In the midst of one of the biggest seasonal periods for car buyers in the United States, online used auto retailer Carvana is surging on Wednesday, lifting online retail ETFs, thanks to a debt restructuring agreement that will lower the company’s existing by over $1.2 billion, according to sources from the company.
The Tempe, Arizona company, known for its unique, multi-story car vending machines, said the agreement will wipe out more than 83% of its 2025 and 2027 unsecured note maturities, as well as reduce its obligatory cash interest expense by over $430 million per year for 2024 and 2025.
In a separate public filing today, Carvana revealed it will sell up to $1 billion in shares in an effort to increase capital and revamp its operations.
Shares of the used vehicle retailer rocketed more than 35% Wednesday to hit $54 a share, its highest opening level in over a year.
The company has been kind to investors this year, surging from approximately $4 per share at the start of 2023 to almost $40 as of Tuesday’s close. However, the stock still has a way to go to reach its all-time high of nearly $377 notched in August 2021.
“This transaction significantly increases our financial flexibility by reducing our total debt, extending maturities, and lowering near-term cash interest expense as we continue to execute our plan of driving significant profitability and returning to growth,” Carvana CFO Mark Jenkins said in a statement.
The Improper Carvana Deal
The company has been attempting to make a deal like this a reality for over a year after the stock plummeted from a heavy debt load and improper management during the coronavirus pandemic.
Carvana’s total gross profit per unit was $6,520 during the second quarter, a gain of 94% compared with the prior year, beating the company’s previous best quarter by 27%.
“Our strong execution has made the business fundamentally better, and combined with today’s agreement with noteholders that reduce our cash interest expense and total debt outstanding, gives us great confidence that we are on the right path to complete our three-step plan and return to growth,” Carvana CEO Ernie Garcia said in a statement.
For investors interested in using ETFs to trade Carvana, there are a number to choose from, including the Amplify Online Retail ETF (IBUY), the Invesco DWA Consumer Cyclicals Momentum ETF (PEZ), and the ProShares Online Retail ETF (ONLN), which is up 2.82% on Wednesday.
ONLN tracks retailers that mainly sell online or through other non-store channels. The index uses a modified market-capitalization weighted approach, is rebalanced monthly, and is reconstituted annually. In addition to Carvana, ONLN holds other major online retailers such as eBay, Amazon, Etsy, and Alibaba, offering a way for investors to diversify from traditional brick-and-mortar retailer stocks.
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