Carvana Co (CVNA) 2026 Q2 法說會逐字稿

Hello, and welcome to the Carvana second-quarter 2026 earnings call. (Operator Instructions)

I will now turn the conference over to Meg Kehan, Investor Relations. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's second-quarter 2026 earnings conference call. Please note that this call is being webcast and can be accessed along with our Q2 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 get started, 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 Forms 10-K and 10-Q. 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 Ernest Garcia. Ernie?

Thanks, Meg, and thanks, everyone, for joining the call. The second quarter was another exciting quarter for Carvana. We sold almost 200,000 cars in the quarter. The power of compounding is clear in that number as it is almost double the number of cars we sold just two years ago. That sales volume puts us at just 2% market share of the used car market and 1.5% of the auto retail market as a whole. These numbers make the size of our opportunity exceedingly clear.

In Q2, we also crossed over $3 billion adjusted EBITDA annual run rate for the first time. And that adjusted EBITDA isn't your typical growth company variety as is apparent based on how much flows further down the income statement. Our operating income and net income run rates were about $2.7 billion and $2 billion, respectively.

In the shareholder letter, there's some simple data related to the inventory growth and sales growth by region that looks detailed at first, but it tells a much bigger story. Over the last couple of years, we've been rapidly adding retail production capacity to ADESA sites and existing inspection centers. This has led to variation in inventory growth rates in different parts of the country.

The two regions where we added the most production capacity, the Midwest and the Northeast grew inventory by 57%. In those markets, sales grew in the second quarter by 54%. In the two regions where we added the least incremental production capacity over the last year, the West and the Southeast, we grew the inventory by 17%. In those regions, sales grew by 30% in the second quarter.

The middle two regions are also reported in the letter and validate this strong correlation. The correlation of this data is driven by the positive feedback in our model we've discussed so many times before in conceptual form. When we grew inventory, any given customer is more likely to find a car they love and converting goes up. When conversion goes up, marketing dollars get more efficient, and as a result, our marketing algorithms allocate more dollars to these markets and more customers in these markets come to our site.

With more cars closer to more customers, delivery times go down, shipping fees reduced, logistics efficiency goes up and conversion goes up again, restarting a loop as this caused us to grow inventory further. These simple data points clearly show all that positive feedback in action. It's only possible because of the machine we've built and it drives our strategy and prioritization. Building this machine and the unmatched customer experience it delivers is the key to our future success. And the bigger it is, the wider the moat.

Our midterm goal is to build this machine to sell 3 million cars per year at 13.5% adjusted EBITDA margin by 2030 to 2035. When we announced this goal with our Q1 2025 results, we needed to grow to about 6 times our scale in order to achieve it. Now five quarters later, we need to grow to under 4 times the current scale in order to achieve it.

The path is very clear and there's a lot of execution to do. We have to keep building. We have to keep hiring. We have to keep training. We have to keep caring, and we have to continually improve every part of the machine. We've been doing all those things for the last 13 years. We are not going to stop. We are still just getting started, the march continues. Mark?

Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons will be on a year-over-year basis.

Q2 was another strong quarter, reflecting our team's continued focus on profitable growth and operational 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 $197,325 in Q2, an increase of 38% and a new company record. Revenue was $7.376 billion, an increase of 52% and a new company record. Revenue growth exceeded retail units sold growth primarily due to traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner, higher industry-wide prices and a mix shift into newer and higher-cost vehicles.

The gross revenue treatment change will no longer affect year-over-year comparisons beginning in Q3, and we expect revenue growth to be more in line with retail unit growth in Q3. Consistent with past quarters, our growth in the second quarter was driven by our three long-term drivers of growth: a continuously improving customer offering, increasing awareness, understanding and trust, and increasing inventory selection and other benefits of scale.

Even beyond automotive retail, our growth continues to stand out. Our organic revenue growth in our most recent quarter ranks in the top 5% of S&P 500 companies, making us one of the fastest growing, large, profitable companies across all industries.

Second quarter marked our 10th consecutive quarter of industry-leading retail unit growth and adjusted EBITDA margin. Non-GAAP retail GPU decreased by $105, primarily driven by lapping the approximately $100 benefit from tariff-related effects last year. Non-vehicle costs were higher, primarily due to inbound transport fuel prices, more than offset by higher retail appreciation.

Non-GAAP wholesale GPU decreased by $158, driven by our 38% retail unit sold growth outpacing wholesale gross profits. Non-GAAP other GPU decreased by $192, primarily driven by our decision to give back to customers in the form of lower interest rates, as well as higher benchmark rates, partially offset by lower cost of funds, higher average amount financed, and higher finance attach rates. Total GPU aligned with our expectations with a shift in allocation between retail and other components driven primarily by industry retail pricing dynamics and benchmark rate increases, respectively.

Q2 was another strong quarter for levering SG&A expenses. Our 38% growth in retail units sold led to a $157 reduction in non-GAAP SG&A expense per retail units sold, reflecting a $272 reduction in overhead expenses, partially offset by an $88 increase in operations expenses, primarily due to higher fuel prices. Advertising expense increased by $27 per retail units sold as we continue to invest in building awareness, understanding, and trust in our offering. We expect an increase in advertising expense dollars in Q3.

