Carvana CEO Ernie Garcia joins Yahoo Finance to discuss how the company is adapting to fulfill consumer demand despite supply concerns, the rising prices in used cars, and the company’s strategy for growth.
Video Transcript
- Still having a problem finding a new or used car? You aren't alone as the semiconductor shortage has caused major manufacturing downtime at the likes of Ford, General Motors, Toyota, and many other automakers. Strong auto demand due to the pandemic hasn't helped the inventory issue either. Let's get a look at the lay of the land in auto retailing with Carvana CEO Ernie Garcia.
Ernie, always good to see you. Good morning to you. I was driving this past weekend. We have a row of dealerships by my house, and really there were no cars on the lot. It was striking. I just forgot to take a photo. I was surprised that this continues to go on. Are you having-- are you still having difficulties getting the inventory you need to really match a consumer that is clearly willing to buy a new or used car right now?
ERNEST GARCIA: Sure. Well, so I think there's two different interesting issues going on right now. I think what you saw is all about new car manufacturing, and I think that you know that's really struggling as a result of the global supply chain being heavily impacted by the subsequent waves of COVID, leading to a decrease in new car production.
I think what we at Carvana feel, you know, there's all the used cars already out there. They're on the road today driving around. But we've been growing very rapidly. And so as we grow, you know, we do all kinds of different things. We open inspection centers where we put about $1000 into each car to certify it up to our standards. We ship those cars around to customers. We have a bunch of other operational functions to support customers who go through the whole transaction.
So our supply side constraints have been more about scaling the business, not about getting access to physical cars. But on the new car side, certainly that's a problem today.
- What are some of the trends that you've seen just in the past month or two as it relates to prices and sales of these used cars? Because one of the things that really stood out to a lot of people in the last consumer price index report that we got out was that the index for used cars and trucks declined 1 and 1/2 percent in August, that's after five straight monthly increases. So, are you seeing that demand is coming off a little bit on the consumer side?
ERNEST GARCIA: So, I think one relatively simple way to think about it is that I do think that basically new car production leads car prices generally both new and used. And I think as we see COVID waves, not necessarily just in the US but globally, the supply chains of all the manufacturers get disrupted. These supply chains are really broad global supply chains with parts coming from all over the world. There's a lot of attention on semiconductors microchips today, but really there are different parts coming from all over the world.
And so as those manufacturers run into trouble with the production of those parts and they can't produce cars, that leads to a dearth of new cars. And then when there's not enough new cars, that leads to price increases across the board in used cars as well. So we've actually seen over the last month is we saw used car prices start to rise again. You know, they had dropped for about a month and a half, and they just started to rise again, especially in the wholesale markets and just more recently to a lesser degree in the retail markets.
- Those supply chain challenges you mentioned, Ernie, where are they most acute? Is it finding people to work-- to help recondition the cars you do ingest? Is it building materials to help build those really big vending machines? Where are you seeing this?
ERNEST GARCIA: So for us, it's the entire operational chain. So, you know, we just came out of Q2 is the last quarter we reported. It was an incredible quarter for us. It was our first quarter we've sold over 100,000 units. We grew at 96% year over year as our first quarter $5,000 GPU, as our first profitable quarter. So it was an incredible quarter. In order to power that kind of growth, we're growing the entire apparatus of our business.
So whether it's purchasing cars directly from customers, purchasing from other sources, certifying those cars to get them up to our standards, shipping those cars around the country, answering customer questions as they have questions about the car or process, last mile delivery to the customer. There's so many parts of our business that we're scaling up, and we're 100,000 sales for the first time in a quarter in Q2, but we're still just 1% of the market.
So the opportunity in front of us is still very much like a startup opportunity. So we're just working really hard across the board to scale that whole apparatus up, and I think that to some degree that's actually independent of the pandemic. That's more just a function of the growth that we're experiencing as a result of our new offering and the great experiences we give to customers.
