Carvana Co. — Q3 2021 Form 10-Q Summary
Reporting period: Unaudited results for the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Amounts are in millions of dollars unless stated otherwise. Carvana operates an e-commerce used-car platform, including vehicle sales, financing, wholesale sales, and ancillary products.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3,480 | $1,544 | $9,061 | $3,760 |
| Gross profit | $523 | $262 | $1,413 | $550 |
| Net loss | $(68) | $(18) | $(105) | $(308) |
| Net loss attributable to Carvana Co. | $(32) | $(7) | $(46) | $(108) |
| EBITDA (non-GAAP) | $6 | $21 | $88 | $(187) |
| EBITDA margin (non-GAAP) | 0.2% | 1.4% | 1.0% | (5.0)% |
| Retail units sold | 111,949 | 64,414 | 312,221 | 171,939 |
Q3 gross margin was approximately 15.0%, down from 17.0% a year earlier; nine-month gross margin was approximately 15.6%, versus 14.6%. Q3 SG&A of $546 million exceeded gross profit of $523 million. Interest expense was $48 million in Q3 and $121 million for the nine-month period.
Q3 revenue rose 125.4%, while retail units sold increased 73.8%. Used-vehicle sales reached $2,650 million in Q3; wholesale sales were $552 million and other sales and revenues were $278 million. Q3 total gross profit per retail unit was $4,672, up 15.2%. Used-vehicle gross profit per unit fell 4.8% to $1,769, as higher reconditioning costs and wholesale acquisition prices partly offset customer-sourced inventory benefits. For the first nine months, retail units grew 81.6% and total gross profit per unit rose 41.5% to $4,526.
Cash flow, balance sheet, and liquidity
- For the first nine months, operating cash flow was $(1,422), investing cash flow $(352), and financing cash flow $1,849. Operating cash use increased from $(447) million a year earlier, primarily reflecting a $1,230 million increase in vehicle inventory.
- At September 30, cash and cash equivalents were $297 million and restricted cash was $107 million. Total assets were $5,360 million; vehicle inventory was $2,285 million. Stockholders’ equity totaled $708 million.
- Reported committed liquidity resources were $1,635 million, comprising $297 million of cash and $1,338 million of availability under short-term revolving facilities. The company also reported $2.3 billion of unused capacity under its $4.0 billion committed finance-receivables forward-flow arrangement.
- Total debt, including finance leases and before unamortized issuance costs, was approximately $3,697 million, up from $1,743 million at year-end 2020. This included $2,450 million of senior notes and $455 million drawn on the floor-plan facility. The company reported compliance with debt covenants.
Material changes and management outlook
Growth reflected increased market coverage, marketing, inventory selection, and higher used-car prices. Population coverage increased to 80.6% from 73.2%; the website listed approximately 56,000 vehicles, versus 26,897 a year earlier. The company operated 13 inspection and reconditioning centers (IRCs), up from nine, with stated combined annual capacity of approximately 750,000 vehicles at full utilization.
Management expects retail sales to grow through market penetration and expansion, and plans continued investment in technology, IRCs, logistics, advertising, and customer experience. It also expects operating expenses to increase substantially and cautions that desired returns on growth investments are not assured. No specific earnings or revenue guidance is provided. Management stated that working capital, operating results, and financing arrangements were expected to fund operations for at least one year from issuance of the financial statements.
Carvana issued $600 million of 5.50% senior notes due 2027 in March and $750 million of 4.875% notes due 2029 in August. In October, after quarter-end, it invested approximately $126 million in Root, Inc. securities and warrants, and entered a new $350 million finance-receivables revolving facility. The filing also disclosed new Atlanta and Los Angeles office leases, with stated undiscounted minimum payments of approximately $162 million and $51 million, respectively.
Risks, contingencies, and unusual items
- Management cited possible ongoing COVID-19 operational constraints; the Delta variant contributed to production-throughput pressure and higher reconditioning costs. Used-car price appreciation supported selling prices and loan sizes, but exposes results to shifts in vehicle supply, demand, and prices.
- Profitability depends in part on gains from selling finance receivables. Gain on loan sales was approximately $191 million in Q3 and $529 million for the nine months, compared with $77 million and $129 million, respectively, in 2020. Securitization-market access, loan pricing, credit performance, and retained interests are significant sensitivities.
- The company has a history of losses and relies on external financing to support growth and working capital. Management identified rapid growth, inventory sourcing and turnover, competition, regulation, customer service, logistics, and capital availability among important risks.
- Carvana Co. owned approximately 48.9% of Carvana Group at quarter-end; non-controlling owners held 51.1%. Related-party dealings with DriveTime include leases, vehicle purchases and sales, servicing, and VSC administration.
- A full valuation allowance was recorded against deferred tax assets. The company disclosed approximately $1.3 billion of unrecorded potential Tax Receivable Agreement liability; future recognition could affect results. Ordinary-course legal matters were not believed by management to be materially adverse, though outcomes are uncertain.
- The company identified its minority investment in Root as a risk because it has limited influence and may face restrictions or difficulty monetizing the investment. Disclosure controls were concluded effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether retail-unit growth and gross profit per unit can be sustained if used-car prices normalize and reconditioning capacity remains constrained.
- How much reported revenue and gross profit depend on loan-sale gains, securitization access, and ancillary-product commissions.
- Whether operating cash use and inventory investment can be managed while the company expands, and how debt and interest costs evolve.
- The terms, availability, and ongoing capacity of revolving, floor-plan, and forward-flow financing arrangements, including related collateral and restricted-cash requirements.
- The economics and potential downside of the Root investment, new long-term office leases, related-party transactions, and the unrecorded TRA exposure.