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 component of our cost structure.

Net income was $513 million, an increase of $205 million. Net income margin was 7%, an increase from 6.4%. Adjusted EBITDA was a record $769 million, an increase of $168 million year-over-year (technical difficulty) exceeded $3 billion for the first time, marking another company milestone. Adjusted EBITDA margin was 10.4%, a decrease from 12.4%, primarily driven by increased retail revenue per unit resulting from the traditional gross revenue treatment mentioned previously. GAAP operating income was $680 million or 88% of adjusted EBITDA, an increase of $169 million and a new company record.

As discussed in prior quarters, we continue to drive toward investment-grade quality credit ratios over time. In Q2, we again reduced our net debt to trailing 12-month adjusted EBITDA ratio to 1.0 times, our strongest financial position ever. Our results in Q1 and Q2 position us well for a strong Q3 and Q4. Looking forward, we expect the following as long as the environment remains stable. One, a sequential increase in retail units sold in Q3 compared to Q2 and two, adjusted EBITDA of $2.7 billion to $3.0 billion for the full year 2026, an increase from $2.24 billion last year.

In closing, we are excited about what our team accomplished in Q2. We remain focused on executing at a high level, delivering profitable growth and making steady progress toward our long-term goals of becoming the largest and most profitable auto retailer and buying and selling millions of cars.

Thanks for your attention. We'll now take questions.

(Operator Instructions)

Daniela Haigian, Morgan Stanley.

For what it's worth, I do think the webcast is out, so you might get some questions there.

First question is on what's the progress update on reconditioning operations specifically? That was something a lot of people were speaking about in the first half of the year. Can you disaggregate how much of the recent retail GPU dynamics is coming from gains there versus a supportive or favorable used car pricing environment?

Sure. So I think first of all, we're working on the webcast. The team is aware of that. So thanks for the heads up.

So I would say, yes, I think the team's done a great job. As we spoke last time, they worked really quickly in a couple months, got costs back into a great place. I think that was step one of the plan.

Step two of the plan was to return back to growth. Our inventory growth slowed a bit there as we were focused on costs. And I think around mid-Q2, the team started to get kind of inventory growth moving back closer in line with sales growth. So I think that's great.

And then step three, we plan now to shift to cars that are closer to our traditional mix in terms of age of cars and mileage, et cetera. We've been moving up a little bit in car price and to a little bit more near-age cars as we've gone through this over the last couple of months. So I think that's all going great and is right on track.

I think the retail strength I think had the most -- the simplest and probably most dramatic part of that is during the quarter the FTC put out guidance to all dealers that they were required to update their pricing to include doc fees and also any products that were required to be purchased with the car.

For us, obviously, that has no impact. We haven't had dealer fees and we don't have products that are required to be purchased with a car. But for many dealers, that was certainly a change. And as a result, over the subsequent several months, basically from April through June, many dealers were adjusting to that change and then that was changing the underlying data that we were seeing that powers our pricing algorithms.

We've been making those adjustments and kind of figuring out the implications of that. But as those changes were being made, we were following the market and that led to some of the outsized gains. I think there's a couple of other puts and takes, but for the most part, I think things are operating as expected there.

And then my second question is on the financing piece. How do you think about the outlook on financing margins as you have changes in benchmark rates? How much of the risk is hedged? And how do you think about holding margin versus holding rates steady for consumers?

I would put that back in the context of the previous answer a little bit. So I think the way that we try to think about this is we're trying to build a big machine and that machine delivers great experiences and it kicks off great unit economics, and I think this quarter gave a great example of the flexibility of that machine. So when we saw these price changes that were flowing through to higher retail GPUs, and then we also saw the increase in benchmark rates, we basically paused our response to the benchmark rates to make sure that we were understanding the sum of those two changes, just have fewer moving pieces, and I think that that's the kind of flexibility that we have.

But overall, I think total GPU, when you add the two up, came in right as we would have expected. And I think, again, just kind of demonstrates the overall flexibility of the model.

John Colantuoni, Jefferies.

Just wanted to come back to the pricing versus rates dynamic. Can you talk to your strategy of keeping consumer-facing interest rates stable despite higher benchmark rates rather than maintaining retail prices? I'm curious if you're seeing a higher ROI on investments into rates rather than investments into pricing. And I have a follow-up after that.

Sure. I would again go -- I think the way that we try to think about these things in general is make the machine as efficient as possible overall across all line items. And then we are separately trying to make as much progress as possible in making that machine better in the form of fundamental gains and foundational capabilities we talked about in the past.

I think other GPU is a great place to look at exactly those kind of fundamental gains and to see the types of choices that we're making. Year over year, I think other GPU, to some degree, as a result of the effects we just spoke about, was down just shy of $200.

During that same period, we passed back over 100 basis points of rate to our customers. I think if you do the math on passing back rate to customers, it's probably, a good estimate is maybe $4 to $5 per basis point that we passed back to our customers in rate. And so given all the rate that we passed back, all else costing, you probably would have expected something closer to a $500 reduction in other GPU, but what we actually saw was $200. That's because there's, give or take, $300 of fundamental gains in there.

