Earnings Call Transcript
CARVANA CO. (CVNA)
Earnings Call Transcript - CVNA Q3 2025
Operator, Operator
Good day, and welcome to Carvana's Third Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Meg Kehan with Investor Relations. Please go ahead.
Meg Kehan, Investor Relations
Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Third Quarter 2025 Earnings Conference Call. Please note that 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. Additionally, we posted a set of supplemental financial tables for Q3, which can be found on the Events and Presentations page of our 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 Forms 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. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to non-GAAP metrics, and all references to EBITDA will be to adjusted EBITDA. 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 IR website. And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?
Ernest Garcia, CEO
Thanks, Meg, and thanks, everyone, for joining the call. The third quarter was another incredible quarter for Carvana. We remain the most profitable and fastest-growing automotive retailer. These data points are exciting in isolation. Achieving them simultaneously is rare and points to an exceptional future. Achieving them by the margins we have been recently, profit margins more than 2x the industry average and growth over 40% when other public retailers are approximately flat points to something that is structurally different, something that is capable of achieving our ambitious mission of changing the way people buy and sell cars. That is exactly what we believe we are capable of, exactly what we are focused on making happen and exactly what the data is telling us we are marching toward every quarter. Q3 was another large step on the path to achieving our current goal of selling 3 million cars at a 13.5% adjusted EBITDA margin in the next 5 to 10 years. We're getting better as we get bigger, aided by the feedback inherent in our business, the benefits of scale and our continued pursuit of fundamental gains as well as the addition of foundational capabilities. The positive feedback flywheel is spinning. The data that powers our decision-making throughout the business is growing exponentially and allowing us to iteratively improve the models powering every decision across the business. Our sales growth allows us to keep growing inventory economically, constantly broadening customer selection. Year-over-year, our inventory turn time is approximately flat, yet our customers have nearly 50% more cars to choose from. And the benefits of scale are also allowing us to make investments that magnify these advantages. Over the last 18 months, we've added reconditioning capacity to 15 ADESA locations, allowing us to position inventory closer to our customers, reducing customer delivery time by a day in the last 5 quarters. We've developed our digital auction capability, ADESA Clear, delivering a best-in-class digital auction experience to our wholesale customers, allowing us to add wholesale capabilities to 12 of our inspection centers and counting. Having the strongest retail and wholesale channels to sell vehicles makes us a systematically better buyer of all cars from our customers and our partners. We've also been working on making dramatic improvements to delivery capability that will show up over time. We are currently using Phoenix as a test market to optimize our finance verifications, registration processes, vehicle staging, delivery scheduling systems and staffing models for speed. As a result, 40% of customers in Phoenix are now getting same or next-day delivery compared to 10% that get same or next-day delivery nationwide. On any given day, customers in Phoenix have about 2,500 cars available to be delivered that same day. That's worth pausing on and taking time to think through the implications. Thousands of vehicles that can be purchased in minutes and delivered in hours is a highly desirable and extremely difficult to replicate capability. Like all good things, this will take some time to optimize the rollout across the country, but it is coming. Another set of statistics that demonstrate meaningful progress are that today, more than 30% of retail customers now complete the entire process without any interaction with the customer advocate until their delivery or pickup appointment. For customers selling their car to us, this number is more than 60%. To make this possible, our business must be vertically integrated, data must be well organized and immediately accessible. Decisions have to be deterministic and automated. Workflows have to be concretely defined inside of systems and all that has to be wrapped in intuitive interfaces that make customers feel confident. It's hard. Our team is doing a great job, has detailed plans to keep making it better and is nowhere near satisfied. Looking forward, we continue to see opportunities for fundamental gains in every line item. Opportunities that will make our customer experiences simpler and more fun, will make our costs lower and will make our business more efficient. Our plan is to unlock these opportunities with the same discipline that has driven our success so far. Something that has always been true in the past remains true today and that we suspect will be true for a long time is that prioritizing our opportunities is the hardest part of making significant progress quickly. With constantly evolving technology, constantly evolving customer preferences and expectations and an ambitious group of thoughtful people, new opportunities emerge faster than we are able to take advantage of the ones we previously saw. With AI, this is more true today than it has ever been. The future is bright. Selling 3 million cars per year with a 13.5% adjusted EBITDA margin in 5 to 10 years is very achievable. There's a lot left to do, and there's an excited team ready to do it. We will continue to aggressively pursue rapid progress, and we aren't tired. The march continues.
