Friday, Jun. 09, 2017, 10:55 AM UPDATED 11:10 AMBy Nick Zulovich
Carvana founder and chief executive officer Ernie Garcia is confident that the online used-vehicle retailer will have turned at least 10,000 units by the time the second quarter closes at the end of the month. And Garcia is upbeat that the gross profit per unit will be about $1,400.
“The path to profitability is clear,” Garcia told investment analysts when Carvana hosted its first quarterly conference call as a publicly traded company on Tuesday. “The strength of the demand we are seeing with end markets and our ability to open new ones provides most of the fuel necessary to enable our total GPU (improvement). The brand we have built is powerful. Our website and brand assets like the vending machine make a strong impression and tell a clear story to our customers.
“We are executing,” he continued. “We are a 4-year-old company and have achieved this scale in this timeframe because we are comprised of a group of people that believe in what we are doing and that pour themselves into delivering incredible customer experiences every single day. I couldn't be prouder to call myself a part of that group. We are well positioned. My view isn't that customers are just now becoming ready to buy cars online. My view is that customers have been ready for a while, but the right product hasn’t been available to them and that demand has remained waiting.
“I believe this is because building an easy-to-use ecommerce platform that lives up to the expectations of customers is very hard and requires expertise in many different areas. If it is hard the first time, it will also be hard to replicate,” Garcia went on to say as a part of his opening comments.
While Carvana posted record revenue in Q1, its net losses spiked, too. But later in the call, Garcia pointed out the strikes Carvana is making in gross profit per unit. Back in 2014, the company lost about $200 per unit on average. A year later, Carvana improved to about $200 in positive gross. Last year on average, Carvana said that gross profit rose to roughly $1,000.
The math then isn’t too complicated. If Carvana turns 10,000 units and the gross averages out to be $1,400, that computes to $14 million.
Garcia closed the call with a message directly to his employees.
“To everyone on team Carvana out there, thank you for everything you’ve done to get us here. Achieving these goals relies on nothing more than us executing on our plan. Let's do it and let's have fun along the way,” he said.
With the expectations of retailing 10,000 units in Q2 and perhaps 44,000 to 46,000 for the year, investment analysts wondered if Carvana’s inventory strategy put the company in place to hit those targets. Currently, Carvana holds about 7,500 units in inventory that’s spread throughout the 29 markets where it operates.
“So the way I would think about that is I think we still believe that there are gains in conversion rates to be had by growing inventory from here,” Garcia said. “We believe that those gains are less pronounced than they were when our inventory was smaller. And so the balance of growing inventory and growing conversion versus recognizing higher gross margins by holding a smaller inventory turning cars faster has shifted to where we now have more of a focus on driving down average days to sale and driving up GPU. So you can expect to see that going forward.
“We do expect also to be growing inventory over that timeframe,” he continued. “Over the next several years, we don’t expect it to be completely flat. And then in terms of where that could go, I think if you look at other retail models across the board, you see kind of 30 to 60 days is probably the average window of average days to sale that you see for other groups out there.
“I think our medium term goal is to get in line with traditional retailers and I think from there, there is certainly upside,” Garcia added.
Chief financial officer Mark Jenkins noted that approximately 70 percent of site buyers use Carvana financing to complete their purchase. Carvana made arrangements with several finance providers to help move metal, including Ally Financial and Randolph-Brooks Federal Credit Union (RBFCU).
“That’s a number that we’re very proud of,” Jenkins said in reference to that 70 percent penetration rate. “I think a number that’s enabled by the technology that we build that provides a very seamless experience to customers who could very easily fill out a credit application form on their phone or desktop and then select from a wide variety of financing options that we make available in a very transparent way.”