And then we take those fundamental gains and we try to figure out what's the best thing to do for the business and our customers in the long run. And we've elected to pass those back over time as we think that that's the right thing to do on our path to $3 million and 13.5%.

And second, with labor hours per unit approaching all-time best levels since April, I'm curious if you're expecting to see an incremental tailwind to retail GPU from this dynamic in the third quarter, given you don't record the lower reconditioning costs until the cars are actually sold.

I think that conceptually holds. And then I think we are also at a place where our hours per unit is in a very good spot. And I think the realistic variability in those rates aren't huge dollars. So they're not dollars that we would really want you to kind of take in one direction or the other. I think there's more noise in just building a machine of this complexity at the pace that we're building it than there is kind of, I think, certainty that any given move there will flow through to the bottom line in any given period.

But I think there's clearly opportunity for us there over time and we will seek to get it as quickly as we possibly can. But I think given the way the business is performing and the economics that kicks off, the most important thing we can do is just make sure our costs are in a really good spot and then continue to build the machine.

So I think today in step two and step three of that inventory plan we discussed earlier, we're really focused on making sure we get inventory growth back up. Inventory has undergrown sales over the last several months, and that certainly creates a headwind to the overall business. The team's got a great plan, and we're confident they'll catch up and hopefully surpasses the not-too-distant future. But we've got to make sure we do that and execute. And that, I would say, is the primary objective today in that group.

Rajat Gupta, JPMorgan.

So Ernie, in the past, we have hinted that EBITDA per unit is an important metric that you care about and you know investors do as well. I mean, the used car industry will continue to have these pricing fluctuations like the two-year rate fluctuations.

We've had three quarters of lower EBITDA per unit in a row. I'm curious if you can give us a sense of when investors should expect that to return to growth? Do you think it can happen like later this year? Is it the 2027 story? Any color on that would be helpful and have a quick follow-up.

Sure. I'm going to again go back to this framework of I think it's all part of the big machine that we're trying to build and we're trying to make as much progress in both growth and EBITDA dollars per unit as we possibly can. I think when you look year over year, I think this quarter we were down about $300 in EBITDA dollars per unit. Quarter over quarter, I think we were up about $300.

If you break it down this quarter, I think there's some pretty clear year-over-year impact. Last year, we had a tariff benefit that was around $100. Gas prices moved up pretty dramatically throughout the quarter. That probably cost us something on the order of $75 across the entirety of the income statement. I think there were a couple of things that kind of flowed through that helped to explain that. Benchmark rates moving certainly didn't help us in the quarter.

So I think those things are moving around a little bit. But I think we're extremely happy that we were able to deliver 38% growth, still be there with a map that's that clean. And we did at a time when our inventory wasn't growing as fast as we wish it were. I spoke in my prepared remarks about those graphs that kind of show the extremely strong relationship between inventory growth and sales growth in all these different regions.

When you kind of extrapolate that to the company as a whole, that obviously has a large impact as well. And we clearly undergrew sales during the quarter. As I said, the team's got that back on track and we're starting to catch up, but we have not yet caught up. That put the headwind on the business that has to show up some way, either it's going to show up in lower sales or lower profitability overall, but that's just kind of, again, part of building that machine and balancing it.

So I think the team's growing the machine, scaling it, adding fundamental gains we just discussed in other GPU. We're on a great path, and I think we've got to march and execute. I think the hardest stuff that we have to do is make sure that we're executing across every different operational part of the business. And if we do that, the demand is clearly there as shows up in those graphs.

Just a quick follow-up. So I think 2025 was a pretty clean year in terms of cadence of the business. In the second-half of '25, you actually grew EBITDA versus the first half, despite a pretty challenging fourth quarter. The guidance would imply a step down this time despite the fact that you're actually now catching up to production better in the second quarter, more better run rate on production in the second-half versus the first half.

So just curious like what's driving that conservatism or is there anything that we're missing in terms of the dynamics between first-half and second-half versus the last year when it looks like things are actually getting better from an execution standpoint?

Yeah, I think we got to stick with guidance. I think once we start giving guidance on guidance, I think it gets complicated. But I think -- listen, I think we said this in the opening of the shareholder letter and also in my prepared remarks, the most important thing is execution. And I think it is very likely clear, again, I'm going to call back to those graphs. When you look at those graphs, you really think about the implications of those graphs.

It's pretty clear if we build the machine and we deliver great experiences, the demand is available. If the demand is available, it will show up in some combination of growth and improving unit economics. That's just -- the demand has to express through that.

So I think the question looking forward is generally about our ability to execute, and I think the team has done an incredible job executing. But I also think the execution is always uncertain as we look forward several months. And so we're always going to take that into account as we're looking forward. But we're confident we're executing really well. The question is how well do we build out the machine because the machine generates the demand and creates the unit economics.

Ron Josey, Citi.

Ernie, I wanted to go back to the execute on execute and specifically understand a little bit more about Roll Call and LeaderHub and wondering, can you give us some insights on whether that's been fully rolled out across the IRCs and is that what's needed for inventory to get to that level that the team needs to drive continued growth? That was question one.

