Story Stocks®
Updated: 13-May-21 14:21 ET
Vroom growth hits accelerator on thriving used car market, but flaws emerge under the hood (VRM)
Bolstered by a rising comfort level among consumers in purchasing vehicles online, and a strengthening used car market, Vroom (VRM) reported upside 1Q21 results that featured a 96% surge in eCommerce units sold. Coming on the heels of competitor Carvana's (CVNA) impressive quarterly results last week, VRM's solid performance relative to the consensus estimates doesn't come as a total surprise. What stands out to us, though, is the sequential improvement seen in a couple key metrics.
For instance, eCommerce revenue jumped by 81% yr/yr to $422.3 mln, up sharply from last quarter's 41% growth. Higher inventory levels and a boost in marketing expense, including from its first ever Super Bowl commercial, supported the acceleration in sales. With VRM forecasting a 164% surge in eCommerce unit sales in Q2 to 17,500-18,000, the momentum is expected to continue.
Also encouraging is the 36% increase in eCommerce vehicle gross profit per unit to $1,151. Last quarter, this metric was up a modest 12% yr/yr. Initially, we expected that the improvement would be related to an upswing in average selling prices. Yesterday's surprising inflation data showed that rising used car prices were the most significant factor behind the spike in the Consumer Price Index. In fact, the cost of used vehicles surged by 10% in April, representing the fastest climb in recorded history.
However, after digging into the earrings report, we found that the average selling price per eCommerce unit actually fell by 7.4% to $26,336. Rather than higher prices, the improvement was partly driven by efficiencies in reconditioning costs. This is a positive development for two reasons. First, it illustrates that VRM's investments in expanding its reconditioning capacity are paying off and that the improvements should have staying power. Second, the fact that VRM didn't benefit from stronger prices in Q1 suggests that the surge hasn't filtered through to its financials yet. That makes sense since VRM's Q1 ended on March 31, prior to the April surge in prices.
It stands to reason that VRM, CVNA, and other used car dealerships like CarMax (KMX) will benefit from tight inventories of new cars resulting from the chip shortage. Supporting that idea is VRM's Q2 average eCommerce selling price per unit forecast, which stands at $27,000-$28,000, up about 4.5% sequentially at the midpoint.
The news for VRM isn't all positive, though. Most notably, adjusted EBITDA worsened to ($72.6) mln from ($39.2) mln in the year-earlier quarter. In comparison, CVNA experienced a substantial yr/yr improvement, registering Q1 EBITDA of ($30) mln versus ($139) mln a year ago. Still in the early innings of its growth curve, VRM can be forgiven for investing heavily in its workforce, logistics network, inventory, and eCommerce platform. The profitability difference between the two companies is stark, though, especially since CVNA's growth rates are superior to VRM's at 105% and 66% over the past two quarters.
Overall, it's promising to see an acceleration in growth and an improvement in per unit economics. The outlook for next quarter also looks very bright as demand for used cars escalates while dealerships grapple with semiconductor shortages. Suppressing our sentiment on VRM is its underperformance relative to peer CVNA, especially in terms of profitability.
For instance, eCommerce revenue jumped by 81% yr/yr to $422.3 mln, up sharply from last quarter's 41% growth. Higher inventory levels and a boost in marketing expense, including from its first ever Super Bowl commercial, supported the acceleration in sales. With VRM forecasting a 164% surge in eCommerce unit sales in Q2 to 17,500-18,000, the momentum is expected to continue.
Also encouraging is the 36% increase in eCommerce vehicle gross profit per unit to $1,151. Last quarter, this metric was up a modest 12% yr/yr. Initially, we expected that the improvement would be related to an upswing in average selling prices. Yesterday's surprising inflation data showed that rising used car prices were the most significant factor behind the spike in the Consumer Price Index. In fact, the cost of used vehicles surged by 10% in April, representing the fastest climb in recorded history.
However, after digging into the earrings report, we found that the average selling price per eCommerce unit actually fell by 7.4% to $26,336. Rather than higher prices, the improvement was partly driven by efficiencies in reconditioning costs. This is a positive development for two reasons. First, it illustrates that VRM's investments in expanding its reconditioning capacity are paying off and that the improvements should have staying power. Second, the fact that VRM didn't benefit from stronger prices in Q1 suggests that the surge hasn't filtered through to its financials yet. That makes sense since VRM's Q1 ended on March 31, prior to the April surge in prices.
It stands to reason that VRM, CVNA, and other used car dealerships like CarMax (KMX) will benefit from tight inventories of new cars resulting from the chip shortage. Supporting that idea is VRM's Q2 average eCommerce selling price per unit forecast, which stands at $27,000-$28,000, up about 4.5% sequentially at the midpoint.
The news for VRM isn't all positive, though. Most notably, adjusted EBITDA worsened to ($72.6) mln from ($39.2) mln in the year-earlier quarter. In comparison, CVNA experienced a substantial yr/yr improvement, registering Q1 EBITDA of ($30) mln versus ($139) mln a year ago. Still in the early innings of its growth curve, VRM can be forgiven for investing heavily in its workforce, logistics network, inventory, and eCommerce platform. The profitability difference between the two companies is stark, though, especially since CVNA's growth rates are superior to VRM's at 105% and 66% over the past two quarters.
Overall, it's promising to see an acceleration in growth and an improvement in per unit economics. The outlook for next quarter also looks very bright as demand for used cars escalates while dealerships grapple with semiconductor shortages. Suppressing our sentiment on VRM is its underperformance relative to peer CVNA, especially in terms of profitability.