- And Ernie, we followed your business for quite some time and because of the scale you are getting, that profit line-- the profit line is starting to turn in the right direction, driving adjusted operating profits. Is that the new norm for your business moving forward?
ERNEST GARCIA: So, you know, we're public companies. We want to be really careful about exactly what we tell people to expect. But I think if you look back over the last several years, we've constantly levered. We've grown GPU by over $400 year over year. We've grown very quickly. Through 2019, we had triple digit rates every year. Slowed down a little bit in 2020 through the pandemic. Last quarter, we were back to 96%. So growing really quickly.
If you look at our EBITDA or our earnings per share, you know, basically a linear line upward. And so as the business keeps scaling, the economics get continually better. And so we expect more of the same in the future.
- You know, looking longer term, we really are headed down a direction over the next decade where there is unlikely to be any gasoline-powered cars, or severely less and replaced by electric autos. How is what you do going to have to evolve because of that?
ERNEST GARCIA: So I think it's a huge opportunity for us. You know, we sell to a broad swath of American consumers. So across age, or income, or credit, or geography. We're selling to all customers. That said, we do kind of shift in the directions that you'd expect as an online retailer. So it is a little bit younger, it is a little bit more affluent. So we're a little bit more likely to sell to customers that are interested today in electric cars. And so I think this transition for us is a big opportunity. Undoubtedly, there are some changes that come along with it, but we're very well positioned to handle that.
So when an electric car comes into our system, it just means that the reconditioning process are a little bit different. That you have to have the ability to measure the battery and ensure that it's in good shape, and to be able to charge it up quickly when you deliver to the next customer. There's different mechanical things you have to pay attention to in a car like that.
So I think there's some adjustments that get made, our inspection centers. But to the actual business model itself, it's still the business of taking a great car from a consumer who is ready to move on to the next car, buying it from them, preparing it for the next consumer who wants that car, and then giving them a great experience as you sell it, and the underlying propulsion system doesn't really change the core business too much.
- Ernie, it's Julie here. Finally, I feel like I would be remiss if we didn't ask you about the report in The Wall Street Journal that talks about the stock sales executed by your father Ernie Garcia II And as that story notes-- in filings, you guys have said the interests of the Garcia parties may not in all cases be aligned with your interests, meaning the shareholders. Any plans on your part to change any of the governance structures of the company?
ERNEST GARCIA: Wow. That's a big complicated question I could talk for a long time on. So let me start with this. My parents have been incredibly lucky going through all this. You know, when we tried to raise money six or seven years ago, we went to every venture capital firm out there and couldn't find anyone to fund us. And so my dad was maybe the only one that was dumb enough to step in and give us money at that time.
As a result of the way the business has played out, that's worked out very well for him, and he's been incredibly lucky and has sold down somewhere between a fifth and a sixth of his position, which I hope people won't begrudge him for too much. But that's the choice he's made, and it's his choice to make. I think as it relates to the interests of for very complicated tax reasons, all of the pre-existing shareholders that existed prior to us going public have a little bit of an interest in us actually becoming more profitable more quickly.
And that's really the only place where the interests diverge between the pre-existing shareholders and public shareholders. So we disclose that as is standard in these kinds of setups, but hopefully it's not something that shareholders are too concerned about.
- Well, some shareholders are concerned because there is a lawsuit involving some of his sales. Any response you would want to give to that?
ERNEST GARCIA: So again, this is-- it's hard to explain that concisely. What I will say is that there is a lawsuit that we completely expect to kind of be wiped away very-- in hopefully short order here around a sale that we did as the company in 2020. Early in the pandemic, it was important for us to raise additional money as many companies out there did. And then after that as the entire stock market did, our stock price rocketed upwards and with the benefit of hindsight, some have asked whether or not that was beneficial stock sale timing. It was not, is the simple answer there. So that'll all get worked through.
- All right. Well, we appreciate you coming on here and answering these questions. Good luck this quarter. Carvana CEO Ernie Garcia, good to talk to you again.