Cazoo Group Ltd
NYSE:CZOO
Earnings Call Analysis
Q3-2023 Analysis
Cazoo Group Ltd
Despite the challenging economic climate characterized by high-interest rates and inflation, the company has successfully enhanced its unit economics, evidenced by a record Retail Gross Profit per Unit (GPU) of GBP 1,470. This considerable achievement comes as demand for used cars has become volatile, and the supply of new cars reaches pre-pandemic levels, leading to excessive supply and depreciating used car values. Yet, the firm's strategic adjustments and focus on digital optimization have led to continuous improvement in unit economics, creating higher margins per car sold.
In this tough climate, the company sold 9,525 retail cars generating GBP 173 million in revenues. Remarkably, Retail GPU has witnessed a 14% quarter-to-quarter and an astonishing 201% year-to-year increase, reaching an average of GBP 1,215 over the first nine months of 2023. The gross profit surged by GBP 1 million from the previous year, primarily due to the significant Retail GPU increase despite a lower volume of units sold. The gross margin itself improved by an impressive 350 basis points to 6.5%. Furthermore, ancillary revenue per retail unit rose by 29% year-on-year, and the finance attachment rate improved by 6.7 percentage points compared to the previous year, showcasing steady progress in profitability per unit sold.
The company holds a robust cash position, with GBP 151 million in cash and cash equivalents. Moving forward, a transaction support agreement with certain noteholders and shareholders has led the company to adjust its year-end cash balance guidance to account for transaction-related costs. The projected year-end cash and cash equivalents stand between GBP 100 million and GBP 115 million. Retail unit sales for the fourth quarter are being aimed at approximately 8,500, with full-year retail sales anticipated to be between 40,000 to 42,000 units.
The company expects the Retail GPU to exceed previous forecasts, ending the year closer to GBP 1,250, with an aim to reach around GBP 1,400, considering seasonal trends and economic hurdles. The firm is steadfast in maintaining its adjusted EBITDA forecast between negative GBP 100 million and negative GBP 120 million while focusing on further improving unit economics, trimming the fixed cost base, and prolonging the cash runway—all integral to achieving profitability.
Operational efficiency remains a priority, as reducing the days to sale for vehicles directly correlates with less depreciation during ownership and positively impacts unit economics. Ancillaries have also been contributing to income, and although the finance attachment rate dipped slightly in Q3, other products have offset this decline. The company continues to explore new products to improve unit economics, focusing on a 'finance first' model and enhancing digital customer journeys to boost engagement and profitability.
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Greetings. Welcome to the Cazoo Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Anna Gavrilova, Head of Investor Relations. Thank you. You may begin.
Good morning, everyone. Thank you for joining today's call to discuss our results for the third quarter of 2023. You will be able to find today's press release on our Investor Relations website at investor.cazoo.co.uk. We appreciate everyone joining us today.
With me on the call are Alex Chesterman, Founder and Executive Chairman; Paul Whitehead, Chief Executive Officer; and Paul Woolf, Chief Financial Officer.
Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, please see the filings of Cazoo Group Limited with the U.S. Securities and Exchange Commission. Today's call will not be recorded and will not be available for replay. We kindly ask you not to record it and not to transcribe it. I will now hand the call over to Paul Whitehead.
Thanks, Anna. Good morning, everyone, and thanks a lot for joining us today. I'm very pleased with the results we are reporting today, and that we have delivered another quarter of meaningful improvement in our profitability. We have achieved a lot over the first 9 months of this year. We restructured our operational footprint and headcount to better match the scale of our business. And at the same time, we have consistently been driving improvements in our unit economics quarter-on-quarter against the backdrop of a deteriorating economic environment.
Interest rates are much higher than a year ago and inflation is persisting far above the 2% target set by the Bank of England. High cost of living and cost of credit are causing volatility in demand for used cars. At the same time, supply of new cars has been rising towards levels seen before the COVID pandemic. This has had the effect of aggravating the misalignment of supply and demand in the used car market, and daily depreciation for our stock selection has been higher than normal market conditions.
Despite all of this, we have continued to focus on unit economics and we managed to maintain quarter-on-quarter improvement in Retail GPU reaching a new Cazoo record of GBP 1,470 per unit. The improvement was achieved across several areas. We took a number of steps which helped to partially mitigate the impact of higher interest rates on customer demand. And most significantly, we focused our web platform optimization efforts on enhancing customers' digital finance journey with our finance first approach.
Despite these improvements, our finance attachment rate declined to 49.8% from our record performance of 53.2% in the previous quarter. And we are implementing a range of actions to target areas such as pre-eligibility and pre-approval with the goal of enhancing our future performance in this area.
We also initiated a program to enable our delivery specialists in our Cazoo customer centers to sell ancillary products offline when we hand over the purchase cost to the customer. This has proved to be a growing source of ancillary revenue for us, helping to increase attachment rates for the products we offer. And we've made further progress in reducing our reconditioning costs as we focus on the efficiency of our operations. And we continue to work on optimizing our car acquisition pricing by combining our own proprietary data with third-party sources. And there is still further scope to sustain and grow our Retail GPU by targeting opportunities across all these areas with particular focus on faster stock turn as well as further efficiencies in our operations through digitization.
