In his 2/27/2019 Letter to Shareholders, Carvana (CVNA) co-founder and CEO Ernie Garcia III reported the following for Q4 and FY 2018:
[Note: Throughout the letter there is reference to items as “including Gift” that include the impact of the compensation expense related to the 100k Milestone Gift to employees, in accordance with GAAP. There is also reference to several measures that are presented “ex-Gift,” which exclude the impact of the 100k Milestone Gift to employees.]
We grew units and revenue by 105% and 121% respectively in Q4 YoY, marking our 20th consecutive quarter of triple-digit unit and revenue growth. While our growth remained at an extremely high level, we finished at the lower half of our guidance range due to a Cyber Monday promotion that was more similar to last year than to 2015 and 2016. EBITDA margin was below our guidance range by 30bps, equating to approximately $2 million dollars, due to the lower units and small incremental investments to prepare for a strong first half of 2019. Unless otherwise noted, all financial comparisons stated below are versus Q4 2017.
Q4 2018 GAAP Results
• Retail units sold totaled 27,750, an increase of 105%
• Revenue totaled $584.8 million, an increase of 121%
• Total gross profit, including Gift, was $56.1 million, an increase of 156%
• Net loss, including Gift, was $86.4 million, an increase of 83%
• Basic and diluted net loss, including Gift, per Class A share was $0.74 based on 39.4 million shares of Class A common stock outstanding
Q4 2018 Ex-Gift Results, non-GAAP
• Total gross profit per unit ex-Gift was $2,131, an increase of $512
• EBITDA margin ex-Gift was (10.8%), an improvement from (15.5%)
• Adjusted net loss per Class A share, was $0.55, based on 149.4 million adjusted shares of Class A common stock outstanding, assuming the exchange of all outstanding LLC Units for shares of Class A common stock
Q4 2018 Other Results
• We opened 7 new markets and 1 vending machine, bringing our end-of-quarter totals to 85 and 15, respectively
• We lowered our average days to sale to 59, from 63 last quarter and 72 in Q4 2017
All financial comparisons stated below are versus 2017, unless otherwise noted. Complete financial tables appear at the end of this letter.
FY 2018 GAAP Results
• Retail units sold totaled 94,108, an increase of 113%
• Revenue totaled $1.96 billion, an increase of 128%
• Total gross profit, including Gift, was $196.7 million, an increase of 189%
• Net loss, including Gift, was $254.7 million, an increase of 55%
•Basic and diluted net loss, including Gift, per Class A share was $2.24 based on 30.0 million sharesof Class A common stock outstanding
FY 2018 Ex-Gift Results, non-GAAP
• Total gross profit per unit ex-Gift was $2,133, an increase of $594
• EBITDA margin ex-Gift was (9.9%), an improvement from (16.9%)
• Adjusted net loss per Class A share, was $1.73, based on 143.8 million adjusted shares of Class A common stock outstanding, assuming the exchange of all outstanding LLC Units for shares of Class A common stock
After reporting his company’s 2018 Q4 and FY earnings, CVNA jumped up almost 10% at one moment in after hours trading on 2/27/2018.