Mark Jenkins, CFO
Thank you, Ernie, and thank you all for joining us today. The third quarter was another very strong quarter for Carvana that was driven by our team's continued focus on identifying further fundamental gains and operating efficiencies and developing foundational capabilities while also pursuing growth. We set new records for retail units sold, revenue, adjusted EBITDA and GAAP operating income. And for the first time, our annual revenue run rate exceeded $20 million, a significant milestone pointing toward the long-term scale of our business. Moving to our third quarter results. Unless otherwise noted, all comparisons will be on a year-over-year basis. Retail units sold totaled 155,941 in Q3, an increase of 44% and a new company record. Revenue was $5.647 billion, an increase of 55% and also a new company record. Revenue growth exceeded retail units sold growth, primarily due to higher average selling prices and traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner. Consistent with past quarters, our growth in the third quarter was driven by our 3 long-term drivers of growth: a continuously improving customer offering, increasing understanding, awareness and trust, and increasing inventory selection and other benefits of scale. Our strong profitability results in Q3 were again driven by our team's focus on driving fundamental gains and operating efficiencies as well as leveraging our overhead expenses. Non-GAAP retail GPU decreased by $77, primarily driven by higher retail depreciation rates. Non-GAAP wholesale GPU decreased by $168, primarily driven by higher wholesale depreciation rates and retail units sold growth outpacing ADESA marketplace growth. Non-GAAP other GPU increased by $63. This change was primarily driven by improvements in cost of funds and higher finance and VSC attach rates, partially offset by higher-than-normalized loan sales relative to originations in Q3 2024. Looking ahead to Q4, we expect sequential changes in retail GPU, wholesale GPU and other GPU in a similar range to last year, with the latter primarily reflecting sharing fundamental gains with customers through lower interest rates. In October, we expanded on several existing loan sale partnerships with agreements for the sale of up to $14 billion of future loan principal. First, we upsized and extended our Ally agreement for up to $6 billion of loan purchases through October 2027, an increase from $4 billion through April 2026. Second, we entered into a new loan purchase agreement with a loan sale partner for up to $4 billion of loan purchases through October 2027. Third, we entered into an additional loan purchase agreement with another loan sale partner for up to $4 billion of loan purchases through December 2027. The latter 2 agreements formalize existing relationships and establish defined expectations for sale volume and sales procedures throughout the agreement period, highlighting the significant fundamental strength of our vertically integrated finance platform. Q3 was another strong quarter for demonstrating the power of our model to leverage SG&A expenses. Our 44% growth in retail units sold led to a $319 reduction in non-GAAP SG&A expense per retail unit sold. Carvana operations portion of SG&A expense decreased by $96 per retail unit sold, primarily driven by our operational efficiency initiatives. We continue to expect Carvana operations expense per retail unit sold to decrease over time as we deliver fundamental gains and operating efficiency. The overhead portion of SG&A decreased by $314 per retail unit sold, driven by continued leverage of our overhead expenses with greater retail units sold. Advertising expense increased by $139 per retail unit sold as we continue to take advantage of opportunities to invest in building awareness, understanding, and trust of our customer offering. We expect the advertising expense in Q4 to be similar to or slightly higher than 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 components of our cost structure. Net income was $263 million in Q3, an increase of $115 million. Net income margin was 4.7%, an increase from 4%. GAAP operating income was $552 million, an increase of $215 million and a new company record. GAAP operating margin was 9.8% and an increase from 9.2%. Adjusted EBITDA was $637 million, an increase of $208 million and a new company record. Adjusted EBITDA margin was 11.3%, a decrease from 11.7%. As previously discussed, our adjusted EBITDA is of very high quality compared to many rapidly growing companies due to our relatively low noncash expenses, which we'll continue to leverage with scale. We converted approximately 87% of adjusted EBITDA into GAAP operating income, an increase from 79% last year. As previously noted, we currently carry many expenses that support retail unit sales capacity of over 1 million units and expect our GAAP operating income to grow faster than adjusted EBITDA over time. In the third quarter, we took additional steps to further strengthen our balance sheet with a continued goal to drive toward investment-grade credit ratios. In Q3, we retired the remaining $559 million of our 2028 senior secured notes, primarily through proceeds from $539 million of equity issuance through our ATM program. Following the quarter end, we also retired $98 million of 2025 senior unsecured notes due October 2025, bringing our total quantum of corporate debt retired in 2024 and 2025 to $1.2 billion. With more than $2.1 billion of cash on the balance sheet, our net debt to trailing 12-month adjusted EBITDA ratio is now down to just 1.5x, our strongest financial position ever. Our results through Q3 position us well for a strong finish to 2025. Looking toward the fourth quarter, we expect the following as long as the environment remains stable: retail units sold above 150,000, and adjusted EBITDA at or above the high end of our previously communicated range of $2 billion to $2.2 billion for the full year 2025. In conclusion, Q3 marked another outstanding quarter for Carvana. We remain very excited about progressing toward our long-term phase of driving profitable growth and pursuing our 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, Operator
The first question comes from Sharon Zackfia with William Blair.
