Carvana, the online used-car buying and selling platform launched in 2012 “to change the way people buy cars” is making good on that lofty promise if its third-quarter 2019 performance is an indicator.
In his third-quarter earnings conference call with investors, co-founder, president, and chief executive officer Ernie Garcia III reiterated that promise.
“Third quarter was our 23rd quarter of triple-digit revenue growth, and a 250% growth in the number of cars we bought from customers,” he said.
Carvana dealerships retailed 46,413 units in the quarter, an 83% increase, driving total revenue to $1.95 billion, an increase of 105%.
“We’ve built something our customers love,” Garcia said, noting that in seven years Carvana has grown to become the third-largest retailer of used cars in the U.S.
Garcia said that Carvana in the third quarter:
- Bought 70% more cars from customers as sold to them
- Sourced 31% of retail cars from Carvana customers
- Improved gross per unit from $1,000 to $3,000, and margin by 20%
In its third-quarter performance news release and Letter to Shareholders, Carvana reported, yearover year (unless noted), that it:
- Retailed 46,413 vehicles, an 83% increase
- Increased vehicles purchased from customers by 249%, up from 188% in second quarter
- Earned $1.095 billion in revenue, a 105% increase
- Served 72,000 customers, up from 60,000 the prior quarter
“Certainly, we benefited from retail sourcing from consumers in the third quarter relative to second quarter and year over year. That said, there were a number of offsets. If we look sequentially, those offsets included high wholesale prices in second quarter and the early part of Q3, followed by relatively high depreciation rates in the latter part of Q3, which had an impact on our vehicle margin,” said Mark Jenkins, chief financial officer.
“Moreover, another sequential change was a reduction in delivery revenues on a per unit basis that came along with us scaling inventory on the eastern half of the U.S., with our Indianapolis, Cleveland and Nashville inspection and reconditioning centers coming online,” Jenkins added.
“Obviously, we are excited about our progress overall reaching gross profit per unit up $170 year over year with buying customers definitely contributing, as we continue to source more retail cars from customers and continue to optimize our bidding and pricing algorithms,” Jenkins said.
Garcia noted that Carvana has bought cars from customers for only the last 12 months.
Garcia and Jenkins noted the Carvana platform scales quickly, with nine new markets launched in third quarter, for 146 markets. It also added four Carvana vending machine facilities in the quarter, including two in the Los Angeles area, for 22 centers.
It added a 23rd, in Memphis, Tenn., in mid-November.
Market growth now gives Carvana coverage in 66% of the U.S. population, up from 58.6% at the end of fiscal year 2018. Its move into smaller markets, Carvana said, will position it to reach 90-plus percent of the U.S. population.
“In addition,” the shareholder letter noted, “we believe we can efficiently serve another 5% of the U.S. population in smaller cities and towns through delivery from our nearby markets, ultimately bringing the total share of the population we serve to 95%.”
For 2020, the company intends to resume “the rapid pace of market openings,” beginning fourth quarter. Market grow decisions will be based on population coverage versus current market growth, “as this metric will be more relevant as we move into smaller markets and fill in existing regions,” the company said.
Recon facilities key
Its plan to achieve these milestones depends partly on how quickly the company can build out its inspection and reconditioning centers (IRC) and, given the projected vehicle volume, maintain delivery timelines, especially the “last mile.”
The company operates seven IRCs, with the eighth under construction in North Carolina. Its annual production capacity of 67,000 vehicles adds to Carvana’s current operating IRC footprint of 350,000 annual units. The company is considering five additional IRC sites to become four-lane facilities “over time.” Carvana sees its IRCs as a “long-term competitive advantage.”
He said before completing IRC facilities in Indianapolis and Cleveland, Carvana had no Midwest inspection centers. “So many markets in the Midwest suddenly got cars a lot closer to them, and the offering got better,” Garcia said.
“Those markets had broader selection, and they had faster delivery times. What we saw there was a 20% reduction in average miles traveled by all cars that were sold in those 10 markets that were nearest those bases. And we also saw sales more than double in those markets and grow over twice as fast as we would have otherwise expected,” Garcia said.
The company, however, is not yet profitable. Garcia said Carvana management will “remain intently focused on this goal. But on the question of unit economics, the data is pretty clear: In the third quarter, 80% of our markets which made up 97% of our sales were contribution positive, and 14 markets which made up 35% of our sales were even more positive, after fully allocating all logistics and corporate expenses.”
Jenkins said Carvana’s pace sourcing cars from customers exceeded expectations. “We now expect to have more of an impact on the business in 2020 than we previously anticipated. And, so, we’re investing in several dimensions for two reasons.
“First, we’re investing in staffing to help pinch-points both in the short term and to make sure that we don’t see further pinch-points in the first half of 2020 with this substantial transaction growth that we’ve been seeing,” Jenkins said. “We’re also investing in technology to make sure both in the short term and as we move into 2020 that we’re making investments to ensure we’re providing a great customer experience and we have the backend process efficiencies to support this level of growth.”
The company is forecasting long-term sales of 2 million-plus vehicles a year “and becoming the largest and most profitable automotive retailer,” management said in its shareholder letter.