Mark Jenkins: I can take that one. So I do think we saw an increase in wholesale market depreciation in Q3 relative to what we were seeing in Q2. I do think the way that flows through our business, it certainly impacts wholesale GPU, where the cars that we’re buying from customers that are wholesale eligible experience a little bit more depreciation. That tends to push down margins, and then that can also flow through to volume, if we adjust in order to take into consideration updated depreciation expectations. And so I would say that’s probably – that’s the pattern that we saw in Q3 and then the most important impact that it had on our business. I think if you move to the retail market, I guess I would also say the retail depreciation that we saw in Q3, based on our data, was actually the highest level of retail depreciation that we’ve seen in the third quarter going back at least through 2018.
So it really was a somewhat unusual quarter for retail depreciation, and so that definitely had an impact on our retail GPU. I think we feel particularly pleased with our retail GPU in light of the fact that we saw many year highs in retail depreciation in the quarter. And so that was just to add a little bit more color. Another dynamic that we saw in Q3 was elevated retail depreciation in addition to elevated wholesale depreciation.
Michael Montani: That’s great. And just to follow-up on some of the commentary about focusing on enhancing levels of profitability, how – I guess how urgent or how much opportunity do you see potentially, Mark, kind of over the next two years to potentially start eating into the debt stack to avoid some of the higher interest payments a couple years out?
Mark Jenkins: So I think our most important priority, and this has been the way we’ve thought about our most important priorities for many years running now, is improving the operations of the business. And obviously we’ve made tremendous gains there. As we pointed out, the last couple of quarters generated over $300 million of adjusted EBITDA, of which on the order of 100 was one-time items. But that still leads to a very significant generation of adjusted EBITDA over just the last couple quarters, with we believe, opportunities for further improvement in unit economics as we continue on with our Step 2 initiatives. And so I think our focus is going to be on continuing to improve the fundamental strength of the business, continuing to make progress on unit economics in Step 2, and then when it’s time to return to Step 3, taking advantage of our significant excess capacity to efficiently grow, while also significantly levering overhead expenses.
And we believe that combination leads to growth, being profitable growth that I think we’re very excited about.
Michael Montani: Thank you.
Operator: Our next question comes from Daniel Imbro with Stephens. Please go ahead.
Daniel Imbro : Hey, good evening everybody. Maybe I wanted to add two follow-ups on inventory. Maybe first just on inventory efficiencies. So retail GPU, I guess partially is benefiting from just carrying fewer cars, having less depreciation. Do you think Carvana can keep this near 66 days of inventory as we return to growth? Like, have we learned to be more efficient with days on hand or will we need to build that inventory back before we can return to that unit growth?
Mark Jenkins: So I would offer a couple of perspectives on that. One, I think during some very significant growth years prior to the pandemic, we operated in a low to mid-60s average day sales. In some quarters, it even ticked down to the high 50s. So I think we feel very comfortable operating in this range of average day sales, and indeed have done so for many years while executing very high growth rates. So I think that would be the most important point on that particular question.
Daniel Imbro : Got it, okay. And then maybe a follow-up on inventory. As we think about off-lease availability, Ernie, you just talked about returning supply. But if the average lease is 36 months, we’re about to come up on a period where fewer units were sold and fewer leases were generated. And so if we don’t get back to pre-pandemic off-lease for a couple of years, I guess, what other sources can you lean into to support that growth?
Ernie Garcia: Sure. So yeah, first of all, I think you’re right. So just to set the table, I think lease rates were relatively consistent through at least the beginning of 2021. And then I think as you headed through 2021, lease rates dropped to about half what they were prior as a percentage of new car sales by the end of 2021. And so as we head into 2024, the number of cars coming off-lease will decrease. That is correct. We view that first and foremost as a positive, and the reason is because those off-lease cars have not been making it to us. So first order, the effective way to think about our access to off-lease cars over the last year and a half has been that it has been roughly zero. And so we have not benefited from the existence of those cars coming off-lease.