Sharon Zackfia, Analyst
I guess the topic du jour is kind of subprime loans. And I know we can see a lot of your subprime loan performance and your prime loan performance through various different vehicles. But can you talk about kind of the health of the portfolio, whether you foresee needing to take incremental reserves there at all? And then separately, the timing of the formalization of these new third-party agreements, kind of what brought on that timing?
Mark Jenkins, CFO
Sure. I can take that one. So the very simple answer on loan performance is our 2024 and 2025 loan originations are performing extremely well, both in an absolute sense and relative to industry comparables. I think some of the chatter out there about loan performance more broadly, we think has a lot to do with the 2022 and 2023 industry-wide cohorts, which did underperform initial expectations. I think most of the industry, ourselves included, tightened credit in late 2023. We certainly did, and we've maintained that tightness here through where we are today in 2025. As a result, our loans are performing strongly. I think the best evidence of that is twofold. One, just the stability and strength in our other GPU. And then secondly, the outside validation of having Ally upsized from $4 billion to $6 billion based on the performance trends that they're seeing and additionally, the addition of these 2 new purchase agreements, I think, are great validation of the strength that we're seeing given all the fundamental gains that we've made in the program over time. So I'll start there. In terms of the specific timing of these agreements, I think it's really just a continuation and a maturation. These 2 large agreements are with existing partners who we've been selling loans to over the preceding periods. Those previous loan sales have been more on a one-off basis. And so what these agreements do is effectively formalize the sales procedures and set volume expectations with those partners to essentially make more programmatic, the more one-off sales that we've already been doing. And so really, I think the main point there is it's a maturation and a continuation of something we've already been doing, but now just in a more structured and formal way.
Operator, Operator
The next question comes from Marvin Fong with BTIG.
Marvin Fong, Analyst
I hopped on just about 5 minutes ago, so I apologize if I missed this. But the OpEx, the operating expense per unit, I noticed ticked up sequentially, although it was down year-over-year. And I just wanted to understand, is that a better way to measure that metric? And can you just kind of talk about your future opportunities to continue to kind of like drive down your operations cost per unit, that would be great.
Mark Jenkins, CFO
Sure. I think it's helpful to break down total operating expenses into a few categories: operations expense, overhead expense, and advertising expense. Starting with advertising expense, we're beginning to invest in various aspects of our three-part growth plan, which focuses on improving our product offerings, building trust and awareness, as well as expanding our selection and leveraging scale. Advertising supports the second aspect of this plan, so we've been putting significant investment into advertising as part of our long-term strategy. Regarding overhead expenses, we've seen nice leverage both year-over-year and quarter-over-quarter. This expense has grown much more slowly than retail units, although we've experienced some irregular expenses recently that we believe are temporary, which has caused these costs to be slightly higher than expected. Overall, we’re achieving strong performance with good leverage on a year-over-year basis and to some extent quarter-over-quarter. Lastly, in terms of operations expense, we’ve observed very strong gains year-over-year. This metric can fluctuate from quarter to quarter due to one-time items or nonrecurring expenses. There was a slight increase sequentially, but the overall trend is downward, and we anticipate further reductions over time as we continue to enhance our operating efficiency.
Marvin Fong, Analyst
Great. And if I could maybe sneak in one more. Just skimming the real-time transcript here. So I believe you said retail GPU will be similar to last year. And I was just kind of wondering what's sort of underpinning those dynamics? So are your recon and logistics efficiencies sort of being offset by the macro environment and what's going on with depreciation rates? Or just kind of maybe double-click on what's kind of behind the year-over-year flattish retail GPU guidance?
Mark Jenkins, CFO
Sure. Let me first address the seasonality in Q4. Most people are familiar with the industry trends during this time, which generally include higher depreciation rates in both retail and wholesale markets. Additionally, demand tends to be lower during this period compared to other quarters that typically see stronger seasonal demand. Regarding retail GPU, we've observed a sequential change in Q4 compared to Q3 that is similar to last year, largely driven by seasonality. Year-over-year, I believe we've noted that Q2 experienced significant depreciation in the retail market, which we attribute to the auto tariff announcements made in late March. Conversely, Q3 was a softer quarter in terms of depreciation compared to the previous year, seemingly compensating for the strength we saw in Q2. Therefore, the depreciation trends are a key focus, along with what I mentioned earlier about Q3 retail GPU.
Operator, Operator
The next question comes from Rajat Gupta with JPMorgan.
