Carvana to Cut 2,500 Staff As It Struggles With Overcapacity

Carvana to Cut 2,500 Staff As It Struggles With Overcapacity

The American used-car business Carvana, which garnered at least $9 million in venture funding before going public, announced 2,500 layoffs Thursday. The company’s “previously disclosed initiatives to better match employment and expenditure levels with sales volumes” are included in the workforce reductions, according to a filing with the U.S. Securities and Exchange Commission, Carvana noted. According to the same filing, the business will, among other things, give “impacted team members” “the chance to obtain extended healthcare” and “the ability to earn four weeks of compensation plus one extra week for every year they have been with Carvana.”

Additionally, according to Carvana, its “leadership staff is forgoing their wages for the rest of the year to assist in assisting the severance compensation for leaving team members.” Given its recent financial performance, it is not surprising that the corporation is making personnel reductions; yet, the size of the layoffs is noteworthy. Let’s discuss how Carvana arrived to this position.

What a waste of the afterglow. Even on an EBITDA basis, which is a significantly modified profit statistic, Carvana lost money in the first quarter. Carvana’s first quarter sales was $3.497 billion, up 56 percent from the same period last year. Despite its top-line growth, Carvana’s gross profit decreased to $298 million over the course of the three months, resulting in a net loss of $506 million—a far worse situation than its net deficit of $82 million in Q1 2021. Additionally, the business’ EBITDA margin decreased, going from -1.3 percent in the first quarter of 2021 to -11.6 percent in the same period in 2022.

How did Carvana manage to increase its revenues while simultaneously reducing its gross profit, increasing its losses? In its earnings report, the business provided the following explanation: We typically build capacity in most of our business operations for substantially greater volume than we fulfilled in Q1 since we typically plan for sales volume six to twelve months in advance. 

The lower retail unit volume resulted in higher cost of goods sold per unit (such as reconditioning and inbound shipping expenses), which in turn resulted in lower GPU and higher SG&A per unit because our expenditures were largely constant in the short term. Lower EBITDA margin was the result of these factors, together with quickly increasing interest rates and widening credit spreads.

Carvana constructed too much for a volume it never reached, which resulted in greater fixed costs and worse profitability. The firm stated in its Q1 2022 report that as a result of the problem, it plans to “better align sales with expenditure levels through a mix of improved sales and expense savings” over the “coming few quarters.” More personnel reductions may be forthcoming given that schedule.

It’s important to note that the firm included a whole section in its Q1 report outlining its development goals, stating that it had launched three additional inspection and reconditioning centers, or IRCs, in Q1 2022, three in Q4 2021, and three more this year. (That Carvana is utilizing external debt to acquire another firm is a different issue.) Carvana’s April statements now seem strange in light of the company’s SEC filing, which stated that “[i]n conjunction with these right-sizing activities, over the next few weeks Carvana will be shifting operations away from its Euclid, OH IRC and a few logistical hubs.”