In the third quarter, we sold 9,525 retail cars as our fully online proposition continues to resonate with customers, and we generated revenues of GBP 173 million. These results were in line with our focus on unit economics. Retail GPU of GBP 1,470 increased by 14% quarter-on-quarter and by 201% year-on-year. Average Retail GPU for the first 9 months of 2023 was GBP 1,215. Gross profit of GBP 11 million increased by GBP 1 million year-on-year, driven primarily by higher Retail GPU to lower volume of units. Gross margin improved by 350 basis points to 6.5%.
Ancillary revenue per retail unit sold at GBP 735 increased by 29% year-on-year and the finance attachment rate of 49.8% represented a 6.7 percentage points improvement year-on-year. Both metrics, however, declined quarter-on-quarter due to factors related to higher interest rates. We continue to reduce fixed and variable costs in line with expectations to extend our cash runway. Our cash position remains strong with GBP 151 million of cash and cash equivalents plus approximately GBP 35 million of self-financed inventory as of September 30, 2023.
We announced in September that we had entered into a transaction support agreement with certain noteholders and shareholders in connection with the contemplated transaction. We are updating our cash balance guidance for 2023 year-end to take into account such transaction-related costs, which were incurred in the third quarter and will be incurred in the fourth quarter. We now expect to finish the year with between GBP 100 million and GBP 115 million of cash and cash equivalents, and between GBP 20 million and GBP 30 million of self-finance inventory.
Higher interest rates, high used car prices, rising insurance premiums and the recent spikes in fuel prices, driven by geopolitical conflicts means higher cost of car ownership to customers. Demand for used cars will remain volatile. And against this backdrop, our priority is to continue to deliver better unique -- better economics per unit sold. And we expect retail unit sales in Q4 2023 to be around 8,500 and the full year retail sales to be between 40,000 and 42,000 units. Total unit sales, including both retail and wholesale, are expected to amount to be between 50,000 and 52,000 units.
Even though we have averaged GBP 1,215 Retail GPU for the first 9 months of this year, we expect the average Retail GPU for the full year to be higher than previous guidance, and we now expect to end the year with average Retail GPU approaching GBP 1,250 and the exit rate is expected to be around GBP 1,400, which reflects normal market seasonality and a challenging economic environment.
We are maintaining our adjusted EBITDA forecast of between negative GBP 100 million and negative GBP 120 million. Our top priorities remain to further improve unit economics, reduce our fixed cost base and extend our cash runway as we work towards our goal of reaching profitability.
Thank you very much, and we'll now take any questions you might have.
[Operator Instructions] Our first questions come from the line of Rajat Gupta with JPMorgan.
I had a first question just on the profitability cadence going forward. I'm curious to know if there are more cost savings or on the SG&A side or more GPU opportunity at the current level of unit that you can capture before the company can decide to return to growth again? And when can we expect the business to return to growth or target return to growth in order to start scaling the fixed cost eventually? And then relatedly, what kind of macro or company-specific factors we should be watching to determine that timing? I have a quick follow-up.
I would say -- Paul Woolf here. Thanks so much for the question. So the -- there's a little bit more to do as we said and referred to in the announcement on GPUs. And I think our -- there are a number of levers across multiple areas. The 2 that are sort of forefront of our mind. One is to reduce the days to sale in the business. Obviously, the faster we turn over vehicles, not particularly on the website, but that is the taking on refurbishment, getting on to our site and then eventually the fulfillment. The faster we do that, the less vehicles depreciate during our ownership. So that still remains a significant lever for [indiscernible]. Finance and ancillaries has been a success story all the way through. Paul just described how it has taken a step back at an attachment rate level from finance attachment that is in Q3, but mind you, that's been largely offset in terms of overall finance income or ancillary income by the other products. So we continue to evaluate new products, and we continue to drive attachment through opening up new channels to drive attachment and improving our digital journey, which is again, we referred to in the commentary, just then really where a lot of our technical team are spending their time at the moment, and we describe it as finance first. And then there's a question also -- so GPU, yes, we would expect that to continue to go up, albeit we've called out in the announcement that Q4 will take -- we expect it to take a small step back from the Q3 numbers due to the market and seasonality. So those 2 things are against us in Q4. But Q1, we'd expect to be sort of back on the growth track again. And then in terms of fixed costs, there is more to come out. I think the big -- the main numbers are out now. So it's smaller slices, but we continue to reduce fixed costs really every quarter. We're not shouting about it because the numbers are relatively smaller. But the big chunks are done, but there are -- certainly, the numbers aren't going to go up in terms of fixed costs. We expect to continue to gently go down, notwithstanding inflation and everything else.
And there's a question -- and the final question was around, which is the great question around growth. What we've consistently said is once we established the right foundations for unit economics, we would -- we wish to push the growth button again. But when we do that, we're not going to be -- we wouldn't expect to be growing at sort of 50s or 100% as we were prior to 2023. We're in the process of putting together our plans for next year, and we'll be talking about that in due course. But we're certainly at the levels of profitability now per unit, which you rightly pointed out, means that we -- by doing more units, we will be better off building the fixed cost better.
Got it. Got it. That's really helpful color. Just one follow-up just on that. Could you help us give us an update as it stands today on what the fixed versus variable mix is within your SG&A? That will be all from my end.
Yes, sure. So the fixed versus variable mix, I mean, it hasn't really changed. It is sort of 50% to 60% fixed within SG&A.
We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Anna Gavrilova for closing comments.
Thank you very much, everyone, for joining us today. We'll speak to you next time. Thank you.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.