Earnings Call Transcript - CVNA Q3 2021

Operator, Operator

Good day, and welcome to the Carvana Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. 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 Mike Levin, Vice President of Investor Relations. Please go ahead.

Mike Levin, Vice President of Investor Relations

Thank you, Matt. Good afternoon ladies and gentlemen and thank you for joining us on Carvana's third quarter 2021 earnings conference call. Please note this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.carvana.com. The third quarter shareholder letter is also posted on the IR website. 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 the following 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 the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K and Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Unless otherwise noted on today's call, all comparisons are on a year-over-year basis. Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our Investor Relations website. And now with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Ernie Garcia, CEO

Thanks Mike and thanks everyone for joining the call. The third quarter was another great quarter for Carvana as we continue to march toward becoming the largest and most profitable automotive retailer. We sold over 110,000 cars to customers; recorded nearly $3.5 billion of revenue; grew total gross profit by 100%; and had our second consecutive quarter of positive EBITDA. Our team delivered these strong numbers despite entering the quarter with significant operational constraints, facing the Delta COVID wave that peaked late in the quarter, and making the choice to meet both retail and purchasing volume, which we implemented mid-quarter to ease pressure on the system, while we operationally catch up to the demand we're seeing. Since the onset of the pandemic, we found ourselves constrained in various parts of our operational chain. While those constraints held us back relative to where we might have otherwise been, our team has done an exceptional job and has made tremendous progress throughout. In fact, in the third quarter, we bought and sold over three times as many cars as we did in the third quarter of 2019 prior to the pandemic, and roughly eight times as many as we did in the third quarter of 2018. This has all been possible because we've continued to focus on the long-term, investing in the people, technology, and infrastructure that are necessary to buy and sell millions of cars per year, while delivering the exceptional customer experiences we've become known for. Given our opportunity, we believe this is clearly the right choice. To everyone across Carvana who has worked so hard to make our continual progress possible, thank you. We've also recently entered into two exciting partnerships with Root and Hertz that we discussed in more detail in our Shareholder Letter. While the potential of these opportunities is significant, they're both in their very early stages, so we plan to share additional details on our products, financials, and scale ambitions with respect to these partnerships over time and will not be providing meaningful additional color at this time. These partnerships are very exciting, each has excellent underlying fundamentals and excellent potential. But they're also exciting because of what they represent. As we continue building the Carvana platform to deliver exceptional customer experiences and handle the constantly increasing scale, our horizontal and vertical opportunities continue to increase. As has been the case since our inception, to maximize our opportunity, we must thoughtfully assess and continually increase the capacity of the business to effectively manage our growth while exploring these opportunities. And then we must appropriately balance our ambition for both scale and scope with the focus necessary to make constant forward progress. So far, we would like to think our team has done a good job at building more capacity in the business to tackle these opportunities and managing these trade-offs given the capacity we have. To build Carvana into what it can be, we'll need to continue to spend energy getting this right in the future and we plan to. Looking forward, we remain extremely excited. We've reached a scale of over 100,000 cars and $3.5 billion of revenue per quarter, yet we're still only approximately 1% of the overall market. Our focus today is exactly the same as it has been from the very beginning. It remains on our customers, on the experiences we provide them, on maximizing the value we deliver, on leveraging technology to minimize our costs, on building for scale, and on doing all of that with a long-term perspective so we can maximize our opportunity. The march continues. Mark?

