Shift Technologies Inc (SFT) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Shift Technologies third quarter earnings conference call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Jennifer Jarman, Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good afternoon, and welcome to the Shift Q3 earnings call. Joining me on the call today are Co-CEOs, George Arison and Toby Russell; and CFO, Cindy Hanford. Following prepared remarks, Shift's executive team and VP of Strategy and Finance, Henry Bird, will be available for Q&A.

During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold, and while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statement. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call.

During the course of the call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. With that said, I will now turn the call over to George.

Thank you, Jennifer, and thank you, everyone, for joining us on our first earnings call as a public company. This has been a transformative year for Shift and for our business, functioned by us entering the public markets in October. We are pleased to report strong financial results year-to-date and expect to continue building on that momentum in the fourth quarter and beyond.

The last 9 months have been extraordinary for Shift. Since the onset of COVID, consumers and businesses have accelerated a digital transformation that was already underway. Our business was built to support this consumer behavior. So unlike other traditional retailers, we didn't have to shut down during the lockdown period or create new capabilities to be able to sell in a touchless way in a new shopping environment. While COVID has brought about unfortunate events, it has resulted in accelerating demand for our offering. And we have been working hard to meet it.

In the third quarter, we grew total revenue 31%, adjusted GPU 89% and total unit sales 34% year-over-year and sold nearly 1,000 e-commerce units per month. These rapid growth rates were ahead of our prior expectations, demonstrating our momentum and the massive opportunity in front of us.

This is our first earnings call as a public company, and I want to take a moment to outline our strategic priorities and highlight our operational efficiencies. I'll then turn the call over to Toby to provide a business update, and discuss our recent accomplishments. Since Toby and I first came up with the idea, Shift's mission has always been to make car purchase and ownership simple, to make buying or selling a used car fun, fair and accessible to everyone. We are delivering on that mission since selling our very first car in 2014 to now, expecting to generate approximately $194 million to $197 million in revenue in 2020, the strongest in Shift's history.

Shift sells the broadest range of cars of any major auto e-commerce company, including value cars, which our customers love. Additionally, we have built a strong technology platform that enables us to service our customers with low-cost logistics, delivering an exceptional customer experience.

As a result of our technology-driven and consumer-centric approach, Shift has earned a 70 Net Promoter score for customer satisfaction, well above that received by traditional auto retailers. Our regional presence enables us to source vehicles locally and then resell them within the same region, leaving us uniquely positioned in each market. There are several benefits to this model, such as inventory acquisition, onboarding and sales, pure average days sale as compared to the broader industry, transportation, logistics and fulfillment costs, unique test-drive offering as well as our future ownership opportunities that we believe tie well into our customer life cycle model.

In addition, our model benefits significantly from strategic and targeted merchandising marketing. Although we operate using regional fulfillment model, we still use centralized services such as our inside sales operation and our customer service.

Looking ahead, we are focused on several strategic priorities that we believe will drive long-term growth. In the near term, our strategy is to deepen penetration in our existing markets and expand into new markets, to improve attachment rates of high-quality durable products, to drive reconditioning efficiencies and to increase our brand recognition. We are focused on driving penetration within our existing footprint through strategic branding and marketing strategies as well as offering customers the largest and broadest selection of inventory.

Over the long term, as we strengthen our foothold in the end market, we benefited from word of mouth as well as from improving unit economics . We believe we can continue to strengthen our market presence in our mature markets, while driving further penetration in our more nascent markets.

At the end of Q3, we were operating in 6 regions in the U.S. The model that we presented during the investor meetings we held in connection with our recent SPAC merger, contemplates launching 2 markets a year. We're confident in our continued geographic expansion and believe we have the runway to opportunistically accelerate our plans, while continuing to focus on deepening penetration in our existing markets. We initially announced the launch of our newest market, Seattle, which, while early, is getting good traction. We are also excited about launching vehicle acquisitions in Austin, Texas this week.

Driving growth in F&I revenue is another important component of our long-term strategic goals. Shift offers customers, high-quality ancillary products such financing, warranty, tire and wheel protection services. We are making strategic investments in our F&I offerings to improve monetization per unit sold over time. In Q3, we grew F&I per unit, 48% compared to Q3 2019. We will continue optimizing our ancillary product offerings to increase attachment rates and drive gross profit margin expansion over time.