5-YEAR SUMMARY OF CVNA CORPORATE FINANCIALS
**MARKET NO. USED WHOLESALE NET Diluted SHARE** **CARVANA CAP OF VEHICLE Change VEHICLE Change REVENUE Change INCOME EPS PRICE Change** **FY/QTR ($M) MKTS UNITS SOLD YoY UNITS SOLD YoY ($M) YoY ($M) ($) ($) YoY** 2/27/18 6.370 B 41.82 **FY 2018 4.712 B 85 94,108 112.7% 15,125 132.4% 1,955.467 127.7% (61.754) (2.24) 32.71 [xx.xx](http://xx.xx)** Q4 '18 4.712 B 85 27,750 105.3% 4,717 155.8% 584.838 120.6% (28.704) (0.74) 32.71 Q3 '18 5.428 B 78 25,324 116.1% 4,408 145.3% 534.921 137.3% (16.042) (0.50) 38.75 164.0% Q2 '18 5.818 B 65 22,570 111.3% 3,658 131.5% 475.286 127.0% (9.965) (0.41) 41.60 103.2% Q1 '18 3.003 B 56 18,464 121.6% 2,342 81.8% 360.422 126.6% (7.043) (0.53) 22.93 106.6% **FY 2017 2.606 B 44 44,252 135.9% 6,509 145.5% 858.870 135.2% (62.841) (1.31) 19.12 19.12** Q4 '17 2.606 B 44 13,517 141.4% 1,844 152.3% 265.053 148.1% (5.480) (0.45) 19.12 Q3 '17 1.949 B 39 11,719 133.3% 1,797 128.3% 225.379 128.0% (4.380) (0.29) 14.68 Q2 '17 2.718 B 30 10,682 145.3% 1,580 151.2% 209.365 142.0% (14.542) (0.28) 20.47 Q1 '17 23 8,334 120.3% 1,288 155.6% 159.073 118.1% (38.439) (0.28) 11.10 **FY 2016 21 18,761 187.6% 2,651 147.8% 365.148 180.0% (93.112)** Q4 '16 21 5,600 155.5% 731 106.827 151.3% (35.694) (0.26) Q3 '16 16 5,023 182.8% 787 98.844 177.1% (21.985) (0.16) Q2 '16 14 4,355 224.3% 629 86.526 202.5% (18.108) (0.13) Q1 '16 11 3,783 212.1% 504 72.951 237.7% (17.325) (0.13) **FY 2015 9 6,523 209.9% 1,070 681.0% 130.392 212.8%** Q4 '15 9 2,192 182.8% 42.514 200.7% Q3 '15 5 1,776 206.7% 35.668 202.4% Q2 '15 5 1,343 208.0% 28.607 202.8% Q1 '15 4 1,212 284.8% 21.603 243.0% **FY 2014 3 2,105 137 41.679** Q4 '14 3 775 14.137 Q3 '14 3 579 11.795 Q2 '14 2 436 9.449 Q1 '14 1 315 6.298
The following shows that Q4 and FY 2018 results have met or exceeded corporate guidance given last quarter, with only one exception EBITDA margin.
**YOY** **Q4 ’18 GUIDANCE Q4 '18 ACTUAL CHANGE** Retail unit sales 27,500 - 30,000 Increase of 103% - 122% 27,750 105% Total Revenue $570 M - $630 M Increase of 115% - 138% $ 584.838 M 121% Total Gross Profit/unit $2,000 - $2,350 Increase from $1,619 $ 2,023 EBITDA margin (10.5%) - (8.5%) Improvement from (15.5%) **YOY** **FY 2018 GUIDANCE FY 2018 ACTUAL CHANGE** Retail unit sales 93,858 - 95,500 Increase of 112% - 118% 94,108 113% Total Revenue $1.94 B - $2.0 B Increase of 126% - $133% $ 1,955.467 B 128% Total Gross Profit/unit $2,100 - $2,175 Increase from $1,539 $ 2,133 EBITDA margin (9.8%) - (9.2%) Improvement from (16.9%) (9.9%) Market openings 40 Increase from 23 openings 41 in 2017, bringing end-of-year total to 84
The CEO letter gives corporate guidance for only fiscal year 2019 as follows with expectations that triple digit YOY growth in total retail units sales and total revenue will continue:
**FY 2019 GUIDANCE** Retail unit sales 160,000 - 165,000 Increase of 112% - 118% Total Revenue $3.4 B - $3.5 B Increase of 126% - $133% Total Gross Profit per unit $2,450 - $2,650 Increase from $1,539 EBITDA margin (5.5%) - (3.5%) Improvement from (16.9%) Market openings 50 - 60 Increase from 41 market openings in 2018, bringing our end-of-year total to 135-145 markets and our total U.S. population coverage to at least 65%
CARVANA MANAGEMENT OBJECTIVES
Excerpts from the latest Q4/FY 2018 report:
Our management team remains focused on delivering an exceptional and unparalleled customer experience while simultaneously growing the business rapidly and achieving our financial objectives. We firmly believe wowing the customer is the core of our model and drives all other metrics. To realize our long-term vision, our three primary financial objectives remain unchanged: (1) Grow Retail Units and Revenue; (2) Increase Total Gross Profit Per Unit; and (3) Demonstrate Operating Leverage.