Mark Jenkins, CFO

Thanks a lot, Ernie and thank you all for joining us today. Q3 was another strong quarter for Carvana. Retail units sold totaled 111,949, an increase of 74%. Total revenue was $3.48 billion, an increase of 125%. Total gross profit per unit was $4,672, an increase of $616 and the second highest quarter in our history. Retail GPU was $1,769, a decrease of $88. The change in retail GPU was primarily driven by higher reconditioning costs, in part resulting from the impact of the Delta variant on production throughput, and higher wholesale acquisition prices, partially offset by a higher customer source ratio. Wholesale GPU was $420, an increase of $154. This was driven by gross profit per wholesale unit of $936 and record wholesale unit volume, which grew 227% year-over-year due to buying more cars from customers. Other GPU was $2,483, an increase of $550. The increase in other GPU is primarily driven by strong finance execution and a positive impact of higher industry-wide vehicle prices on average loan size. EBITDA margin was positive 0.2% in Q3. This marked our second consecutive quarter of both positive quarterly and trailing 12-month EBITDA, despite significant investments for growth in 2022 and beyond. We ended the quarter with approximately $2.3 billion total liquidity resources, giving us significant flexibility to execute our plan. We are executing well and remain focused on building our network and increasing our production capacity to meet demand. We grew immediately available inventory to an average of 16,400 units in Q3, an increase from 12,800 units in Q2 despite the impact of the Delta variant on production volume. We remain on track to launch eight new IRCs by the end of 2022 and continue to focus on growing our IRC teams in preparation for future growth. The explosive growth in buying cars and customers we experienced in the past two quarters also placed significant constraints throughout our system in Q3. To ease the pressure on our system, we began metering both retail units and cars bought from customers mid-quarter to allow our operational capacity to catch up to demand. Most notably, to manage retail sales volume, we reduced the number of vehicles shown to customers in search results, limiting the benefits of higher immediately available inventory on retail units sold. We expect to increase our operational capacity in Q4 with an eye toward 2022. Looking forward, we expect to complete a record year on retail units, revenue, total GPU, and EBITDA margin in 2021. In Q4, we expect retail unit growth to continue to be governed primarily by our operational capacity. We expect revenue growth to be more closely aligned with retail unit growth in Q4 than it was in Q3. We expect total GPU in the low to mid-4,000s for the full year, marking our eighth consecutive year of substantial gains. We expect a seasonal pattern in total GPU in Q4, with Q4 lower than Q3. Finally, we plan to continue to invest in the business both to catch up with current demand and to prepare for growth in 2022 and beyond, leading to a seasonal pattern in SG&A for retail units in Q4 and close to breakeven EBITDA margin for the full year. We are extremely proud of the progress we've made in the company in 2021, navigating the unique macro environment, while delivering rapid growth and managing through operational constraints. Our results relative to the industry continue to leave us more excited than ever about our long-term model and the path toward our goal of delivering more than 2 million retail units per year and becoming the largest and most profitable auto retailer. Thank you for your attention. We'll now take questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia, Analyst

Hey, good afternoon, I guess, can you provide some more color on the metering that you're talking about where you kind of took down the level of cars you were buying from customers? And then the concurrent shift in the search results that consumers saw, I mean, how much of an impact was that to the quarter, can you dimensionalize that? And then I guess it sounds like you're hoping that'll be kind of all back to normal in early 2022. I just want to make sure I understood that commentary correctly.

Ernie Garcia, CEO

Sure. So, let me start with the constraints that we've been facing and then we can kind of go from there. I think the primary driver of constraints was definitely the very significant growth we saw in the entire business, most notably, buying cars from customers in Q2, which then has continued and put additional strain on the business. I think it was accentuated by COVID, especially in the inspection centers, and then we found ourselves a little bit behind; it was probably a little bit harder to catch up than it might have otherwise been given the unique hiring environment. And so I think that's kind of what's been going on from a constraints perspective. To clarify, there can be increases in the total amount of work that are necessary inside the business that are actually greater than the increases in transactions that we see. What I mean by that is if we get behind, and it takes us a little bit longer to resolve some customer question, and we have to call them back, we will see more customer calls. If we have a delivery that gets delayed because the logistics network is full on certain legs, we have to reschedule that delivery, putting additional strain on the logistics network. So you can see total work in the business grow more than just transactions. We saw that starting in Q2 and spilling over into Q3. Now due to the nature of constraints, throughout our life, normally that system can balance itself out, and you'll see service levels kind of move out a little bit, which reduces the number of sales you'll see conditional on demand. Then we catch up, and it gets back into balance. The difference this quarter was normally that system can kind of balance and we weren't able to catch up. We took those same drivers and effectively chose to reduce conversion, which there were several factors affecting that, but the most notable was being surgical with what inventory was displayed. We reduced the amount of inventory that customers could see in certain places. That tool was effective, as we could limit inventory in markets where logistics were very constrained. We didn't want to precisely quantify the impact, but the larger effect was the degree to which we were behind in general over time. But that certainly wasn't the only factor affecting the quarter and we did that to position ourselves to catch up to the demand we're seeing.

Sharon Zackfia, Analyst

That's super helpful. I guess, when you think about all this complexity of buying the cars from consumers and the weird environment you're operating in just in general, is this mainly a human issue at this point? Are you just behind where you want to be on staff or is it a tech issue?

