Carvana Co. (NYSE:CVNA) Q1 2026 Earnings Call Transcript

Carvana Co. (NYSE:CVNA) Q1 2026 Earnings Call Transcript April 29, 2026

Carvana Co. beats earnings expectations. Reported EPS is $1.7, expectations were $1.58.

Operator: Good afternoon, and welcome to the Carvana First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead.

Margaret Kehan: Thank you, Gary. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana’s first quarter 2026 earnings conference call. Please note that this call is being webcast and can be accessed along with our Q1 shareholder letter and supplemental financial tables on the Investor Relations section of the company’s corporate website at investors.carvana.com. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that this discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, Carvana’s market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

A detailed discussion of these factors can be found in the Risk Factors section of Carvana’s most recent Form 10-K. These forward-looking statements are based on current expectations as of today, and Carvana assumes no obligation to update or revise them. Our commentary today will include non-GAAP financial metrics. GAAP reconciliations can be found in the shareholder letter posted on our IR website. And with that said, I’d like to turn the call over to Ernie Garcia. Ernie?

Ernest Garcia: Thanks, Meg, and thanks, everyone, for joining the call. The first quarter was another outstanding quarter for Carvana. It was another quarter full of records, including a record 187,000 cars sold in a single quarter, a record GAAP operating income of $581 million and record adjusted EBITDA of $672 million, and it was our ninth straight quarter of being the most profitable and fastest-growing automotive retailer as well as our sixth straight quarter of 40% year-over-year growth. The quality of our customer offering, the fact that it naturally gets better as we get bigger and our experience over the last 13 years lead us to believe the demand is available at the speed that we are able to scale the business effectively.

As it has been since the beginning, we expect our execution will be the biggest determinant of the speed and degree of our success. Execution in a complex operational scaled business like Carvana that is growing at 40% is an inherently difficult problem. While the best-case scenario in a vacuum is to avoid bumps in the road, those bumps are a reality of building ambitiously. This means success requires building a better system with better scaling properties and assembling a team and building a culture that drives intensity, focus, accountability and resilience. With the right team and culture, the bumps in the road create pressure that makes us better. In the fourth quarter, we hit a bump in recon that gave us another chance to prove that we assembled just such a team.

The Recon team is using that pressure to make us better. When we realize we are off track a bit, the first thing the team did was turn out the operational intensity across the network, setting higher expectations for each facility and leaning into the operational structures we’ve built over the last several years. This allowed us to make rapid progress nationwide. In addition, they quickly assess the underlying cause of the variation in facility performance, most notably newer managers that could use more detailed directions and more powerful tools to help them execute at the level we were aiming for and adjusted their road map to prioritize building the tools that mattered most immediately. Over the last couple of months, they built additional data integrations, developed tools to help managers make faster, higher quality decisions, and how they staff their lines, and how they optimize flow through their paint lines and implemented a productivity tracker to ensure feedback reaches the right groups quickly.

To accomplish all this and to ensure the tools address real-world operational needs, the product team spent weeks on the ground in the facilities that needed it most, rolling out testing and iterating with the operators until they are making a real measurable difference. We’ll continue to iterate on these tools, and we’ll roll them out to the rest of the facilities over the coming months. The result is that, so far in April, we are operating just shy of our all-time best and labor efficiency throughout the network. This will take a little time to flow through to the financials as cars carry the cost of reconditioning at the time they were produced, not at the time they were sold. We still have a ton of work to do across reconditioning and other operational and technology teams, but every time a team reacts that quickly to a problem that excites us.

Once again, the people on team Carvana have proven that they are exceptional that they’re resilient that they are up to the challenges we will inevitably face as we scale Carvana to millions of transactions per year. We remain firmly on the path of achieving our mission of changing the way people buy and sell cars and is selling 3 million cars per year to 13.5% adjusted EBITDA margin by 2030 to 2035. The March continues, Mark?

Mark Jenkins: Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons will be on a year-over-year basis. Q1 was a strong quarter driven by our team’s continued focus on profitable growth and strong execution. We set new company records for retail units sold, revenue gross profit, SG&A expense per retail units sold, GAAP operating income and adjusted EBITDA. Retail units sold totaled 187,393 in Q1, an increase of 40%, and a new company record. Revenue was $6.432 billion, an increase of 52%. Revenue growth exceeded retail units sold growth primarily due to traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner. Consistent with past quarters, our growth in the first quarter was driven by our three long-term drivers of growth, a continuously improving customer offering, increase awareness, understanding and trust and increasing inventory selection and other benefits of scale.

The first quarter marked our ninth consecutive quarter of industry-leading retail unit growth and margins. Non-GAAP retail GPU decreased by $58, primarily driven by higher non-vehicle costs and lower shipping fees. Looking ahead to Q2, we expect retail GPU to increase sequentially, but to decrease year-over-year due to approximately $100 of tariff-related benefits last year, lower shipping fees and higher non-vehicle costs this year and approximately $100 to $200 of impact from narrower industry-wide wholesale to retail spreads this year. Non-GAAP wholesale GPU decreased by $83, primarily driven by increased wholesale vehicle volume and gross profit per unit that was more than offset by lower wholesale marketplace gross profit and growth in retail units that outpaced wholesale gross profit.

