Carvana Co. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Amounts are in millions of dollars unless stated otherwise. Carvana operates an e-commerce platform for buying and selling used vehicles, with vehicle sales, vehicle-finance receivable sales, and ancillary products as key revenue sources.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales and operating revenues | $2,245 | $1,098 |
| Gross profit | $338 | $138 |
| Gross margin | 15.1% | 12.6% |
| Net loss | $(82) | $(184) |
| Net loss attributable to Carvana Co. | $(36); $(0.46) per share | $(60); $(1.19) per share |
| EBITDA and EBITDA margin (non-GAAP) | $(30); (1.3)% | $(139); (12.6)% |
| Net cash used in operating activities | $(532) | $(168) |
- Revenue increased 104.5% year over year. Used vehicle sales rose 86.7% to $1,800; wholesale sales rose to $240 from $80; other sales and revenues rose to $205 from $54.
- Retail units sold increased 76.4% to 92,457. Wholesale units sold were 26,040, up from 10,754. Population coverage rose to 74.5% from 68.7%; average monthly unique visitors increased to 13.2 million from 6.8 million.
- Total gross profit per retail unit increased 38.5% to $3,656. However, used vehicle gross profit per retail unit fell 23.4% to $1,211, which management attributed primarily to transitory costs of rapidly ramping inspection and reconditioning capacity. Other gross profit per retail unit rose to $2,218 from $1,036, reflecting, among other factors, finance-receivable gains and ancillary-product revenue.
- SG&A increased to $397 from $276, including higher compensation, advertising, occupancy, logistics, and other costs to support growth. Interest expense was $30, versus $29. Other income was $7, compared with other expense of $17, principally reflecting fair-value changes in securitization interests and purchase-price adjustment receivables.
Balance sheet, debt, and liquidity
- At March 31, 2021, cash and cash equivalents were $370 and restricted cash was $45. Total assets were $3,819; total liabilities were $3,098; stockholders’ equity was $721.
- Vehicle inventory increased to $1,439 from $1,036 at year-end 2020. Cash, cash equivalents, and restricted cash totaled $415, up from $329 at year-end.
- Total debt including finance leases was $2,473, versus $1,743 at year-end; reported debt net of unamortized issuance costs was $2,445. Senior Notes principal was $1.7 billion. The company issued $600 of 5.500% notes due 2027 in March.
- Short-term revolving facilities had $122 outstanding and approximately $2.1 billion of unused capacity. Reported committed liquidity resources were $1,665, comprising cash and facility availability (and including sale-leaseback availability as presented by the company).
- Operating cash use increased to $532, primarily from higher inventory and the timing of finance-receivable originations and sales. Investing cash use was $75; financing provided $693, including proceeds from the 2027 Notes. Capital expenditures were $82.
- 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. A $500 revolving facility for finance receivables was added on April 30, 2021, after quarter-end.
Changes, outlook, risks, and unusual items
- Management reported recovery in used-vehicle demand after the early-pandemic disruption, with higher demand and used-vehicle sales in Q1 2021. It expects retail-unit sales to grow through deeper market penetration and expansion, and anticipates continued investment in logistics, IRCs, vending machines, advertising, technology, and software.
- No quantified earnings or revenue guidance is provided in the filing. Management warned that losses may continue and operating expenses are expected to increase; returns on growth investments are not assured.
- Finance-receivable sales are a significant source of gross profit. The company recognized $138 of gains on finance-receivable sales, versus $13 a year earlier. A forward-flow partner committed to purchase up to $4.0 billion of receivables through March 2022; approximately $3.5 billion of capacity remained at quarter-end.
- The company has incurred losses since inception. It recorded a full valuation allowance against deferred tax assets due to cumulative losses and disclosed an unrecorded Tax Receivable Agreement liability of approximately $857. Future realization of tax benefits could result in a recorded liability and expense.
- Key stated risks include rapid-growth execution and customer-service quality; used-car price, supply, and inventory risks; reliance on finance-receivable sales and capital markets; access to financing; COVID-19 and seasonality; regulation and litigation; and dependence on DriveTime and affiliates. The company reported compliance with Senior Notes covenants and no material change to previously disclosed risk factors. Ordinary-course legal matters were not expected by management to have a material adverse effect.
- Related-party transactions include VSC commissions administered by DriveTime and leases and services with DriveTime affiliates. Other sales and revenues included $42 from related parties; wholesale revenue included $6.
Investor verification points
- Assess whether rapid revenue and unit growth can translate into sustainable vehicle-level margins, particularly given the decline in used-vehicle gross profit per unit and higher growth-related expenses.
- Examine the composition and repeatability of other revenue and the $138 finance-receivable sale gain, including securitization pricing, forward-flow capacity, and retained credit exposure.
- Track operating cash burn, inventory growth, facility availability, and debt maturities and costs; reported liquidity availability is not the same as unrestricted cash.
- Review the full valuation allowance, the $857 unrecorded TRA liability, and potential implications if deferred tax assets become realizable or the TRA is accelerated.
- Consider the company’s continuing losses, growth-investment requirements, used-vehicle market sensitivity, and related-party arrangements when evaluating management’s one-year liquidity assessment.