Investors’ tendency to slash the valuations of unprofitable businesses when the macroeconomic winds aren’t blowing their way is understandable. But for companies that are feeling the brunt of investor skittishness, making a solid argument for shareholders not to jump ship in times like this is the only way out of the predicament.
One company that seems to have done that well is U.K.-based online car retailer Cazoo.
Despite the solid second quarter (Q2) results released Tuesday (Aug 2) in an H1 earnings call, the more-than 80% decline in share price experienced so far this year remained the elephant in the room.
Related: Online Car Retailer Cazoo To Generate $2B+ Revenue In 2022 From Expanding Europe Operations
But in an indication that they knew oh-too-well what shareholders were thinking, Cazoo’s senior leadership pointed to the impressive Q2 performance that saw revenue skyrocket by a record 145% year-on-year (YoY) to £333 million, while taking every opportunity they could to paint the company as a picture of frugality, dead set on the path to profit.
“Our business realignment plan focuses on cash preservation, sustainable growth margins and reduced SG&A [selling, general and administrative] costs,” Alex Chesterman, the firm’s CEO, told investors on the call, adding that the realignment plan is progressing well and that the company remains “laser-focused on profitability and cash generation.”
The focus on generating cash and slashing costs reflects the reality that if Cazoo were to issue more shares in the current market, it would be at a significantly lower value than the $10 a share at which it floated less than a year ago.
Facing the prospect of such a scenario, Chesterman stated that the retailer intends to become self-funding in its U.K. home base without needing further capital. Outside of the U.K., Cazoo is “currently conducting a strategic review of our business in mainland Europe, with the aim of further reducing our cash burn and ensuring that the company has a plan which materially reduces the requirement to raise any additional external funding,” he explained.
Investor Confidence Renewed
Cazoo’s leadership seems to have done a good job in convincing investors that the business is serious about cutting costs and aggressively pursuing profitability. In fact, within a few hours of the Q2 earnings announcement, the company’s share price on the New York Stock Exchange skyrocketed nearly 200%.
What’s more, an increased emphasis on preserving cash and reducing expenditure doesn’t mean Cazoo has curtailed its ambitions for growth. For example, while the firm has a 5% market share in the U.K., a figure that puts it well ahead of its closest competitors, it still represents a tiny fraction of the overall market for used car sales.
The British retailer put the low market share down to low digital penetration and a highly fragmented market. And while this presents an opportunity to further expand in the region, with so much of the remaining pie still up for grabs in the U.K., Cazoo’s current lead is by no means secured.
Read more: Cazoo Expands Online Car Platform to Spain
Beyond the U.K., Cazoo is looking to expand further into continental Europe, launching in France and Germany last year as well as in Spain and Italy earlier this year. Yet despite these continental ambitions and efforts put in place, the firm’s sales on the continent account for less than 10% of its total revenue.
Read on: Online Car Retailer Cazoo Rolls Into Italy
In light of Cazoo’s current high exposure to the U.K. market and its increased emphasis on profitability, Chesterman’s allusion to a review of its business model in mainland Europe may signal a pending slowdown of investment on the continent while the company focuses on cementing its existing revenue streams.
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