Carvana Co. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Carvana operates an e-commerce used-vehicle platform, including vehicle sales, financing, ancillary products, and wholesale sales. Comparisons are with the corresponding 2020 periods; amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3.336 billion | $1.118 billion | $5.581 billion | $2.216 billion |
| Gross profit | $552 million | $150 million | $890 million | $288 million |
| Gross margin | 16.5% | 13.4% | 15.9% | 13.0% |
| SG&A | $470 million | $239 million | $867 million | $515 million |
| Interest expense | $43 million | $20 million | $73 million | $49 million |
| Net income (loss), consolidated | $45 million | $(106) million | $(37) million | $(290) million |
| Net income (loss) attributable to Carvana Co. | $22 million | $(41) million | $(14) million | $(101) million |
| EBITDA, non-GAAP | $112 million | $(69) million | $82 million | $(208) million |
| EBITDA margin, non-GAAP | 3.4% | (6.2)% | 1.5% | (9.4)% |
- Q2 retail units sold rose 95.7% to 107,815; six-month retail units increased 86.3% to 200,272. Population coverage reached 79.4%, versus 73.2% a year earlier.
- Q2 total gross profit per retail unit was $5,120, up 87.8%; six-month figure was $4,444, up 65.6%.
- Cash used in operating activities was $1.139 billion in the first half, versus $175 million. Cash used in investing was $174 million, while financing provided $1.294 billion. Cash, cash equivalents and restricted cash ended at $310 million, down from $329 million at year-end 2020.
- At June 30, cash and cash equivalents were $201 million; restricted cash was $109 million. Reported committed liquidity resources were $1.009 billion, including $808 million of availability under short-term revolving facilities.
- Total debt, net of issuance costs, was $3.078 billion, compared with $1.722 billion at December 31, 2020. This included $680 million drawn under the floor-plan facility. Stockholders’ equity was $770 million.
Material changes and drivers
- Revenue growth reflected higher retail and wholesale unit volumes, higher vehicle selling prices, and increased gains on finance-receivable sales and ancillary product revenue. Q2 used-vehicle sales increased 152.4%; wholesale sales rose from $49 million to $557 million.
- Management attributed stronger vehicle gross profit per unit to buying more vehicles directly from customers and a stronger used-vehicle market. Q2 retail average selling price rose 29.0% to $23,225; the filing notes that market appreciation contributed to the increase.
- Other sales and revenues increased to $275 million in Q2. Finance-receivable sales gains were $200 million for the quarter and $338 million for the first half, compared with $39 million and $52 million, respectively, in 2020.
- SG&A rose with staffing, advertising, logistics, occupancy, and infrastructure spending to support growth. Interest expense increased with additional senior notes and sale-leaseback financing.
- Operating cash outflow increased primarily because vehicle inventory grew by $926 million in the first half and because of the timing of finance-receivable originations and sales.
Outlook, risks, and unusual items
- No specific quantitative earnings or revenue guidance is provided. Management expects retail sales to grow through deeper market penetration and expansion, and expects continued investment in logistics, inspection and reconditioning centers, advertising, technology, and product development. It anticipates higher operating expenses and acknowledges returns on these investments are not assured.
- Management states it expects losses to continue as the business expands, but believes working capital, operating results, and financing arrangements are sufficient for at least one year from issuance of the statements.
- Financing includes a $4.0 billion committed forward-flow purchase arrangement for finance receivables through March 2022. Effective July 1, 2021, the floor-plan facility increased to $1.75 billion, taking total short-term revolving capacity to $3.25 billion; this was a subsequent event, not a June 30 balance-sheet change.
- Key exposures include used-vehicle price and supply volatility, the ability to acquire and sell inventory promptly, reliance on finance-receivable sales and securitization markets for gross profit and funding, credit and prepayment risk on retained securitization interests, rapid-growth execution, and substantial cash needs. Management notes seasonality and continuing uncertainty related to COVID-19.
- The company recorded a full valuation allowance against deferred tax assets because of cumulative losses. It disclosed an approximately $1.1 billion unrecorded potential Tax Receivable Agreement liability; future realization of related tax benefits could require recognition of a liability and expense.
- DriveTime and affiliates are related parties. Q2 included $16 million of wholesale sales to DriveTime and $49 million of other sales and revenues from related parties, primarily VSC-related amounts. Management reports ordinary-course legal matters and does not expect their resolution to materially harm the company, while noting litigation can still impose costs and divert management attention.
Investor verification priorities
- Track retail unit growth and gross profit per unit as used-vehicle prices and acquisition conditions change; assess whether Q2 margins are sustainable.
- Reconcile reported net income with cash generation, especially inventory investment, finance-receivable originations and sales, and operating cash outflow.
- Review debt maturities, interest costs, facility availability and covenants, including the July 2021 floor-plan amendment and the forward-flow commitment through March 2022.
- Evaluate the quality and sensitivity of finance-receivable sale gains and Level 3 securitization valuations, plus exposure from retained interests and related-party arrangements.
- Monitor the deferred-tax valuation allowance and the $1.1 billion unrecorded TRA exposure, including potential acceleration under specified termination or change-of-control events.