And then with all the comments on AI and with Sebastian being used more and more, are there any insights on conversion rates given just greater uses of Sebastian?

Okay. So on the inventory plan, no, our new tools are not fully rolled out everywhere. And so I think that's certainly opportunity. I think the team has rolled out process improvements everywhere, even where the technology is not yet fully rolled out. And I think we're seeing very strong results. So you're seeing that in our HPU costs and in the fact that we started to grow inventory again in the middle of the quarter. So I think there's good stuff in front of us. And I think it's a function of how well we execute.

And then I think, yeah, the progress that we're seeing across the entire business enabled by AI, whether it's just every product in the business being able to move more quickly or if it's customer experiences. Getting better and simpler, I think that's exceedingly clear. I think that may take the form of Sebastian, so it may happen in chat, or it may take the form of different features that we've built throughout the website that either pull customers into Sebastian or provide information that Sebastian would have otherwise provided.

I think a reasonable way to think about that is just to think about what is the customer care cost over the last several years and what's happening there? I think if the website is infinitely intelligent and can answer every customer question on its own through whatever tool you put in front of them, then there would not be calls into customer care and our customer care expenses would be zero.

If we just look at kind of what's happened over the last several years, three years ago, customer care costs went down 40% year-over-year. Two years ago, it went down an additional 30% year-over-year. One year ago, it went down 20% year over year. This year, we went down an additional 10% year-over-year.

So I think the sum of the effects of those compounding gains is clearly showing up. And I think we've got a lot of great ideas and a lot of great work still in front of us that we need to make sure we execute on and unlock the fundamental gains that come with it.

And just a quick follow-up. You said not fully rolled out for Roll Call and LeaderHub. Any insights on how close we are or where are we on penetration there or plan to make it fully rolled out?

We'll be rolling it out over the coming quarters.

Brian Nagel, Oppenheimer.

So just the question I want to ask, and maybe it's kind of basic, but this was with regard to the guidance that was laid out for the balance of '26. One, I'd say you now are you providing at least a range of EBITDA guidance. That's new.

So the question I ask is, why issue the guidance now? And then probably more importantly, as you think about that guidance, the parameters around that guidance or maybe the thought process behind that guidance, are you signaling any type of change in the business from what we've seen here in the first half of the year, either from the sales or from, more importantly, a profit standpoint.

Let me take that one. So I think as a starting point, we're very excited about Q2 results, as Ernie pointed out, a record quarter across many dimensions. I think as we think about the guidance, it's actually the same style of guidance that we've applied the last three years. So typically in the first half of the year, this is speaking back to, I think, '24, '25 time frame.

We'll give some sequential color just to understand -- allow everybody to understand the seasonality and where we think the business is heading. And then when we reach mid-year here, we actually give more specific guidance on adjusted EBITDA.

The goal there is just to let people know some guardrails around what we're expecting in the second-half and that really is our philosophy and again, basically the identical philosophy that we've applied the last couple of years. I will say that overall, I think we're feeling very good about the trajectory of the business. I think, like I said, this is a very strong quarter, driving 38% retail unit growth. That is against an industry backdrop where the industry is down. Call it on the order of four points year-over-year. So I think the 38% growth is a notch more impressive in light of that industry backdrop.

The other thing that I just get very excited about this quarter is the fact that in two large regions, representing approximately a 1/3 of the country, we grew 54%, and we're growing at 54% in those very large regions, despite the fact that at the company level, we're almost ticking over $30 billion annual revenue run rate. We've ticked over in Q2 over $3 billion adjusted EBITDA run rate, more than $2 billion run rate of net income in the second quarter, which is a good quarter. But that just says we're at real scale here.

And the fact that we're at this scale and level of profitability and we've got major regions that are growing at 54%, to me just got me very fired up this quarter. I think why is that happening? It is building the machine. It's basically all the sources of positive feedback. So we grew selection in that region that did allow customers to choose cars that were closer to them. In addition, as we had more cars, it made sense to market more in those regions. And as we marketed more, we drew more customers to the site who then converted on the cars that we had available.

And it just served as a really good example of how the whole model works and why it's so valuable for us to just continue to march down our execution path, continue to build this machine that involves ramping production, building last mile and multi-car logistics capacity to connect that production to consumers, continuing to drive the customer experiences.

And I think one thing Ernie may have mentioned, but we had a great quarter on customer experience as well. We've seen that marching up as we've been growing at these levels. And so when we put all that together, it was a really great quarter. And it was a quarter where I think we just have data points that give us very high conviction about the growth trajectory that we're on and the long-term sustainability of that growth trajectory. So those would be some of my thoughts.

Sharon Zackfia, William Blair.

I had a GPU question. Given the degradation we've seen kind of over the past year, which I think has run between [$250] a quarter, do you expect that to narrow as we get into the third quarter? It seems like you might have still some other GPU compression, but perhaps the retail side is now getting better. I just would love to get some color on how you're thinking the third quarter might shape up there.

Sure. I think at a high level, we're going to stick with our guidance on this. I think you can look at our results. There's a bit of seasonality in the different GPU line items that is kind of reasonable to assume could be somewhat similar in the future as to what it was in the past. But I think we're going to stick with our guidance and try to stay away from giving too much detailed line item by line item color.