Non-GAAP other GPU decreased by $88 primarily driven by our decision to give back to customers in the form of lower interest rates, partially offset by higher finance and VSC attach rates. Q1 was another strong quarter for levering SG&A expenses. Our 40% growth in retail units sold led to a $170 reduction in non-GAAP SG&A expense per retail unit sold, including a $36 reduction in operations expenses and a $226 reduction in overhead expenses. Advertising expense increased by $92 per retail unit sold as we continue to invest in building awareness, understanding and trust in our customer offering. With a nearly 2% market share in the U.S. used vehicle retail market compared to approximately 20% e-commerce adoption in non-automotive retail verticals, we believe we are in the early days of customer awareness and adoption of our model.

We continue to see opportunities for significant SG&A expense leverage over time and as we scale, driven by both continued improvements in operational expenses as well as leverage in the fixed components of our cost structure. Net income was $405 million in Q1, an increase of $32 million. Net income margin was 6.3%, a decrease from 8.8%. Adjusted EBITDA was $672 million, an increase of $184 million and a new company record. Adjusted EBITDA margin was 10.4%, a decrease from 11.5%, primarily driven by increased retail revenue per unit, resulting from the traditional gross revenue treatment mentioned previously. GAAP operating income was $581 million or 86% of adjusted EBITDA, an increase of $187 million and a new company record. As discussed in prior quarters, we continue to drive toward investment-grade quality credit ratios over time.

In Q1, we again reduced our net debt to trailing 12-month adjusted EBITDA ratio to 1.1x, our strongest financial position ever. Q1 was a record quarter that again demonstrated the significant power of our business model. Looking toward Q2 and assuming the environment remains stable, we expect a sequential increase in both retail units sold and adjusted EBITDA, leading to all-time company records on both metrics. We remain on track to deliver significant growth in both retail units sold and adjusted EBITDA in full year 2026. In conclusion, our Q1 results were outstanding. Our team is intently focused on driving profitable growth. And we remain excited about progressing toward our goals of becoming the largest and most profitable audit retailer and buying and selling millions of cars.

Thank you for your attention. We’ll now take questions.

Q&A Session

Operator: [Operator Instructions] The first question today is from Chris Pearce with Needham.

Christopher Pierce: Ernie, in your remarks, you said — you talked about new tools at underperforming sites where there are new managers. I just want to understand, do these tools — these are brand-new, and these could help top-performing sites further improve, or these are to bring those underperforming sites in line with the — your top performing sites.

Ernest Garcia: Sure. Well, first, I want to start with just giving gratitude and credit to the reconditioning team. I think they took it very personally and hard when we didn’t have a perfect fourth quarter, and they reacted extremely effectively. And that’s why I wanted to make sure that I spent some time in our comments, giving them credit. I’m extremely impressed and proud of how hard they work, and how quickly they made a difference. I think there were a number of things that were done. The new tools that were discussed are net new tools. And those are tools that we hope will drive additional fundamental gains over time. I think that will take time, and we’ll see how powerful that ends up being. But I think they’re fundamentally value-added tools that are not in the vast majority of our facilities yet.

So we’ll roll those out over time. And I think to me, the way that — we hope that this goes over the next many years as we’re scaling a big business, it’s operationally complex very quickly. I think we’re inevitably going to run into bumps in the road. And every time you run into a bump, I think it’s a chance to reevaluate what you’re doing and to try to learn from that and get a little better. And I think the team dug in. I think they reevaluated their road map. I think they found new opportunities that are potentially bigger, and I think they focused and made a huge difference quickly, and I think we’re very excited about those opportunities. So to me, I wouldn’t want to set expectations too high beyond. We think we’re very much back on track, but I think if we had to pick a direction, the tooling that we’re building, I think, is exciting, and it’s more room for fundamental gains over time.

Christopher Pierce: Okay. Perfect. And then just kind of a bigger picture question. New vehicle prices, tariffs, gas prices, do you think there’s some portion of people tapping out and dropping down to use? And could we see when off-supply and more supply comes back used go north of 40 million units for a couple of years because of this? And if that did happen, would that affect other GPU as you guys tilt more prime versus subprime, or — I just would love to hear your thoughts on that.

Ernest Garcia: Sure. I think I mean car prices are high. I think these numbers won’t be exactly right, but the last number that I remember is kind of pre-pandemic. I think general consumer goods are up 25%, give or take, and I think cars are up 35% to 40%. So I think car prices at all else constant, are and that has to be impacting people. I think generally, the kind of elasticities for cars at like the aggregate level are not super high. People need cars to live their lives and they get hired the car they own. And so I think you generally see aggregate transactions that are relatively stable. I think there is room, though. All the things you pointed to are things that are probably directional positives for the overall market size over time.

But I think realistically, the scale of those positives relative to the sale of our growth is just very small. And so I think our view is that most things that happened to the market are going to impact us in a proportionate way. But what we are doing ourselves is dramatically more powerful than that. And so we try to stay really focused on all the fundamental tools that we’re building and just making sure that we’re delivering great customer experiences and doing all the hard operational work to make sure we can scale effectively. And then I think on your last point on rates and shifting between prime and non-prime customers, I think, first of all, our balance of customer credit is pretty similar to the market overall. And then I think the profitability per retail unit sold for prime versus non-prime is not different enough to where moves in those distributions matter all that much to the overall other GPU.

So generally speaking, I think that would fit in the same category. We think it’s — those things can move around. There will always be a little macro effects that move things around by tens of dollars, give or take. But in general, the most important thing is that we keep delivering great customer experiences and stay focused on us. And so that’s where our focus remains.

