Carvana holds off on loan sales

Carvana held onto a higher volume of finance receivables on its balance sheet in the first quarter to maximize yield as the retailer pulled back on inventory and advertising spend to reduce costs. Finance receivables held for sale tallied $1.6 billion, up 20.4% year over year, according to the retailer’s letter to shareholders Thursday. By comparison, receivables held for sale have historically hovered between $300 million and $500 million as the lender leverages capital markets and its $4 billion forward flow arrangement with Ally Financial . "We plan to sell [receivables held] down in the coming quarters in an orderly way,” Chief Executive Ernie Garcia said during the retailer’s earnings call Thursday. “The benefit of carrying them is we earn additional finance [gross profit per unit] because those are [high yield] assets. Prior to sale, we are the ones benefiting from that yield. We had some benefits in finance GPU, but we do plan to catch up and sell them.” Originations totaled $1.4 billion in Q1, a decrease of 6.7% sequentially and 28.1% YoY , according to the letter. Other GPU, which includes finance revenue, totaled $2,032, an increase of 29.9% QoQ and 12.5% YoY. Other GPU is expected to decline in Q2 driven by “normalization of loan sale volumes,” according to the letter. Carvana sold or securitized $1.3 billion of loan principal since the start of Q2 2022. Notably, Carvana came to market in late April with its first nonprime asset-backed securities transaction since March 2022, a $478.8 million deal marked by widened spreads and an increase in overcollateralization. “Sequential improvement in other GPU was primarily driven by a greater volume of loans sold in the quarter compared to Q4,” Mark Jenkins , chief financial officer, said during the lender’s earnings call Thursday. “In Q1, we sold slightly less than a normalized volume of loans as a result of uncertainty in the securitization market in March. The GPU impact of this less-than-normalized sales volume was largely offset by higher interest income and other improvements, leading to an approximately normalized other GPU in Q1.” Year-over-year improvement in other GPU was driven by Carvana aligning loan origination interest rates to benchmark rates following consistent increases by the Federal Reserve , according to the letter. Cutting supply, ad costs Carvana’s retail units sold fell 9% quarter over quarter and 25% YoY to 79,240 as the retailer purposely reduced inventory and cut back on advertising expenses, according to the letter. Inventory shrank by 21% compared with Q4 2022 and by 55% on a YoY basis. Carvana’s advertising spend was slashed by 35.6% sequentially and 63.9% YoY to $56 million, reducing the retailer’s customer acquisition cost per unit. Total selling, general and administrative (SG&A) expenses decreased 25.3% QoQ and 35.1% YoY to $472 million. “We have significant opportunities across the business to become more efficient in our operations,” Jenkins said during the call. “That happens through all of the technology projects that we have ... to automate manual tasks, make our routing and scheduling more efficient … [as well as] incentivize customers to choose the cars that are close to them or do pickups versus delivery.” The retailer continues to look for ways to shore up liquidity and in late March offered a $1 billion debt swap aimed at reducing its debt by up to $300 million. Carvana has not ruled out leveraging Adesa real estate to build liquidity as well, Jenkins said. Carvana acquired wholesale used vehicle auction marketplace Adesa in May 2022. “When we think about financing sources, we favor asset-based or secured financing, of which I think the biggest asset that we have today is real estate,” he said. “We have nearly $2 billion of total unpledged real estate assets; a little more than half of that is Adesa real estate locations and [there has been] no change to our overall thought process there.” Carvana also continues to expand geographically and recently opened additional vending machines in Illinois, New York and Texas, according to the letter. Shares of Carvana [ NYSE: CVNA ] were trading up 27.64% at 3:29 p.m. ET in New York on Friday to $9.19. The company has a market capitalization of $1.72 billion. Auto Finance Summit East, Auto Finance News’ new spring event, is set for May 10-12 at the JW Marriott Nashville featuring a fireside chat with Peter Muriungi , CEO of Chase Auto . Visit autofinance.live.

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