Carvana Co. (Update)

  • Spruce Point believes that the recent terrible financial results reported by Carvana continue to validate our concern about its uneconomic business model that isn’t scaling, is capital destructive, and favors insider enrichment over shareholder wealth creation. Our revised price target is $7.50 – $19.60 (56% to 83%).
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  • Q4’18 Results Disappoint By A Mile..Retail Units: 27,750 (vs Bloomberg cons 29,200, vs guidance 27,500 – 30,000)
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  • Reported Revenue: $535m v $605m expected (original guidance: $570m – $630m)
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  • At The Current Burn Rate of $1.1m/Day, Carvana Had Just 70 Days of Operating Cash On Hand At Yr End
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  • We estimate just $12.8m of unrestricted cash on hand by March 1st
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  • 100% Gross Margin Finance Revenue Driving GPU: Carvana generates an outsized share (~50%) of GPU from 100% gross margin finance and insurance (F&I) sales, vs. <20% for KMX. Underlying GPU on car sales alone are >10% below industry average and less than half that of KMX
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  • In Spruce Point’s opinion, Carvana will require more equity capital to continue operations, and has limited flexibility to incur more debt given its deep junk CCC rating. Yet, despite the accelerating cash burn, management received a 100% increase in cash compensation at the approval of an “independent” Board, further compounding the pain to investors.
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  • Other liquidity alternatives include going further into debt by tapping the floor plan facility and/or sale leaseback agreements with $331m of capacity. However, this could be incrementally negative from a credit perspective
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  • We caution investors that Carvana’s stated belief that it won’t need to raise additional debt or equity appears aggressive. Importantly, management has a poor track record of hitting its stated financial targets.
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  • “The Board also approved annual base salary increases for the Company’s executive officers as part of its annual performance review, including Ernie Garcia III, the Company’s Chief Executive Officer, whose annual base salary was increased from $400,000 to $885,000, Mark Jenkins, the Company’s Chief Financial Officer, whose annual base salary was increased from $375,000 to $735,000, and Benjamin Huston, the Company’s Chief Operating Officer, whose annual base salary was increased from $375,000 to $735,000. The salary increase were approved retroactively to January 1, 2019, consistent with the Company’s practices for annual merit increases.”
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  • By reporting on Feb 27th, Carvana is already 2/3rds through the quarter and should be able to provide investors visibility into expected results

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