Ernie Garcia, CEO

First, it's a personnel issue. It extends inside of Carvana across all of our operational groups and outside of Carvana. Different groups we deal with, for example, when we buy cars from customers, we're generally reaching out to a bank, dealing with payoffs, and asking for titles in return. Many banks are understaffed in this environment relative to where they would like to be. Those processes can take longer. So, it’s primarily a personnel issue, both internally and externally. Over time, building more technology to automate processes is part of the solution. Many processes can be further automated, which takes longer to implement compared to just getting more people.

Zach Fadem, Analyst

Hey, good afternoon. So, I just want to follow-up a bit on the last couple of questions. Just with all the metering and Delta variant and labor constraints in the quarter, do you think the gap between your demand and actual unit sales widened or compressed in the quarter? And then with your new IRC openings, is there anything you can share on timing or cadence of those IRCs as we move through 2022?

Ernie Garcia, CEO

Sure. So, on the first, I would say we believe it widened in the quarter. The first way I would articulate that is just in this quarter, we took additional steps to meet our demand that were proactive as opposed to just natural system balancing. I do think it widened. Now, while constrained, we have had a lot of success alleviating those constraints over a long time. To repeat, we've been constrained for 18 months yet grown total transactions and customers by three times in the last three years, eight times in the last two years. While constrained relative to the demand, we've scaled rapidly and I believe our teams have done an exceptional job under a lot of pressure to catch up. We're extremely grateful to them. As relates to the cadence of the inspections that rollout, we expect to open eight by the end of 2022. We're sticking with that for now for the guidance that we're providing.

Zach Fadem, Analyst

Got it. And then I can't let you off without asking about the Hertz partnership, as well as the Root partnership. So many elements to unpack and I just wanted to drill in on the sourcing side as this appears to be a way of mixing in a higher source of new vehicles on your platform without having to go to auction. So, do you think this partnership and partnerships like it expand your addressable market? And then on the unit economics side, to what extent do you believe your marketplace offering could be additive to the long-term 15% to 19% gross margin?

Ernie Garcia, CEO

Sure. Let me start with this. The general framework we use to evaluate any opportunity includes ensuring that we can give a high-quality differentiated customer experience, believing in the long-term economics of whatever we're doing, and ensuring we build it for scale. If those are true, then you can scale it over time. From there, there's a question of whether we should partner or build something ourselves. With Hertz, they have an incredible asset—a high-quality flow of vehicles coming directly from manufacturers utilized in their rental fleets before they make their way into consumer hands. This is an incredibly valuable asset that would be hard for us to replicate, and our scalable platform to sell cars would be difficult for them to build. So, we’re natural partners here. From a scalability perspective, it means that there's less work per transaction. For something to be scalable, there has to be significant demand for it. This partnership reduces the total amount of work we have to do to get a car to a customer. That’s an exciting potential. It's early and we're still figuring it out. Regarding Root, I think we share a vision for what a solution should look like. It's a complicated business with a lot more intricacies than it appears. We're excited about the partnership but it's also very early, and there's a lot of work to do.

Operator, Operator

Our next question will come from Brian Nagle with Oppenheimer. Please go ahead.

Brian Nagle, Analyst

Good afternoon. Thank you for taking my questions. My first question is about the operational constraints. I would like to understand better if you are beginning to see any easing in the various aspects of that. Acknowledging that the environment is quite dynamic, at what point do you think these constraints might lighten and allow the business to operate more smoothly?

Ernie Garcia, CEO

That's hard. Constraints show up when we don't forecast the amount of work needed for the future accurately or if we don't execute as well as we would like. I think we have executed well through this. However, constraints really come down to our ability to foresee and plan for what's going to happen. The hope is that this will be the last meaningful COVID wave, but we can't say for certain. We're investing aggressively to catch up because we believe there's excess demand. It’s hard to predict exactly how this will unfold, but we're working hard to grow our operational capacity as quickly as we responsibly can.

Brian Nagle, Analyst

Got it. That’s helpful. My follow-up question is regarding the efforts to buy cars directly from consumers. You've been very successful. There are now a number of players both online and offline pushing aggressively in this aspect of the business. So, are you seeing greater competition and does this fact that more players are pushing, does it ultimately impact how the consumer reacts?

Ernie Garcia, CEO

I think that’s a smart place to be. It's the right assumption. We are buying more cars from customers than ever and seeing a massive influx of demand from an already very high level. That speaks to the quality of our offering, but we also believe we can continually improve it. There is a lot of attention in this area, which will keep growing. We will continually build to ensure we maintain a competitive edge. While we believe we have the highest quality customer offering today, we also believe we can make it better in critical ways. Continuous improvement is essential.