As we and others in this space have discovered before, COVID has appended the pricing dynamics in the used car market. Our technology suite is optimized to successfully acquire the right inventory at the right price. And our regional reconditioning strategy means that our software can adjust for different variables and enable us to quickly adapt our return process. We are leveraging our core technologies, and we'll continue investing to enhance our in-house reconditioning processes.

We strongly believe that in-house reconditioning is a valuable advantage in the used auto retail market. In addition to market maturity and ancillary products, efficient reconditioning is a critical component to our long-term gross margin targets. Shifts has 5 reconditioning facilities across our California and Oregon markets, enabling us to execute on our regional strategy, and we will be launching facilities on our newer markets like Seattle and Austin. While our facilities have the physical capacity to process substantially more cars and are scalable in nature, hiring skilled labor has been uniquely challenging in the COVID environment, especially in California, creating a bottleneck for our internal reconditioning throughput.

At the onset of COVID, we had solid inventory on hand and made strategic decisions to be hyper selective about our car buying during the lockdown period. Our selective acquisition strategy resulted in strong gross profit per unit year-to-date but ultimately, the heightened demand throughout that period resulted in substantial inventory gap as we were selling far more units than we were acquiring in those early lockdown months. Then, we were rapidly accelerating acquisitions to build our inventory and meet the growing consumer demand. This dynamic created a near-term backlog for our reconditioning operations, especially given slower-than-anticipated mechanic hiring, which I mentioned earlier. In order to accelerate unit sales and drive growth, we decided to outsource reconditioning for certain vehicles, while also incurring substantially more overtime expenses for in-house technicians than we would otherwise expect. Cindy will get into some of the details of the financial impact later on.

We are building Shift for the long-term and believe that the demand we are seeing exemplifies the spent of our offering. We're actively working on hiring additional mechanic labor to bring all of our reconditioning facilities back in-house, which we believe is critical for long-term success.

Now turning to our brand and marketing strategy. We have been successful in leveraging advanced data tools to enable smart decision-making and take advantage of our regional strategy, enabling us to make efficient channel choices. Regions we operate in are very different from each other. For example, convertible sales are prevalent in Southern California. EV and Hybrids are more popular in the Bay Area and in Portland, and trucks are really well in Sacramento. Through our regional merchandising marketing strategy, we can deploy marketing campaigns that reflects the personality of each of those markets, while maintaining the inventory to support our customers' preferences.

We have identified an opportunity to create a truly differentiated brand, which Toby will talk more about in a few minutes. We're leading the way in building a brand that has a lasting relationship with consumers and therefore, building long-term strategic value for Shift. We're very happy with how the team and our business performed in Q3 and believe these results position us well to execute on this next stage of our growth for the business. With that, I'll turn the call over to Toby to discuss some of the business highlights and progress we've made towards achieving our long-term goals in Q3. Then Cindy will provide details on our financial results and performance guidance, and we will open the call to questions. Toby?

Thanks, George. We are excited about the opportunity in front of us. We believe we have the right strategy in place and are making meaningful progress despite the challenging macro factors that have been confronting us, not only in regard to the pandemic, but also the fires that have impacted areas of the West Coast, encompassing several of our core markets. Despite these issues, we are seeing strong performance across all our markets, and are making inroads in expanding our geographic footprint.

With the recently announced launch of our newest 2-sided marketplace in Seattle, Washington, Shift now covers all major metros on the West Coast. We believe that the combination of having a supply line along the coast in both interlocking and self standing regions creates both strong inventory advantages and cost synergies. There's a tremendous growth opportunity within our West Coast footprint, and we believe we can replicate this model in other regions.

As a reminder, we take a highly efficient CapEx-light approach to opening new markets by first acquiring cars locally to build inventory, followed by the establishment of our own hubs and reconditioning centers. To that end, we recently announced that we are beginning to purchase inventory in Austin, Texas, creating the backbone of our next regional concentration. We're using the same playbook we have successfully deployed to establish and expand our footprint on the West Coast.

Q3 was also an exciting time for Shift from a brand point of view. We recognize the opportunity to establish a truly differentiated brand and recently unveiled our new brand and marketing strategy, including an ad campaign, new look and feel, and an official spokesperson for the company. The overarching theme of the new Shift brand is embracing and celebrating used cars, unique in a category that often pushes consumers to purchase new vehicles.