Rajat Gupta, Analyst
Regarding the fourth quarter, it seems that the guidance suggests a return to more typical industry seasonality, particularly at the lower end of the forecast. I'm wondering if this indicates a shift in how we should view the seasonal trends of the business moving forward. Traditionally, you've seen sequential unit growth from Q3 to Q4, so this guidance is somewhat surprising. Is this a change in how we should approach seasonality, or is it simply a more cautious stance given the current economic conditions and what you're observing in the consumer market? I have a follow-up question as well.
Ernest Garcia, CEO
I'll jump on this one. I think it's largely more of the same. I think when you look at the last several years, Q3 to Q4 for us or for other retailers, there's a decent amount of variability in the shape that you see Q3 to Q4. And so I think we're taking that into account and we're guiding. But I think we continue to see extremely strong growth. You saw it this quarter. We expect that heading into Q4 and into next year. I think we're on a great path and everything remains the same.
Rajat Gupta, Analyst
Understood. Okay. And then just on the other GPU within that, just the ancillary product penetration. It looks like you're starting to chip away at that. Can you maybe size for us what the penetration levels are today in that business? Or how much was it up year-over-year? And curious like how we should think about benchmarking that? I mean if you look at some of the franchise retailers out there, they make roughly $1,500 a unit or higher at a 45% penetration. I'm curious, is that kind of a benchmark in terms of the long-term opportunity there? Are we thinking about this differently? Any thoughts there would be helpful.
Ernest Garcia, CEO
Sure. I think there's a number of parts to that. I think as a general matter, I think other GPU is an area with a couple of line items underneath it. And like everyone else in the business, it's an area where we believe there are fundamental gains to be had. And I think we've been working on those for a while, and I think we've got plans to continue to work on those, and we think there's certainly opportunity there. Just to generalize a bit, I think that's true in every GPU line item and every expense line item. We continue to feel like we've got extremely exciting opportunities and the hardest part is just prioritizing those. I think thinking about any part of our business, I think, relative to the kind of mature pre-existing automotive retail industry, I think, is a reasonable starting point. I think as a general matter, we've always sought to outperform the benchmarks that you would see if you compared us to the outside industry. But I think in ancillary products, there is definitely additional opportunity, and we definitely plan to go unlock it.
Operator, Operator
The next question comes from Brian Nagel with Oppenheimer.
Brian Nagel, Analyst
I have a couple of questions. First, the results you presented regarding the used car segment are exceptionally strong. However, I've noticed some data points indicating weaker and more volatile demand in the used car market. Are you seeing any signs that suggest a tougher demand environment than what you've reported? Additionally, is there anything happening that is enabling Carvana to gain even more market share in this latest quarter?
Ernest Garcia, CEO
I believe that, overall, the situation remains quite similar at a high level. We are consistently monitoring the market and have a solid understanding of the current landscape. This includes analyzing retail sales and loan performance across our portfolio. Generally, things appear to be stable. We are vigilant, and while we do not observe signs of macroeconomic weakness at this time, we feel well-prepared for when it may arise. Economies go through cycles, and considering our financial performance, industry standing, cash flow, balance sheet strength, consumer offerings, and scalability, we feel optimistic about our position. Overall, things are looking positive. The key metrics we focus on are our performance in relation to the industry in customer experience, growth, and economic health. If we continue to advance in these areas, we are likely to remain on a strong trajectory, especially in such a mature industry where we understand its scale and economics. That is the most critical factor, although there is nothing particularly noteworthy to mention at this time.
Brian Nagel, Analyst
That's very helpful. And then my follow-up question, I guess, longer term in nature, but you mentioned in your script, just AI and to the extent to which AI is helping to enhance that consumer offering. And maybe if we could talk a little bit further about that. I mean as a consumer of Carvana now, where is AI helping my experience? And kind of how far along are you in this process now of integrating that technology?
Ernest Garcia, CEO
I believe we have made significant progress. Every company is expected to discuss their AI strategy, and investors are aware of this expectation as well. Therefore, we try to provide clear anecdotes that showcase our real capabilities. For instance, in our shareholder letter, we included a chat example where a customer inquires about a car’s delivery, requests a specific color, and asks about payment options. For our AI to respond effectively, it must engage with various systems, including finance, scheduling, and search services. Additionally, we included a clickable image of the car that directs the customer to the Vehicle Display Page. This requires a dynamically rendered response that reflects an early version of a dynamic user interface, which is fascinating. These capabilities do not exist solely for our AI; they are designed to support our entire business model, which is built for automation, self-service, and customer simplicity. Previously, we had a more conventional user interface that involved clicking and scrolling. However, as our teams develop these services and integrate business logic into our systems, they make it easier for us to create complex tools. Another example in our shareholder letter shows a customer uploading their insurance document to handle preparations before car delivery. Addressing this scenario requires knowledge of state laws, the ability to process the document, convert it into data, apply business rules, and inform the customer about compliance. This entire process must be automated, which involves several systems. These examples reveal the underlying intelligence at work. Our company is generally technology-driven, with many ambitious and curious employees who quickly adopt new technologies. A recent and exciting development is what our team calls ambient agents. These agents operate based on specific triggers instead of requiring human prompts. For example, if a customer encounters a bug on our website, it can automatically initiate an agent to investigate and report on the issue. Recently, one agent identified a bug, suggested a solution, wrote the necessary code, and after human approval, deployed it. This was almost unheard of just two years ago and exemplifies the advancements within our company. We are well-positioned to leverage these innovations, and our dedicated team is working hard to ensure we maximize this potential. I believe we are on the right track.
