- In Q3 2021, net revenue of the company increased by 128% to $68 million.
- Net losses increased to $3.5 million in the Q3 from $0.5 million in the year ago quarter.
- The company has opened 14 new hubs in 2021 to reach a cumulative number of 22 hubs.
- The new hubs are not generating results as expected and the pandemic has adversely affected the business.
- The company offers a digital and hassle-free process for its retail buyers, including a whole range of services like financing, insurance, and extended warranties.
CarLotz (LOTZ) is increasing its revenue and opening new hubs. As and when the retail-wholesale pricing environment becomes more favorable for CarLotz, the company should do well. The company aims to return to mainly consignment business model as the chip shortage issue gets resolved. Such asset-light inventory sourcing model allows the company to source its vehicles at a limited capital risk.
Virginia-based used car company CarLotz was founded in the year 2011. The company offers a consignment-to-retail used car marketplace that gives its sourcing partners and used vehicle retailers an easy access to the retail sales channel. It operates a technology-based buying, sourcing, and selling model that offers a broad selection of vehicles and an omni-channel experience. It currently operates 22 retail hub locations in the U.S.
CarLotz went public in January 2021 by merging with SPAC Acamar Partners Acquisition Corp.
CarLotz sells used vehicles to its retail customers through its hubs located in the U.S. The company sources vehicles from both corporate partners and retail sellers.
The company offers its products and services to its corporate partners, retail sellers, and to retail customers who are looking to buy used cars. Fleet leasing companies, finance companies, wholesalers, corporations managing their own fleets, and OEMs, are the company's corporate vehicle sourcing partners. Buyers can see the vehicles online through the website or at the company's locations, along with its financing and insurance products.
The company has developed a proprietary technology for its corporate car sourcing partners that integrates with their internal systems and supports every step of the consignment and sales process. It has also developed tools to supplement such platform, providing real-time data to its corporate vehicle sourcing partners and retail sellers. As the company is continuing to improve its technological solutions, it offers a digital and hassle-free process for its retail buyers.
CarLotz's Revenue Model
The company generates most of its revenues from the sales of used vehicles. These vehicles are sold to retail customers from its hubs located throughout the US. The customers frequently trade their existing vehicle to apply towards the transaction price of a used vehicle. This generates revenue for the company on the sale of a used vehicle to the customer trading-in their vehicle, as well as the traded-in vehicle when it is sold to a new owner.
The vehicles are also sold to wholesalers or other dealers, primarily through auctions. CarLotz also makes revenues by offering retail vehicle buyers services like financing, insurance, and extended warranties.
The used vehicle market in the U.S. is huge. It generated around $841 billion revenue from roughly 41 million units in 2019, as per Edmunds Used Vehicle Report 2019.
There are approximately 50,000 auto dealers in the U.S. The market is fragmented with the largest dealer controlling less than 2% share in 2019. CarLotz represents roughly 0.02% of the U.S. used car sales by volume, which indicates an opportunity for robust growth.
The pandemic has resulted in a heightened demand for used cars. This has resulted from a combination of factors, including rising preference for own vehicles rather than public transport or ridesharing, as well as supply shortages impacting production of new cars.
The used vehicles market in the U.S. is highly competitive and fragmented. Many transactions occur in peer-to-peer market. There are roughly 50,000 used vehicles dealers in United States.
CarLotz's competitors in the used vehicle market include large national car dealers, i.e., CarMax (KMX) and AutoNation (AN), which are expanding into online business; digital and physical auction businesses, such as ADESA, Manheim, ACV, BackLotCars, and several other smaller independent auctions.
The company also faces competition from car rental companies such as Hertz Car Sales and Enterprise Car Sales, which sell directly to consumers vehicles previously used in their rental fleets.
Due to a sustained shortage of semi-conductor chip and COVID-related supply chain issues constraining supply, the margin between retail and wholesale prices of used vehicles has been compressed. This, in turn, has reduced the incremental value which CarLotz delivered to its corporate vehicle sourcing partners, making consignment less attractive to the partners than selling vehicles through the wholesale channel. The lack of new vehicle supply caused by the semi-conductor chip scarcity limited the supply of used automobiles from CarLotz's corporate vehicle sourcing partners.
What's more, the company isn't sure when the used vehicle market will return to a more normal state.
