Will Carvana's Fixed Cost Leverage Drive Its EBITDA Margin?

Carvana Co. CVNA reported an adjusted EBITDA margin of 9.1% in the fourth quarter of 2025, down from 10.1% in the same period the previous year. The decline was primarily due to increased retail revenue per unit, which resulted from the application of traditional gross revenue accounting for certain vehicles acquired through a large retail marketplace partner, per the company’s fourth-quarter 2025 earnings transcript. Overall, the company’s variable adjusted EBITDA margin slowed to approximately 7% during the quarter.

However, when evaluating EBITDA on a per-unit basis, the year-over-year change was minimal. In the fourth quarter, EBITDA dollars per unit declined by roughly $14 compared with the prior year, which is effectively flat on a first-order basis. As a result, analyzing performance using EBITDA dollars per unit presents a somewhat different picture than looking at margins alone.

The company believes its margin trajectory remains clear. The current results already illustrate the company’s progress, while highlighting substantial fixed costs that can still be leveraged. At the same time, operational improvements across the business are driving fundamental gains, many of which are visible in declining expense line items.

The company reported strong progress in managing operational expenses, even while returning value to customers through initiatives, such as faster delivery times and other service improvements that carry additional costs. Despite these investments, the company expects that there remains considerable room for further efficiency gains.

Based on these factors, the company views its path to a 13.5% adjusted EBITDA margin as straightforward. Moreover, additional operational improvements are also expected along the way.

Carvana’s strategy focuses on making simultaneous progress across all major areas of the business. The company aims to improve EBITDA margins, increase EBITDA dollars, accelerate growth and enhance the customer experience at the same time. To achieve this, it will prioritize projects that advance these objectives and communicate those priorities both internally and to investors.

Finally, the company estimates that fixed-cost leverage alone could contribute roughly two percentage points to adjusted EBITDA margin over time. In addition, ongoing operational improvements are reducing variable costs and increasing the efficiency of variable monetization, providing additional momentum toward achieving the company’s long-term financial targets. CVNA carries a Zacks Rank #3 (Hold) at present. 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Carvana expects margin expansion primarily through fixed-cost leverage and operational scale, competitors in the auto retail industry are pursuing margin improvement through cost restructuring and efficiency initiatives.

CarMax, Inc. KMX is targeting at least $150 million in SG&A cost reductions by the end of fiscal 2027. CarMax took its first major step toward achieving these savings in the fiscal third quarter by reducing its CEC workforce by about 30%, which was enabled by ongoing process improvements and technology upgrades. Reduction in operating costs is likely to boost CarMax’s overall margins.

Group 1 Automotive, Inc.’s GPI restructuring plan has helped it improve overall operational efficiency and performance in the U.K. market. The workforce realignment and strategic facility closures will streamline Group 1’s operations and reduce costs. Systems integration, despite initial disruptions, will create a more unified and efficient dealer management system. Group 1 intends to cut its corporate workforce by another 537 positions and implement further cost-saving measures in its stores to reduce expenses.

Carvana’s Price Performance, Valuation and Estimates

Carvana has outperformed the Zacks Internet – Commerce industry in the past six months. CVNA shares have lost 11% compared with the industry’s decline of 12.8%.

 
From a valuation perspective, Carvana appears overvalued. Going by its price/sales ratio, the company is trading at a forward sales multiple of 2.59, higher than its industry’s 1.92.

 
The Zacks Consensus Estimate for 2026 and 2027 EPS has moved up a penny and 4 cents, respectively, in the past seven days. 

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This article originally published on Zacks Investment Research (zacks.com).

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