Operator: The next question is from Daniela Haigian with Morgan Stanley.

Daniela Haigian: So my first one is on SG&A leverage. Most line items this quarter, including logistics, came in lower as a percentage of sales versus the run rate we’ve been seeing in the last few quarters. How should we be thinking about operating leverage in fixed costs, Mark, you mentioned that? And then more near term, how should investors think about logistics expense in a rising fuel cost environment.

Mark Jenkins: Sure. I can hit that. So I think it’s helpful to break that down into a couple of different categories. So one, operations expense, that’s the expenses associated with executing the transaction, providing customer service, filling the transaction via our logistics network and last mile delivery network and all of those sort of expenses that are more variable in nature. I think we had a strong quarter on that front with operating expenses, down slightly year-over-year. I think in the longer term, we definitely see an opportunity to march those down further on a per retail unit basis. In any given quarter, they can be impacted. You mentioned fuel prices, that would definitely have an impact because because logistics is part of that operations expense.

I wouldn’t expect that impact to be particularly large, but there’s some impact there. Then the second category of expenses is overhead expenses there, that’s an area where we’ve shown a lot of strong leverage. I think overhead expenses are expenses that are more fixed in nature. They can grow due to investments that we make. For example, we’re making some investments now in additional technology, including AI-related technology that would be in that overhead expense number. So that can grow. But it’s much more fixed in nature, and we do expect to see significant leverage in that overhead line item over time. So those are two of the big categories to stay at the third. We have been marching up advertising spend. We think given where we are in our company’s life, we think there’s still a lot we can do to continue to raise that understanding, awareness and trust of our offering.

We’re in the relatively early days of online auto retail adoption. Obviously, we’re playing a big role in telling that story, and we think there’s a lot of value to us continuing to invest in advertising. So those would be the three big categories, and I’ve walked you through some of the dynamics.

Daniela Haigian: Mark, that’s helpful. Second question, a bit longer term on CapEx long term. So recognizing you’re only 20% utilized on your current real estate capacity of $3 million. But at this rate of growth, you’re going to need to think about build beyond that over the next few years. And you had a helpful exhibit in last quarter’s investor letter on eventually building out greenfield production. What would that look like? What’s the team’s philosophy on building that capacity?

Mark Jenkins: Sure. So the way I think about our production growth plan, and I think a lot of our capital investment is really related to just growing production and production facilities. Right now, there’s multiple ways that we’re doing that. One is just adding staffing into existing facilities. That’s no CapEx. A second is we’re integrating ADESA locations, which basically means going into existing ADESA buildings that have already been constructed implementing our car lead proprietary software system to do inventory and reconditioning management in those centers, adding some equipment. And that’s a very CapEx-light way to add production capacity. The third way is to actually start doing full build-outs of existing ADESA facilities.

The way to think about that is we’ve got the land, but we can expand the buildings and structures in order to add more production lines into those facilities. We did talk a little bit about that in our last letter. We think those are very high-quality investments to be making and expect to start making those investments over the course of this year. And then last is greenfield IRCs. That’s not a priority at this time. I think the I think our bigger priority is executing those first three types of production expansion. Up to this point, we’ve been really focused on the first two ramping capacity in existing facilities and integrations. This year is the year where we’ll start doing some of those full build-outs, which we think make a lot of sense.

Operator: Next question is from Rajat Gupta with JPMorgan.

Rajat Gupta: Great congrats on the execution around the reconditioning costs. I had a question on the wholesale retail spread comment, Mark, that you made in the prepared remarks, is that impact that you’re already feeling in the month of April based on how retail prices are tracking? Or is that more of an expectation around May and June or baking in some sort of slowdown in demand because of gas prices and just sentiment tied to the war. Any more color around that 100 to 200 wholesale retail spread headwind would be helpful. And I have a quick follow-up.

Mark Jenkins: Sure. Yes. So I think the — what we’re seeing on spreads and what we’ve seen year-to-date, it really starts with a very hot wholesale market in Q1. So I think wholesale prices really appreciated in Q1, and that appreciation can happen in any given year as a lead up to tax season, but the appreciation in the wholesale prices that we saw early this year at both started earlier and it was of a larger magnitude than we’ve typically seen in past Q1. And so I think a strong wholesale market, which did benefit us, we had one of our highest quarters ever on wholesale vehicle gross profit per wholesale unit sold in Q1, commensurate with that hot wholesale market. But I think what we’re seeing is that wholesale appreciation wasn’t fully passed on into retail prices, and that’s causing a little bit of that wholesale to retail spread compression that we’re pointing to.

Rajat Gupta: Got it. Got it. That’s clear. And just to follow up on the previous question around SG&A. Did the sequential pickup in the overhead expenses. It’s just the other the yard cost is probably the highest we have seen in a while from 40 to 1Q, particularly since the turnaround. You mentioned some investments around AI and stuff. Any way you could double click on that, give us a little more detail around what’s going on. Are there any one-timers, maybe some of the new car acquisitions? Just a little more grounded there would be helpful. And any color on overhead expenses for the year would be helpful.

