Online used-car dealer Carvana Co. reported a three-digit percentage increase in losses for its first quarter compared with last year—along with an expansion into new U.S. markets and several steps meant to help the company weather the COVID-19 pandemic.
Carvana’s sales were hit hard when the U.S. pandemic lockdowns started in March and early April, then they soared as the crisis dragged on into the second quarter, CEO Ernie Garcia III said in a conference call with analysts on Thursday.
“We began to see significant reductions in demand in the back half of March with a sales trough in early April at approximately 30% reduction in sales year over year,” Garcia said during the call, according to a Seeking Alpha transcript. “From there, we have consistently improved week after week with sales in the most recent weeks being up about 20% to 30% year over year.”
For the quarter, the company reported the following:
- The net loss was $183.6 million for the quarter March 31, an increase of 122.3% from $82.6 million for the year-ago quarter.
- Revenue totaled $1.098 billion, an increase of 45.4% from $755.2 million a year earlier.
- Retail units sold during the quarter totaled 52,427, a year-over-year increase of 42.6% from 36,766.
- Total gross profit (revenue minus the cost of goods sold) was $138.4 million, an increase of 56.4% from $88.5 million in the year-ago quarter.
Carvana says growth in existing markets due to expanded inventory selection, enhanced marketing efforts, increased brand awareness and customer referrals helped drive the increase in units sold. Carvana expanded to 161 markets as of March 31, 2020, up from 109 markets a year earlier, which also affected the number of units sold.
Looking ahead, Carvana says it expects the COVID-19 pandemic to hurt its most significant source of revenue—retail used-car sales—and other sources of revenue, such as wholesale vehicle sales and gains on the sales of automotive loan proceeds to third parties. But the company says it expects those effects to be temporary.
“Overall, we view underlying trends at [Carvana] as still solid,” Brian Nagel, senior sell-side equity research analyst at Oppenheimer & Co Inc., wrote in a May 7 note to investors.
The onset of the coronavirus pandemic was the entire cause of Carvana’s sales and earnings weaknesses, Nagel says in the note. Looking forward, he says, used car prices are easing, which could create “compelling inventory acquisition opportunities” for Carvana. Also, he thinks Carvana “is particularly well-situated to serve the needs of customers looking for a ‘contact-light’ used-car shopping experience,” the note says.
In March, Carvana unveiled a service called Touchless Delivery, which allows customers to take delivery of vehicles without contacting the employee delivering the vehicle. Also, Ally Financial doubled the size of its current loan purchase arrangement with Carvana to $2 billion over 12 months.
The same day it announced its first-quarter results, the auto retailer announced it expanded to serve 100 additional U.S. markets across 24 states. With the expansion, Carvana now serves 261 markets across the country, the company says.
Carvana’s COVID-19 response
In a letter to shareholders, Carvana outlined several measures intended to help shore up its finances during the coronavirus pandemic and the unpredictable marketplace the health crisis creates. Among them:
- Carvana raised $600 million in a registered direct equity offering to existing shareholders. In the shareholder letter, the company says the new cash brought its liquid resources to more than $1 billion as of April 1. The money raised included $25 million each from CEO Ernest Garcia III, the company’s founder and CEO, and Ernest Garcia II, the company’s largest shareholder.
- Carvana substantially reduced working hours for its operations and customer care teams. To offset the financial impact of reduced hours, the retailer launched the “We’re All In This Together Fund,” which provides money to workers whose hours were cut back. More than 500 employees voluntarily donated part of their salaries to the fund—including the members of the executive team and board of directors, which gave 100% of their salaries.
- In mid-March, Carvana paused acquiring new inventory. As of May 6, 2020, the company reduced total inventory by approximately 30% compared with the end of the first quarter. But, because inventory levels have declined and demand has begun to increase, it has started selectively acquiring vehicles again.