'It's Only Getting Worse' For Carvana, Analyst Says

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  • Wedbush analyst Kevin Merritt reiterated an Underperform rating on the shares of Carvana Co CVNA with a price target of $1.00.
  • Following recent data points, including CarMax Inc's KMX Q3 results last week and no Q4 Carvana ABS deal, we reduce estimates further below consensus for Carvana.
  • The analyst said that CarMax painted a bleak near-term industry picture, highlighting that many competitors were sharply cutting prices to reduce bloated high-cost inventories in a falling price environment.
  • CarMax's top-notch inventory management has enabled the company to be less aggressive on price to maintain gross profit per unit (GPU) while also rapidly reducing inventory, but Carvana is facing much worse prospects, the analyst added.
  • Also ReadThe Irony Of A 'Virtual' Bus Tour With Carvana: Car Buyers Want 'Physical' Shopping Experiences Again
  • Carvana entered the quarter with 87 days of inventory, and the analyst's web-scraped data indicates that figure has unfavorably increased as CVNA's sales have floundered further and inventory units for sale have only modestly declined.
  • The analyst now forecasts 85,000 retail unit sales in Q4, down from 94,000 previously and versus consensus' 96,000.
  • This is a 25% y/y decline, which would fall well short of the industry's High Single Digit decline.
  • The lower retail volume will ripple through CVNA's income statement, reducing other GPU and deleveraging SG&A even further despite 1,500 additional employee cuts early in the quarter, added the analyst.
  • Wholesale volumes could fall further as the company pulls back on purchases from consumers in the declining price environment, leading the analyst to reduce our Wholesale unit volume estimate to 36,000 versus consensus' 45,000.
  • With worsening results, the company could run out of committed liquidity sooner than the analyst's early 2024 forecast.
  • The analyst believes that CVNA should more drastically reduce costs and leverage its unencumbered real estate to raise cash.
  • Price Action: CVNA shares are trading higher by 1.61% at $3.78 on the last check Wednesday.
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