Operator, Operator

Our next question will come from Rick Nelson with Stephens. Please go ahead.

Rick Nelson, Analyst

Thanks a lot. Good afternoon. I'd like to ask you about ASPs. They've been on a rapid rise trajectory. Do you have any concerns, Ernie, about physical affordability and any potential pullback in demand given where pricing is today?

Mark Jenkins, CFO

So, I do think higher used vehicle prices have an impact on demand through an affordability effect. Clearly, there are some customers targeting specific monthly payments that meet their budgets. As used vehicle prices rise, those customers are less likely to meet that budget. Industry-wide, various data sources have noted total industry sales down, approximately 10% to 15% in Q3. While that's true, we’ve grown rapidly despite those constraints, showcasing the incredible demand we continue to see.

Rick Nelson, Analyst

Thanks for that. And a follow-up regarding the unit growth that you were seeing during the quarter before you pulled things in or adjusted things. What was the final straw that led you to pull back mid-quarter?

Ernie Garcia, CEO

Sure. I don't think we want to jump into the details of intra-quarter growth. What I would say drove the decision was that we weren't catching up. Historically, we could catch up faster, and we just saw a huge influx of demand, making it challenging. Once you see that happen and you're behind, it creates a situation where the amount of work per transaction goes up. Even with flat demand, it becomes increasingly challenging. We made the proactive decision to give ourselves some breathing room to catch up. We feel good about our ongoing progress. We've provided strong stats on the improvements made over the years and we are continuing to see better outcomes across numerous operational groups despite the challenging environment we faced.

Operator, Operator

Our next question will come from Rajat Gupta with JPMorgan. Please go ahead.

Rajat Gupta, Analyst

Great. Thanks for taking the question. Just had a couple of questions on the GPU component. On retail GPU, how should we think about the moving pieces? The intra-quarter price benefit was likely lower than the second quarter? But was there any impact of higher reconditioning labor costs or inefficiencies that impacted that number sequentially? Given that pricing has continued to remain strong in the fourth quarter, you talked about a seasonal decline in Q4. Why would that be the case? And as you continue to face a ramp of IRC next year and the labor environment remains challenging, should we anticipate any impact on the GPU bridge next year?

Mark Jenkins, CFO

Sure. So, if we think back prior to COVID, we would normally expect to see some seasonal decline in retail GPU. This year, we did see a slightly similar effect even though we're in a unique environment where we did see early in the quarter, depreciation rates pick up a little relative to Q2, which had an effect on the sequential change in GPU going from Q2 to Q3. Also, we did see higher reconditioning costs on a per unit basis in the quarter due to Delta impacting production efficiency, increasing our per unit cost. Those impacts were smaller this time but were definitely part of the sequential change. Looking forward, the assumptions for retail GPU in Q4 are embedded in our guidance for the full year. We typically don't break down individual components of our GPU guidance and we provided some confirmation on total GPU. As for labor market effects due to reconditioning costs in 2022, it may be too early to say, but any labor cost adjustments are expected to be relatively small compared to the overall magnitude of retail GPU and overall reconditioning costs.

Rajat Gupta, Analyst

Got it. Great. Sorry, coming in one. But just on finance in the third quarter, was the slight decline quarter-over-quarter more finance-driven or service contracts? Just curious about broader assumptions like delinquency assumptions for that business. Have they started to move back towards normal? And how should we think about the trajectory moving forward and the impact to just the other GPU?

Mark Jenkins, CFO

Sure. The other GPU came in at $2,483, which was down slightly quarter-over-quarter. I think the sequential movement in other GPU is within the normal range of variability we’d expect. The biggest driver of the sequential change was in finance, where some rate optimizations led to slightly lower interest rates that affected the GPU in Q3. Overall, it was a relatively small change.

Ernie Garcia, CEO

Additionally, it can be challenging to predict the line item by quarter. We believe looking at a bigger view is useful. If you analyze public retailers over the last 20 years and plot their EBITDA margins, you'd find a high level of stability in the industry. While there are slight squiggles that occur from quarter to quarter, the quality of the customer experience and the scalability of our business will ultimately dictate our long-term performance. Compared to our competitors regarding both components of the transaction economics, our performance appears very good, even amid the current environment.

Operator, Operator

Our next question will come from Chris Bottiglieri with PNB Paribas Exane. Please go ahead.

