Investors had a gloomy outlook for the stock market in the first part of the week, and Wall Street looked set to suffer a third straight day of declines based on early morning performance. Stock index futures fell across the board, with market participants pointing to economic pressures around the world as the root cause.
Adding to the uncertainty was negative news from a stock pair that investors have been watching lately. Both caravan (CVNA -5.49%) and Ollie’s Bargain Outlet Holdings (OLLI 0.73%) are underpinned by a healthy consumer economy, and both companies saw their stock prices drop significantly in premarket trading on Wednesday. Their declines are representative of the lack of confidence many investors have in consumer behavior in general.
Carvana deals with creditors
Carvana shares plunged more than 25% in premarket trading on Wednesday. The struggling online used-car specialist has recently faced significant financial challenges, and now some of the companies involved in providing capital to Carvana are working together to try to keep things in order as they are working on a possible debt restructuring.
Principal holders of Carvana’s unsecured debt, which include Global Apollo Management, black rock, and bond giant PIMCO, have signed an agreement that will see them cooperate in negotiations with the auto dealer regarding ongoing financial obligations, according to Bloomberg reports. The idea behind the agreement is to ensure that creditors don’t end up fighting each other in costly legal battles that can end up siphoning off substantial sums of potentially recoverable funds towards litigation.
Carvana shares have already fallen precipitously during 2022, but the real bad news is that the company’s bonds are trading at a huge discount of more than 50% below face value. This indicates an overwhelming belief that Carvana will default on its bonds, in part due to rapidly changing macroeconomic conditions and the impact of rising interest rates on its heavily leveraged balance sheet.
When creditors start to come together, it can be difficult for any company, and Carvana’s situation is particularly difficult. While conditions in the used vehicle market will only worsen after an extremely strong period for the industry, Carvana is not trading from a position of strength.
Ollie’s sees strains in discount retail
Ollie’s Bargain Outlet Holdings didn’t see the same level of decline as Carvana, but its stock fell 9% in premarket trading. The discount retailer’s third-quarter results for the period ending Oct. 29 left the company’s shareholders unconvinced as the key holiday shopping season approaches.
Ollie’s financial numbers were mixed. Revenue rose 9% year-over-year to $418 million, as same-store sales increased only 1.9%. Operating profit fell from year-ago levels due to margin pressures, although Ollie’s managed to secure a 4.5% increase in adjusted net profit to $23 million. This was equivalent to $0.37 per share.
Investors appeared to react most negatively to comments from CEO John Swygert, who noted that selling trends have been volatile recently. After a slowdown in business in late October, sales trends have improved somewhat, but the combination of high inflation and an unusual amount of promotional activity could weigh on business performance over the holidays.
Ollie’s had to adjust its full-year numbers, now expecting sales of $1.817 billion to $1.827 billion and adjusted earnings of $1.57 to $1.62 per share. With Ollie’s now expecting same store sales to decline between 3.3% and 3.8%, it is clear that even the often resilient discount niche of the retail sector is not at risk. sheltered from macroeconomic pressures.
Dan Caplinger has no position in the stocks mentioned. The Motley Fool recommends Ollie’s Bargain Outlet. The Motley Fool has a disclosure policy.
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