LOTZ - CarLotz

[hasilp89]

LOTZ went public via the Acamar SPAC last week. I had looked at some of the digital auto names and invested in ABG so was interested in the long story. After a bit of research things started smelling fishy. I've never sold anything short but there was something about this that seemed off. Wanted to tease it out here and get some opinions (be nice).

 

The investor presentation has the basics of the Company and the merger. In short they claim to be the only direct to retail option for consignment car sellers (Fleet Businesses such as rental companies etc. and Retail customers). While I understand the market desire to have sellers and buyers more directly matched I'm wondering how that is really possible here with the business model. For retail customers I may want an extra $1000 for my sale but it does come at a cost - 30 days of waiting around for the best price, vs. trading in on the spot and getting my new car. For Fleet Businesses (who are the majority of the supply) isn't it the same thing. Aren't they looking to get the inventory unloaded and the lower price just accounts for that. Is the claim here that CarLotz will be able to shorten that time with technology and scale (both things Carvana and Carmax have or others could build…).

 

Here are a few things that jumped out at me.

 

SPAC Structure:  Acamar  raised $300m in Jan 2019 (30M Units). Note that their website still states their initial goal. "Acamar Partners is interested in businesses operating in sectors including but not limited to: travel retail, luxury, fashion, lifestyle, leisure and entertainment, food and beverage, restaurants, beauty and consumer branded products and services." Strange they ended up buying a used car company. They invested $25k and got ~20% of the Company so they were incentivized to consummate a deal - we all know that about SPACs. In this case their $25k would turn into  20% of the new company or $70M+, which is what their shares are now worth. I'm not accounting for the warrants or any investment in the PIPE (I don't think they participated), but overall not a bad return. Here is what is interesting though. As is usual the SPAC had a limited timeframe to consummate a deal. In this case 24 months . Meaning if they couldn't find a deal in 24 months they would have to give the money back. Is it coincidence that they merged with CarLotz in Jan 2021 right before the deadline… A Company in an industry they had no intention of initially investing in… If you had the option to turn 25k into $70M+ what would you do?

 

Performance/Business Model/Valuation.

-Part of the long thesis is that they are growing the footprint across the country. They claim this is low cost and high ROI - $750k or less to start a new lot and profitable within 2 years. Curious why they then only have 8 since they started in 2011. In addition they haven't opened one in the last 2 years. I'd think there would be plenty of willing investors out there to help finance their growth without having to go public. Maybe the business model may not be that scalable and they took advantage of a sponsor that was incentivized to do a deal. Or current ownership (PE sponsor and CEO) saw easy money out there that was ready to overvalue the company and cash them out (I know they are rolling money over but they're cashing out a portion at an inflated valuation they've made just as much money at a fair valuation with 100% cash out, everything they still have in is extra).

 

-I know current value is based on future performance but they sold ~6k cars in 2020 and have a $1b market cap. Prior to this they had only raised $35M. Additionally, they put $360m on the balance sheet when investments in new lots is expected to only be $21m over the next 2 years. Investing in customer acquisition on the P&L? They claim they have the lowest CAC in the industry. What are they going to do with all that cash and why did they raise it?

 

-Last thing for now on this point is where they get their cars from. The claim is that this is a two sided market place with benefits for the seller who wants a higher price. Their filing states that 50% of their inventory comes from two Fleet Businesses. For a Company selling 6000 cars it doesn't seem that Fleet Businesses are actually buying into or adopting this. Two have and maybe there is a reason for that.

 

Related Party Transactions: Related Party Transactions aren't illegal or necessarily bad.  My guidepost on this though is Buffett. When the AMEX CEO wanted to get into Costco (or whatever example it was), Buffett didn't get involved - if your business is good enough to win a customer it should be able to do so without the nudge of your investor/parentco CEO. So what's going on at LOTZ - TRP Capital is an investor in LOTZ and also in Flex Fleet Rental LLC. In 2019 Flex Fleet Rental LLC signed an MSA to be a vehicle sourcing partner, my assumption it is one of the two I mentioned above. I'd assume the other might be KAR which invested in the PIPE.