Operator, Operator
The next question comes from John Colantuoni with Jefferies.
John Colantuoni, Analyst
I just wanted to start with the EV tax credits. Given your mix of EVs is greater than the industry average. Can you give us some perspective on how you see the elimination of the federal tax credits impacting demand for used cars in that space? And how you're making any necessary adjustments to minimize the impact on Carvana's growth trends? And I have a follow-up.
Ernest Garcia, CEO
Sure. I think as a general matter, the expiration of those credits clearly mattered and clearly shifted customer selection. I think the evidence so far is pretty clear that it's just a shift in preference of vehicles, not a change in aggregate demand, at least not one that is noticeable. So I think our system is well positioned to handle that. Our system is, for lack of a better description, sort of listening all the time to what our customers are interacting with and what it is that they want. And then we're making sure that we replace the cars that they want based on the actions that they're taking. And so we kind of have a system that pretty naturally adapts. And I think that what you'd expect, we have seen, we've seen a reduction in EV purchases as a result of the expiration of that credit. And I think the system has adapted in a way that in the numbers is basically not something that you really see or need to be called out. And then I think as a general matter, I think we continue to be believers in EVs. I think all these new technologies go through their positive moments and their tougher moments. And I think it is true that EVs are a very high-quality fundamental technology that's early in their curve. And we expect over time that they will make a comeback, and we'll be well positioned for it when they do.
John Colantuoni, Analyst
Okay. Great. And you announced sort of a second franchise dealership acquisition last month. Can you talk about the results from your first foray into physical dealerships that made you acquire a second? I'd be curious if your findings suggest that this could be an area of investment for you in the coming years.
Ernest Garcia, CEO
Yes. I appreciate the question. I think it remains early. It would be a bit premature to comment. So we're going to kind of stick to focusing on the core business and stay tuned for the future.
Operator, Operator
The next question comes from Christopher Bottiglieri with BNP Paribas.
Christopher Bottiglieri, Analyst
I wanted to discuss the same-day delivery test, which is quite exciting. The logistics cost per unit has increased for the first time in about 10 quarters, indicating that it is being utilized significantly. Can you explain how performance in Phoenix compares to the control market that hasn't experienced this increase? It seems like this could be an area for investment in 2026.
Ernest Garcia, CEO
Sure. First, there is a clear connection between speed and conversion, which is common in e-commerce. We've observed this trend consistently and continue to experience it today. This underscores the importance of focusing on and enhancing this capability. From a broader perspective, we believe this aspect is highly distinguishing and strategically vital, allowing us to achieve things that competitors cannot. In my earlier comments, I emphasized the significance of being able to purchase thousands of cars in minutes with delivery in hours. It’s crucial to consider the implications of this capability as we create more substantial inventory pools closer to customers. As we expand our offerings and automate processes, the speed and ease of transactions will improve. We believe we are developing a fundamentally different machine compared to what is available in the market. We expect this will lead to increased conversion rates as we enhance our operations in Phoenix and eventually expand to more locations. More importantly, we view this as a way to set ourselves apart as a unique business, which should yield significantly different outcomes for consumers over the long term.
Christopher Bottiglieri, Analyst
Got you. That makes sense. And then wanted to parse the other GPU commentary out a little bit more. So it sounds like attach rate was up. You probably benefited from rate cuts because you don't perfectly hedge. There was another Fed rate cut in Q4. So that should be another tailwind that mitigates lapping that. But it sounds like you're going to reinvest that into the consumer proposition to offer lower rates to the consumer. I just wanted to, a, confirm that. And b, how do you think about beyond when there's some more rate cuts and you kind of lap this into '26? Do you feel like the rates go back up? Or how do you think about the value prop to the consumer on financing once the rates stop going down?