Can I ask a follow-up? The West and the Southeast are lagging in production increases, as you think about the ADESA conversions, if I remember correctly, part of the real estate advantage there was that there were quite a few ADESAs that were in kind of very favorable locations in the West, particularly in California. What does the slate look like for conversions geographically kind of over the next 18 months?

Yeah, I think we've got opportunities all over the place. And I think the team has a very clear kind of build out plan and it works basically two ways. One way is where is the optimal place for us to put inventory on the map given where we have opportunity. And then one way is, what are the inspection centers or regions where we've got the management teams that are executing at the highest level? And I think that we are constantly trying to balance those two things out.

So I think, for example, the two regions where we grew inventory the most, the Midwest and the Northeast. The Northeast is definitely pretty heavily impacted by the ADESA footprint that we were able to open up. The Midwest is also impacted, but that was a place we already had some strength.

I think looking forward, we plan to balance those two considerations, but all of it, we plan to open up. And then in addition, we also are just beginning work on a fresh build site as well. So the way the team determines where fresh builds will go is they look beyond $3 million and they say, where are the gaps in the map that would be optimal for us to fill in. And then those are the sites that we look at there.

So I think we'll continue to kind of run that. I'd say the first way is basically conceptually. It's just like what is the best place on the map to grow inventory? And the second way is practically where are we executing the best, and I think we'll try to continually balance those two considerations. One thing I want to add to Mark's previous comments, because when Mark gets fired up, I get fired up, and I kind of think everyone in the whole company gets fired up, so I'm going to go back to those charts for a second.

Not only is kind of the inventory growth driving sales, it really truly does drive the entire machine. In those same regions where we have more production and then we have more sales, we have more cars that we buy from customers. We have marketing that is more efficient than the rest of the country. We have profitability that looks very similar to the rest of the country. There's not variability in profitability across those markets.

So anyway, I do want to keep pushing on that because I think we try to make this point that execution is the most important, and I think the evidence that the variability in growth rates around the country provided us is very helpful. I think the evidence has always been there across time, but to see it laid out so clearly in the same moment in time and to see it across the entire business playing out that clearly, we think is really exciting. And so that makes it, again, an execution story, and we just got to make sure we execute.

Andrew Boone, Citizens.

Ernie, I wanted to go back to the last comment that you just made about production and more inventory coming online and what that means. You guys made a decision earlier this year to reinvest 2 points back into financing costs. And so I guess just from a higher level, like why is that the right decision versus investing into labor? Or some other choke point that you guys have to drive more production? Like why did you guys make that and then how do we think about what you're saying today and where you guys allocate investments and cost going forward?

Yeah, perfect. Yeah, I think that's a great question. So let me answer like the kind of labor versus anything else first. I think the reality is like the financial returns on growing the machine are extreme. It's not a financial question, like if we did write a check and have the machine be bigger, it would be very straightforward that we would want to do that at extreme speed.

It's much more about the execution of building up the facilities, hiring people, training people, making sure people execute well, that people care. That is the thing that I think is much harder and it's the thing that unlocks much larger returns and more enduring returns.

As a general matter, we are working to go as fast as we reasonably can there. I think occasionally you will see bumps in the road. I think kind of Q4 into early Q1 in recon we had some bumps in the road, and I think kind of idealized execution would never have a bump, but I think real world practical execution, I think the best you can hope for is that when you hit a bump you recover quickly, and I think that team is recovering very quickly. So those execution type investments we want to make as quickly as we possibly can and it's just about making sure that we execute. I think that's the big question there.

On financial kind of investments. I think that's a very good question that is, I think, interesting and points to at least an apparent contradiction a bit in some things that we're saying. So we've invested a bunch back in the customer offering, right? We've given fundamental gains back to customers. We've done that at the same time that we are constrained, right? We're showing you these graphs. We're constrained. We're telling you that inventory grew less than we wish. Why would you kind of give money back to customers in the face of those constraints?

And the answer is that we expect to relieve those constraints and we're trying to make sure that we build the business in the best way that we can over the long-term. I think anytime we do customer-facing optimization, you can kind of do it two ways. You can view what are the starting economics that we've got and what are elasticities and what are the smart things that we should do to maximize the value to customers and to ourselves if we were not constrained at all, if we could press button get car and the whole system just kind of worked. And that's one way to kind of do the math.

Another way you can do the math is you can say, okay, we're constrained. And as a result, all fundamental gains should just flow straight through to us. I think in '22 and '23, when we were making sure that we put ourselves in a spot where we were completely financially independent, it was very clear what choice we should make.

I think where we are today, where we're extraordinarily financially independent, where we're generating enormous cash flow that is accruing to our balance sheet quarter after quarter and we're compounding and growing. I think we're in a position that we're excited to be in where we feel like we can make longer-term choices there and do what's right for the customers.

So it is likely the case that giving back to customers in the form of rates over the last year is not something that we've been fully paid back for in growth. The fact that our inventory is tight sort of makes it clear that we didn't get fully paid back for it in growth because if inventory gets tight, your conversion rates go down. So we probably didn't get fully paid for it. But it puts pressure on the machine, it'll cause us to build and then we got to make sure that we execute and we're in a great spot anyway. So we're going to try to do what's right for us and our customers over the long run.

