CVNA Q1 2026 Earnings Call
Operator: Good afternoon, and welcome to the Carvana First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, after today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead.
Meg 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 section of Carvana's most recent Form 10-Ks. 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 would like to turn the call over to Ernie Garcia. Ernie?
Ernie 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 thirteen years lead us to believe that 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 scale 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 realized we were off track a bit, the first thing the team did was turn up the operational intensity across the network, setting higher expectations for each facility and leaning into the operational structures we have built over the last several years. This allowed us to make rapid progress nationwide. In addition, they quickly assessed the underlying cause of the variation in facility performance, most notably newer managers that could use more detailed direction 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 months, they built additional data integrations, developed tools to help managers make faster, higher quality decisions in 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 were making a real measurable difference. We will continue to iterate on these tools, and we will 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 in 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, it excites us. Once again, the people on Team Carvana have proven that they are exceptional, that they are 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 to selling 3 million cars per year at 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 unit 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 $6.43 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; increased 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 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 twelve-month adjusted EBITDA ratio to 1.1 times, 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 auto retailer and buying and selling millions of cars. Thank you for your attention. We will now open the call for questions.
Operator: We will now begin the question and answer session. The first question today is from Christopher Pierce with Needham. Please go ahead.
Christopher Pierce: Hey, good afternoon. Ernie, in your remarks, you talked about new tools at underperforming sites where there are new managers. I just want to understand: are these tools brand new, and could they help top-performing sites further improve, or are they to bring those underperforming sites in line with your top-performing sites?
Ernie 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 when we did not have a perfect fourth quarter, and they reacted extremely well. That is why I wanted to make sure that I spent some time in our comments giving them credit. I am extremely impressed and proud of how hard they worked 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 will see how powerful that ends up being, but I think they are fundamentally value-added tools that are not in the vast majority of our facilities yet, so we will roll those out over time. To me, the way that we hope this goes over the next many years is we are scaling a big business that is operationally complex very quickly. We are inevitably going to run into bumps in the road. Every time you run into a bump, it is a chance to reevaluate what you are doing and to try to learn from it and get a little better. I think the team dug in, reevaluated the road map, found opportunities that are potentially bigger, and focused and made a huge difference quickly. We are very excited about those opportunities. I would not want to set expectations too high beyond that we think we are very much back on track, but if we had to pick a direction, the tooling that we are building is exciting and gives us more room for fundamental gains over time.
Christopher Pierce: Okay. Perfect. Thank you. And then just a bigger-picture question. With new vehicle prices, tariffs, and gas prices, do you think there is some portion of people tapping out and dropping down to used, and could we see, when off-lease 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 tilt more prime versus subprime? I would love to hear your thoughts.
Ernie Garcia: Sure. Car prices are high. These numbers will not be exactly right, but the last numbers that I remember are kind of pre-pandemic: general consumer goods are up 25% give or take; cars are up 35% to 40%. So car prices, all else constant, are higher, and that has to be impacting people. Generally, the elasticities for cars at the aggregate level are not super high. People need cars to live their lives, and they get tired of the car they own, so aggregate transactions tend to be relatively stable. There is room, though—everything you pointed to is probably a directional positive for the overall market size over time. But realistically, the scale of those positives relative to the scale of our growth is very small. Our view is that most things that happen to the market are going to impact us in a proportionate way, but what we are doing is dramatically more powerful than that, so we stay focused on all the fundamental tools we are building, delivering great customer experiences, and doing the hard operational work to scale effectively. On your last point on rates and the mix between prime and non-prime customers, our balance of customer credit is pretty similar to the market overall. 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 overall other GPU. Those things can move around; there will always be a little macro effect that moves things around by tens of dollars, give or take, but in general, the most important thing is that we keep delivering great experiences and stay focused on us. That is where our focus remains.
Operator: The next question is from Daniela Haigian with Morgan Stanley. Please go ahead.