Mark Jenkins, CFO
Sure. Yes. So I mean, I think we talked about some of the drivers of strength in other GPU. I think strong loan performance, strong performance on loan sale monetization and cost of funds. There's some positive trends we're seeing in finance attach. I do think those are driven by lower rates. We're also seeing some positive trends in ancillary product attachment rates as well. I think our viewpoint, and you'll notice we had a record in other GPU this quarter. It's our highest level ever. That's really driven by these fundamental gains that I was just pointing to. I think in Q4, our plan is to pass these fundamental gains back on to customers. So other GPU in we think will end up looking something much more like Q4 2024 rather than Q3 2025. And I think that's something we feel really great about. We really have driven meaningful fundamental gains in the finance and ancillary products platform, and that gives us an opportunity to pass some of those gains on to customers, for example, in the form of lower interest rates.
Operator, Operator
The next question comes from Daniela Haigian with Morgan Stanley.
Daniela Haigian, Analyst
So first, clearly, Carvana has built a strong digitally enabled mousetrap in the dealer business. But how do you think about competition from new entrants such as Amazon that also have warehouse and logistics capabilities? How does that feed into your, I guess, expected return on ad spend? And then also on that same line is what is the biggest gating factor in your near-term growth curve?
Ernest Garcia, CEO
We generally focus on delivering the best customer experience possible. We're attentive to every aspect of the business and dedicated to making constant improvements. Our approach doesn't center on any specific competitor, which has benefited us greatly over time. Depending on the profit metric, we are 2 to 2.5 times more profitable than the average automotive retailers. While there are questions about potential new entrants and their impact, it’s important to note that 98.5% of used cars and 99% of all cars are sold by traditional retailers whose economic models are different from ours and are not well-suited to replicate our business model. By concentrating on creating a scalable business that provides exceptional customer experiences with distinct economics, we believe any changes in the landscape are unlikely to affect the overwhelming majority of the industry. From my perspective, it's essential to measure our growth, customer experience, and economic performance against the industry. In a capital-intensive business that relies on scale for quality customer experiences, it’s challenging for the entire industry to adapt quickly due to the necessary investments. The complexity of moving various parts within our organization limits our speed, as there's a significant amount of effort involved. We’ve discussed our initiatives with ADESA and our inspection centers, which reflect our commitment to enhancing our capabilities across the country. This ongoing effort demonstrates our determination to position ourselves well for the future and highlights the work required to scale our business effectively.
Daniela Haigian, Analyst
Great. And I guess on that piece of your moat of what you've built out on this physical business, you also have a very low capital intensity in building this out. I think a lot of your fixed costs are already embedded. And so as you think about making progress toward that 3 million unit target in 5 to 10 years, what do plans look like to expand production capacity beyond that 3 million? And what are the capital requirements to get there?
Ernest Garcia, CEO
I think our eyes are as big as anyone out there. And I think the opportunity in front of us is very, very large. And I think there's no doubt that the goal that we're chasing today that is time-bound is our current goal, and we expect to have other goals beyond that. I think it's premature to talk too much about those other goals because I think that we've got several years here of hard work to make sure that we get to the $3 million and the 13.5 million. But I think there's no question that there's opportunity beyond that. And I think that you can probably look at our past when we've attacked problems in the past to get a sense of what that future could look like. But I think it's early for us to be giving specific guidance and expectations on that today.
Operator, Operator
The next question comes from Jeff Lick with Stephens.
Jeffrey Lick, Analyst
Congrats on a great quarter, guys. In terms of the sourcing environment, I was just curious if you can comment on any evolutions of that. I know your relationships or how you're doing business with some of the commercial rental providers has changed a little bit. And then also just as you grow into sourcing 600,000, 700,000, 800,000, 900,000 units, buying from people's driveway, just any evolution there would be helpful and just the color on that.
Ernest Garcia, CEO
Sure. Well, I think the most important fundamental there is what we alluded to a bit a moment ago, it's just making sure that the business is structured to be a structurally better buyer of cars so that we can be a better partner to partners out there, and we can give very exciting bids to our customers. If we divide the types of cars in the world into wholesale and retail with retail being defined as a car that we're well positioned to retail, it's very obvious that we are deeply structurally advantaged in buying cars that we are well positioned to retail. I think as one of the many benefits of partnering up with ADESA is that it put us in a spot where we're also structurally advantaged to be able to buy cars that are wholesaled. When we do the further work to unlock both wholesale and retail capabilities at the same locations, I think we become a better buyer again because not only are we well positioned to dispose of both types of cars, we're also well positioned to reduce the expenses that are traditionally inherent in the system that take the form of time and extra shipments and cost. I think we are doing the work today to go unlock those capabilities. In that graph, we've got 74 sites. We now have 41 that we label as wholesale only. That's the original 56 ADESA sites minus the 15 where we have added reconditioning capabilities. And so those 15 now represent both wholesale capable and retail capable sites. We have 6 sites that are just retail. Those are the 18 inspection centers that we had prior, minus the 12 where we've added ADESA Clear, which is a digital auction capability. And then we've got 27 that are both, which is the sum of the 12 inspection centers that have ADESA Clear plus the 15 integration sites where we've added reconditioning capabilities to ADESA. So we now have 27 sites where we're well positioned to handle any type of car very efficiently, not just because we have a great wholesale distribution channel and a great retail distribution channel, but also because we can do both more efficiently. So to me, that's the structural thing that we're doing. I think the more progress we make there, the better position we're going to be. And then I think we continue to make progress with our partners. And I think there will probably be more to talk about there over time. But as long as we position the business for it very well, I think we continue to be in a great spot to take advantage of that.
