Online car retailer Carvana (NYSE:CVNA), known for its glass-framed, multistory car vending machines, dispensed a mixed report to investors on Wednesday after markets closed for trading. The company's third-quarter 2019 earnings were notable, as aggressive top-line growth had failed to provide the company with enough operating leverage to prevent year-over-year losses from widening. As we work through the quarter's details below, note that all comparative numbers are presented against those of the prior-year quarter.
Carvana: The essential metrics
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$1.095 billion||$535.0 million||104.7%|
|Net income (loss)||($92.2 million)||($64.4 million)||(43.2%)|
|Diluted earnings (loss) per share||($0.78)||($0.50)||(56.7%)|
Highlights from the quarter
- Retail units sold increased by 83% to 46,413.
- The company's revenue advance came in well above the level implied by management's revised full-year guidance last quarter. As a result, Carvana again bumped up its 2019 outlook (which we'll review below).
- Excluding the effects of a milestone compensation bonus awarded to employees in Q3 2018 ("ex gift"), the company achieved gross profit per unit, or GPU, of $2,996. As I discussed in my earnings preview, ex-gift GPU was set to decline sequentially from a high mark of $3,175 notched in the second quarter, but it again met the $3,000 multiyear target the company achieved earlier this year. This was a higher profitability level than management's guidance had suggested.
- Carvana's purchases from customers increased 249%, a positive trend, as inventory acquired from customers boosts gross margin on sales. During the quarter, 31% of retail units sold were sourced from Carvana's customers.
- Building out inspection and reconditioning centers (IRCs) continues to be a priority to enable growth. Carvana has begun construction on its eighth IRC, which will be located in North Carolina and should begin operations next year. In addition, management has identified five additional sites for new IRCs in the coming years.
- The company installed four new car vending machines, bringing its total to 22 across the U.S.
- Carvana launched in nine new markets during the quarter, widening its reach to 146 markets at quarter end.
- Management has decided to discontinue reporting on market penetration beginning in 2020, as it believes that population reach is a more relevant metric. The company's reach, defined as areas in which it advertises locally and offers Carvana-branded home delivery, currently encompasses nearly 67% of the total U.S. population. Management believes the company can eventually extend its reach to 95% of the U.S. population.
A faltering bottom line
While ex-gift EBITDA margin (i.e., earnings before interest, taxes, depreciation, and amortization, divided by revenue) improved to negative 5.1% from negative 8.3% booked in Q3 2018, investors had anticipated a slightly better result. As I discussed in my preview, midyear performance suggested a third-quarter margin closer to the high end of the company's projected full-year range of negative 5.5% to negative 3.5%.
The company's negative EBITDA, and for that matter its rise in net loss against the comparable period, is due to growth in operating expenses, which are absorbing the benefit of improved gross margin. Selling, general, and administrative expenses jumped roughly 80% to $208 million during the quarter, while interest expense nearly quadrupled to $21 million. The swelling overhead results from higher selling and marketing expenses feeding the company's top-line acceleration, but it's also affected by higher compensation costs as Carvana grows its employee base, as well as expensed items from investments in both digital and physical infrastructure.
Revisions to 2019 guidance
Carvana adjusted its full-year outlook heading into the final quarter of the year. The company raised its retail unit sales target to between 174,000 and 176,000 vehicles, which translates to 85%-87% expansion over 2018 sales. This is an impressive adjustment from last quarter's projection of 78%-83% growth.
Due in part to its strong third quarter, Carvana bumped up its 2019 revenue goal, from a range of $3.6 billion to $3.7 billion to a new band of $3.85 billion to $3.95 billion.
GPU ex gift is now expected to settle between $2,825 and $2,875, a tighter and slightly higher range than last quarter's expectation of 2019 GPU of between $2,650 and $2,850.
As for earnings, Carvana doesn't issue per-share guidance. However, the company did tell investors to expect "EBITDA margin ex-gift toward the higher loss end of our negative 5.5%-negative 3.5% range." While this will represent an improvement over 2018's EBITDA margin of negative 10%, investors had likely chalked in a healthier margin projection.
Given this outlook along with a higher-than-expected loss, shares opened roughly 9% lower on Thursday. However, Carvana has still represented a phenomenal investment in 2019 -- shares have returned 66% over the last 12 months.