Daniela Haigian: Hi, Ernie and team. Thanks for taking the question. 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 have seen 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 think it is helpful to break that down into a couple of categories. One, operations expense: that is the expense associated with executing a transaction, providing customer service, fulfilling the transaction via our logistics network and last-mile delivery network, and all of those expenses that are more variable in nature. We had a strong quarter on that front, with operations expenses down slightly year over year. 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 logistics is part of that operations expense. I would not expect that impact to be particularly large, but there is some impact there. The second category is overhead expenses. That is an area where we have shown a lot of strong leverage. Overhead expenses are more fixed in nature. They can grow due to investments that we make—for example, we are making some investments now in additional technology, including AI-related technology. That would be in that overhead expense number. So they can grow, but it is much more fixed in nature, and we do expect to see significant leverage in that overhead line item over time. Just to state the third: we have been marching up advertising spend. Given where we are in our company’s life, we think there is still a lot we can do to continue to raise understanding, awareness, and trust of our offering. We are in the relatively early days of online auto retail adoption. Obviously, we are playing a big role in telling that story, and we think there is a lot of value to us continuing to invest in advertising. Those would be the three big categories and some of the dynamics.
Daniela Haigian: Thanks, Mark. That is helpful. Second question, a bit longer term, on CapEx. Recognizing you are only 20% utilized on your current real estate capacity of 3 million, but at this rate of growth, you are going to need to think about builds beyond that over the next few years. You had a helpful exhibit in last quarter's investor letter on eventually building out greenfield production. What would that look like? What is the team’s philosophy on building that capacity?
Mark Jenkins: Sure. The way I think about our production growth plan—and a lot of our capital investment is really related to growing production and production facilities—right now, there are multiple ways we are doing that. One is adding staffing into existing facilities—that is no CapEx. Second, we are integrating ADESA locations, which basically means going into existing ADESA buildings that have already been constructed, implementing our Carly proprietary software system to do inventory and reconditioning management in those centers, and adding some equipment. That is a very CapEx-light way to add production capacity. Third is to start doing full build-outs of existing ADESA facilities. We have the land, and we can expand the buildings and structure in order to add more lines into those facilities. We did talk 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. Last is greenfield IRCs. That is not a priority at this time. Our bigger priority is executing those first three types of production expansion. Up to this point, we have been really focused on the first two—ramping capacity in existing facilities and integrations. This year is the year where we will start doing some of those full build-outs, which we think make a lot of sense.
Operator: The next question is from Rajat Gupta with JPMorgan. Please go ahead.
Rajat Gupta: Great. Thanks for taking the question, and congrats on the execution around the reconditioning cost. I had a question on the wholesale-retail spread comment, Mark, that you made in the prepared remarks. Is that impact that you are 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 sentiment tied to the war? Any more color around that $100 to $200 wholesale-retail spread headwind would be helpful. I have a quick follow-up.
Mark Jenkins: Sure. What we are seeing on spreads and what we have seen year to date really starts with a very hot wholesale market in Q1. Wholesale prices really appreciated in Q1. That appreciation can happen in any given year as a lead-up to tax season, but the appreciation we saw early this year both started earlier and was of a larger magnitude than we have typically seen in past Q1s. A strong wholesale market should 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 what we are seeing is that wholesale appreciation was not fully passed on into retail prices, and that is causing a little bit of that wholesale-to-retail spread compression that we are pointing to.
Rajat Gupta: Got it. And just to follow up on the previous question around SG&A: the sequential pickup in the overhead expenses—it is probably the highest we have seen in a while from 4Q to 1Q, particularly since the turnaround. You mentioned some investments around AI and such. Any way you could double click on that and give a little more detail? Are there any one-timers—maybe some of new car acquisitions—just a little more granularity would be helpful. And any color on overhead expenses for the year would be helpful. Thanks.
Mark Jenkins: Yes, sure. There are some seasonal or one-time components in there as well as some investments. We typically see Q1 as 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 would not think of as seasonal or one-time—including technology investments and 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 increase at a rate like that. Thinking of Q1 as something more like a new level is probably more appropriate.
Operator: The next question is from Sharon Zackfia with William Blair. Please go ahead.