Mark Jenkins: Yes, sure. Yes. So I think there are some seasonal or onetime components in there as well as some investments. So we typically see — Q1 is a high quarter for payroll expense related to share-based compensation because we typically have large vesting of share-based compensation in Q1 larger than some other quarters. In addition, the weather events in Q1 actually did have some impact on overhead expenses, where we spent much more than a typical winter quarter on snow plowing and removal. And so that is in that number. There are ongoing investments, things that I wouldn’t think of as seasonal or one time, including technology investments, some incremental investments in facilities. That, I think, will have us operating at a higher level on overhead expenses than we were in 2025. But I would not expect to see overhead expenses to increase at a rate like that. I think thinking of Q1 is something more like a new level is probably more appropriate.

Operator: The next question is from Sharon Zackfia with William Blair.

Sharon Zackfia: Congratulations on getting wholesale ops back up and running. I guess — well, it was running, but more and more optimized. I guess with that, it sounds like you might be positioned to hold retail GPU for the full year. And I’m curious on your thoughts on that in terms of seeing an improvement in the back half of the year again?

Ernest Garcia: Sure. I think we try to stay away from giving too much precise color there, but I think all the things that we’ve generally kind of set in the past, we continue to believe. I think there’s a little bit of seasonality in those numbers. And then I think we have fundamental gains that we’re going to continue to seek to attack. And then I think across the sum of the GPU line items plus expenses, we feel like we’ve got clear visibility to 13.5% adjusted EBITDA margin, which is our goal. So yes, I think there’s been — there’s always like a couple of little interesting stories that pop up from time to time, whether it’s gas prices or impacts from Iran or Recon expense or whatever it is. But I think as a general matter, we think we’re in an environment that looks similar to the past, and we’re just going to keep chugging forward.

Sharon Zackfia: I think secondarily, sorry, I’m losing my voice. For the OBB, there have been kind of a lot of talk about tax refunds and the benefit that you might see in your business that happened right around the time the war broke out and obviously, gas prices spiked. So I’m curious, as you went throughout the quarter, did you see any change in the complexion of your customers across income cohorts, or those all look very similar to what you were seeing in 2025.

Ernest Garcia: Sure. Well, I would say we grew by 40% in the quarter. So overall, I would say we’re extremely happy with the way the business performed and the way the team operated during the quarter. I think it’s a little hard to massage out some of those effects. I think there was an expectation that tax dollars would be larger. I think that did play out, like there’s data out there that suggests that, that is true. And that, that may lead to additional vehicle demand. I think we only see our own data and that did coincide very closely with the Iran situation. So I think it’s hard to disentangle. But I would say our view would be that it probably was not as strong as I expect in terms of converting to vehicle demand and was probably more similar and maybe even a touch softer than years past.

But I think overall, not really a huge event for the quarter. And I think hard to separate the tax season effect from the gas price effect. Since then, it feels like things are operating in the way that we’d expect. And I think that’s true. Almost any way you look at the business, whether it’s volume or seasonality or distribution of customers or anything like that.

Operator: The next question is from Brian Nagel with Oppenheimer.

Brian Nagel: Great quarter, congratulations, very nice. The course I know that — and look, I know that this has been asked before, so I apologize you being repetitive. But just with respect to gas prices, I mean, clearly, the straight you’ve had a very strong quarter. The commentary in Q2 has been very strong as well. But as you think about gas prices and the potential impacts to our consumer and then maybe you look over time, over prior spikes in gas prices. I mean how should we be thinking about that? I mean have you noticed over time that your consumer acts different when gas prices spike?

Ernest Garcia: I think — sure. I think maybe there’s two potential impacts. One is what happens to aggregate sales and one is, what happens to mix of sales. I think what we’ve seen in the past is that the impact to aggregate sales is usually pretty small and over any reasonable period of time, I think largely massage is out. I think in terms of mix of sales, we do see some movement. You see expected things. I think over the last couple of months, we saw large SUVs kind of decrease as a percentage of sales a little bit. And we saw EVs kind of increase again as a percent of sales. I think even over the last several weeks, we’ve seen that normalize or kind of go back to closer to baseline, not all the way to baseline, but closer to baseline.

I’m sure those things will continue to migrate. I think the way that we try to manage that is we try to make sure that we build a system that’s adaptive, and we’ve got all the cars that customers could want in front of them. And then based on the demand signals we see every day. We’re adjusting what we’re buying every day to try to match what that demand is. And given how quick our turn times are, generally, the system adapts very quickly. So I think our view would be that there will be impacts, and they will generally be directionally as would be expected. But we don’t expect them to be a central part of the story unless the impacts were to get much, much larger.

Brian Nagel: That’s very helpful. I appreciate that. And then my second question, just with regard to the commentary on the narrowing spreads between retail and wholesale. So I just want to understand, but as you look at this and what’s happened here, is this more of a short-term phenomena where it maybe started a couple of quarters ago and now is correcting, or do you think there’s actually some type of longer term or multi-quarter shift happening within the marketplace?

Ernest Garcia: Yes. I think our pretty strong view would be this is a transitory impact. I think it’s hard to know exactly what drives these movements, but I think the kind of wholesale retail spread that we mentioned a lot, I think generally, that follows a pretty clear seasonal pattern. And I think in any given quarter, it tends to bounce around a little bit around the normal seasonal expectation. I do think that this year heading into the year and heading into tax season, wholesale market was really strong. And then the way the market would normally react to that is the retail market would just kind of catch up on a 30- to 60-day lag. And seems like the retail market is catching up, but it’s catching up on a little bit longer lag.

And so I think there’s room for that to normalize relatively quickly, and there’s room for it to kind of hold where it is. And either way, we don’t think it will be a central part of the story. But as we look at it today, the wholesale market is ahead of the retail market, and so that led to the call out.

