Are the wheels falling off of used-car retailer Carvana (NYSE:CVNA)? It’s a legitimate question as CVNA stock investors have suffered staggering losses over the past year. As an important date approaches, Carvana will have to disclose its financial facts. Overeager investors should seriously consider getting out of the trade before Carvana’s problems go from bad to worse.
Onlookers could easily have seen trouble brewing with Carvana last year, as the company hired a financial adviser in December. Alarmingly, Carvana reportedly has more than $7 billion worth of debt and recently enacted a “shareholder rights plan,” which is commonly called a poison pill plan.
Sure, meme-stock traders might target Carvana for a short squeeze at some point. However, serious investors should think about Carvana’s long-term prospects as a business enterprise. And in the short term, there’s an event coming up in February that may reveal how deep and wide Carvana’s problems actually are.
Legal Developments Should Concern CVNA Stock Traders
Before we get to the big event in February, CVNA stock investors should know that Carvana recently had some legal issues to deal with. The company did its best to spin the outcome as a positive event. However, the reputational damage to Carvana is undeniable.
According to a report from Barron’s, Carvana reached a settlement with authorities in Illinois “over delays in transferring vehicle ownership to customers and its misuse of temporary license plates.” The terms of the settlement require that Carvana surrender a $250,000 bond and admit that the company broke Illinois state law.
On top of all that, Carvana also must “submit to special inspections” and could lose its license to sell vehicles in Illinois if Carvana is “found to have broken the law there again.” Illinois Secretary of State Alexi Giannoulias stated in a press release, “Carvana was violating the law in a manner that was harmful to Illinois consumers.”
Meanwhile, Carvana tried to spin this as a positive event. Note the headline from Carvana’s press release: “Carvana Reaches Agreement with State of Illinois to Continue Bringing Greater Vehicle Selection, More Convenience and Lower Costs to Residents.”
The truth is, Carvana will continue to face scrutiny from regulators in Illinois. Plus, Carvana is getting negative press coverage and could sustain reputational damage for a while.
Mark This Date on Your Calendar
While you’re processing all of that, be sure to mark Feb. 23, 2022, on your calendar. That’s when Carvana plans to report its financial and operational results for 2022’s fourth quarter, as well as for fiscal 2022.
That event could be disappointing, or even dismal. Carvana’s fourth-quarter retail sales are anticipated to decline to approximately 86,000 vehicles. That’s compared to roughly 113,000 vehicles in the year-earlier quarter.
Also, consider Carvana’s woeful data from the previously reported quarter. During the third quarter of 2022, Carvana’s total gross profit per unit sold was $3,500, versus $4,672 in the year-ago quarter.
Additionally, in Q3 2022 Carvana’s retail units sold decreased 8% year-over-year, and the company’s revenue contracted 3%. Moreover, Carvana’s net earnings loss widened significantly on a year-over-year basis. In fact, it increased from $68 million in 2021’s third quarter to $508 million in 2022’s third quarter.
Will the upcoming earnings report deliver a miracle for Carvana? Don’t count on it. The company and its customers had to deal with high inflation and recession fears in 2022. Chances are, Carvana’s fourth-quarter and full-year 2022 stats will be cringe-inducing.
What You Can Do Now
As we’ve discovered, Carvana’s reputation is far from perfect. It looks like regulators in Illinois will be keeping a close watch on the company for a while.
Prospective shareholders should also know that Carvana has a heavy debt burden and a widening net earnings loss. Therefore, don’t expect anything positive to happen on Feb. 23 as Carvana releases a slew of financial data. It’s wise to stay out of the way and consider selling CVNA stock now if you happen to own it.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.