Objective #1: Grow Retail Units and Revenue
CVNA reported the following:
We again recorded triple-digit growth in Q4, as retail units sold increased to 27,750, up 105% from 13,517 in the prior year period. Revenue in Q4 grew to $584.8 million, up 121% from $265.1 million in Q4 2017. Our growth in the fourth quarter was broad based, driven by gains across our markets nationwide.
Our 2013 cohort grew by 2,690 units in the full year 2018 vs 2017, while the 2014 cohort grew by 1,287 units, 2015 by 3,915 units, 2016 by 6,646 units, and 2017 by 16,850 units. In its first year, the 2018 cohort contributed 7,132 units, or approximately 8% of total. Out of market sales grew by 11,336 units. Out of market sales primarily consist of sales in smaller cities and towns around our core markets that are fulfilled on our first party network.
Buying Cars from Customers
We also saw substantial gains in our business of sourcing cars from customers in 2018. Total vehicles acquired from customers grew by 229% in 2018 vs. 2017. Wholesale units sold, which are primarily sourced from customers, increased by 132% to 15,125 in 2018 from 6,509 in 2017. Similarly, retail units sold sourced from customers increased by 376% 2018 vs. 2017.
Objective #2: Increase Total Gross Profit Per Unit (GPU)
The following are Carvana excerpts:
We achieved another strong quarter of total GPU growth on our way toward our $3,000 midterm goal. Items “including Gift” reflect the impact of the compensation expense related to the 100k Milestone Gift to employees, in accordance with GAAP. Ex-Gift items exclude the compensation expense impact of the 100k Milestone Gift to employees and are non-GAAP metrics.
For Q4 2018:
o Total GPU (incl.Gift): $2,023 vs. $1,619 in Q4 2017
o Total GPU ex-Gift: $2,131 vs. $1,619 in Q4 2017
o Retail GPU (incl.Gift): $810 vs. $751 in Q4 2017
o Retail GPU ex-Gift: $914 vs. $751 in Q4 2017
o Gains in retail vehicle GPU were primarily driven by lower average days to sale, which declined
from 72 to 59
o Wholesale GPU (incl.Gift)was $36 vs.$50 in Q4 2017
o Wholesale GPU ex-Gift was $40 vs. $50 in Q4 2017
o Changes in wholesale GPU were driven by higher wholesale unit volume (+156%) relative to
retail units (+105%), offset by lower gross profit per wholesale unit sold ($212 incl. Gift and $236
ex-Gift vs. $364 in Q4 2017).
o Other GPU was $1,177 vs. $819 in Q4 2017
o Gains in Other GPU were driven by higher attachment of financing and VSC,as well as the $2.4 million fee we received for facilitating the refinancing of a previously sold pool of finance receivables. We plan to continue executing refinancing or similar transactions going forward as we expand our financing monetization program. We also recognized an expected $1.9 million excess reserve reimbursement based on the historical performance of our VSCs sold to date versus reserves held by the VSC provider. At current performance we expect to earn approximately $10-$15 per retail unit in excess reserve reimbursements on our VSC product going forward.