On the positive side, the company has seen some improvements in the third quarter, compared to the second quarter of 2021. Michael Bor, Co-Founder and Chief Executive Officer of CarLotz, noted during the third quarter call,
As we worked to improve all of our sourcing channels in the face of this adversity, we have made progress in lessening our reliance on options to source vehicles. While monthly sourcing can vary based on seasonality and growth needs in June about 70% of our inventory and flow is being sourced at auction, while in October that number was less than 50%. In part the increase in unit sourced non-competitively this past quarter is a result of new accounts, the rekindling of a prior account and the wholesale retail pricing environment making consignment more attractive than in the recent past.
Due to strong wholesale market for vehicles, the corporate vehicle sourcing partner that accounted for more than 60% of the cars CarLotz sold during the Q4 2020 and Q1 2021, informed the company in May 2021 that it would be pausing its consignment of vehicles to CarLotz. The partner, however, has returned, though with a lower volume. Speaking of the positive developments, Bor added,
As we mentioned on our last call, the partner who paused our relationship during the height of the wholesale pricing disruption has returned and is now consigning again accounting for about 10% of our sourcing volume in October. In addition, we have added new corporate partners to our sourcing mix, while seeing more corporate sourcing partner pilots in Q3 than in Q2. Also encouraging from a sourcing perspective is the increase in units sourced from consumers through consignment trade-ins and purchases.
Meanwhile, hubs opened by CarLotz in 2021 have not been performing as predicted. Also, during the three months ended September 30, 2021, the company had a lower retail GPU (gross profit per unit) because of decreased pricing on aging inventory, reducing the margin between the selling prices and the acquisition costs on owned inventory.
CarLotz reported revenue of $175.4 million for the nine months ended on September 30, 2021, which is 115% higher compared to a revenue of $81.6 million for the nine months ended on September 30, 2020. During the same period of 2021, net losses increased to $25.7 million compared to $2.2 million losses reported in the same period of 2020.
The major reason of difference was increase in selling, general and administrative expenses to $63 million during the nine months ended September 30, 2021, from $11.1 million in the comparable period in 2020. The increase was mainly due to additional expenses incurred due to being a public company, increased head count in the new hubs opened, additional marketing expenses, and technology upgradation expenses.
Source: CarLotz's Form 10-Q for Q3 2021
The company has reported liquidity of $201.2 million as on September 30, 2021. The management believes that the current liquidity level is sufficient to perform operations for at least the next 12 months.
The company expects to continue incurring losses until it achieves scale and can leverage its operating costs. The hubs opened in 2021 are not generating results as expected. If this does not improve, it may impact the company's expansion strategy, or the company may have to raise equity or debt financing to continue expansion.
- Due to strong wholesale market for vehicles, the corporate vehicle sourcing partner that accounted for more than 60% of the cars the company sold during the Q4 2020 and Q1 2021, informed the company in May 2021 that it would be pausing its consignment of vehicles to CarLotz. Although its corporate vehicle sourcing partner restarted consignment of automobiles in the Q3 2021, but they have not returned to the same volume of vehicles. There is no guarantee that they will return to the same volume, or that the price, types, and quality that will be attractive to CarLotz.
- Certain automakers have experienced slower production of new vehicles due to the COVID-19 pandemic's effects, as well as shortages of semi-conductor chips and other automotive supplies since the beginning of 2020. The decrease in new vehicle supply has constrained the quantity of used vehicles available through the company's corporate sourcing partners, and the same is expected to continue in 2022. To compensate for the decrease in supply from this source, the company has sourced a bigger percentage of its vehicles through wholesale auction channels than in the past. Because the company is purchasing these vehicles, it has increased risk on the margin between the vehicle's cost and its selling price. It has witnessed gross profit compression in the third quarter 2021, which is expected to continue throughout the year. Its inability to turn inventory rapidly and the rate at which second-hand automobiles deteriorate could worsen the risk.
The company is continuously improving its technological solutions. A fragmented market means significant growth opportunities for CarLotz. In addition to the return of a positive market environment, adding experienced management personnel could help in the company's turnaround.
As and when the retail-wholesale pricing environment becomes more favorable for CarLotz, the company should do well. It aims to return to mainly consignment business model as the chip shortage issue gets resolved. Such asset-light inventory sourcing model allows the company to source its vehicles at a limited capital risk.
Seeking Alpha's proprietary quant ratings give 'Neutral' rating to CarLotz stock. While the stock is rated high on valuation and revision factors, it has been rated low on the profitability and momentum factors.
CarLotz stock has some scope of an expansion in its forward price-to-sales multiple, as its business improves. Overall, though risky, CarLotz stock looks attractive right now.
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