Sharon Zackfia: Hi, and congratulations on getting wholesale ops more optimized. With that, it sounds like you might be positioned to hold retail GPU for the full year, and I am curious on your thoughts on that—in terms of seeing improvement in the back half of the year again?
Ernie Garcia: Sure. We try to stay away from giving too much precise color there. But the things we have generally said in the past we continue to believe. There is a little bit of seasonality in those numbers, and then there are fundamental gains that we are going to continue to seek to attack. Across the sum of the GPU line items plus expenses, we feel like we have clear visibility to 13.5% adjusted EBITDA margin, which is our goal. There are always a couple of little interesting stories that pop up from time to time—whether it is gas prices or impact from Iran or recon expense or whatever it is. As a general matter, we think we are in an environment that looks similar to the past, and we are just going to keep chugging forward.
Sharon Zackfia: Secondarily—sorry, I am losing my voice—for the OBDD, there had been 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 gas prices spiked. As you went throughout the quarter, did you see any change in the complexion of your customers across income cohorts, or does it look very similar to what you were seeing in 2025?
Ernie Garcia: We grew by 40% in the quarter, so overall I would say we are extremely happy with the way the business performed and the way the team operated during the quarter. It is a little hard to massage out some of those effects. There was an expectation that tax dollars would be larger; data suggests that is true and that may lead to additional vehicle demand. We only see our own data, and that did coincide very closely with the Iran situation. It is hard to disentangle, but our view would be that it probably was not as strong as expectations in terms of converting to vehicle demand and was probably more similar and maybe even a touch softer than years past. Overall, not really a huge event for the quarter and hard to separate the tax season effect from the gas price effect. Since then, it feels like things are operating the way that we would expect, and that is true almost any way you look at the business—whether it is volume, seasonality, distribution of customers, or anything like that.
Operator: The next question is from Brian Nagel with Oppenheimer. Please go ahead.
Brian Nagel: Hi, good afternoon. Great quarter—congratulations. With respect to gas prices, clearly the company had a very strong quarter and the commentary in Q2 has been very strong as well. As you think about gas prices and potential impacts to the consumer, and looking over time over prior spikes, have you noticed over time that your consumer acts differently when gas prices spike?
Ernie Garcia: I think there are two potential impacts. One is what happens to aggregate sales and one is what happens to mix of sales. What we have seen in the past is that the impact to aggregate sales is usually pretty small and, over any reasonable period of time, largely massages out. In terms of mix of sales, we do see some movement—the expected things. Over the last couple of months, we saw large SUVs decrease as a percentage of sales a little bit. We saw EVs increase again as a percent of sales. Even over the last several weeks, we have seen that normalize or go back closer to baseline—not all the way to baseline, but closer. Those things will continue to migrate. The way we try to manage that is to build a system that is adaptive: we put all the cars that customers could want in front of them, and based on the demand signals we see every day, we adjust what we are buying every day to match that demand. Given how quick our turn times are, generally the system adapts very quickly. There will be impacts directionally as would be expected, but we do not expect them to be a central part of the story unless the impacts were to get much, much larger.
Brian Nagel: Then my second question, with regard to the narrowing spreads between retail and wholesale. Is this more of a short-term phenomenon where it maybe started a couple of quarters ago and is now correcting? Or do you think there is some longer-term or multi-quarter shift happening within the marketplace?
Ernie Garcia: Our pretty strong view is this is a transitory impact. It is hard to know exactly what drives these movements. The wholesale-retail spread generally follows a pretty clear seasonal pattern, and in any given quarter it tends to bounce around a bit around the normal seasonal expectation. This year heading into tax season, the wholesale market was really strong. Normally, the retail market would catch up on a 30- to 60-day lag. It seems like the retail market is catching up, but on a slightly longer lag. There is room for that to normalize relatively quickly, and room for it to kind of hold where it is. Either way, we do not think it will be a central part of the story. As we look at it today, the wholesale market is ahead of the retail market, and that led to the callout.
Operator: The next question is from Jeffrey Lick with Stephens Inc. Please go ahead.
