Q2 2024 Earnings Summary
- Operational Efficiency and Scalability: Carvana grew retail units sold by 33% while keeping SG&A expenses flat, leading to a reduction of $1,160 in SG&A expense per retail unit sold. This demonstrates significant operational leverage, indicating that Carvana can increase sales without proportionally increasing expenses.
- Record Profitability and Margin Expansion: Carvana achieved a record high non-GAAP total Gross Profit per Unit (GPU) of $7,344 and an adjusted EBITDA margin of 10.4%, approaching the midpoint of their long-term financial model EBITDA margin range of 8% to 13.5%. This reflects strong profitability improvements with potential for further gains as they continue to optimize operations.
- Significant Growth Potential in a Large Market: With only a 1% market share in a $1 trillion industry, Carvana has substantial room for growth. Their focus on improving customer experience and increasing production capacity positions them well to capture additional market share.
- Carvana's guidance implies a significant decline in adjusted EBITDA in the second half compared to Q2, suggesting that the exceptional profitability achieved in Q2 may not be sustainable.
- The strong adjusted EBITDA in Q2 was partially boosted by a $12 million favorable impact from loan sale timing effects, which may not recur in future quarters, potentially leading to lower profitability ahead.
- Management indicated operational constraints, such as inventory limitations and production capacity challenges, which may hinder Carvana's ability to sustain rapid unit sales growth.
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SG&A Outlook
Q: How sustainable is your current SG&A expense structure?
A: Ernest Garcia explained that they have held overhead expenses flat for the last 5-6 quarters and plan to continue doing so. Marketing expenses have decreased from over $1,000 to $542 per unit this quarter. Operations expenses are down to $1,696 per unit, several hundred dollars less than pre-pandemic levels. They believe there are still significant gains to be made in SG&A efficiency. -
Retail GPU Ceiling
Q: What is the upper bound for retail gross profit per unit (GPU)?
A: Ernest Garcia believes there are significant fundamental gains to be had in retail GPU. He noted that industry-wide retail GPUs have increased by about $1,000 due to inflation and higher dealer costs. Carvana aims to push retail GPU higher through efficiencies in buying, reconditioning, and delivering cars. -
Growth Capacity and Constraints
Q: Are there any limitations to increasing sales volumes further?
A: Ernest Garcia mentioned that they are scaling up production and operations to meet demand. They sold more cars than anticipated in Q1 and Q2 and are continuing to lean in that direction. All operating groups are scaling together, and they plan to continue this transition period to growth. -
Seasonality Impact on Future Results
Q: How will seasonality affect upcoming quarters?
A: Mark Jenkins stated that they typically see seasonality most prominently in the fourth quarter and early first quarter, with softer used car demand and higher depreciation rates. Ernest Garcia acknowledged that seasonality is an industry-wide phenomenon and they are considering it in their outlook. -
Passing Gains to Customers
Q: Will you pass efficiency gains back to customers?
A: Ernest Garcia anticipates that a significant portion of future fundamental gains will be passed back to customers. This could take the form of sharper pricing, more choice, or faster service. They will invest these gains intelligently to drive growth. -
Credit Tightening and Impact on Customers
Q: How is credit tightening affecting your customers?
A: Ernest Garcia noted that credit is moving back toward pre-pandemic norms after being very good in 2020-2021 and worse in 2022-2023. They and other lenders tightened credit in Q4 2023, and performance is in line with expectations. They don't foresee material changes but are monitoring the situation. -
Competitive Dynamics
Q: How are competitors reacting to your recent results?
A: Ernest Garcia believes that high-quality results will attract attention, but they focus on serving customers rather than competitors. They recognize the challenges competitors face in replicating Carvana's model due to its complexity and the effort required. They remain committed to staying ahead and not becoming complacent. -
Other GPU Potential
Q: What is the potential for growth in other GPU categories?
A: Mark Jenkins highlighted opportunities to make gains in other GPU through improved scoring and pricing algorithms, streamlining the financing process, efficient funding sources, and higher attach rates on ancillary products. They have had a strong quarter and first half in other GPU. -
ADESA Reconditioning Centers Expansion
Q: What are your plans for expanding reconditioning capacity?
A: Mark Jenkins explained they have flexibility to increase production by adding lines in existing facilities, adding shifts, and integrating Carvana reconditioning into ADESA locations. They are excited about integrating more ADESA sites, starting with a megasite in Kansas City. -
Unmet Demand and Future Growth
Q: How much demand are you leaving unmet due to inventory constraints?
A: Ernest Garcia acknowledged that measuring latent demand is complicated but they are very small compared to their goals. They are in a transition period balancing growth with efficiency gains. Their focus is on selling millions of cars and they are not yet investing heavily in marketing.