 

I've gone done a bit a of a Rabbit hole here and all of this warrants further diligence. Considering I've never taken a short position and don't have experience there I'm not sure how far I'll go. It's just something that got me thinking as it went from being overpriced to something that may not be what its being sold as. From what I'm seeing its as if these guys saw Carvana's stock price go through the roof and thought "we should just do the same". To me the business is very different. Carvana has actually done a good job of making the customers life very easy when it comes to selling/buying a new car and has scaled well - although there are some RP issues there I have not dug into and have no comment on its valuation.

 

Interested to hear what wiser people think.

[Convexity]

I own a small position here to keep things interesting but you appear to have done more work than me so far. 

 

I think this company rhymes a little with NVR's asset light model.  The story I am testing: 

[*]CarLotz has high per-unit margin due to an inventory light model

[*]CarLotz has low per-unit CAC from high churn so ad dollars go very far

[*]High churn is possible because of low inventory levels (CarLotz is a "marketplace" with little owned inventory)

[*]Capital light consignment model is a meaningful advantage that will be difficult for competitors to replicate (big one to prove correct)

[*]There is a multi-state runway for expansion while historical hub startup costs of $200-400k provide quick payback (this appears intact; CEO states 750k is in current model)

 

Founder/CEO Michael Bor is no dummy.  Gotta love the Harvard MBA who goes into used car sales.

 

He talks about suppliers as customers that sell cars using the CarLotz platform.  I do see the rationale for this inversion - why compete in a commodity area (e-sales of used cars) on price when you can gain a capital and input costs advantage?  It is that advantage though, that in my book is the lynchpin for scalability and a "capital light" model that drives margins.

 

[rogermunibond]

LOTZ vs VRM vs CVNA?

 

So they all take share from traditional dealers?

[hasilp89]

I own a small position here to keep things interesting but you appear to have done more work than me so far. 

 

I think this company rhymes a little with NVR's asset light model.  The story I am testing: 

[*]CarLotz has high per-unit margin due to an inventory light model

[*]CarLotz has low per-unit CAC from high churn so ad dollars go very far

[*]High churn is possible because of low inventory levels (CarLotz is a "marketplace" with little owned inventory)

[*]Capital light consignment model is a meaningful advantage that will be difficult for competitors to replicate (big one to prove correct)

[*]There is a multi-state runway for expansion while historical hub startup costs of $200-400k provide quick payback (this appears intact; CEO states 750k is in current model)

 

Founder/CEO Michael Bor is no dummy.  Gotta love the Harvard MBA who goes into used car sales.

 

He talks about suppliers as customers that sell cars using the CarLotz platform.  I do see the rationale for this inversion - why compete in a commodity area (e-sales of used cars) on price when you can gain a capital and input costs advantage?  It is that advantage though, that in my book is the lynchpin for scalability and a "capital light" model that drives margins.

 

I honestly did very little work, the incentives jumped out at me and I’m just questioning the business model.

 

To some of your points.

On the whole inventory thing - the cost of that inventory still sits somewhere. Majority of customer base is wholesale, aren’t they just paying/carrying that inventory. Hey get slightly higher prices in return? Turning inventory quicker seems like better business for them.

2020 was a hot year for used car prices with supply issues, what does that do to prices?

If they are so capital light why did they raise so much money (markets were open, incentives were there). RPs with prior sponsors related cos concerned me.

 

 

Do you have any personal connections, or references on ceo? I wouldn’t lean on a Harvard mba.

 

All told it’s hard for me to wrap my head around a company with EV of $1.2 that sold 6200 cars. Carmax sold over a million cars and has an EV of $35b. I’m not wishing bad on them or anything, just seems off.

[Convexity]

I think I either met or saw Bor & one of the old founders speak a while back.  Neutral to favorable impression but I know more now than I knew then so that's anchored in bias of the past.  And of course, the Harvard MBA might be a union card of sorts but the price of admission as a full position in my portfolio is far higher!

 

Totally agree on the cars sold vs. ent value thing. There are also dilutive events at 20-day prices above 12.50, 15.00, and 18.00 from earnout shares and warrants, with I think 15% dilution in total.