Operator: The next question is from Jeff Lick with Stephens Inc.

Jeffrey Lick: Of course, I was wondering if you could talk just unpack a little bit deeper as you guys become bigger, you become a bigger part of the entire used ecosystem, they’re not just retail but wholesale. And just looking at your wholesale numbers, wholesaled less as a percentage of your retail down to 44.6% from 47.4%. I know your marketplace were actually down, and then you were — Mark, as you pointed out, your wholesale DTU was $1,327. So I’m just curious kind of how that dynamic is playing out in terms of your ability to source your decisions that you’re making as to why you might — as you would think almost if you can get that much money wholesaling, you might have wholesale more, but it appears that you retailed more. So just — can you maybe talk a little bit more about the dynamics there?

Ernest Garcia: Sure. Yes. I think we’re extremely excited with how the business is operating overall. And I think — keep in mind, I think one of the central things that we’re always trying to balance is making sure that we’re managing the business operationally as best we can while growing at these very high rates. And the wholesale side of the business does have operational impacts on the overall business, most notably in last mile logistics, which is an important part of our system that we’ve got to carefully manage to make sure we can handle the growth. So I think we’re always making trade-offs there and trying to make sure that we’re doing smart things. But in general, all the signs that we see are very good, and the teams are executing extremely well.

I think the wholesale team continues to unlock fundamental gains and is doing great. I think you see that in the wholesale vehicle results. And then I think in wholesale marketplace, I think we’re also building a lot of fundamental value there that feels very exciting. I think we made a comment in the letter that we feel like ADESA Clear, which is our digital platform is now a best-in-class platform. And we’ve got a lot of reasons for believing that, but that’s pretty exciting. We think that we’ve built something there that is extremely high quality, and it’s growing very quickly, and it’s adding value to the ADESA system and to the Carvana system as we buy cars wholesale and and dispose of most of them through that platform. And then you kind of saw in the letter we shared a number of speed stats that I think are fund reductions of the rate at which we can kind of move cars through the system.

We’ve talked about it before, but the goal of building the entirety of the Carvana system is to deliver incredible customer experience on both sides of the transaction and to minimize the expense that is necessary to allow customers to trade cars with each other. And I think if you look at the cars that we’re buying retail and then putting through our system and selling to a different customer, that entire process in the fastest case took place in just under 5 days, which I think is remarkable. I mean it’s — forgive me for walking through that. But that means the customer goes to our site, get a value for their car, decides they want to sell it. They go through a verification process, go through all the title work, schedule time to drop off the car to us or for us to pick it up, we get the car.

We landed at our hub. We put it on a multicar hauler. We drive it to an inspection center. We inspected. We run it through the reconditioning process after figuring out what needs to be fixed on the car, photograph it, put it up on the site, price it in an automated way. And another customer finds it, decides they want to buy it, they go through the entire purchase process, schedule their delivery. We put it on a truck, deliver to them, and it’s theirs, and that took 4.8 days, which is pretty exciting. So I think the system overall, we’re making a lot of investments to make sure it’s very tight, and we’re getting a lot of fundamental value out of that, and we think that, that’s going to unlock a lot of value over time. So I think, overall, we’re very excited about how the system is performing overall.

Jeffrey Lick: That’s an amazing anecdote. Thanks for sharing that. Congrats and best of luck for Q2.

Ernest Garcia: Thank you. Appreciate it.

Operator: The next question is from John Colantuoni with Jefferies

John Colantuoni: Just wanted to ask about other GPU. Can you give us a sense if you sort of see an opportunity to incrementally invest some of the financing GPU into growth as you’ve done in recent quarters? Or is that reinvestment largely behind you so that other sort of is more or less hit a run rate level at this point.

Ernest Garcia: Yes. Thank you. I would say — I mean, let’s start with — in the quarter, we are 10.4% adjusted EBITDA margin. I think in the past, we’ve provided these walks that we think are relatively straightforward to get to our goal of 13.5% that basically include leverage and fixed costs and then include getting to marketing dollar per unit spend that is similar to our more mature cohorts. And I think if you do that walk, it continues today to be pretty straightforward and the math is approximately the same. And then I think what that leads from there is basically, we’ve got room for any place where we make fundamental gains, whether we get more efficient in any of the GPU line items, or we get more efficient in any of the variable cost line items, that gives us room to share value with customers.

And I think where we share value with customers will not necessarily always be in the exact places that we unlock it, but we are seeking to unlock it in every part of the business. We’ve got projects that we’re very excited about in every single one of those line items, every expense line item, every revenue line item. And they’re all credible projects that we think have a real impact to make meaningful differences in the business. But we haven’t done them yet, so we got to go unlock that value. And then as we unlock it, we — our plan is to share that with customers. So we do think that there’s going to be value that or share with customers. We think that if we execute really well, it could be significant. And we think even with doing that, we can hit our goals, which overall has us excited, it means there’s a lot of work to do.

John Colantuoni: Okay. Great. And I wanted to ask one about advertising. Mark, you talked about spending more. Just be curious if you could give us a sense for what advertising channels you’re seeing the best returns? And how you sort of think about advertising fitting into your broader growth strategy over time? Is there sort of a near-term ramp in spend in a particular market? And then once you hit a level of mind share, you sort of can pull back. I just made that up. But just curious to get your perspective on sort of how you think about advertising fitting into your long-term growth strategy over time?