And then just as my follow-up question, I wanted to ask about the cash generation. You guys are now at 1 times kind of leverage. What should we be thinking about or considering before you guys start to think about capital returns or some other form of return of cash?

Sure. Well, I think the most important thing that I think of when I think about what to do with our cash, it really comes down to investing in the business and generating returns and building the machine for the long-term, just to give an example of that. So, our trailing 12 months operating income was just over $2.2 billion. We generated that $2.2 billion of operating income on only about $7.5 billion of net operating assets. And so, we're talking about on the order of 30% operating return on net operating assets, which is a pretty great business and a business that you really want to invest in.

And so that's a little bit of a different angle on some of the things that we're excited about in the business, including our growth, including our customer experiences and including our industry-leading margins. But the way that we're now earning returns on the capital that we invest in building the machine, I think is also very exciting. And so first and foremost, where our head goes on, hey, what do you want to do with the cash that you're generating? It's invest in this machine that we're building that delivers great customer experiences and has shown the capability to grow very quickly in a sustained way over a long period of time. So those are my major thoughts on that.

Jeff Lick, Stephens.

I think I'm going to ask Sharon's question maybe in a different way. But last quarter, you talked about kind of the $200 to $300 of GPU headwinds. As you look at how things have unfolded, it does appear that supply has maybe come back online to be a little faster than demand. Do you see that that $200 to $300 maybe hasn't really played out and it's a little better environment than at this point?

I mean, I would go back to what we said before. I think at the highest level, we want to kind of stick with overall guidance and not give too much detailed color on every line item. I think there's some clear year-over-year things that we're dealing with. I think we spoke about some of those, whatever, gas prices, interest rates, tariff, et cetera.

And then I think that the one that probably matters the most today to the machine that is inside our control and isn't just kind of one of those macro speed bumps that you absorb is that our inventory in the quarter was less than we wish. And when your inventory is less than you wish, that's going to show up as lower conversion. And lower conversion means either lower sales or lower economics, all else constant. Those two things are very directly tradable.

And so if we build the machine to generate kind of the maximum demand and maximum conversion and we get to decide how to express it. But I think we've been dealing with those headwinds a little bit over the last quarter or so and I think that we also had less inventory than we would like and teams got a great plan, we're working quickly to resolve that.

And then one follow-up, your inventory, your average list price, as we showed, and I guess it's not your number, was above $28,000. It looks like about a 4% increase year-over-year, which last year was a big increase as well. I'm just curious, it would appear that you're on the margin getting a higher price point.

And if you look at your APR, you're offering, maybe you're getting a -- did you go up the demand curve a slightly better customer or a customer that has options? I'm just curious, are you learning anything new as you try to cater to a customer maybe that has a bit more options?

Yeah. So I think that's another very interesting and we would like to think exciting, like data point within the implications. So for sure our ASP is up. So going back to the inventory plan, step one, drive down reconditioning costs. Step two, turn back to growth, but do it on cars that all else constant required less reconditioning so we could turn that on faster. That meant that we went toward more expensive cars and newer cars.

Step three, continue to grow and move back to a more traditional ASP. And all that, by the way, is happening in the context of market prices are going up a little bit anyway, which makes that situation a little bit fuzzier, but that's the plan. I would say we are heading into step three today.

Now, as a result of leaning into more expensive inventory, there's been some interesting findings though. So for example, if we look at customers with over $100,000 of income, our year-over-year growth in that segment was a little more than 60% year-over-year.

So that's showing you that when the cars are there for that customer segment, the growth is there. And so I think again, all of the signs point to us. They just say if we can build the cars that our customers want, whether we think about that in aggregate or if we think about that in segments, if we can build the cars that they want and we can deliver great experience to them through our machine, the demand is there and the economics are there. And this is very much an execution story where we just have to make sure that we keep building this machine.

And I think that it's the best thing and the worst thing about Carvana is that we've got a big, complicated machine. It means that it's hard. It means sometimes we're going to hit a bump. It means that there's going to be $100 that bounce around here or there.

And people are going to look for clear explanations. And a lot of times the explanation is going to be something a little more complicated. It's going to be a function of us building this really big complicated machine where we're balancing logistics routes and we're balancing building cars in different parts of the country and we're balancing last mile delivery and customer care.

And so I think that's the reality of what we've got to do and build. I think that we're extremely proud of the consistency of the results that we've been able to demonstrate for years in a row here. We're going to continue to keep working hard to do that. But in our minds, this is just an execution question. And we just got to make sure that we execute and build this big machine.

And then the good news is when we build that big machine, there's a big moat behind us that nobody else wants to run across. And so I think, like I said, there's good things and there's bad things. We think on net, that it's good and we think we're up to the task.

Tom Babcock, Barclays.

I guess just first of all, you talked about investing more in advertising over the balance of this year. Are there other areas you're also planning to invest in from an SG&A standpoint?

