The One Secret Carvana’s Comeback:From Near Bankruptcy To 413% Surge Now, That Will Turnaround Your Business

Carvana, the online used car retailer, has pulled off a stunning turnaround from near-death to profitability in just one year. Their website’s popularity has made it a go-to destination for car buyers, but the company was on the brink of collapse by the end of 2022.

The numbers in 2022 were grim: cash reserves dwindled to $600 million, a staggering loss of $1.6 billion, negative operating cash flow of $1.3 billion, and a crushing debt load exceeding $8 billion. Investors fled, sending the stock price plummeting.

Then, in 2023, a miracle happened. Carvana engineered a remarkable turnaround, slashing costs and achieving profitability for the first time. They secured crucial refinancing, ensuring their survival against all odds. The stock surged 413% on December 12, 2024, since the beginning of the year.

How? An interesting thing happened: profits increased while sales significantly reduced from $13.6 billion to $10.7 billion. This paradoxical feat was achieved through several key strategies:

1. Laser focus on hot sellers: They concentrated on popular cars that sell fast, dramatically reducing inventory levels.
2. Rightsizing operations: With lower sales volume, it was natural that SG&A (Selling, General and Administrative expenses) costs decreased proportionally. Each SG&A cost supports a certain amount of sales volume, so fewer cars meant fewer staff, facilities, and marketing expenses across the board.
3. Faster sales, more profit: Lightning-fast inventory turnover supercharged their gross profit rate on retail vehicle sales, increasing from 3.6% in 2022 to a whopping 9.9% in 2023.
4. The bottom line: Profitability at last.

In the cutthroat world of used cars, time is money – literally. The longer a car sits, the deeper the discounts needed to move it, and the risks of holding inventory for months are severe.

This correlation is crystal clear in the plot of quarterly DIO (Days Inventory Outstanding: how many months it takes for a company to sell its inventory.) versus gross profit rate from 2017 1Q to 2024 2Q. The tight negative correlation coefficient of -0.88 indicates that faster turnover equals fatter profits.

Inventory reduction was key to the turnaround this time. So, how did Carvana slash its inventory so effectively?

The important change in strategy was this: Previously, the strategy was to increase sales volume pursuing growth, but this time it was survival first. The easiest way to increase sales is just having the widest range of selection. That way, they can avoid sales loss due to lack of inventory, never losing a selling opportunity and thus maximizing sales, even if it takes years to finally sell a car. But this approach hurt the bottom line very badly because steep discounts are needed to sell these long-held cars.

Instead, they narrowed down the selection. To enable this, they leveraged cutting-edge machine learning algorithms to predict which cars would be popular and sell fastest in each market, factoring in seasonal shifts and emerging trends.