For FY 2018:
o Total GPU (incl.Gift): $2,090 vs. $1,539 in FY 2017
o Total GPU ex-Gift: $2,133 vs. $1,539 in FY 2017
o Our GPU improvements for the year were broad-based, including improvements on retail used vehicles, wholesale vehicles, and other products. Our gains in retail used vehicle GPU were primarily driven by reducing average days to sale (approximately $270). Our gains in other GPU were driven by higher upfront premiums on the sale of our finance receivables, the addition of our refinancing transactions increasing loan monetization, higher penetration of VSCs, and a full year with GAP waiver coverage. We also saw small gains in wholesale gross profit, driven by higher volumes and increased GPU per wholesale unit. We expect further gains in all three gross profit components in 2019.
Objective #3: Demonstrate Operating Leverage
The following are Carvana excerpts:
We demonstrated meaningful operating leverage in 2018 and expect another strong year in 2019 as we progress toward our long-term SG&A goals.
For Q4 2018:
• Total SG&A levered by 2.9% incl. Gift and 3.0% ex-Gift, primarily reflecting benefits from scale
• Compensation and benefits levered by 0.8% incl. Gift and 1.0% ex-Gift, primarily reflecting benefits from scale
• Advertising levered by 0.7%, reflecting leverage in existing markets offset by new markets
• Logistics and market occupancy was approximately flat, reflecting our coast-to-coast network expansion
• Other SG&A levered by 1.4%, primarily reflecting benefits from scale
For FY 2018:
• Total SG&A levered by 4.3% incl. Gift and 4.7% ex-Gift, primarily reflecting benefits from scale
• Compensation and benefits levered by 1.8% incl. Gift and 2.2% ex-Gift, primarily reflecting benefits from scale
• Advertising levered by 0.8%, reflecting leverage in existing markets offset by new markets
• Logistics and market occupancy was approximately flat, reflecting our coast-to-coast network expansion
• Other SG&A levered by 1.7%, primarily reflecting benefits from scale
We achieved meaningful operating leverage in 2018 while continuing to make significant investments focused on long-term growth, scalability, and customer experience. For example, we completed two acquisitions, Car360 and Propel AI, and made significant investments in technology infrastructure and management bench strength throughout the year to prepare us for continued high rates of growth. We are excited about our progress integrating these investments into our business and believe they will deliver substantial benefits in the years to come.
We also nearly doubled markets for the second consecutive year and broadened our geographic footprint from Boston in the Northeast to San Diego in the Southwest. SG&A expenses that are correlated with new market openings levered despite this expansion, with reductions in advertising and market occupancy expense as a percent of revenue partially offset by increases in logistics expense. We expect these expenses to lever over time as our markets scale, as seen in our cohort advertising expense per unit curves.
Logistics expense delevered by 12 basis points in 2018, largely due to ramping our Phoenix IRC beginning in late 2017. We expect logistics expense as a percent of revenue to stay elevated in 2019 while our nationwide logistics network is serviced by just a handful of IRCs, but to decline over time as we add density to our IRC network and decrease the average miles traveled from our IRCs to our customers.
For the full year 2019, we expect to again make significant gains in improving our EBITDA margin ex-Gift as the underlying leverage in our cohorts becomes more visible at the corporate level.
We launched 7 new markets in the fourth quarter and 41 for the full year bringing our total markets to 85 as of December 31, 2018. This increases the total percentage of the U.S. population our markets collectively serve to 58.6%, up from 41.2% at the end of FY 2017. We also opened 1 vending machine in the quarter in Indianapolis, bringing our year-end total to 15. We continue to see noticeable increases in market penetration following the launch of a vending machine and are excited to launch several more in 2019.
We view our coast-to-coast logistics network and capital- and headcount-light market opening model as a key competitive advantage and expect to leverage that advantage in 2019. With our infrastructure in place, we expect to set another record in 2019 with 50-60 market openings. These 50-60 markets will largely utilize our existing network, leading to faster launch timelines and lower incremental capital expenditures than previous market launches. We expect our markets to cover at least 65% of the population by year end.