Jeffrey Lick, Analyst
And when you get to the retailing of 2 million to 3 million cars, do you think the proportion of where you source will change much? Or will it be pretty much the same?
Ernest Garcia, CEO
I think we'll see over time. I think it's early to call a shot there. I mean I think at the simplest, most fundamental level, most of the used car market is customers swapping cars with each other. And then they just do it through many different mechanisms. That's not strictly true because you do have off-rental cars and then you do have cars that flow out of fleets. I think you could call kind of off-lease cars, something sort of in between because it is a customer car that makes it to another customer. But generally speaking, cars are just moving through some elaborate mechanism from one customer to another. So we think having the business of buying cars from customers is essentially important. I think there are many forms that can take over time. And then we think having a business of being able to buy cars very efficiently from business disposers of cars from fleets is also centrally important. The machine is being constructed in a way where we feel like we're an advantaged buyer regardless of where cars are coming from. If you look at buying cars from customers, that is a slightly different offering than selling cars to customers. For probably 5 or 6 years, those 2 brands have grown pretty much in lockstep, whether you're looking at the percentage of cars that we're retailing that were sourced from customers or if you're looking at our wholesale to retail ratio, they bounce around a little bit. But generally speaking, they've been pretty consistent. And I think that just speaks to, a, the fundamental that largely this market is customers swapping with each other. And so there's a similar sized market to buy cars as there is to sell cars; and b, the fact that those 2 businesses are growing at about the same rate as we continue to grow our brand in a way that benefits both sides of the business. So like I said, I think we're well positioned either way. I think it's early to call our shot. We'll hope to succeed in both areas.
Operator, Operator
The next question comes from Andrew Boone with Citizens.
Andrew Boone, Analyst
Ernie, you talked about scale in the beginning of your prepared remarks. And then you mentioned automation multiple times as we've gone through this call. Can we just step back? And can you just talk about what are the biggest opportunities that you have to increase automation as you do gain scale? Like what are the key variable costs that you guys can really drive down that still remains in the model?
Ernest Garcia, CEO
Sure. I’d like to reference the anecdote again because I believe it conveys a lot. If we reflect on the chat we highlighted in the shareholder letter, which featured a customer interacting with an insurance document, it illustrates what can be achieved. Essentially, we are enhancing automation to a greater extent, allowing the entire process to occur instantaneously with very clear instructions provided to the customer. They understand exactly what to do and can complete tasks without delay. This has been a gradual progression over the years as we have developed these capabilities. Initially, we needed to learn all the rules across various states, document them, and determine our specific business rules. We then had to establish a method for uploading data to our site. At first, the data was manually reviewed to ensure compliance with business rules, and customer approvals were required. Eventually, we added the capability to extract data from the submitted documents, simplifying the process through automation. This ongoing enhancement of automation is invaluable. We anticipate significant cost reductions from this effort, which will also lead to smoother and more efficient customer interactions.
Andrew Boone, Analyst
If I could sneak in one more quick one. How do you think about the guardrails of expanding same-day delivery? How do you guys think about making sure that rollout is smooth? And what are the profitability metrics that you guys are involving to make sure you guys are containing what may be the cost for that?
Ernest Garcia, CEO
Sure. Well, I think like anything in the real world, I think the first thing you have to do is you have to kind of aim for something that's hard and then you start to see what are all the constraints in the system that are causing you to be limited in what you're able to achieve and then you have to go attack the biggest constraint and then move on to whatever the next constraint is that emerges. I think that's why we're working really hard in Phoenix right now to attack those constraints one at a time. I think we've seen a lot of progress there. Phoenix looks like other markets in the country just several months ago. Now we've got 40% of customers getting same or next-day delivery compared to approximately 10% in the rest of the country. So we've obviously made rapid progress there. I think we will continue to try to progress in Phoenix. And then undoubtedly, the next step is going to be to roll that out to other inventory pools that are near large population centers, and we'll prioritize that intelligently. That will be a multifaceted, multistep approach over the next several years. But step 1 is proving out that we can do it at meaningful scale. I think that box is checked. Step 2 is making sure that we really nail it in Phoenix. And then step 3 will be continuing to roll it out from there.