Jeffrey Lick: Good afternoon. Thanks for taking my question. As you become bigger, you become a bigger part of the entire used ecosystem—not just retail but wholesale. Looking at your wholesale numbers, you wholesaled less as a percentage of your retail, down to 44.6% from 40.4%. Your marketplace units were actually down, and your wholesale GPU was $1,327. I am curious how that dynamic is playing out in terms of your ability to source and your decisions. You would think if you can get that much money wholesaling, you might have wholesaled more, but it appears that you retailed more. Can you talk about the dynamics there?
Ernie Garcia: We are extremely excited with how the business is operating overall. One of the central things we are always trying to balance is making sure that we are managing the business as best we can while growing at very high rates. 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 have to carefully manage to handle the growth. We are always making trade-offs there and trying to make sure we are doing smart things. In general, all the signs we see are very good; the teams are executing extremely well. The wholesale team continues to unlock fundamental gains and is doing great—you see that in the wholesale vehicle results. In wholesale marketplace, we are also building a lot of fundamental value that feels very exciting. We noted in the letter that we feel like ADECLAIR, our digital auction platform, is now a best-in-class platform. We have a lot of reasons for believing that, and it is pretty exciting. We have built something that is extremely high quality, growing very quickly, and adding value to the ADESA system and to the Carvana system as we buy cars wholesale and dispose of most of them through that platform. We also shared a number of speed stats that are fun—reductions in the rate at which we can move cars through the system. 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 necessary to allow customers to trade cars with each other. If you look at cars that we are buying retail, putting through our system, and selling to a different customer, that entire process, in the fastest case, took place in just under five days. The customer gets a value for their car, goes through verification, title work, schedules drop-off or pickup, we land the car at our hub, put it on a multi-hauler, drive it to an inspection center, inspect it, run it through recon, photograph it, put it up on the site, price it in an automated way, another customer finds it, goes through the entire purchase process, schedules delivery, we put it on a truck, deliver to them—and it is theirs. That took 4.8 days. That is remarkable. We are making a lot of investments to keep the system very tight, and we are getting a lot of fundamental value out of that. We think that is going to unlock a lot of value over time. Overall, we are very excited by how the system is performing.
Operator: The next question is from John Colantuoni with Jefferies. Please go ahead.
John Colantuoni: Great. Thanks for taking my question. On other GPU, can you give us a sense if you see an opportunity to incrementally invest some of the financing GPU into growth as you have done in recent quarters? Or is that reinvestment largely behind you so that other GPU is more or less at a run-rate level at this point?
Ernie Garcia: Thank you. In the quarter, we were at 10.4% adjusted EBITDA margin. In the past, we have provided walks that we think are relatively straightforward to get to our goal of 13.5% that basically include leverage in fixed costs and getting to marketing dollar per unit spend that is similar to our more mature cohorts. If you do that walk, it continues today to be pretty straightforward, and the math is approximately the same. What that leaves from there is room for any place where we make fundamental gains—whether we get more efficient in any of the GPU line items or in any of the variable cost line items—that gives us room to share value with customers. Where we share value with customers will not necessarily always be in the exact place we unlock it, but we are seeking to unlock it in every part of the business. We have projects that we are very excited about in every single one of those line items—every expense line item, every revenue line item—and they are all credible projects that we think can make meaningful differences in the business. We have not done them yet, so we have to go unlock that value. Then, as we unlock it, our plan is to share that with customers. We do think there is going to be value there to share with customers. If we execute really well, it could be significant, and even with doing that, we can hit our goals, which has us excited—but there is a lot of work to do.
John Colantuoni: And one on advertising. Mark, you talked about spending more. Could you give a sense for what advertising channels you are seeing the best returns, and how you think about advertising fitting into your broader growth strategy over time? Is there a near-term ramp in spend in a particular market and then, once you hit a level of mind share, you can pull back?