Inspection & Reconditioning Centers
As our rapid growth continues, we expect Inspection & Reconditioning Centers (IRCs) to play an important role in our strategy. Increasing sales means we can hold a broader selection of inventory at any given average days to sale. Additional IRCs enable us to produce and hold more cars to support growth in sales and inventory. Building out our logistics and IRC network will lead to better selection, shorter shipping distances, and faster shipping times, which we expect to result in higher conversion and lower shipping costs.
We expect our IRC footprint to evolve in several ways as we expand. Historically, each of our first five IRCs, including Indianapolis, included three production lines, each of which can be run on two (or optionally, 2.5-3) shifts per day, amounting to six production shifts per facility. At full utilization, we estimate six production shifts to equate to approximately 50,000 units per year of production capacity, or 250,000 units total across the five facilities.
We expect two refinements to this baseline in 2019. First, both our Phoenix and Indianapolis facilities have the ability to expand to 4 production lines (or 8 production shifts at two daily shifts per line), bringing their total capacity at full utilization to approximately 67k units per year. We plan to invest in expanding both facilities in 2019 in preparation for 2020.
Second, in 2019 we plan to launch two IRCs with 2 production lines each (or 4 daily production shifts) and begin construction on a third with up to 4 production lines (or up to 8 daily production shifts), bringing our targeted total after these additions to 8 IRCs with a total annual capacity at full utilization of approximately 400k units.
The two 2-line IRCs – one in Cleveland and a second we will announce this spring – were previously operated by DriveTime. We expect both IRCs to have total capacity at full utilization of approximately 33k units per year. Following the transition at each location, we will be the sole occupant of both facilities and pay all associated rent and facilities expenses, similar to our other IRC leases.
We expect capital expenditures for new IRC facilities to be approximately $10-12 million per line. This per line total is approximately $1.5 million per line higher than our previous expectations based on enhancements that we are implementing to increase throughput and improve long-term scalability.
Over time, we plan to finance our new IRC real estate investments primarily with sale-leasebacks. To give a sense of magnitude, at full utilization and assuming an 8% annual lease capitalization rate, the total rent expense associated with these IRC investments would be approximately $48-58 per vehicle produced.
[MY NOTE: Carvana provides complete transparency about “Finance Leases” stating in its FY 2018 10K Report: The Company finances certain purchases and construction of its property and equipment through various sale-and-leaseback transactions that do not qualify for sale accounting due to forms of continuing involvement. Accordingly, the Company records the assets subject to these transactions within property and equipment and the sales proceeds as finance leases within long-term debt in the accompanying consolidated balance sheets. Required monthly payments, less the portion considered to be interest expense, reduce the corresponding liabilities. See Note 8 — Debt Instruments for additional information on finance leases. Carvana also provides more transparent details in NOTE 6 - RELATED PARTY TRANSACTIONS Lease Agreements on pages 99-03. Bottom-line: Carvana gets no free rides from anyone.]
**CARVANA** 2/27/18 GICS SECTOR Consumer Discretionary GISC INDUSTRY Automotive Retail MARKET CAP $ 6.37 B Employees 3,879 52-WK HIGH 72.59 PRICE/SHARE 41.82 52-WK LOW 16.02 Price Y-T-D change 27.8% Price change 52-wk 170.1% S&P 500 52-wk change 2.9% EV/EBITDA (mrq) -12.51 P/E (ttm) N/A Fwd P/E -34.56 EV/Revenue (ttm) 1.32 P/S (ttm) 3.89
After reporting its 2018 Q4 and FY earning on 2/27/18, CVNA jumped up almost 10% at one moment in after hours trading.
Carvana margins demand investor vigilance. So far, during its ongoing growth and expansion phase, Carvana is realizing positive improvements in all three margins.