But buying a new car is a trap. Even if you think you succeeded in haggling through the industry's opaque and discriminatory pricing approach, the moment you drive off the dealers' lot, you proceed to lose thousands of dollars on average with rapid depreciation. And this is not true when you buy a quality used car from Shift. It was this insight that inspired the company's new brand by being driver centric and tech forward, Shift is challenging the traditional model to give consumers a better used car buying experience, one they can feel good about.

We proudly celebrate and champion the value and quality of shift used cars and the savvy consumers who buy them. We believe we're going to lead the way in the category with our unique philosophy of building a relationship with consumers and the brand they love, which ultimately drives long-term value and top line growth.

Our positioning and creative strategy is differentiated and will drive brand affinity. We now have an increased marketing budget to execute on our strategy. Despite the increased spend, we continue to market more efficiently than peers due to focus on targeted digital advertising and regional market efficiencies. Some specific new initiatives that we have taken over the last 90 days include, in Q3, we continue to invest in our technology platform. This includes investments in the consumer experience on the operations side to ensure our team uses technology leverage to its fullest and data science, where machine learning can continuously help us improve how we buy cars and engage with consumers.

We have a deep bench of industry experts leading Shift. We will continue to strengthen our leadership team as we position shift for long-term success as a public company. We recently added Mark McCollum to our team as Chief Revenue Officer. Previously, Mark led the Texas and Arizona markets for AutoNation, and has been an automotive software startup founder as well. So he brings deep expertise as a multi-decade veteran of the auto retail industry to Shift.

We are also pleased to welcome our Senior vice President and Controller, Blima Tuller, who has over 20 years of experience in running public company accounting teams. Blima will lead our accounting team and work to optimize our internal processes and practices for best-in-class public company reporting standards.

In addition to our management team, we also invested in the development of our world-class Board of Directors. During the third quarter, we welcomed the financial veteran of the automotive industry and our Audit Committee Chair, Victoria McInnis. Adam Nash, a seasoned consumer technology executive from bellwether companies such as LinkedIn and Dropbox, and Kellyn Smith Kenny, an experienced marketer who served as the Global Chief Marketing Officer at Hilton Worldwide, and is recognized by Fortune, AdWeek and others for marketing innovation, effectiveness and leadership. We are thrilled to have such a diverse set of experts in our corner as we enter the next phase of growth.

In summary, we have made significant progress in the past 9 months and are embarking on our life as a public company with exciting momentum. We are investing in market expansion and innovative branding and marketing strategy, industry-leading consumer technology and a world-class leadership team. I couldn't be more excited for the future of Shift.

I'll now turn the call over to Cindy, who will review our Q3 financial results and outlook.

Thank you, Toby. We operate in a highly fragmented industry with a massive market opportunity. Our focus on achieving strong unit economic has positioned us well to accelerate revenue growth. This, coupled with our CapEx-light e-commerce approach, makes for a compelling long-term model. Our third quarter and year-to-date results demonstrate that there is a clear demand for our offerings, and consumers are embracing Shift more than ever before.

One of our goals as a public company is to provide transparency around our performance and future expectations. I will first hit on our Q3 financial highlights and then walk through our Q4 outlook. Unless otherwise noted, all comparisons are year-over-year.

Total revenue grew 31% year-over-year and 85% sequentially, reaching a record $59.9 million. Total units sold were 4,046, up 34%. Our strong growth was driven by higher e-commerce and wholesale unit sales, which grew 35% and 31%, respectively.

We continue to optimize the business and reported strong margins throughout the third quarter. We grew non-GAAP adjusted gross profit 156% to $3.9 million or 6.5% of total revenue. The significant increase was largely driven by an increase in e-commerce unit sales as well as 113% increase in other revenue, both of which carry high margins.

E-commerce GPU, which can be thought of as the margin earned on the sale of the vehicle itself increased to $545 per unit, up from $360 per unit. This increase was largely driven by operational and technological improvements made to rationalize our inventory and improve our vehicle sourcing.

Other GPU increased to $745 per unit, up 48% year-over-year. We have made strategic investments to enhance our high-quality ancillary products to better monetize our unit sales, and we believe these results are a testament to the contribution of F&I.