Mark Jenkins: Sure. Absolutely. Well, let me just start with that long-term growth strategy. We’ve talked about the three pillars of that growth strategy. One is continuing to improve the product and customer experience. That’s a place where we’ve made and hope to continue to make significant gains. Second is building increased awareness, understanding and trust. That is the growth pillar. Obviously, where advertiser plays a role, advertising is not. The only component of that, great customer experiences, word-of-mouth, repeat customers. There’s a number of different ways to do that, but advertising is certainly a component of it. And then just to round out that framework. Third is increasing collection and other benefits of scale, including adding more inventory pools to put more cars closer to customers.

So on the advertising component of that leg, as I mentioned in my remarks, we still feel like we’re in the relatively early days of telling our story. So we do see opportunities to continue to advertise more. I would expect that advertising to be very broad-based across many different channels as we seek to reach different audiences and meet them where they are. I think in the very near term, we haven’t provided too much commentary on our advertising outlook. But I think if you look over the last 2, 3 quarters or so, you’ll see relatively consistent advertising expense per unit, and I think that’s a reasonable way to think about where we are today.

Operator: The next question is from John Healy with Northcoast Research.

John Healy: Just wanted to see if we could switch gears just a little bit and talk about your priorities on the new car side. I think you guys are up to maybe 6 or 7 Chrysler dealerships. There’s a lot of the dealerships now. Any kind of updated perspective on where you’re seeing benefits, and I know you said in the past, it’s a learning process, but with the pace of these acquisitions continue, I was hoping you could provide some more context there.

Ernest Garcia: Thank you. I’m going to apologize in advance, and you are welcome to ask another question, but I think our answer remains the same. It’s still early. So stay tuned. We’ll share more when it’s time to share more. And as I said, if you’ve got another question, you’re more than welcome to ask it.

John Healy: Understood. And I guess I’ll stick on the other businesses as well. Obviously, we continue to see mobility and autonomous offerings rolling out in more cities. Obviously, you have a really good asset, and we’ve talked about capacity at the reconditioning centers. Have you guys game planned out any more that you could talk to us about maybe how you see yourself maybe facilitating those, that business potentially as being a service provider there? And kind of any updated thoughts maybe on evolution of the business model.

Ernest Garcia: Sure. Yes, I would say we’re always paying attention, and I think we try to always be thoughtful about what opportunities exist out there given the assets that we’ve built. But I think we try to balance that with where is the best place to put our focus. And I think we’ve clearly got an opportunity here to continue to grow a lot very quickly, and it clearly takes a lot of operational discipline and operational effort. So I think that will continue to be our primary focus for the foreseeable future, but we’re always paying attention.

Operator: The next question is from Marvin Fong with BTIG.

Marvin Fong: Congratulations. I think this quarter, I mentioned the top new car dealer in the country. Question on just kind of inventory. I was taking that from the 2Q? It looks like it grew quite a bit less than sales. And I just wanted your take on — was that partly a function of just kind of bringing the operational efficiency up and getting recon in order? And then just secondarily, how should we kind of think about having what looks like a pretty lean inventory relative to your sales growth rate. So kind of how do we think about that in terms of your pricing power acknowledging what you said about spread, but it would seem to me that you have pretty good ability to exercise and pricing power with this level in.

Ernest Garcia: Sure. Yes. So I think last quarter, I think, our inventory was up approximately 40% year-over-year. I think this quarter, it was up a little over 30% year-over-year. So I think that directional change is correct, and that kind of means that our implied turn times have gotten a bit faster. I think that can generally be not surprising seasonal move as you had kind of right out of tax season, where you tend to have like the biggest discrete change in sales rates and so you can kind of quickly eat through inventory that you’re building up prior to that. So I think that’s not a totally unexpected change, but I think there’s no question that if we could press the inventory button and have tens of thousands of more cars, I think we likely would.

And I think that would probably result in additional sales as long as we were able to manage kind of all that recon and operational complexity. But I think that, that’s just part of building this machine. I think we got to keep building the machine as we keep building it, we’ll keep getting to bigger scales. And as we get to bigger scale, we’ll have more inventory, more selection for our customers, and that will result in better conversion rates. And I think that that’s kind of the flywheel of the Carvana business that we just got to keep working hard to make sure we continue to unlock.

Marvin Fong: Great. And if I could do a follow-up here. Just — how would you characterize just the pricing environment? I think one of — at least one competitor is kind of out there discounting. And obviously, it’s a famine market, but just what’s your view on pricing discipline across the industry?

Ernest Garcia: I think nothing too notable to call out. I think in a way that’s sort of implicit in the wholesale retail spread that we talk about. When we measure that, we’re looking at various wholesale market indicators and then we’re looking at various retail market indicators, and that sort of captures where pricing is for the industry in some total. So I think I think there — we noted some mild differences there versus average, but would not necessarily associate that with pricing. I think it’s more just kind of the evolution of the way the last couple of months have played out. And so nothing notable to call out there.

Operator: Your next question is from Andrew Boone with Citizens.

Andrew Boone: Ernie, I wanted to go back to some of the tools you guys rolled out this quarter at IRCs, specifically centralized planning. Can you talk about maybe moving some of your maybe lower-performing IRCs more towards best-in-class performance just through more centralized planning. What’s the unlock there? And how do you guys really create more of a uniform system across all IRCs? And then in the letter, very specifically, you called out ADESA Clear as a best-in-class digital auction. Can you speak to the longer-term opportunity of what you guys may be thinking about Clear and the broader potential for that asset?