Mark Jenkins: Absolutely. Our long-term growth strategy has three pillars. One is continuing to improve the product and customer experience—an area where we have made and hope to continue to make significant gains. Second is building increased awareness, understanding, and trust—that is the pillar where advertising plays a role. Advertising cannot be the only component—great customer experiences, word of mouth, and repeat customers also matter—but advertising is certainly a component. Third is increasing collections and other benefits of scale, including adding more inventory pools to put more cars closer to customers. On advertising, we still feel like we are 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. In the very near term, we have not provided too much commentary on our advertising outlook, but if you look over the last two to three quarters, you will see relatively consistent advertising expense per unit, and I think that is a reasonable way to think about where we are today.
Operator: The next question is from Analyst with Northcoast Research. Please go ahead.
Analyst: Thanks for taking the question. I wanted to switch gears a bit and talk about your priorities on the new car side. I think you are up maybe six or seven Chrysler or Stellantis dealerships now. Any updated perspective on where you are seeing benefits? I know you have said in the past it is a learning process, but with the pace of these acquisitions continuing, hoping you could provide more context.
Ernie Garcia: Thank you. I am going to apologize in advance—you are welcome to ask another question—but our answer remains the same. It is still early. Stay tuned. We will share more when it is time to share more. And as I said, if you have another question, you are more than welcome to ask it.
Analyst: Understood. I will stick on the other businesses as well. We continue to see mobility and autonomous offerings rolling out in more cities. You have a really good asset, and we have talked about capacity at the reconditioning centers. Have you game planned how you could facilitate those businesses potentially as a service provider, and any updated thoughts on evolution of the business model?
Ernie Garcia: We are always paying attention, and we try to be thoughtful about what opportunities exist given the assets we have built. We balance that with where the best place is to put our focus. We clearly have an opportunity to continue to grow a lot very quickly, and that takes operational discipline and effort. That will continue to be our primary focus for the foreseeable future, but we are always paying attention.
Operator: The next question is from Marvin Fong with BTIG. Please go ahead.
Marvin Fong: Great. Thanks for taking my question. Congratulations—I think this quarter you are the top used car dealer in the country. Question on inventory. From the Q, it looks like it grew quite a bit less than sales. Was that partly a function of bringing operational efficiency up and getting recon in order? Secondarily, with what looks like pretty lean inventory relative to your sales growth rate, how do we think about your pricing power—acknowledging what you said about spreads? It would seem to me you have pretty good ability to exercise inflation power with this level of input. Thanks.
Ernie Garcia: Last quarter, inventory was up approximately 40% year over year. This quarter, it was up a little over 30% year over year. That directional change is correct and implies our turn times have gotten a bit faster. That can be a not-surprising seasonal move as you head out of tax season where you tend to have the biggest discrete change in sales rates, and you can quickly eat through inventory that you are building up prior to that. There is no question that if we could press the inventory button and have tens of thousands more cars, we likely would, and that would probably result in additional sales as long as we were able to manage all the recon and operational complexity. That is part of building this machine. We have to keep building it; as we build it, we will get to bigger scales. As we get to bigger scales, we will have more inventory and more selection for our customers, which will result in better conversion rates. That is the flywheel of the Carvana business that we have to keep working hard to unlock.
Marvin Fong: How would you characterize the pricing environment? One competitor is out there discounting. It is a fragmented market, but what is your view on pricing discipline across the industry?
Ernie Garcia: Nothing too notable to call out. In a way, that is implicit in the wholesale-retail spread we talk about. When we measure that, we are looking at various wholesale market indicators and various retail market indicators, and that captures where pricing is for the industry in sum total. We noted some mild differences versus average, but I would not associate that with pricing discipline so much as the evolution of the last couple of months. Nothing notable to call out there.
Operator: The next question is from Andrew Boone with Citizens. Please go ahead.
Andrew Boone: Thanks so much for taking the question. Ernie, I wanted to go back to some of the tools you rolled out this quarter at IRCs—specifically centralized planning. Can you talk about moving some of your lower-performing IRCs more towards best-in-class performance through more centralized planning? What is the unlock, and how do you create more of a uniform system across all IRCs? And in the letter, you called out ADESA Clear as a best-in-class digital auction. Can you speak to the longer-term opportunity of what you may be thinking about for Clear and the broader potential for that asset?