I think we pointed to that one because that's our expectation in the very near term. And again, I would point back to that goes back basically at the simplest level to this inventory point. Inventory is a little lighter relative to where we wish it were today. All of constant that's impacting conversion a bit. We want to make sure we keep building the machine at a very consistent pace. We expect to get inventory back in line relatively quickly. A good way to fill in that gap is marketing dollars. So I think that's basically the near-term plan there.

And then you were talking just recently about the growth with incomes above $100,000. Just kind of curious, are there income groups that are growing more slowly at this juncture? Which ones are more challenged, really, I guess is what I'm getting at.

Yes. It's -- I mean, in order to have 60 on a big population, you have to have less than your average on the remaining population. And so I would say the groups that are more challenged are basically the cars that we're not producing, which I think is great. I think what's happening is as we lean into more expensive cars and as we handed right back to customers, it was more focused in the prime area. I think that led to more demand there, and that demand caused our machine to build more of those cars and crowded out some of the less expensive cars and crowded out some of the sales that we would have seen in those other areas.

So I think our view is we are seeing less express demand in the kind of like lower income bands in terms of the growth in sales, but likely not lower actual demand. If the cars were there, we would expect the sales to be there as well.

And then I was wondering if you might be able to give some update in terms of how things are going in July so far? And by this, I mean, just generally from a GPU standpoint because obviously, I imagine there's some reconditioning cost improvement as you're starting to roll out those systems across your other sites on top of that, I don't know how we should maybe think about fuel costs, maybe fuel costs are flat, maybe higher. I'm not 100% sure there. Are there things you could maybe help us bridge kind of June to July with a little bit?

So on that one, I would just point to our outlook. Our outlook for the rest of the year gives us a good sense of what we're thinking. And I wouldn't go into more detail than that on a specific month.

Marvin Fong, BTIG.

Most have been answered here. But I did want to go back to just the mixing into slightly into newer cars. Have you done that in response to sort of reducing the pressure on your reconditioning and what I'm getting at is, is this a structural change we should expect, or might you kind of rebalance a little bit once you get the recon under control and as well as being able to source that lower price point inventory that you just sort of mentioned. And then should we think about kind of the newer car having any different GPU profile from an absolute dollar standpoint compared to maybe a 4- to 6-year-old bucket or (inaudible) in that.

Yes. So I would say definitely not structural. I think there's been two drivers of that shift. I think one is we have passed back rates to customers, and that has been disproportionately to prime customers, which, on average, kind of demand a more expensive car. So all else constant, that kind of shifts the way all the algorithms work toward purchasing more expensive cars.

And then I think as part of step two of the inventory plan, we also did lean into newer cars that would be able to be reconditioned more quickly to get us back to growth. So I think that some of those two things are what's causing that shift in the supply of cars that we're putting in front of customers.

We very much do not view that as structural. I think over time, we expect all of our metrics to move toward the average car buyer. We plan to play a very big role in this industry. And to do so, we want to make sure that we're offering the broadest selection we possibly can to customers.

But I think in moments like that, we're working to quickly get cost back in line and get operations tight. We will make adjustments, and I think that we're in the exciting position of having sufficient demand across every part of the customer spectrum that even as we make those choices, it doesn't really show up in the aggregate business results because the cars get absorbed by the different groups.

And if I could do one quick follow-up, I mean, the FTC dynamic that you mentioned, is that still ongoing benefit to you or do you feel like all dealers have pretty much adjusted their advertised pricing now?

We believe most dealers have adjusted their pricing. I think there are two components to that, one was the requirement of the inclusion of dealer fees and one was the requirement of the inclusion of different products that were required to be bought in order to get the car. I think that it looks to us like most of those have probably been passed through. Some of the latter may still be kind of like lagging in.

We certainly expect over time for that to be a positive for us. I think in the immediate moment, our algorithms needed to adapt to that new world because kind of dollars meant different things and they meant different things for different dealers at different points in time. And so that took a second for everything to adapt and for us to fully figure out.

But yes, certainly, for most dealers, let's say that there's -- their prices on their website just went up $500 or $600 and ours didn't move. That should be a tailwind in the grand scheme of things once all that settles out.

Joseph Spak, UBS.

Look, I know seasonality is difficult when you've been growing like you've been growing. But over the past four years, the back half profitability has always been stronger. And I hear you're talking about inventory availability and some investment. But I guess it's still just a little bit unclear to me like with the second half profitability sort of close to the first half. Is this more comp driven or more cost driven, or it's pretty balanced between the two?

I think we're going to stick with our guidance. I think, yes, we try to be consistent there and thoughts about what we put out there. And then I think we think the remainder of the year is a function of how well we execute. We think we've got a great plan, and I think we have an opportunity to have an awesome year. But as always, we're going to have to execute on that, I think, is the biggest question for how the results will come out.

And then just to follow-up on a question before I get -- I don't know if I understood the answer. So with the introduction of this EBITDA guidance, is that something you do plan on continuing to do more regularly or sort of at certain points in the year when you have better visibility or what's just the go-forward communication strategy there?

The -- to just put it in historical context, this type of outlook is exactly what we provided in Q3 of 2025 and Q3 of 2024. So we are just following the same playbook that we followed in Q2.