Q3 adjusted gross profit per unit was $1,319, up 89% year-over-year and in line with our prior expectations. Our non-repair labor costs, which provide helpful insight into the efficiency of our reconditioning processes for $152 per unit in the quarter. Internally, in order to have a comparable view of GPU with industry peers, we add back this non repair labor component to our GPU calculation. So net of these costs, management's internal view of GPU for Q3 is $1,471.

Moving to expenses. SG&A was $24 million or 40% of revenue, up from 35% in Q3 last year. The increase in SG&A was primarily driven by increased marketing spend, which totaled $7.7 million for the quarter and an increase in expenses associated with becoming a public company. We will continue to make disciplined investments in sales and marketing to drive long-term revenue growth and anticipate similar G&A impact from costs associated with becoming a public company in the near term.

As a result, adjusted EBITDA loss for the period was $19.4 million or 32.4% of total revenue as compared to 30.5% of revenue in the year-ago period. As of September 30, 2020, cash and equivalents totaled $18 million. We closed our merger with insurance acquisition Corp. on October 13, 2020, in a transaction that delivered approximately $302 million, net of deal-related expenses to support growth and working capital. Subsequent to the close of the merger, we also paid down the $6.1 million balance of our PPP loan and a $25 million balance on our delayed draw term loan.

As of October 13, 2020, and immediately following the transaction, Shift had approximately 82.1 million shares outstanding, inclusive of 6 million shares, which are subject to the earn-out provisions of the agreement governing the merger. We expect basic and diluted weighted average shares outstanding to be approximately $82.7 million in Q4.

Additionally, as we previously disclosed, on November 5, we filed a preliminary proxy statement and schedule TO, which contemplates our intention to commence an offer to all holders of Shift's outstanding publicly traded warrants to exchange each warrant for a combination of cash and a fractional share. We expect to file a definitive proxy statement on or about November 16, 2020, following which we expect to commence an exchange offer for the warrants that will be open for no less than 20 business days.

Turning to our outlook. While COVID-19 has clearly presented us and the industry with a new set of challenges, we continue to see strong demand for our product. And as a result, we are increasing our prior revenue expectations. We now expect Q4 revenue to be another record in the range of $72 million to $75 million, representing 163% to 174% year-over-year growth, the strongest revenue growth rate in the company's recent history.

Before providing GPU guidance, I want to reiterate a point that George discussed earlier regarding the use of outsourced reconditioning and overtime labor and take a moment to provide a onetime disclosure of the financial impact and our rationale. We've always known that using third parties for recon is less than ideal for both operational and financial reasons, which is why owning the process in-house is a core competency for Shift. Due to the heightened demand we are anticipating, we conducted an internal analysis to determine the financial impact of the need to outsource some reconditioning for select vehicles as we ramp our capacity to meet our strong demand. We found the blended impact of third-party reconditioning to be $209 per unit in the third quarter. On top of that, the amount of overtime paid to internal teams is resulting in an additional incremental cost of $60 to $70 per unit over the course of the period.

As evidenced by our revenue growth guidance, we are prioritizing the revenue acceleration by fulfilling demand and building our brand to capture market share. As with the case in Q3, we will continue to leverage a combination of our internal staff, assuming increased overtime and third-party reconditioning for certain vehicles in Q4 to absorb outsized demand. We believe this is a short-term trade-off that will leave Shift well positioned for the long term. We anticipate that our GPU for Q4 will represent 100% to 200% year-over-year growth.

We will continue to work through the COVID-19 related staffing challenges that we've discussed, while remaining focused on GPU. Our near and midterm GPU growth drivers are: our regional inventory strategy, technology-first model and data advantages, ancillary products and optimizing our in-house reconditioning, we remain confident in our long-term GPU targets. As a result of our expectations for GPU as well as the investments we are making in sales and marketing to drive long-term revenue growth and G&A expenses associated with becoming a public company, we expect adjusted EBITDA margin to improve by 250 to 350 basis points year-over-year in Q4.

Our Q3 financial performance and Q4 outlook are testaments to our ability to scale Shift. We will continue to make responsible investments as we execute our strategy to drive long-term growth. With that, I'll turn the call back over to Toby.

Thank you, Cindy. We exited the third quarter with record revenue growth and strong momentum. We will continue to invest in the business to accelerate growth as we scale in new and existing markets, and are committed to delivering shareholder value for years to come.