Ernie Garcia: We are extremely excited about the way the recon team executed in this last quarter and the tools they built. The tools that enable more centralized planning are very exciting in concept. The early reads are good. We will be rolling them out over the next several months, and then we will get a better sense of the near- and medium-term quantitative benefits. We certainly think there are benefits that can show up over time. One benefit is collapsing the distribution of performance across locations, which is driven by differences in quality of execution and partially by differences in scale. Last quarter, we talked about there being a couple hundred dollars’ spread between our top quartile and bottom quartile of performers. Despite the fact that we improved the overall number this quarter, that spread remains about the same. That opportunity is certainly there, as is getting fundamentally better across the sum of the facilities. Unlocking that takes time, and it is hard to do while simultaneously growing at 40%. It is a clear opportunity and hard to execute fast, but it is something we are always paying close attention to and seeking to unlock as quickly as we can. With Clear, we are very excited by what we have done. To make progress, you have to decide what to focus on. In Clear, we built what we believe is a best-in-class platform by focusing a lot on the buy side. There are seller-side and buyer-side tools. We simplified the problem by using ourselves as the primary seller, so we are not required to build as many sell-side tools. We have been able to build a platform for the buy side that we think is highly differentiated, with room to differentiate further. That is showing up in the results and has positively contributed to our wholesale vehicle gross profit per wholesale unit. In aggregate, the sum of Clear plus our resale platform plus the general ADESA business and our ability to wholesale cars physically means we are, in aggregate, the most economic buyer for cars for any seller that is selling pools of cars. That is fundamentally valuable, that we are well positioned to provide as a service and to benefit from as a business. There will be a long road map of making sure all those tools fit together well and reduce to simple offerings for our customers that result in great business performance. The foundations have been laid and are continuing to be laid, and it is an exciting capability add to our overall system.
Operator: The next question is from John Babcock with Barclays. Please go ahead.
John Babcock: I want to go back to the discussion on retail GPU. You gave some color for the upcoming quarter, which is helpful. I also want to reconcile how you performed from 4Q into 1Q. Last quarter you talked about headwinds from reconditioning costs and depreciation. How did 1Q end up relative to that? What factors, in addition to those, might have impacted GPU? There was strength on the used vehicle side—did that contribute? Any commentary would be useful.
Mark Jenkins: Retail GPU was down slightly year over year in Q1—it was pretty close to flat, but down slightly. A couple of key drivers there are things we talked about in Q4 as well. We are having great success in our logistics network getting cars to customers even faster and with shorter distances. That manifested in Q1 with an all-time low logistics expense per retail unit sold. As we brought down distances for outbound shipping, we also brought down our shipping revenue and passed those gains on to customers. That is great for customers, but it had a negative impact on retail GPU, both in Q4 and Q1. We have also talked a lot about elevated retail reconditioning costs, where we have made lots of progress, as Ernie discussed at length. Those were a couple of the key drivers that applied to both Q4 and Q1.
John Babcock: Did the depreciation change much from April to January?
Mark Jenkins: I do not think we feel like we had major unusual seasonal patterns there, if I remember correctly.
John Babcock: Thanks. And back to reconditioning costs—you talked about centralizing that a little bit. Are you comfortable doing that? Do you think there will be any added bureaucracy or added time? Are you maintaining flexibility at the reconditioning center level to ensure they can make decisions quickly?
Mark Jenkins: It is really important to strike a balance. The teams on the ground are there every day, hands-on with the dynamics and cars flowing through and all the people that are there and their various strengths and abilities. It is important to have a lot of on-the-ground input into the way the reconditioning centers function. At the same time, there are a lot of very quantitative decisions that can help the centers run better. For example, if you have a given number of people at the center on any given day with a given distribution of skill sets, what is the optimal way to distribute that team across the various stations in the reconditioning process? You can do that by hand on the ground manually, but it is also a problem that can be solved with algorithms and data. Pairing those two things together—a very strong quantitative focus via software and better use of all the data we are collecting in the centers—with the teams on the ground is where we think the special sauce is. We have been investing in reconditioning technology over several years, but we have not solved that problem yet, and that is a place we have been focusing.