Okay. And then last one, just Ernie, I know you've been pretty reluctant to talk a lot about the new dealership strategy and so I won't press there. But just in terms -- maybe you could just sort of comment if it's at all paying any early dividends on that inventory ability challenge that you mentioned.

Yes, sir. I think it remains very early, and I think we still are going to wait until we have, I think, a lot more data to share a lot more with you all. But I will say that the early signs are very clear. The customer experiences are great. And I think that, that's exciting. I think -- we track our NPS closely in every possible dimension, whether it's different customer attributes, different transaction attributes, the way the customer went through the flow or different car attributes.

And it's pretty clear that new car NPS is very high. And in a discontinuous sort of way. So I think that's great. The most important thing, whenever you're testing anything is make sure you're delivering an experience that customers love because that's the fuel that ultimately powers everything. So I think that's exciting.

And then I think it's still very early days but obviously, the operational implications of new cars are very different than used cars. In new cars you are outsourcing manufacturing to somebody else, so it's a simpler operational problem for us.

Right. But I guess the question -- sorry to be more direct, like is having those new dealerships helping with your used inventory at all there.

I think it's early for any of those types of comments.

Michael McGovern, Bank of America.

Given the big gap in production growth across regions, how are the challenges different between investing in a higher production growth region versus a low-growth region where you might have unit growth outpacing production, which might create its own set of challenges or limit your unit sales growth there if you have selection issues or anything else?

Yes. So I think I think general matter, we want to grow as quickly as we can everywhere. And then I think the sort of good news is sort of a self metering problem. If we have less production in a region, and we have demand that kind of outstrips our ability to produce cars then our kind of local inventory shrinks. And so that all else constant, would reduce kind of demand in that region. And then the opposite is also true.

So I think those problems do resolve to some degree on their own. And it's more about just how quickly can we open production in these different regions and how well can we execute.

Got it. And then I have a follow-up quickly on the new car discussion. NPS is very high. Are there any key differences within the NPS for these new car customers versus used? And can you discuss any sort of initial learnings on what the GPU expectation would look like for new versus used?

I think the NPS is clearly high. I think there's nothing too. Concrete to call out that's different. The experience is very similar. I don't think there's anything too concrete to call out. And then I think it's early for a ton of detail. New cars are profitable for us today, but beyond that, there's not a ton of detail that we're ready to provide.

Chris Pierce, Needham.

Just one on the inventory you're going to grow here. How do you, I guess with the machine, how do you make sure that you don't have the same problems you had last year and the last year in the IRC? Like what safeguard can you put in place to make sure that you're growing inventory that gets up on the website, at a normal pace?

Well, first of all, thank you for adopting the word machine. That's the most important thing. And then I think there -- these are operational problems and I think they exist in every part of the group. I think if you're in many of our conversations with these different groups, there's always a site somewhere that we're focused on, whether it's in recon or logistics or customer care or anything. There's always a number of groups inside the company that we are focused on making sure we make progress where we're not doing as well as we would like to do, we're not moving as quickly as we would like to move.

I think most of the time those things come and go and there's never public awareness of it. I think in the case of reconditioning costs in Q4, I think that rose to the level where it was apparent and so we discussed it. But I think that's the reality of execution in a complicated machine. I think there will always be areas where we're working on different problems and I think the more problems that we solve and put behind us, the more resilient we get and the better we get at resolving whatever the next problem is, whether that's hiring or training or building or permitting or whatever the problem ends up being, but there are constantly little issues that pop up and our team's done a very good job of taking those problems on as they show up and getting them behind us and having it not go up at all in the results. And I think you see that in the consistency of the results over a very long period of time. So we hope to continue to execute at that same level, but it's always work.

And then just one more on the machine. If you kind of said I don't want to I'm going to try to paraphrase, hey, we lowered rates to 100 bps. GPU should be down $400 to $500, but it was only down $200, we had efficiency gains. What are some of those efficiency gains that you're still able to drive to that magnitude of $200, $300 in other GPU? Is it more demand for these loans from other parties or is it something internal you're doing? Or if I got that math totally wrong, please correct me as well.

So yes, I think you've got it right. I think it's all the things that we've talked about, your fundamental gains in the past. So it can take the form of lower rates. It can take the form of higher finance attach. It can take the form of longer duration because prepayment rates are different. It can take the form of better credit models that help to monetize those things. It can take the form of improvements in our underlying credit pricing that allow us to better monetize kind of variation in loan value across customers.

So I think there are many things that go into that. But yes, I mean, if you do the math simply, we should be down several hundred dollars more than we are and we're not. And that gap is fundamental gains. And I think that in finance, those are some areas where we're discussing those right now, but those exist throughout the business and the opportunities also exist throughout the business and it's our job to make sure we go pick those up as quickly as we can.

That's all the time we have for questions for today. I would now like to take this time to turn the call back over to CEO Ernie Garcia for closing remarks.

Awesome. Well, thank you for joining the call. Really appreciate it. Team Carvana, another awesome quarter. I'm glad we got Mark fired up there for a second. Sometimes the crowd cheers and sometimes they don't. But we're going to bend them to our will and make them cheer eventually. So let's just keep doing us. We're going to be all right. Thanks, everyone. Appreciate it.

This concludes today's conference call. You may now disconnect.