**MARGINS GROSS OPERATING PROFIT** FY '18 10.1% (TBD) (3.2%) Q4 '18 9.6% (TBD) (4.9%) Q3 '18 10.7% (10.9%) (2.9%) Q2 ‘18 10.3% (9.8%) (2.1%) Q1 ‘18 9.5% (13.6%) (2.0%) FY '17 7.9% (18.1%) (7.3%) Q4 ‘17 8.3% (17.0%) (18.9%) Q3 ‘17 9.1% (17.0%) (1.9%) Q2 ‘17 7.7% (17.2%) (7.0%) Q1 ‘17 FY '16 5.3% (24.5%) (25.5%)
Regarding gross margin, cost of sales includes the cost to acquire used vehicles and direct and indirect vehicle reconditioning costs associated with preparing the vehicles for resale. Vehicle reconditioning costs include parts, labor, inbound transportation costs and other incremental overhead costs, which are allocated to inventory via specific identification and standard costing. Occupancy and labor costs incurred in connection with expanding production capacity are expensed as incurred as a component of selling, general and administrative expense. The Company has certain inventory that does not meet its specifications to sell to customers and disposes of this inventory through sales at auction or through other channels. The cost of these disposals are recorded on a net basis in cost of sales. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
STOCK-BASED COMPENSATION (SBC)
SBC/revenue ratios are favorably low.
**PERIOD SBC SBC/Revenue** **($ M)** Q4 '18 6.205 1.1% Q3 '18 13.800 2.6% Q2 ‘18 2.580 0.5% Q1 ‘18 1.510 0.4% FY '18 24.095 2.5% FY '17 5.611 0.7% FY '16 0.555 0.2% FY '15 0.490 0.4%
RELEVANT INFO FROM MY FILES THAT I SHOULD HAVE INCLUDED IN MY ORIGINAL CARVANA POST BACK ON 11/26/2018
A huge primary market target of CVNA are millennials who came out of their motherly wombs texting on their mobile smartphones. ALL of the top CVNA corporate executives are millennials.
You can get an offer for your used car from Carvana in 2 minutes as follows:
- GET A REAL OFFER. Our real offer will be guaranteed for 7 days or 1,000 additional miles. No haggling. No lowballs.
- WE PICK UP YOUR CAR. Set your pick up for a time convenient for you. We can pick up as soon as the next day.
- GET PAID ON THE SPOT. We’ll do a quick review of the car and make sure everything is in order. Then, hand you a check!
Via the vehicle’s VIN, Carvana’s software program gains access to all the vehicle components and accessories that are priced out and totaled in a quick offer.
Finally, here’s a recent excellent review about Carvana’s Used Car Financing by a highly reputable author Philip Reed, who writes about cars for NerdWallet and got the scoop directly from Ryan Keeton, Carvana co-founder and chief brand officer.
My original Carvana post on 11/26/2018 acknowledges that although this company (a) is not a software company with recurrent revenue, (b) sells things, i.e., used cars, (c) is capital intensive, and (d) has low gross margins akin to its automotive retail industry, Carvana is the rare exception that over a 5-year period not only delivers triple digit Y-o-Y revenue growth, but also triple digit Y-o-Y increases in the number of markets entered and corresponding triple digit Y-o-Y increases in the number of used cars sold and expects to continue this trend through FY 2019.
Carvana is disrupting and transforming the retail used car sector with their company’s custom-built business model and e-Commerce platform. Its business plan and operations provide a distinct diversification for my family’s portfolios and are far easier for me to understand and follow than some SAAS companies and the likes of MongoDB.
I’ll also reiterate that the U.S. retail used car marketplace is not only huge, but also highly fragmented. There are approximately 43,000 used car dealerships in the U.S. according to Borrell Associates’ 2017 Outlook, including approximately 27,000 independent dealerships. The largest dealer brand commands approximately 1.7% of the U.S. market and the top 100 used car retailers that include the likes of big boys CarMax and DriveTime collectively hold only about 7.0% market share, according to Edmunds.com, publicly-listed dealership filings and Automotive News. That leaves Carvana mucho room to grow and expand especially as an e-commerce business.
As always, conduct your own due diligence and decision-making.