A loss of $506 million, rather than the $82 million deficit it had in Q1 2021, was the result of lower gross profit of $298 million for Carvana during the three-month period. To make matters worse, the company’s EBITDA margin fell from -1.3 percent in the first three months of 2021 to -11.6 percent in the same period the following year.

How did Carvana manage to increase sales while simultaneously decreasing gross profit, hence increasing losses? As the following paragraphs in the company’s results report make clear:

The majority of our business activities have been geared up to handle substantially larger sales volume than we were able to deliver in the first quarter. SG&A per unit increased due to the higher cost of goods sold (such as reconditioning and inbound shipping expenses) and lower GPU because to our fixed costs for the near term. The combination of increasing interest rates and widening loan spreads resulted in a reduced EBITDA margin.

Advertisements

This resulted in greater fixed expenses and a decrease in profitability for Carvana, which was unable to meet its expectations. Since the problem arose, we’ve written in our Q1 2022 report that we expect, over the course of the “next few quarters,” to “better match sales with spending levels.”

More job losses might be on the horizon as a result.

According to the company’s quarterly report, it had established one new inspection and reconditioning centre, or an IRC, in the fourth quarter of 2021 and three more in the first quarter of 2022, and it expects to open three more this year. (The fact that Carvana is utilising external debt to acquire another firm is a different story.) Carvana’s SEC filing said that “[i]n combination with these right-sizing activities, over the next few weeks Carvana will be shifting operations away from our Euclid, OH IRC and a few logistical hubs,” making its April statements appear weird in hindsight.

Advertisements

Even so, the corporation will need to make some adjustments. In the first quarter of 2022, it fell short of every single one of its long-term financial targets:

In addition, Carvana’s first-quarter activities used $593 million in cash, a large number for a firm that had $247 million in cash and equivalents at the end of the quarter.

Image Credits: Carvana shareholder letter

Companies of all shapes and sizes are decreasing employees in areas where they overhired or projected greater demand than actually occurred. Carvana’s cutbacks come as a number of startups are also cutting staff.

Advertisements

Despite a tight labour market, high inflation, and mixed market performance, it’s a difficult moment for business. There will be more layoffs in the second quarter than this one.

Leave a Comment