Carvana Co. — Q2 2020 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2020. Carvana operates an online used-car retail platform with vehicle financing, ancillary products, and an integrated reconditioning and delivery network. The filing covers a period of substantial COVID-19 disruption and recovery in vehicle demand.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,118.3m | $986.2m | $2,216.6m | $1,741.5m |
| Gross profit | $150.2m | $137.8m | $288.6m | $226.3m |
| Gross margin | 13.4% | 14.0% | 13.0% | 13.0% |
| Net loss | $106.3m | $64.1m | $289.9m | $146.7m |
| Net loss attributable to Carvana Co. | $40.8m | $20.3m | $100.7m | $43.4m |
| Basic and diluted loss per Class A share | $0.62 | $0.44 | $1.73 | $0.99 |
| EBITDA (non-GAAP) | $(69.0)m | $(35.9)m | $(207.9)m | $(94.9)m |
| EBITDA margin (non-GAAP) | (6.2)% | (3.6)% | (9.4)% | (5.4)% |
- Sales and unit trends: Q2 retail units sold rose 25.2% to 55,098, while revenue increased 13.4%. Retail average selling price fell 7.4% to $18,001. Six-month retail units rose 33.1% to 107,525.
- Profitability: Q2 total gross profit per retail unit declined 13.0% to $2,726; used-vehicle gross profit per unit fell 17.4% to $1,190. SG&A rose to $239.9m from $181.8m in Q2. Interest expense was $19.9m for the quarter and $48.8m for the half-year.
- Cash flow: For the six months, operating cash outflow was $175.4m, investing cash outflow $167.2m, and financing cash inflow $590.4m. Cash, cash equivalents, and restricted cash totaled $366.3m at June 30, including $246.3m unrestricted cash and $120.0m restricted cash.
- Debt and liquidity: Debt including finance leases was $1.061bn principal ($1.049bn net of unamortized premium and costs), versus $1.514bn principal at year-end 2019. The company reported $1.159bn of committed liquidity resources, including $806.7m of availability under revolving facilities and $106.1m under sale-leaseback agreements. Availability is subject to facility terms and eligible collateral. The $950m floor-plan facility matures October 31, 2020; $31m was drawn at quarter-end. Senior unsecured notes bear 8.875% interest and mature in 2023.
- Capital and balance sheet: April and May equity offerings generated approximately $1.059bn net proceeds. Total assets were $2.477bn and total stockholders’ equity $973.1m at June 30. Vehicle inventory was $629.4m, down from $762.7m at year-end.
Material changes versus prior comparable period
- Q2 revenue increased 13.4%, but net loss widened to $106.3m from $64.1m; EBITDA loss and EBITDA margin also deteriorated.
- Retail unit growth was offset by lower average selling prices, longer average days to sale (89 versus 61), and lower total gross profit per unit.
- For the six months, revenue rose 27.3% and retail units grew 33.1%, while net loss nearly doubled. Operating cash outflow improved by $119.4m year over year, primarily reflecting lower cash used for vehicle inventory.
- Cash and equity increased substantially following the $1.059bn equity raises. Revolving-facility balances fell, while long-term debt and lease-related financing increased in some categories.
Outlook, commentary, risks, and unusual items
- Management said demand fell sharply in mid-March through mid-April, then recovered as the quarter progressed; Q2 retail unit sales were 25% above the prior-year quarter. It described the future COVID-19 impact as uncertain and potentially material, with no reliable prediction of duration or effect.
- The company reduced discretionary spending on hiring, travel, facilities, and technology, and adjusted marketing, staffing, and purchasing to demand. It continued market expansion, reaching 261 markets and 73.2% of the U.S. population served at quarter-end.
- Management stated that working capital and expected inventory and capital-expenditure financing were sufficient to fund operations for at least one year from issuance of the statements. It also cited available financing facilities and plans to extend or replace the floor-plan facility; this is not a numerical earnings or revenue forecast.
- Q2 other income of $3.1m included favorable fair-value movement in retained securitization interests, partly offset by a $4.5m loss on disposal of fixed assets following terminated construction projects. Six-month other expense was $14.3m, reflecting fair-value impacts associated with COVID-19 and capital-market uncertainty.
- Risks include continued pandemic effects on demand, operations, supply chains and capital markets; persistent losses; reliance on selling finance receivables and access to funding; vehicle pricing, inventory and resale timing; rapid expansion; and related-party relationships. Carvana reported compliance with senior-note covenants and no legal proceedings expected to have a material adverse effect. Disclosure controls were judged effective.
- Related-party activity is significant: DriveTime affiliates provide or participate in leases, vehicle service contract administration, servicing, and other arrangements. Carvana owned approximately 39.8% of Carvana Group at quarter-end; non-controlling interests represented the remaining 60.2%.
Most important facts for investors to verify
- Whether the strong late-quarter demand and unit growth persisted, and whether average selling prices, days to sale, and gross profit per unit recovered.
- Whether Carvana can reduce operating losses and cash usage while continuing expansion and elevated capital investment.
- The extension or replacement of the floor-plan facility before its October 2020 maturity, and the practical availability and conditions of reported liquidity.
- Ongoing access to finance-receivable buyers and securitization markets, including gains on loan sales and exposure to retained securitization interests.
- COVID-19 effects on customer demand, used-car prices, operations, and management estimates; the filing provides no clear numerical forward earnings guidance.
- Related-party arrangements and the potential implications of the company’s dual-class structure, non-controlling interests, and unrecorded $187.1m Tax Receivable Agreement liability.