Vroom, Inc. (NASDAQ:VRM) Q2 2020 Earnings Summary
Paul Hennessy, CEO
“..Looking back on the second quarter, I’m very pleased that we substantially exceeded the financial targets in our plan. Of course, it’s always a goal to do better than our plans, but the second quarter gave us so much more than that.
The COVID-19 pandemic has, of course, than the Black Swan event for our country in general and definitely for our company. Our single retail store TDA experienced massive annual sales declines in revenue, and continue as we speak. The wholesale markets underwent an alarming bout of instability and illiquidity. And we had to institute emergency furloughs and salary reductions.
To say that it’s been a challenging environment for us would be an extraordinary understatement. And yet it has also been an extraordinarily valuable quarter for us, as it allowed us to learn so much about the capabilities of our business model, our operations, our employees, nearly all of them validating. Hard learnings have reinforced our belief that we are well on our way to building a business that can be a dominant digital car retailer in the coming years.
When I say the word validating, I want spend a couple of minutes to tell you what I mean by that. We founded Vroom based on the firmly held belief that the used car market was poised to finally enter the digital age.
On our road show many investors asked us what we meant by that, given the existence of so many car selling sites, some of which have been around since Amazon was selling only books in the mid 1990s. Our response, yeah, that’s true. But the purpose of nearly every single one of these sites was and is to funnel customers right back to the same old way of buying cars, namely small car dealerships that underserved their customers and over earned.
At Vroom, we have formed a direct relationship with our customers. We are buying cars from them at market setting prices and we are selling them expertly reconditioned and authenticated cars, also at market setting prices. Of course, that’s the job of any great ecommerce company in any vertical. It was certainly the mantra at price line for the many years that I was there as an executive.
But controlling the customer relationship and the transaction in the world of car retailing, it’s very risky business. We go to bed each night owning hundreds of millions of dollars of car inventory. And we hope that one day soon that number will be in the billion.
Thus, when the COVID pandemic came to the United States, it was a very sobering time for us. As we have been in this game long enough to understand that aging inventory can be the death of a car retailer. And yet in the early days of COVID, we saw a significant contraction in retail demand, which had ripple effects into the wholesale markets.
Given the severity of the contraction and the extreme lack of visibility, we made the difficult decision to dramatically reduce our exposure to these alarming trends. It was at this moment that we learned how valuable our technological and operational infrastructures are to us.
At our core, we are a data-driven, demand-driven company. It informs how we buy cars? How we price our cars? How we invest in the reconditioning of our cars, and how we market our cars? We didn’t build these tools to conduct fire sales, but frankly, that’s the best analogy of what we were doing in late March and into the first half of the second quarter. We not only stopped buying new inventory, we methodically, dynamically and carefully priced our inventory to move very quickly. We did so in a way that protected our company and our balance sheet, while also very clearly stimulating demand for our cars.
Thus, while nearly every other used car retailer was in a state of paralysis in late March and April, we were breaking company ecommerce sales records on nearly a daily basis. We commenced this activity with the grim determination to sell down our inventory, even if it meant taking significant gross margin hits. But the power of our data and our pricing tools allowed us to sell down nearly 70% of our inventory, while still maintaining positive gross margins.
At our peak in March, we are carrying over $200 million in inventory. At our low point in Q2, our inventory hit a low water mark of approximately $70 million. Which brings me back to the word validating. What did we validate? We believe we have validated the premise that a car retailer, one with only a single physical retail location, which by the way, is currently experiencing huge double-digit comp store decreases can safely carry the inventory necessary to achieve market leadership. And that’s a very big deal for us, because in the digital world, inventory equals unique content.
Each and every car that we carry and sell is like a snowflake, not a single one the same as any other different color, different make, different mileage, different age, different state of condition. And for us, the more content that we have, the better our ability to line up the specific customer who is looking for that specific content and therein is how a digital flywheel is born. Content begets conversion. Conversion begets success and high NPS. High NPS begets inventory turns in gross profit. And inventory turns in gross profit to get more and more content, throw in repeating customers from prior delightful transactions and massive multiyear digital and media brand building to help lower the marginal costs of finding our customers over time.
And you can see how and why we are so excited about what’s ahead in the coming years. So, yes, COVID has been a huge challenge for us, but it’s also given us the added confidence to go bigger, faster because of the unplanned, but very valuable derisking exercise that we just executed.
And that brings us to today. We definitely have a bit of a high class problem right now. We were so successful selling down our inventory in April, that we were somewhat caught off guard is demand snapback. Thus, we spend every day since May trying to build back our inventory, all while our customers prevents us from doing so to the degree that we want and with the speed that we want, because demand has been so robust.
From a sales perspective, we have been a classic example of a V-shape recovery. As I mentioned, we delivered a record month of unit sales in April, as we sought to derisk our business. With the inventory at extreme lows in May, our unit sales that month were roughly half of April levels. We have rebounded rapidly off of the May lows, with strong monthly sequential increases in unit sales in June and July.
As Dave will discuss momentarily, we’ve made great strides in building back our inventory, but we’re still not where we want to be in terms of cars and inventory that are fully reconditioned and ready to be sold and delivered. Lower availability inventory levels impact conversion. So, we continue to leverage our asset light reconditioning model and are working with our third-party reconditioning partners to ramp capacity levels quickly.
The good news here is that the high demand and limited supply has had a very powerful and positive impact on our gross profit per unit. Losses, Dave will soon detail. Our total company gross profit is running well ahead of our expectations and what underpins the guidance that we’re giving for the third quarter.
We have also noticed a fairly profound shift in the buying preferences of our customer. Specifically, we’ve seen a downward shift in the price points that our customers are looking for. Fortunately for us, our tools were able to discern the shift in real time. And given that our inventory was, and is at such low levels, we have been restocking our inventory at the same lower price points to line up with what our customers are demanding. Thus, we’ve been able to maintain our GPPU targets, while decreasing the overall dollars committed to our inventory due to the lower cost paid for each car that we hold.
Looking forward to the remainder of the third quarter, we will continue to invest in experiments in our end-to-end ecommerce platform, as well as in our driveway delivery experience. We expect to continue to accelerate sales and gross profit per unit in the quarter on a monthly sequential basis, as we scale inventory and take advantage of what we believe are structural shifts in consumer behavior and demand for the Vroom model.