Vroom Military Discount - The online auto retailer is facing a reckoning after a spike in consumer and investor interest during the COVID-19 pandemic.
Online car retailers like Carvana Co. and Vroom Inc., have greatly engaged consumer and investor interest during the COVID-19 pandemic.
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Carvana has cut 2,500 jobs and frozen executive pay after losing $506 million in the first quarter. Vroom benefited from a new CEO who said he would consider cutting jobs after reporting a big loss. Shift Technologies Inc. its workforce was cut by 10 percent last month.
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The now-humble spoilers, which were just last year affecting the powerful Super Bowl dealers, their stock prices collapsed as their losses rose. Rising interest rates and generally higher prices - particularly for fuel - are reducing retail demand, while wholesale prices remain high. For companies struggling to grow in a hot market, the first quarter brought a rude awakening.
"You have to plan your infrastructure to support next year's growth," said Sharon Zackfia, who covers all three online car markets as an analyst at investment bank William Blair. "In January, I don't think any of these companies expected the industry to take off as quickly as it did."
The tough conditions will require cuts in some areas, as managers prioritize what they need to spend this year, she said.
To be sure, the economy is still growing fast, the job market is hot and interest rates are still low compared to historical levels. The publicly traded group, which like many retailers is focusing on used car operations as it expands its digital business, reported strong earnings in the first quarter.
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But online retailers are in troubled territory. Whether they can contain costs and control losses will be crucial in the coming months, analysts said.
Analysts who cover the companies told Automotive News that this period is likely not the beginning of the end for the used car retail sector. But these companies, who have tried to achieve a scale that could provide a competitive advantage, could be the front end.
Having changed their skills and attitudes during the crisis, they now need to take a measured approach to growth to preserve cash flow and build sustainable profitability.
"This will be a long process to slow growth and better manage costs," said Rajat Gupta, a senior analyst at JP Morgan who covers auto retailers, including Carvana, Vroom and Shift.
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Carvana, the largest of the three, lost $506 million in the first quarter. It sold fewer cars than it planned and earned 23 percent less than a year ago.
And the company knows that "demand is probably not going to improve in the near future," said Daniel Imbro, managing director of Stephens Inc. covering the retail/hardlines segment, including Carvana.
Uncertainty about 2022 took center stage this week when former Carvana employees released an email from CEO Ernie Garcia that apparently sent the entire company into layoffs. In it, Garcia said that the Carvana work is more than what is needed and that the company "Can not be a specific growth to recover quickly to restore the balance."
Carvana has done a good job growing its business over the past two years, when car prices and demand have increased, Gupta said.
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But "the business was not built in a way to prepare for a downturn like this," Gupta said. "I think they've grown very quickly and built a very high volume business. So it's a bit unfortunate that they're going to lay people off - you never want to do that with a company because this - But I think it is the result of the big recession, ultimately."
In addition, he said, investors and shareholders today are looking for more control over spending and free cash flow as interest rates rise.
Carvana spent money in the first quarter to add three more of its inspection and repair facilities. Later this week it completed its ADESA US auction network from KAR Global. Carvana believes the acquisition will give it the ability to sell an additional 2 million vehicles annually.
But the real estate cost $2.2 billion, and Carvana took out a lot of expensive debt to finance it. The company borrowed $3.3 billion at 10.25 percent — a higher interest rate than Carvana thought it would have to pay to close the deal, said Chris Pierce, of Needham and Co. A leading provider of online analytics services, including Carvana.
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It has set off alarm bells among investors worried about the speed at which Carvana is burning through cash. Do the math, and it adds up to a huge cost on Carvana's income statement — more than $330 million in interest each year over the next five years, Imbro said.
Carvana plans to spend an additional $1 billion to renovate its 56 ADESA sites in the United States. For that price to be worth it, "they need to get these facilities right now," Pierce said. Carvana declined to comment by press time.
Vroom is also facing layoff cases after losing $310.5 million in the first quarter. Vroom has listed "workforce reductions" as a key part of its plan to restructure the business for sustainable growth.
Vroom also reinstalled the senior leadership that will carry out the plan. Tom Shortt, 53, who has been CEO since January and previously helped run Walmart's e-commerce supply chain, has stepped down as CEO. Former CEO Paul Hennessy left for other opportunities, Vroom said. He is set to become CEO of Shutterstock on July 1.
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A change in Vroom's strategy is accompanied by a change in its executive leadership, said Zackfia, from William Blair, who said more details could emerge this month when Vroom holds an investor day. Vroom has taken a more national focus than a regional one, she said, which creates more challenges in terms of scale. Company leaders also acknowledged that Vroom had advanced its capabilities.
Like Carvana, Vroom will try to increase the profit of every car it sells. Vroom's gross profit per vehicle sold fell 14 percent in the first quarter to $1,763.
Administrators acknowledged that Vroom had "fallen behind" in handling vehicle title and registration matters, for which he was fined $47,000 last month. As a result of the delay consumers are unable to register their vehicles before the temporary plates expire.
"That's an unacceptable outcome for even one customer, let alone the majority that this happened to," said Robert Mylod, independent chief executive officer of Vroom's board, during the company's earnings call this week.
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Such issues — along with consumer complaints that the company misrepresented vehicle conditions — are at the heart of a lawsuit filed by the Texas attorney general against Vroom last month.
Vroom incurred additional repairs and legal fees trying to fix those problems, Mylod said. Dealing with them will be part of the new business strategy, he said. Vroom declined to comment to Automotive News before press time.
Among them, Shift only listed a stress warning in a federal filing, and at least one analyst predicted it has the resources to reach 2023, when the market could normalize.
JP Morgan Gupta said: “Shift is, I would say, the most vulnerable of the three…
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"Carvana is already the second largest used car company in the United States. We are optimistic that they will become a viable player and become even stronger," she said. "You have to figure out how to make your model strong in times like this, and I'm sure they'll figure it out. I think smaller companies are in a tough spot because of the scale. They don't have the brand. . The recognition of Carvana."
Carvana was the first automaker in its segment and built a "very unique business" that will continue to have strong growth potential, said Doug Arthur, managing director of Huber Research Partners, which covers the company. Carvana's challenge is to change its "growth at any cost" mindset to a focus on profitable growth.
It may take a while for used car prices to return to normal levels, but if it does, "that's a much better environment for Carvana," Arthur said. "A, it's going to help sales. B, it's going to help inventory. And C, they're probably going to be able to manage their sales volume a little better at the margin."
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