Carvana Co. (CVNA) Earnings

Management highlights

### Core Business Model Validation & Growth Trajectory - Management confirms a strong positive correlation between regional inventory growth and sales growth: regions with the highest capacity additions (Midwest, Northeast) saw 57% inventory growth and 54% sales growth, while low-capacity growth regions (West, Southeast) saw 17% inventory growth and 30% sales growth. This validates Carvana's flywheel model: larger inventory improves conversion, which increases marketing efficiency, reduces delivery times/shipping costs, and drives further inventory growth, creating a sustainable competitive moat. - Carvana sold nearly 200,000 vehicles in Q2, almost double volume from two years prior, giving Carvana just 2% share of the US used car market and 1.5% of the overall auto retail market, leaving significant long-term growth upside. - Carvana's organic revenue growth ranks in the top 5% of all S&P 500 companies, making it one of the fastest-growing large profitable companies across all US industries, with 10 consecutive quarters of industry-leading retail unit growth and adjusted EBITDA margin. ### Long-Term Strategic Goals - Carvana reaffirms its midterm goal to reach 3 million annual vehicle sales with a 13.5% adjusted EBITDA margin by 2030-2035. After five quarters of progress, the company now needs to scale to less than 4x its current size to hit this target, down from 6x when the goal was announced in Q1 2025. ### Operational Progress - Reconditioning costs have been returned to a strong target range after earlier operational volatility, with labor hours per unit near all-time best levels. New operational and technology tools (Roll Call, Leader Hub) are partially rolled out, with full rollout planned over coming quarters to support faster inventory growth. - AI-powered tools (including the Sebastian customer chat tool) have driven consistent compounding improvements in customer care costs: a 40% year-over-year reduction three years ago, 30% two years ago, 20% one year ago, and 10% this year, with further gains expected as AI capabilities expand. - The shift to higher average selling prices (ASPs) and newer vehicles is a temporary tactical step to speed inventory growth after earlier reconditioning challenges, not a structural change: newer cars require less reconditioning, allowing faster inventory ramp, and the mix will rebalance to a more historical ASP once inventory targets are met. - Early testing of new car dealership operations shows very high customer net promoter scores (NPS), with a simpler operational model than used vehicles because manufacturing is handled by OEMs.

Guidance

- Management expects a sequential increase in retail units sold in Q3 2026 compared to Q2 2026. - Full year 2026 adjusted EBITDA guidance is set at $2.7 billion to $3.0 billion, an increase from $2.24 billion in 2025. This mid-year full-year guidance follows the same communication framework Carvana has used the past three years, with no change to long-standing communication policy. - Q3 2026 revenue growth is expected to align more closely with retail unit growth, as the year-over-year impact of a one-time gross revenue accounting change for partner-acquired vehicles will no longer affect comparisons starting in Q3. - Advertising spending is expected to increase in Q3 2026 to match the expected rebound in inventory levels.

Segment performance

Carvana does not break out separate product segments in this earnings call, but reports aggregate core performance: total retail units sold were 197,325, up 38% year-over-year (a new company record). Total revenue was $7.376 billion, up 52% year-over-year. Non-GAAP retail gross profit per unit (GPU) decreased by $105 year-over-year, driven by lapping 2025 tariff-related benefits, partially offset by tire retail appreciation and offsetting higher inbound fuel costs. Non-GAAP wholesale GPU decreased by $158, as retail unit growth outpaced wholesale gross profit growth. Non-GAAP other GPU decreased by $192, driven by customer interest rate cuts and higher benchmark rates, partially offset by lower funding costs, higher average financed amounts, and higher finance attach rates. Non-GAAP SG&A per retail unit fell $157 year-over-year, with a $272 overhead reduction offset by an $88 increase in operational expenses tied to higher fuel costs, and a $27 per unit increase in advertising spending. GAAP net income was $513 million, up $205 million year-over-year, for a 7% net margin. Adjusted EBITDA hit a record $769 million, up $168 million year-over-year, for a 10.4% adjusted EBITDA margin, and reached a $3 billion annual run rate for the first time.

Risks & headwinds

- Inventory growth has lagged sales growth over recent months, creating a headwind to conversion and profitability, as lower inventory limits customer selection and reduces conversion rates. Management notes the team has a plan to catch up on inventory growth, but execution is required to resolve this headwind. - The auto retail industry faces macro headwinds including higher fuel prices, higher benchmark interest rates, and used car pricing volatility, which create short-term fluctuations in gross profit per unit and overall profitability. - Scaling Carvana's large, complex operational machine creates ongoing execution risk: operational bumps (such as the earlier 2025-2026 reconditioning cost volatility) can arise during rapid growth, even as the team has demonstrated an ability to resolve issues quickly. - All forward-looking results are subject to general market and macroeconomic stability, as noted in the opening forward-looking statement disclaimer.

Analyst Q&A

• Q: How much of recent retail GPU changes come from reconditioning improvements versus favorable used car pricing, following FTC dealer pricing guidance changes? /

  A: Reconditioning costs were quickly returned to target levels earlier this year, completing the first step of the inventory plan. The FTC's new requirement that dealers include all mandatory fees and add-ons in advertised prices created market-wide pricing shifts that impacted Carvana's pricing algorithm data, as competing dealers adjusted their pricing over Q2. Carvana was unaffected by the rule itself because it never charged hidden dealer fees or required add-on purchases. Most of the recent GPU dynamics came from these market pricing adjustments, and operations are now back to expected performance levels. This should ultimately become a tailwind for Carvana as competing dealer prices rise visibly.

• Q: With three straight quarters of lower year-over-year EBITDA per unit, when can investors expect EBITDA per unit to return to growth, and what explains the guidance range conservatism for 2026? /

  A: The $300 year-over-year decline in EBITDA per unit this quarter is explained by identifiable temporary factors: a $100 lapped tariff benefit from 2025, ~$75 in incremental fuel costs, and headwinds from higher benchmark rates. Quarter-over-quarter, EBITDA per unit was actually up $300. The primary ongoing headwind is that inventory has lagged sales growth, which creates unavoidable pressure on either sales volumes or unit economics. Once inventory growth catches up, this headwind will ease. Management maintains guidance ranges to account for execution uncertainty inherent in scaling a large complex business, but remains confident in the long-term growth and profitability trajectory.

• Q: Why did Carvana choose to pass fundamental gains to customers via lower financing rates instead of investing those funds into faster production/inventory growth? /

  A: The primary constraint on faster growth is not capital, but execution: scaling facilities, hiring, and training teams takes time, even with available capital. Carvana is now in a strong financial position, generating consistent high cash flow after deleveraging, so it can afford to make long-term focused choices. Lower rates improve customer value and build long-term loyalty, even if the full growth benefit is not felt immediately while inventory is constrained. The choice to pass gains to customers now helps build demand for when inventory capacity increases, which aligns with Carvana's long-term goal of building the largest most profitable auto retail platform.

• Q: What is the capital allocation plan for excess cash flow, especially after reaching targeted leverage levels? Will Carvana start returning capital to shareholders soon? /

  A: Carvana currently generates ~30% operating returns on net operating assets, which is an extremely attractive return for continued reinvestment in growing the core business. The priority remains reinvesting all excess cash into scaling the operational machine to hit the 3 million unit annual sales target, given the very large visible market opportunity and high returns on incremental investment. No near-term plans for capital returns were announced.