Carvana to lay off 2,500 employees due to overproduction

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Carvana, a US used car retailer that has raised at least nine-figure venture capital while the private, before going public, announced 2,500 layoffs today. Staff reduction, details in the application with the US Securities and Exchange Commission are part of the company’s “previously announced plans to better align staff levels and costs with sales volumes,” Carvana wrote.

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According to the same filing, the company will offer “affected team members” the “opportunity to receive four weeks of pay plus an additional week for each year they have worked at Carvana” as well as the “opportunity to receive extended medical care,” among other things. things.

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Carvana also stated that its “executive team is forgoing their salary for the rest of the year to contribute to the severance pay for departing team members.”

That the company is cutting staff is not surprising given its recent financials; the scale of layoffs, however, is striking. Let’s talk about how Carvana came to this.

So much for the afterglow

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Carvana is a highly loss-making company that lost money in the first quarter even based on EBITDA, a heavily adjusted measure of earnings.

In Karvan’s numerical terms Income for 1 sq. amounted to $ 3.497 billion, which is 56% more than a year earlier. Despite rising revenue, Carvana’s three-month gross fell to $298 million, resulting in a net loss of $506 million, much worse than its $82 million net deficit in the first quarter of 2021. The company’s EBITDA margin also declined from -1.3% in the first quarter of 2021 to -11.6% in the first three months of 2022.

How was Carvana able to increase its revenue and at the same time reduce its gross margin, thereby increasing its losses? Here’s how the company explained it in its income statement:

We typically prepare for sales volume 6-12 months in advance, meaning we ramped up capacity in most of our business functions to significantly more volume than we did in the first quarter. Because our costs are relatively fixed in the short term, lower retail volume has resulted in higher unit costs (such as refurbishment and inbound transport costs), resulting in lower GPUs and higher SG&A per unit. These effects, coupled with rapid growth in interest rates and widening credit spreads, have led to a decline in EBITDA margins.

Carvana rebuilt the volume it hadn’t achieved, resulting in higher fixed costs and lower margins. The issue led the company to write in its Q1 2022 report that it intends to “better align sales with spending levels through a combination of better sales and spending efficiencies” over the “next few quarters.”

Given this schedule, there may be more staff cuts.

It’s worth noting that the company’s Q1 report had an entire section detailing its expansion plans, noting that it opened one new Inspection and Repair Center, or IRC, in the fourth quarter of 2021 and three in the first quarter of 2022. , adding that she expected the opening of three more this year. (This is Karvana buying another company using external debt is another matter.) In a statement to the Securities and Exchange Commission, Carvana said that “[i]Due to these scaling initiatives, over the next few weeks, Carvana will be moving operations from its Euclid, OH IRC, and several logistics hubs,” making her April comments in retrospect odd.

However, the company must make changes. In the first quarter of 2022, the company did not meet all of its long-term financial targets:

Image credits: Letter from shareholder Karvan

What’s more, Carvana’s operations expended $593 million in cash during the first quarter, a huge amount for a company that reported $247 million in cash and cash equivalents at the end of the first quarter of 2022.

Carvana’s cuts come as a number of startups have also cut staff; companies of all shapes and sizes are laying off staff where they may have rehired or expected more demand than materialized.

In some ways, this is a tough time for business due to a still-tight labor market, coupled with above-average inflation and uneven market conditions. This is not the latest series of layoffs we report in the second quarter.

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