Operator, Operator
The next question comes from Michael McGovern with Bank of America.
Michael McGovern, Analyst
There's a lot of talk out there about the K-shaped economy where you have lower income cohorts of consumers seeing relatively more pressure relative to higher income. Curious if there's anything that you've been able to see on that front, demand trends between the two, especially since your unit guidance implies some deceleration. Is there any notable deceleration from lower income cohorts specifically?
Ernest Garcia, CEO
I really don't think we have anything interesting to say about that, and I apologize. There are certainly many narratives out there suggesting this trend. In our data, we can review sales data or credit performance data, and analyze it in various ways. However, I don't believe we have any compelling validating data points to support that narrative. Things appear to be more consistent than that particular story, but we will continue to monitor the situation and follow the data as it evolves.
Michael McGovern, Analyst
Got it. And then in Phoenix specifically with same or next-day delivery, I'm curious, can you discuss kind of what you expect for GPU or EBITDA per unit or anything that you could give us kind of what that investment, if you will, looks like to deliver the cars more quickly? Or is it pretty seamless since you have that infrastructure there built out already?
Mark Jenkins, CFO
Yes. I would say it's really more the latter. I think that the same-day delivery is really more about a technology investment at this stage and a process investment, making sure that it's a complex transaction. And in order to have same-day delivery, you need to nail every single aspect of a complex transaction accurately and in a short period of time. That's really like the main investment. There’s some incremental investment in staffing just to make sure that you have the capacity available to execute same-day delivery. And so you have a little more slack capacity there. But that's not a very large dollar amount in the grand scheme of things. The way that we're executing same-day delivery today, it's really more about a focus, technology, and process investment more so than a cost investment.
Operator, Operator
The next question comes from Michael Montani with Evercore ISI.
Michael Montani, Analyst
I joined a minute late, but I did want to ask if you discussed at all the advertising expense. It sounded like that might be expected to go up. And I just want to see is that quarter-over-quarter or on a per unit basis? Any color that you could provide on that one? And then I had a quick follow-up.
Mark Jenkins, CFO
Sure. I can take that one. The outlook that we gave for advertising expenses on a dollar basis for it to be similar in Q4 to this Q3, maybe slightly higher, but similar to slightly higher. And again, where that comes from is really just continuing to invest in building our brand, building awareness, understanding, and trust of our brand is one of the 3 key pillars of our long-term growth strategy.
Michael Montani, Analyst
Okay. And then just on the wholesale GPU, were you signaling that, that could step down quarter-over-quarter by about 25% to 30% the way it did last year? And if that's the case, I was just thinking there could be opportunities for improvements given some of the enhancements you've made in terms of processes. So I just wanted to make sure I had that right or if there's anything else to dig into from a depreciation perspective, et cetera, to know.
Mark Jenkins, CFO
So I think we really think of sequential changes on a per unit basis, what we called out. And so I do think that there's seasonality in a multiple of the GPU line items. I think in wholesale, that takes the form of higher wholesale depreciation rates in Q4, lower auction volumes in Q4 than other times of the year. So we do typically see a seasonal pattern there. And we called out something seasonal, something similar to last year sequentially on a per unit basis.
Operator, Operator
Last question comes from Chris Pierce with Needham.
Christopher Pierce, Analyst
Can I ask a broad question about the 3 million unit goal? What factors will determine if you reach it sooner or later? Is it related to increasing the recon scale personnel, or did you take into account end markets or credit cycles? I would like to understand the overall reasoning behind the goal, what influences it, and what could potentially accelerate or delay achieving it.
Ernest Garcia, CEO
Sure. I would say at a high level, the timelines we provided there were 5 to 10 years, which correspond to 2030 to 2035. The fast end of that is approximately 40% compounded growth and the slow end of that is approximately 20% compounded growth. I think as a general matter, we view that as largely driven by our ability to continue to execute is probably the biggest determinant of that. There's a lot of work that has to be done across the entire business to make sure that we're buying cars, reconditioning cars, delivering cars to customers long leg and last mile, handling customer questions and just scaling the entirety of the business. So I think there's a lot of work in there. Our execution is the primary driver that we think will dictate when we achieve that goal.
Operator, Operator
That's all the time we have for questions today. I would like to turn the conference back over to Ernie Garcia for any closing remarks. Please go ahead.
Ernest Garcia, CEO
Great. Thanks. Well, thanks, everyone, for joining the call. Carvana team, another awesome quarter. Thank you guys so much. You really have a lot to be proud of. I hope you are proud. I hope the high fives fly, and then let's come back tomorrow and keep it going. We have a lot more work to do. So thanks to all of you.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.