Carvana Co. (CVNA 2.88%), which sells used cars online and delivers them via distinctive "vending machine" retail facilities, reported on Aug. 8 that its net loss in the second quarter widened to $38.9 million, or $0.28 per share, from $18 million a year ago.
That wider loss came despite a big year-over-year gain in revenue, as Carvana spent aggressively on its plan to expand rapidly across the United States.
Carvana's dealership in Houston, with its distinctive "vending machine" tower. Image source: Carvana Co.
Carvana earnings: The raw numbers
| Metric | Q2 2017 | Change vs. Q2 2016 |
|---|---|---|
| Revenue | $209.4 million | 142% |
| Retail units sold | 10,682 | 145% |
| Gross profit | $16.0 million | 166% |
| Gross profit per unit sold | $1,501 | $332 increase |
| EBITDA margin | (16.1%) | 5.0 ppts improvement |
| Net profit (loss) | ($38.9 million) | Loss increased by $20.9 million |
Data source: Carvana Co. "Ppts" = percentage points. "EBITDA margin" = EBITDA (earnings before interest, tax, depreciation, and amortization) as a percentage of revenue.
Carvana's quarter in a nutshell
Carvana's story is all about expansion right now. The company, which sells used cars online and offers customers the option of picking them up from one of its distinctive "vending machine" sites, is using the proceeds of its initial public offering to fund new brick-and-mortar retail sites, or what it calls "markets," across the U.S. Carvana opened seven new markets during the second quarter, bringing its total to 30 markets as of June 30.
Carvana said that it had increased its spending on national advertising in the second quarter to support its rapid expansion. It also announced the acquisition of Carlypso, a start-up focused on bringing "big data" analytical techniques to used-car inventories.
Carvana as an investment
Carvana went public on April 28, 2017. Its offering was priced at $15 per share, but it opened on the New York Stock Exchange at just $13.50. The stock had a bumpy ride in its first weeks on the market, but jumped after Carvana released a good first-quarter earnings report in June:
Carvana has an intriguing opportunity: With the U.S. new-car market likely past its cyclical peak, and average new-car transaction prices near all-time highs, there's a good chance that demand for used cars will pick up over the next couple of years. Meanwhile, right now, used-car prices are down thanks to a glut of just-off-lease vehicles coming to auction. The upshot: It's arguably a good time to be expanding and building inventory, ahead of a potential jump in demand.
That said, as with any fast-growing emerging company, cash burn is a concern that potential Carvana investors will need to evaluate. The management team doesn't have an extensive track record -- but on the other hand, Carvana's distinctive branding and customer experience could help it stand out and find significant growth.
Looking ahead: Carvana's guidance, and a few words from its CEO
Carvana provided updated guidance for the third quarter. It expects:
- Retail unit sales of between 11,500 and 13,000, up 129% to 159% from the third quarter of 2016
- Total revenue of between $225 million and $255 million, an increase of 128% to 158% from the year-ago period
- Total gross profit per unit between $1,625 and $1,725
- EBITDA margin of between negative 14% and negative 16%
On the second-quarter conference call, CEO Ernie Garcia explained why the company's third-quarter guidance includes wide ranges:
Our range for units and revenue for the third quarter is a bit wider than we would typically provide. Historically, we have seen sales bumps in the third quarter that we believe are driven by OEM advertising for their model year-end sales. Given that we sell a lot of late-model cars, we generally benefit from this advertising surge. Looking back to the last three years, we have seen significant variation [in] how large that transitory bump is, and therefore, our guidance range of 129% to 159% year-over-year unit growth in the third quarter reflects our uncertainty around the size of this year's impact.
Carvana also reiterated its prior guidance for the full year. It still expects:
- Retail unit sales between 44,000 and 46,000, up 135% to 145% from 2016
- Revenue of between $850 million and $910 million, up 133% to 149% from 2016
- Total gross profit per unit of between $1,474 and $1,575
- EBITDA margin of between negative 14% and negative 16%
- Openings of 16 to 18 new markets, bringing the total at year-end to between 37 and 39
Long story short: It'll be a while before shareholders see profits, but Carvana remains on track for big sales and revenue growth in 2017.
