Carvana Co. — Q3 2020 Form 10-Q
Business context and period. Carvana operates an online used-car buying and selling platform with vehicle financing, ancillary products, and an integrated reconditioning and delivery network. This unaudited quarterly report covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Net sales and operating revenue | $1.544bn | $1.095bn | $3.760bn | $2.836bn |
| Gross profit | $261.3m | $137.5m | $549.9m | $363.9m |
| Gross margin | 16.9% | 12.6% | 14.6% | 12.8% |
| Net loss | $17.7m | $92.2m | $307.6m | $238.9m |
| Net loss attributable to Carvana Co. | $7.1m | $30.1m | $107.8m | $73.5m |
| Class A net loss per share | $0.10 | $0.60 | $1.73 | $1.61 |
| EBITDA (non-GAAP) | $21.3m | $(60.6)m | $(186.5)m | $(155.4)m |
Q3 revenue rose 41.0% and gross profit rose 90.0% year over year. Q3 total gross profit per retail unit was $4,056, up 36.9%; nine-month gross profit per unit was $3,198, up 11.8%. Despite higher gross profit, Q3 SG&A was $267.8m, exceeding gross profit. Nine-month SG&A increased to $783.5m from $545.1m. Q3 EBITDA margin was 1.4%, compared with negative 5.5%; nine-month EBITDA margin remained negative at 5.0%.
Operating scale. Q3 retail units sold increased 38.8% to 64,414; nine-month retail sales rose 35.2% to 171,939. Carvana reported 261 markets, up from 146 a year earlier, and 73.2% U.S. population coverage. Q3 average days to sale improved to 58 from 63; the nine-month figure increased to 71 from 63.
Cash flow and liquidity. For the first nine months, operating cash use was $446.7m (versus $434.7m), investing cash use was $261.7m (versus $148.8m), and financing provided $786.3m (versus $603.2m). Cash, cash equivalents, and restricted cash ended at $196.3m, including $173.7m unrestricted cash. The company reported $1.250bn of committed liquidity resources available, including cash, facility availability, and sale-leaseback capacity. Capital expenditures for property and equipment were $270.5m.
Debt and balance sheet. September 30 total debt principal, including finance leases, was $1.274bn, versus $1.514bn at December 31, 2019; net carrying amount was $1.262bn. Current assets were $1.747bn and current liabilities $548.8m. Vehicle inventory was $967.5m, up from $762.7m at year-end. Stockholders’ equity totaled $961.6m, substantially higher than year-end following equity offerings.
Material changes and unusual items
- Used-car demand rebounded after pandemic-related disruption in March and April; management reported Q3 retail unit growth of 39% year over year. The company also noted stronger industry vehicle prices and improving days to sale in Q3.
- Two 2020 equity offerings generated approximately $1.059bn net proceeds. The proceeds strengthened liquidity and funded purchases of additional Carvana Group LLC units.
- After quarter-end, Carvana issued $500m of 5.625% notes due 2025 and $600m of 5.875% notes due 2028. It used approximately $626.8m to redeem its $600m, 8.875% notes due 2023; the filing reports approximately $455.9m net proceeds from the refinancing.
- Effective October 1, the floor plan facility was increased to $1.25bn, repriced to one-month LIBOR plus 3.15%, and extended to March 31, 2023. A separate finance-receivable facility commitment was increased to $500m on October 28.
- Q3 other income, net was $9.2m, primarily reflecting fair-value changes in retained securitization interests and purchase-price adjustment receivables. Nine-month other expense included a $5.7m loss on disposal of assets associated with terminated construction projects.
Outlook, risks, and contingencies
Management provided no specific numerical earnings or revenue guidance. It expects further losses as it expands markets, builds inspection and reconditioning centers and vending machines, and invests in technology. It expects operating expenses to rise with growth, while describing continued monitoring of discretionary spending and the ability to adjust marketing, staffing, and purchasing to demand. Management stated that working capital and financing arrangements were sufficient to fund operations for at least one year from the financial statement issuance date.
COVID-19 impacts remained uncertain, including effects on consumer demand, operations and supply chains, capital-market access, and estimates for loan losses, inventory values, fair values, cancellation reserves, and impairments. Other disclosed risks include the company’s history of losses, rapid growth and execution, used-vehicle pricing and inventory availability, dependence on selling finance receivables and maintaining financing partners, and reliance on related-party relationships with DriveTime and affiliates.
The company reported an $8.2m accrued limited-warranty liability. It did not expect ordinary-course legal matters to have a material adverse effect, while noting litigation outcomes are uncertain. A $238.5m potential Tax Receivable Agreement liability was unrecorded because realization of the related tax benefits was not considered more likely than not. The company was in compliance with senior-note covenants at September 30.
Key facts for investors to verify
- Whether retail growth and higher gross profit per unit can translate into sustained operating profitability, given rising SG&A and continued losses.
- Whether finance-receivable sale gains and access to forward-flow, securitization, and revolving-facility funding remain available on acceptable terms.
- How pandemic conditions, vehicle prices, inventory levels, and days to sale affect margins, working capital, and valuation estimates.
- The effect of post-quarter refinancing on interest expense, maturity profile, and total debt, and the terms and availability fees of amended facilities.
- Related-party exposure, retained securitization-interest valuation assumptions, warranty and cancellation reserves, and the unrecorded TRA liability.