Carvana Co. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with the same period in 2018. Carvana operates an e-commerce platform for used vehicles, including vehicle sales, customer financing, ancillary products, and wholesale sales. It reported one operating segment. At quarter-end, it operated in 109 markets, versus 56 a year earlier.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales and operating revenue | $755.2 million | $360.4 million |
| Gross profit | $88.5 million; 11.7% margin | $34.2 million; 9.5% margin |
| SG&A expense | $155.2 million | $83.2 million |
| Interest expense | $15.6 million | $3.5 million |
| Consolidated net loss | $82.6 million | $52.7 million |
| Net loss attributable to Carvana Co. | $28.5 million | $7.0 million |
| Class A basic and diluted loss per share | $0.69 | $0.53 |
| Cash used in operating activities | $214.5 million | $131.4 million |
| Cash used in investing activities | $43.2 million | $28.0 million |
| Cash provided by financing activities | $276.1 million | $112.3 million |
Cash, cash equivalents and restricted cash totaled $107.1 million at March 31, 2019, including $85.3 million unrestricted cash. Total assets were $1.34 billion and stockholders’ equity was $152.8 million. Debt included $434.8 million drawn on the floor plan facility, $343.3 million of senior notes net of issuance costs, and $151.1 million of other long-term debt including its current portion. Operating lease liabilities totaled $120.2 million. The $350 million senior notes bear 8.875% interest and mature in 2023; the company reported compliance with their covenants.
Floor plan capacity was $650 million, with $215.2 million unused and approximately $181.8 million available under the borrowing base. Including cash and available sale-leaseback capacity, reported liquidity resources were $342.3 million, down from $409.8 million at year-end 2018.
Changes versus the prior comparable period
- Revenue increased 109.5%, while retail units sold rose 99.1% to 36,766. Average retail selling price increased 2.8% to $18,599.
- Gross profit increased 158.6%; total gross profit per retail unit rose 29.9% to $2,408. Excluding the CEO’s 100k Milestone Gift compensation expense, management reported gross profit per unit of $2,429, up 31.0%.
- Average days to sale improved to 63 from 70. Wholesale gross profit per wholesale unit declined to $453 from $579.
- SG&A increased 86.6%, reflecting expanded staffing, advertising, logistics and market operations. Interest expense rose substantially, primarily due to the 2018 senior-note issuance and higher inventory-facility borrowings.
- Operating cash use increased by $83.1 million, driven in part by a $112.5 million increase in vehicle inventory and the timing of finance-receivable originations and sales. Financing cash inflows offset operating and investing outflows.
Outlook, commentary, risks and unusual items
- Management expects continued investment in new markets, logistics, vending machines, inspection and reconditioning centers, technology and advertising, and expects operating expenses to rise as the business expands. It provided no specific numerical earnings or revenue guidance.
- Management stated existing working capital and expected continued inventory, capital expenditure and receivables financing should fund operations for at least one year from issuance. The company has incurred losses since inception and expects further losses; additional capital may be needed if current sources prove insufficient.
- In March 2019, Carvana completed its first securitization and retained $19.5 million of beneficial interests to meet risk-retention requirements. These interests expose the company to credit and prepayment risk; securitization-market disruption or higher financing costs could constrain liquidity.
- Subsequent to quarter-end, the company amended its receivables purchase agreement and entered into a $300 million revolving facility in April; in May, it purchased a trust certificate and entered into a $350 million revolving facility. Availability is subject to agreement terms and commitment termination events.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing approximately $80.3 million of right-of-use assets and $86.8 million of operating lease liabilities at adoption; the company said the adoption had no material impact on earnings or cash flows.
- The 100k Milestone Gift contributed $3.0 million of compensation expense in Q1, including $0.8 million in cost of sales. Management’s non-GAAP “ex-Gift” measures exclude this cost. EBITDA ex-Gift was a loss of $56.0 million, with a negative 7.4% margin, versus a $44.5 million loss and negative 12.4% margin a year earlier.
- Related-party dealings include leases and services with DriveTime affiliates, VSC commissions, and $15 million of senior notes held by an affiliate. The company reported no legal matter expected to have a material adverse effect, but noted litigation can still entail costs and management distraction.
Important facts for investors to verify
- Whether unit growth and improving gross profit per unit can outpace rising SG&A, interest expense and continuing operating cash use.
- How much floor plan and receivables financing is actually available under borrowing-base, eligibility and commitment conditions, and whether securitization terms remain attractive.
- The composition and repayment profile of total debt and lease obligations, including the high-coupon 2023 notes and the floor plan facility’s October 2020 maturity.
- The assumptions behind management’s one-year liquidity assessment, particularly given reported liquidity resources declined from year-end.
- The sensitivity of reported performance to the 100k Milestone Gift adjustment, receivables-sale gains, retained securitization interests and related-party arrangements.