Chris Bottiglieri, Analyst

Hey, guys. Thanks for taking the question. I actually had a question. It seems like you rebranded your third-party reconditioning units as marketplace units. At the same time, you’re moving forward with Hertz as a large third-party seller. So if you think about your decision and the recognition units. Is there an opportunity to use these partners in conjunction with third-party sellers like Hertz? Or do you foresee them reconditioning their own units? Maybe talk about that more, please?

Ernie Garcia, CEO

I apologize. We haven't really answered your question in several quarters. We will reach an answer at some point. But it's early in the Hertz partnership and in the marketplace in general. We think there's room for those choices to continue to evolve, and we are not providing additional color at this time.

Chris Bottiglieri, Analyst

At least you're keeping count of it, I appreciate that. Let's move on to SG&A then. Is there a way to further bifurcate SG&A cost between retail and wholesale? I’m trying to understand how much incremental SG&A you incur to wholesale trade-in versus retailing it? Further, if you buy a car from a customer but don't sell one to a customer, how different is the SG&A profile of that transaction compared to buying and selling to the customer? Just trying to understand how trade-ins are impacting your SG&A per unit and personnel costs?

Mark Jenkins, CFO

Sure. At a high level, buying cars from customers incurs additional operational requirements and costs. Some show up in COGS from actions like going to pick up the car and bringing it into our network. Another set of costs impacts SG&A. For example, if customers call in to discuss selling their car to Carvana rather than buying a car from us, that's a direct effect on SG&A. There are also indirect costs from the rapid growth in buying cars from customers, resulting in decreased efficiency levels.

Operator, Operator

Our next question will come from John Blackledge with Cowen. Please go ahead.

Unidentified Analyst, Analyst

Hi, this is Max on for John. Just wondering if you could talk us through the constraints on building in the pace of rollout for IRC build? You gave guidance for the end of the year, but looking forward, what are the puts and takes on being able to rollout additional IRCs? And what's the balance there? And then just inventory, is there a targeted inventory level that you'd like to get through? Typically, 4Q would be a build, but 1Q might be not building in a typical environment. Is that still true for next year? How should we think about that? Thank you.

Ernie Garcia, CEO

Sure. We feel really good about our IRC trajectory. We expect to open eight more new IRCs by the end of 2022. We are making continual progress. Many of the initiatives we have kicked off are paying dividends and we see progress in scaling production capacity, which is building out the team. Regarding inventory levels, we aim to increase the selection of cars available on our website. We made progress in Q3, climbing to just over 16,000 immediately available units, up from just under 13,000 in Q2. Nonetheless, that effect was metered by the steps we took to manage sales. We want to keep building that immediately available inventory because we believe selection drives conversion and sales.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Our next question will come from Michael Baker with Davidson. Please go ahead.

Michael Baker, Analyst

Hey, thanks. Two questions. I'll ask at the same time, both related to GPU. One, does reducing the inventory available for customers to see that metering process? Does that boost the GPU in any way in that, you can show cars that have better margins, because they don't require as much work? Should we expect GPU to naturally decline? And is there anything that would specifically cause ASPs to flatten out in Q4? Or is that just the way you plan the business and may or may not happen?

Ernie Garcia, CEO

On the first question, the answer is no; the cars that get metered are not correlated to the GPUs on the car. For the second question, regarding ASPs—if we think about revenue growth relative to retail unit growth, there are a couple of components. One is retail ASPs, and that is one consideration. When we provide guidance on revenue growth relative to retail unit growth, that influences our forecasts. Secondly, wholesale revenue will impact the ratio of total revenue to retail units. We metered retail sales and buying cars from customers. You might expect metering buying cars from customers to influence wholesale volume and revenue.

Operator, Operator

Our next question will come from Nick Jones with Citi. Please go ahead.

Nick Jones, Analyst

Great. Thanks for taking the questions. I think there's a kind of large franchise competitor that's getting into other adjacencies, like trying to handle logistics for power sports. What are your thoughts on the competitive reaction? Do you think Carvana's success has caused larger, more profitable incumbents to react and perhaps get ahead of some of the direction Carvana is going in the future?

Ernie Garcia, CEO

Anytime you're successful, others will take notice. It's a default assumption—others will try to replicate success. Our job is to keep improving. This is a fundamentally challenging problem to solve; managing a business that involves purchasing vehicles, remanufacturing them, shipping them across the country, and handling numerous logistical tasks, can be complex. From a distance, it can be easy to underestimate the effort involved, but we've worked extremely hard and still have progress to make. We believe the systems we've built create a considerable competitive advantage to maintain for the future.