 

Re CAC, although LOTZ does have low CAC, the investor presentation doesn't point out CarMax's lower CAC.  I've seen this pegged as low at 50% of LOTZ CAC and I'd bet that is due to economies of scale.  Perhaps something to look forward to if LOTZ expands.

 

I am attracted to the consignment model because it offers great value to the car buyer and to the car seller by taking out friction and cost.  I do also think that the consignment model has a big pitfall, namely selection.  Your product offerings are limited to what is consigned, so the corporate fleet vehicles on offer might not be what car buyers want.

 

At this point, half of my investment thesis is that this is going to go up because the margin/CAC/inventory story will become popularized and auto traffic will pick up this year.  The other half (whether that argument holds up over time in one of the most competitive markets in the world), I have not yet decided upon.  I have more conviction that 1st level-thinking about an (arguably) unique business model will take hold and the price will jump, it'll just get a bit bumpy as all that dilution runs through.  The next-level thinking behind industry response, current buy/supply trends etc. I am less convinced on...though if the structural economics is highly durable then this is probably a multi-bagger.

 

Biggest thinking points: 

 

Is CarLotz really a matchmaker or just another auto dealer?

Why do they need SPAC/IPO money if they can bootstrap new locations?  (thanks Hasil)

Does LOTZ make efforts to drive web traffic or is attractive pricing enough to attract paying customers?

Are all car buyers consumers or does LOTZ do fleet sales?  Why can't corporate fleets (60% of supply) do this themselves?

Does structurally taking out margin through vehicle acquisition strategies represent something unique or something already long underway?

Of the 12 million cars wholesaled in the U.S. last year, 6 million were consigned.  How is the LOTZ model different than what those consigners offer?

 

 

A lot of the investment rests upon understanding the essence and directional change of car supply markets.  Any COBF contributors with knowledge of the used car wholesale/auction industry?

 

Finally, this article was written on Bor when he opened the first lot in 2011: https://richmondbizsense.com/2011/04/26/used-cars-on-consignment/#  Looks like Bor even participated in some of the comments at the end.  From this, it appears that corporate consignment suppliers were not there from the beginning at that it evolved either because it was (1) a better model; or (2) forced upon them for supply growth. 

 

 

[Convexity]

Actually, that web site has a lot of CarLotz stories that are all more than auto-generated drivel and press releases:

 

https://richmondbizsense.com/?s=carlotz

 

Cool resource. 

 

 

[Spekulatius]

Trades at $5.29 pre market. A used car would have held  it's value better than LOTZ.

[hasilp89]

lol. I knew they had traded down into the $7's but i hadn't been keeping up. skimmed the earnings. they sold 2554 cars in the quarter. this is still a $600m mkt cap company. I wish I actually knew how to short things.

[Spekulatius]

Slow motion car wreck:

https://www.sec.gov/ix?doc=/Archives/edgar/data/0001759008/000110465921072004/tm2117478d1_8k.htm

 In mid-May 2021, the corporate vehicle sourcing partner that accounted for more than 60% of the cars we sold during the fourth quarter of 2020 and the three months ended March 31, 2021 informed us that it would be pausing its consignment of vehicles to us, with immediate effect, due to the current strength of the wholesale market for vehicles. 

Lotz is a car dealer without cars apparently. It seems like a Harvard MBA does not help much in the used car business. The stock has a shot at becoming a net-net, imo.

[hasilp89]

Yikes. All we had to do was follow the incentives.

[Convexity]

Vehicles for sale up over 50% since that announcement so there's for sure some sourcing back.  Cost of doing that and associated unit economics get messy.  Watching the disclosed operating metrics closely & wishing that they provided more.

Consignment-wholesale savings very compressed & this was telegraphed by at least one analyst earlier in May.  

I look at this company as sort of one big option on a different way of selling cars.  Position sized accordingly knowing the asymmetric possibilities. 

Anyone know of either consignors or wholesalers who have talked publicly about CarLotz?  Would be nice to have data points on the other side of that trade.