Ernest Garcia: Sure. I think we’re extremely excited about the way the team executed the way the Recon team executed in this last quarter and the tools they built. I think the tools that they built that are enable more centralized planning are, I think, very exciting in concept. I think the early signs are good. I think we’ll be rolling them out over the next several months. And then we’ll get a better sense of the near- and medium-term kind of quantitative benefits of those things, but we certainly think that there are benefits there that can show up over time. One of those benefits is what you discussed, which is just trying to kind of collapse the distribution of performance across different locations, which is driven by differences in quality of execution across locations.

It’s also driven partially by differences in the scale of various locations. But I think last quarter, we talked about there being a couple of hundred dollar spread between our top quartile and bottom quartile performers. And I think that’s spread despite the fact that we improved the overall number this quarter, that spread remains about the same. So I think opportunity is certainly there and then just getting fundamentally better across the sum of the facilities is there as well. But unlocking that takes time, and it’s hard to do while you’re also simultaneously growing at 40%. So I would put that in the category of clear opportunity and hard to make sure that we execute well enough to unlock, but very much something that we’re always paying close attention to and seeking to unlock as quickly as we can.

I think with Clear, we’re very excited by what we’ve done there. I think in order to make progress in anything, you have to decide what you’re going to focus on. And I think in Clear, we built what we believe is a best-in-class platform. And we’ve built that by focusing a lot on the buy side of the equation. I think when you’re building these tools, there’s seller side tools, and there’s buyer side tools. It’s enabled us to make the problem simpler by using ourselves as the primary seller. And so we’re not required to build as many sell-side tools. And we’ve been able to build a platform for the buy side that we think is highly differentiated, and where there’s room to differentiate it further from here. And we think that’s showing up in the results.

We think that, that has positively contributed to our wholesale vehicle gross profit per wholesale unit, for example. We think that is identifiable positive contributor to the performance there. So that’s super exciting. And then we think the sum of that, plus our retail platform, plus our — the general ADESA business and our ability to wholesale cars physically means that in aggregate, we’re we think, the most economic buyer for cars for any seller that is selling pools of cars. And that’s a fundamentally valuable thing that we’re very well positioned to provide as a service and to benefit from as a business. So I think there will be a long road map of making sure that we make all those tools fit together really well, and they reduced the simple offerings for our customers and that, that then results in great business performance.

But I think the foundations have been laid and are continuing to be late, and we think that it’s an exciting capability add to our overall system.

Operator: The next question is from John Babcock with Barclays.

John Babcock: I just want to go back to some of the discussion on the retail GPU. I know you gave a little bit of color for the upcoming quarter, which is helpful, but I also want to reconcile that a little bit to effectively like how you performed really from 4Q into 1Q. So I think last quarter, you talked about headwinds from reconditioning costs and also depreciation. Out of curiosity, how did 1Q end up relative to that? And also what factors in addition to those might have impacted GPU? So in other words, I know there was some strength on the used vehicle side of things. Did that come into play and did that contribute perhaps to some performance there. So any commentary you could provide on that would be useful.

Mark Jenkins: Sure. Yes. So I mean retail GPU was down slightly. It was pretty close to flat, but down slightly on a year-over-year basis in Q1. I think a couple of the key drivers there are things that we did talk about in Q4 as well. So one, we’re having great success in our logistics network, getting cars to customers even faster and with shorter distances. I think that manifested in Q1 with I believe an all-time low logistics expense per retail unit sold. We did — as we brought down distances, for outbound shipping, we also brought down our shipping revenue and just pass those gains on to customers. And so I think that was an impact. It was great for customers, but it had a negative impact on retail GPU both in Q4 and Q1.

We’ve also talked a lot about elevated retail reconditioning costs, where we’ve made lots of progress, as Ernie has discussed at length. So those are a couple of the key drivers, applied both to Q4 and Q1. Hopefully, that’s some helpful additional commentary.

John Babcock: Okay. And did depreciation change much from 4Q to 1Q?

Mark Jenkins: I don’t think we feel like we had major unusual seasonal patterns there, if I remember correctly.

John Babcock: Okay. And then just back to reconditioning costs. You talked about centralizing that a little bit. Are you pretty comfortable doing that? Do you think there’s going to be any added — because I’m sure you guys are pretty cognizant in terms of how you’re doing this and trying to avoid any unnecessary bureaucracy or adding any time inappropriately to certain channels. But I’m just kind of wondering, are there — do you generally view this as a positive to do that? Are there any concerns you have in terms of doing that? Are you still maintaining pretty good flexibility at the recommissioning center level to ensure that they have the ability to make decisions quickly. I don’t know if you could talk about that a little bit, but that would be useful.

Mark Jenkins: Yes, sure. Yes. So I think it’s really important there to strike a balance. I think the teams on the ground, they’re there every day. They are hands on with the dynamics in the cars flowing through and all the people that are there, and their various strengths and abilities. And so I think it’s important to have a lot of on-the-ground input into the way the reconditioning centers function. At the same time, there’s a lot of very quantitative decisions that can help reconditioning centers run better. So for example, if you have a given number of people after reconditioning center, on any given day, with a given distribution of skill sets, what’s the optimal way to distribute that team that you have on the ground that day across the various stations and the reconditioning process.