Operator, Operator

Our next question will come from Naved Khan with Truist Securities. Please go ahead.

Unidentified Analyst, Analyst

Good afternoon. This is Robert on from Naved. I have one for Mark and one for Ernie. Mark, I think in your prepared remarks, you said you expect operational constraints to improve in Q4. Is there any color regarding unit growth on a sequential basis? And Ernie, could you discuss if you're seeing increased throughput of vehicles into the wholesale channel due to some constraints, but are you seeing higher demand in the wholesale channel because people are wanting to stockpile vehicles amid the supply constraint in the market right now?

Ernie Garcia, CEO

Regarding expectations, we expect to increase operational capacity in Q4 with an eye toward 2022. This is always a significant investment period for us in preparation for growth in the first half of the following year. As for wholesale volume, it continues to be very strong along with our wholesale GPUs. The strong wholesale market driven by appreciation in vehicle prices has contributed to our success.

Operator, Operator

Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.

Seth Basham, Analyst

Thanks a lot, and good afternoon. My question is around the metering again; have you eased on the metering in the fourth quarter yet?

Ernie Garcia, CEO

We have not materially eased on the metering. We've pulled back on a couple of steps, but not materially. While the metering moves had real effects, the more significant impact remains the constraints we faced beforehand. Hopefully, that's directionally helpful for you.

Seth Basham, Analyst

Okay, that's helpful. We found that the metering, at least regarding the number of units shown to customers in the West Coast market, was more severe than in other areas of the country. What is the reason for that? Is it because of a lack of proximity to IRC or something else?

Ernie Garcia, CEO

I will answer generally; the effect of reducing the number of cars in search results can vary based on the logistics legs. If those logistics are constrained, we may want to suppress some cars in those locations. We can operate fairly surgically in this area, letting specific conditions determine how much certain inventory types are suppressed.

Operator, Operator

Our next question will come from John Colantuoni with Jefferies. Please go ahead.

John Colantuoni, Analyst

Thanks for the questions. I have two. First, regarding consumer purchases, please discuss how much of the increase in consumer purchases stems from necessity due to the tight wholesale market versus your view that it's simply a more profitable channel for inventory. Once new car manufacturing gets back on track, do you envision pulling back on customer purchases, perhaps to levels targeted on your Investor Day?

Ernie Garcia, CEO

Buying cars from customers isn't just a matter of necessity; it provides a high-quality experience and access to higher quality inventory that's more profitable on average. We aim to handle as much of this as possible with business capacity. Currently, we are in a unique market, but historically, acquisition channels have stable profit margins. New manufacturing and a normalized market may impact demand, but we think we are positioned well.

John Colantuoni, Analyst

Thank you. Just a quick one—compensation expense per unit sold was up 30% year-on-year. Is that a reflection of higher employee costs related to capabilities being built around customer acquisitions? How should we think about the trajectory of compensation expenses?

Ernie Garcia, CEO

The largest driver of the compensation expense per retail unit in Q3 relative to last year reflects team-building in line with 2022 projections and long-term investments. We're focused on acquiring the right talent to help us scale the business and seize our opportunities. Consequently, buying more cars from customers has impacted personnel costs. Even facing operational constraints, we've made investments toward future growth.

Operator, Operator

Our last question will come from Edward Yruma with KeyBanc Capital Markets. Please go ahead.

Edward Yruma, Analyst

Hey, guys. Thanks for taking all the questions. You've been really clear about some of the backlogs and reconditioning. I wanted to ask about customer service issues. How do you feel about the strength of the organization today concerning customer satisfaction? Do you think you have to look at metering as well?

Ernie Garcia, CEO

Delivering exceptional customer experiences is our core mission. Throughout these constrained periods, our customer experiences continue to receive high ratings compared to others in automotive retail. However, when we are constrained and service levels drop, it does affect customer experiences. We have seen those effects, and they contributed to our rationale for metering sales proactively to catch up. We've observed improvements and a recovery back to more traditional satisfaction levels. Thank you for your time and your hard work. This was another great quarter. We faced several unforeseen challenges, but once again, you rose to the challenge and put us in a strong position. Because of this, we are continuing to march toward our mutual goals. Thank you for everything you do. We wouldn't be here without you. As for next quarter, thanks.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.