Carvana Co. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. Comparisons are with Q1 2022 unless otherwise noted. Figures are in U.S. dollars.
Business context
Carvana operates an e-commerce platform for used vehicles, including retail sales, vehicle financing and ancillary products. The May 2022 acquisition of ADESA’s U.S. physical auction business contributed wholesale marketplace revenue in Q1 2023. Management said its current priority is improving profitability through operating efficiency and expense reductions.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales and operating revenues | $2.606 billion | $3.497 billion |
| Gross profit | $341 million | $298 million |
| Gross margin | 13.1% | 8.5% |
| Net loss | $286 million | $506 million |
| Net loss attributable to Carvana Co. | $160 million | $260 million |
| Adjusted EBITDA, non-GAAP | $(24) million | $(348) million |
| Adjusted EBITDA margin, non-GAAP | (0.9)% | (10.0)% |
| Net cash used in operating activities | $66 million | $593 million |
| Net cash used in investing activities | $19 million | $208 million |
Retail vehicle sales fell 33.1% to $1.827 billion, while retail units sold declined 24.7% to 79,240. Retail average selling price decreased 11.2% to $23,056. Total gross profit per retail unit rose 51.9% to $4,303; the non-GAAP measure was $4,796. Wholesale revenue increased 7.5% to $618 million, including $211 million of ADESA wholesale marketplace revenue. Other revenue declined 15.3% to $161 million, primarily reflecting lower gains on loan sales.
SG&A decreased 35.1% to $472 million, reflecting prior cost-reduction measures and lower activity. Interest expense increased to $159 million from $64 million, driven by additional senior notes and higher working-capital financing costs. The reported net loss includes a $2 million income-tax benefit. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Financial position, debt and liquidity
At quarter-end, cash and cash equivalents were $488 million and restricted cash was $206 million. Total assets were $8.646 billion, total liabilities were $9.968 billion, and total stockholders’ deficit was $1.322 billion. The company reported $8.5 billion of outstanding debt including finance leases ($8.457 billion net of unamortized debt issuance costs). Senior notes had $5.725 billion of principal; their reported fair value was $3.040 billion.
Management reported $1.489 billion of committed liquidity resources, comprising cash and cash equivalents and availability under short-term revolving facilities, and $3.527 billion of total liquidity resources including unpledged assets. These figures include borrowing capacity and assets that may need to be financed; they are not equivalent to cash on hand. A $4.0 billion finance-receivable purchase commitment had approximately $3.3 billion of unused capacity. Management stated it believed working capital, operating cash flows and expected financing arrangements would fund operations for at least one year from issuance of the statements.
Cash, cash equivalents and restricted cash increased by $66 million during the quarter, supported by $151 million of net financing cash inflow. Operating activities used $66 million. The company cited reduced inventory investment and lower SG&A and reconditioning costs as drivers of the improvement in operating cash use versus the prior year.
Material changes, outlook and risks
- Management attributed lower retail sales to increased interest rates and inflation, reduced vehicle affordability, lower inventory and advertising, and profitability initiatives. It said these trends could continue through the rest of 2023.
- Management provided no specific full-year revenue, profit or cash-flow guidance in the supplied filing text. It said it was focused on efficiency, expense reduction, profitability and positive free cash flow, while continuing to target longer-term growth.
- Floor-plan facilities included a $2.2 billion facility maturing September 22, 2023 and a separate $2.0 billion facility available afterward through March 22, 2024. The company said it planned to extend or replace facilities that mature within the next year.
- In Q1, the company launched an offer to exchange up to $1.0 billion of existing senior notes for new 9.0%/12.0% cash/PIK toggle senior secured second-lien notes due 2028. After quarter-end, it increased consideration for certain notes and extended the offer expiration to May 17, 2023. The filing states the company was in compliance with debt covenants at March 31.
- The company designated ADESA and its subsidiaries as unrestricted subsidiaries under the senior-note indentures in March 2023. Investors should assess the implications for creditors and collateral support.
- The filing identifies substantial indebtedness, continuing losses, financing and refinancing access, used-car prices and demand, loan-sale and securitization markets, and integration of ADESA as significant risks. It also describes securities, antitrust, consumer-protection and vehicle titling/registration litigation and regulatory disputes. Carvana said it could not estimate possible losses and had not recorded reserves for the described proceedings.
- A Section 382 rights plan was adopted in January 2023 to help preserve tax attributes; it is intended to deter acquisitions of 4.9% or more of Class A common stock without board approval. The company also disclosed approximately $1.6 billion of unrecorded potential Tax Receivable Agreement liability, as deferred tax assets were subject to a full valuation allowance.
Important facts for investors to verify
- Whether operating cash use and adjusted EBITDA improve sustainably, rather than primarily through lower inventory, capital spending or expense levels.
- Current borrowing availability, facility renewal or replacement progress, and the terms and completion status of the senior-note exchange offer.
- Debt-service burden and liquidity after considering restricted cash, financing maturities and the difference between cash and total liquidity resources.
- Retail unit sales, per-unit gross profit, inventory levels and vehicle-price trends, including the contribution and economics of ADESA.
- Developments in litigation and regulatory matters, and any resulting material liabilities or operating restrictions.