Operator: The next question is from Michael McGovern with Bank of America. Please go ahead.
Michael McGovern: Hey, thanks for taking my question. On the labor hours per unit metric that you gave, it seems like it is really efficient right now. How much more efficiency can you 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?
Ernie Garcia: We have talked in the past about our expense per unit in recon, and the number one driver of those expenses is labor. It is a big part of the direct cost and is highly correlated with the other costs. When we are looking for operational metrics that move very quickly so that we can manage and make quick decisions, that is a metric we tend to look at. It has clearly gotten better. The kind of numbers we discussed in terms of cost drift in Q4 were driven largely by a drift in HPU. We are back now to where we were last year in Q2, which was our all-time best. As we said, there is clearly room for additional improvement from here. That room exists both by improving the sum of all centers and by getting centers to operate more like our best centers. There is opportunity there that can matter—that is meaningful dollars—but it takes time. We do not want to set expectations that it is coming in the next couple quarters. It will take time for us to unlock and get the full benefit, but it is there and it is exciting and meaningful. It just has to be done at the same time that we are also executing well enough to grow at very high rates of speed. Those two things are hard to do together, but I think the team is up to it.
Michael McGovern: Got it. Quick follow-up. Recon headcount growth is still pretty elevated. From here, is there some shift in how efficiently you are able to train new reconditioning hires and keep growth elevated in recon headcount while also keeping new employees really efficient?
Ernie Garcia: Mark talked a lot about centralization and automation. That can also be thought of as reducing the complexity and the learning curve in many positions. We built these centers in a way where you can take a focused skill set and have people who really know how to do something well do that over and over again, and then you can train them in new skills and move them to different parts of the line. That gives us access to a broader pool of talent than many others trying to provide similar functions, and we think that is an advantage. As we continue to build out Carly—the systems inside Carly that make individual operators more efficient—and as we build out manager tools that make manager decision making more straightforward so they can focus on identifying best performers, keeping people motivated, and keeping the system moving, that generally makes things easier to learn and easier to train. We are also investing in tools that allow us to hire people more quickly and get them up to speed more quickly. That is another area the team has been focused on for a long time. It is all part of continual improvement. We have made a ton of gains over the last many years, but there is clearly a ton of room to continue to make gains, and that is what the team is focused on every day.
Operator: The next question is from Michael Montani with Evercore ISI. Please go ahead.
Michael Montani: Good afternoon. Thanks for taking the question. First, on the diesel front, could you help us understand any exposure you might have there? Obviously, impressive improvement on logistics this quarter, but we were thinking about it as potentially a low single-digit earnings headwind in isolation. The other question is strategic: you continue to have underlying gains in GPUs. I know there is some quarterly noise, but how should we think about the propensity to reinvest those gains to further accelerate share versus being happy at these levels with this kind of unit growth and passing some of that through?
Mark Jenkins: There is an impact of fuel prices on the operations of our business. That takes a couple of forms. One, there is a cost of sales impact for inbound transport. There is also an SG&A expense impact, which is in the operations expense, broader variable cost category in SG&A. I would expect to see some impact from higher fuel prices in the second quarter, but not one that is particularly large. I think of it as being in the normal range of quarter-to-quarter fluctuations as we see things move around.
Ernie Garcia: On reinvesting gains, without being too repetitive from previous answers, we do think we have opportunities across the entire business, and the path from where we are today to 13.5% adjusted EBITDA margin is pretty straight with leverage and advertising expense. We think the gains that we make we can largely pass through to customers. The opportunities are many, but like anything hard, we have to actually do it. When we do it, we will find out how fast we can do it and how big those gains are. We do expect to share additional gains with customers over time—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.
Ernie Garcia: 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. To everyone across the business, when we hit a bump, let us react the way Recon did. No one can stop us but us. Let us just keep marching. Thanks, everyone.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.