And you can do that by hand, and you can do it on the ground manually. But on the other hand, it’s also — that’s a problem that can be solved with algorithms data and pairing those two things together, very strong quantitative focus via software and via making even better use of all the data that we’re collecting in the centers and then pairing that more effectively with the teams on the ground. That’s where we think the special sauce is. We have been investing in reconditioning technology over a period of several years, but we haven’t solved that problem yet, and that’s a place that we’ve been focusing.

Operator: Next question is from Michael McGovern with Bank of America.

Michael McGovern: I was just curious on the labor hours per unit metric that you gave. It seems like it’s really efficient right now. So I’m just curious how much more efficiency you can gain there longer term? Which parts of the chain have decreased the most in terms of labor hours per unit, and how does that flow through into GPU longer term?

Ernest Garcia: Sure. I think we’ve talked in the past about our expense per unit in recon. And I think the #1 driver of those expenses labor. It’s a big part of the direct cost and then it also is highly correlated with the other costs. And so when we’re looking for operational metrics that move very quickly so that we can manage and make quick decisions. That’s a metric that we tend to look at. And I think it’s clearly gotten better. I think the kind of numbers that we discussed in terms of cost that we drifted in Q4, that was driven largely by a drift in HPU. And I think we’re back now to where we were last year in Q2, which was our all-time best. And I think — as we said, I think there’s clearly room that we can see for additional improvement from here that room exists both by improving the sum of all centers and by getting the centers to operate more like our best centers.

So I think there’s opportunity there that can matter that is meaningful dollars, but it does take time. We don’t want expectations that’s coming in the next couple of quarters. I think that will take time for us to unlock and get the full benefit of it. But it is there, and I think it’s exciting and meaningful. It just has to be done at the same time that we’re also executing well enough to grow at very high rates of speed. And some of those two things are hard to do together, but I think the team is up to it.

Michael McGovern: Got it. Just a quick follow-up on that. To your point of how hard it is it seems like your recon headcount growth is still pretty elevated. So from here, is there some sort of shift in just how efficiently you’re able to train these new reconditioning hires and keep that growth elevated in reconditioning headcount while also keeping new employees really efficient?

Ernest Garcia: Yes. I think Mark talked a lot about centralization and automation. And I think that can also just be thought of as reducing the complexity and the learning curve in a lot of these different positions. And so I think as a general matter, we’re trying to — we’ve built these centers in a way where you can take a focused skill set and have people that really know how to do something really well, do that over again and then you can train them in new skills and kind of move them to different parts of the line. And that gives us access to a pool of talent that is broader than many other companies that are trying to to provide similar functions. And so we think that’s an advantage. And then we think as we continue to build out Carli that makes the systems inside Carli that make the individual operators more efficient and as we continue to build out these manager tools that make manager decision-making more straightforward, so they can focus on the other parts of management, making sure they’re identifying their best performers and keeping people motivated and keeping the system moving.

We think that generally just makes things a bit easier to learn and makes it easier to train people. We also are definitely investing in the tools that allow us to hire people more quickly and to get them up to speed more quickly. That’s another area that the team has been focused on for a long time. So I think that’s all part of continual improvement. And I think we’ve made a ton of gains there over the last many years, but there’s clearly a ton of room for us to continue to make gains, and that’s what the team is focused on every day.

Operator: The next question is from Michael Montani with Evercore ISI.

Michael Montani: I was going to ask if I could, just to start on the diesel front. I was wondering if you could help us to understand any exposure that you might have there. Obviously, impressive improvement on logistics side this quarter. So definitely appreciate that. But we were thinking about it as potentially like a low single-digit earnings headwind in isolation. So wondering if you’d comment there. And the other question I had was more just strategic, which was obviously, you continue to have some underlying gains in GPUs. I know there’s some quarterly noise going on, but how should we think about Ernie, the propensity to kind of reinvest those gains to further accelerate share versus you kind of happy at these levels with this kind of unit growth to just kind of pass some of that through.

Mark Jenkins: I can take the first one. So I do think there is an impact of fuel prices on the operations of our business. I think that takes a couple of different forms. One, there’s a cost of sales impact for inbound transport and then there’s also an SG&A expense impact, which is in this operations expense, broader sort of variable cost category down in SG&A. In some — I would expect to see some impact from the higher fuel prices in the second quarter, but not one that’s particularly large and one that I think of as being in sort of the normal range of quarter-to-quarter fluctuations that we see things move around quarter-to-quarter. So at any rate, I think there will be an impact. But based on what we see right now, we don’t expect it to be particularly large.

Ernest Garcia: And then on reinvesting gains, I think we’re trying to be not too repetitive from previous answers, I think we do think that we have opportunities across the entire business, and we think that the path from where we are today to 13.5% adjusted EBITDA margin is pretty straightforward with leverage and advertising expense. And so we think the gains that we make, we can largely pass through to customers. And we think the opportunities are many, but like anything hard, we got to go actually do it. And when we actually do it, we’ll find out how fast we can do it, and how big those gains are, but we do expect to share additional gains with customers over time and hopefully, meaningfully while still marching toward our goal.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garcia for any closing remarks.

Ernest Garcia: Great. Well, thanks everyone for joining the call. Carvana team, awesome job. Another great quarter. You have a lot to be proud of. Recon team, in particular, awesome, awesome job. Thank you for reacting the way that you did. I think to everyone across the business when we hit a bump, let’s react the way Recon did. No one can stop us but us. Let’s just keep margin. Thanks, everyone.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.