Carvana Skirting Cliff Along Dire Financial Straits

Online used car dealer Carvana Co, the parent company of ADESA, which it bought last year in a $2.2 billion deal, faces a perfect storm of financial troubles in recent weeks as it spooks investors and markets with high debt levels.

Most recently, Carvana swallowed a poison pill on Jan. 17 by adopting a shareholders' rights plan aimed at deterring investors from accumulating more than 5% of its shares, the Wall Street Journal reported. The plan is intended to reduce the chances that an investor would accumulate enough shares to threaten the company’s ability to use its significant net operating losses to reduce potential future tax bills.

Four days earlier, the WSJ reported Carvana is reducing staff again amid a deep slowdown in sales as it tries to cut costs and keep cash to handle its debt. The online used-car seller is quietly terminating employees, cutting hours and letting open positions go unfilled, according to current and former employees and internal emails reviewed by The Wall Street Journal.

Compounding the financial pain, Carvana put further pressure on its business last year after acquiring ADESA's U.S. physical auction business in 2022 for $2.2 billion, according to The Motely Fool. That contributed heavily to the company's current financial woes as its debt load now exceeds $7.4 billion. The media outlet is reporting in a recent analysis that the dire state of the company’s finances could have been prevented.

As a result, Carvana risks going under as creditors are increasingly concerned with its numbers and its trajectory, according to a report in Modern Retail:  “They pursued an aggressive growth strategy, both organic — opening three new inspection and reconditioning centers — and inorganic, buying KAR’s [Auction Services] 56 auction sites, right as used vehicle end demand tailed off aggressively given rising interest rates,” said Chris Pierce, research analyst at Needham & Company, in Modern Retail.

During an onstage interview during a remarketing industry conference in Nashville last August, Carvana founder and CEO Ernie Garcia III, whose family has majority control of the company, cited the fact that an e-commerce used car retailer needs a physical footprint like Amazon as a major factor motivating the ADESA deal. Integrating with a major auction company enables Carvana to do more for auction and retail customers while applying economies of scale to complementary services, Garcia told an audience of consignors and auction owners and operators.

“We are more oriented to doing more of the things your customer needs,” he said. “That can lead to complexity, but you have more control in the system to reduce costs and excesses.” The enlarged Carvana enterprise can now span consignors, auctions, rental car clients, retail consumers, and captive finance services across wholesale and retail channels, he added.