Before we open the call to questions, there are 3 key takeaways I'd like to highlight: one, we have a very broad approach to inventory which allows us to cover the largest spectrum of cars consumers want online, that's enabled by our regional model, our test drives and our reconditioning capabilities. Two, our differentiated technology is all built on data with machine learning and AI, which allows us to optimize the entire product experience from inventory strategy through the end sale. Three, we are continuing to build a strong brand, which we believe will drive market share over the long term. And with that, operator, we're ready for questions.

(Operator Instructions)

Our first question comes from Mike Grondahl with Northland Securities.

Could you talk a little bit about how the $7.7 million in brand spend, was spent, like what kind of forms of marketing?

Mike, thanks for joining us. I'll hand this question over to Toby.

Mike, thanks a lot for that question. So as we noted, our primary advertising and communications channels to customers are a digital direct response. That has been the case for a long time, and we continue to invest in that highly tuned direct response machine. There was growth in that, and we're really, really bullish on that.

In addition, as I mentioned, we built out a brand strategy and hired a spokesperson, beginning to expand beyond digital into non-digital, i.e., like out-of-home and TV, more brand building channels.

Now we're doing that in experimentation fashion. And that's really in anticipation of us being able to continue our building our brand over many years. We see the brand building as a long game that's going to create both affinity and long-term value. So we're, again, focusing on that baseline of digital advertising as we expand into the new channels that allow us to build brand more broadly.

Got it. Any spots on the team that you still need to fill? Or do you feel like you've kind of filled the team out for 2021?

Again, another great question. We're super bullish on the building out of our executive team. If you look at what we've announced over the last couple of years, we've been hiring folks with just decades-long experience in each specialty area. And we most recently announced Blima Tuller joining our Finance team. She comes with 20 years of experience in accounting and financial controllership. We also have just recently announced Tim Brauer join. He's going to be taking over fixed ops. We've been doing a good amount of hiring in our reconditioning and fixed ops. As you know, we're bullish on our internal reconditioning capabilities. We think that's a critical strategic advantage over the longer run. That's going to help us drive our growth. And so we're really excited about Tim joining.

You're going to see that continue. We're going to keep hiring in each area to begin to up level the company as we grow more and more, taking this thing to the next level, time and time again.

Great. And really nice to see the demand.

Our next question comes from Seth Basham with Wedbush Securities.

My first question is making sure we understand some of the moving pieces with your results as well as your guidance relative to what you put out just 1 month ago. Your estimated actual results for the third quarter were pretty consistent with what you report, except for that marketing spend. What happened with that marketing spend? When did it occur? And is it just an accounting timing issue or something else?

Thanks, Seth. Good to talk to you, and I'll hand that question over to Cindy and Henry.

Thank you, Seth. Marketing, specifically brand marketing is a key part of our growth initiative. With the high demand for used vehicles, we took the opportunity to invest earlier than originally planned to drive brand awareness as we moved into 2021 and beyond. Okay.

Okay, just to be clear, you didn't anticipate this spend in early October after the quarter had closed, but it actually had occurred?

This is Henry Bird. The guidance that we provided for the estimated actuals were actually focused primarily on the top line guidance ranges as well as the reiteration of the GPU guidance. At that time we didn't articulate any changes to the full P&L. It was soon after the quarter closed, and given the timing of the transaction, we wanted to provide some insight into certain line items that we felt comfortable providing at that time.

Fair enough. And a follow-up question as that guidance at that point in time. For the fourth quarter, the guidance you're now providing is very different, below the top line. Can you give us some insight as to how your thinking changed over the course of the past month?

Seth, I don't think that's 100% correct. The guidance for fourth quarter in our model that we presented during the SPAC process was $72 million. And now we're providing a top line guidance of $72 million to $75 million. It's definitely not lower than what we provided before. And so I think we're really excited about where the demand is. And we think that there's a ton of opportunity to capture share and to help consumers and grow our business. So we are very, very bullish about the quarter and

I'm sorry, George, I think you misunderstood me. I said it's different except for the top line. GPU seems much lower than at that point in time and implied SG&A is much lower because the EBITDA is much lower as long as we're using the correct base for 4Q 2019.

Yes. Go ahead, Toby, do you want to take that one?

Yes. As I was referencing earlier, we didn't provide specific guidance on that for Q4, but we have projected that we're going to be doing major investments in marketing and brand. We've actually seen an opportunity to pull that forward and get going on that earlier. We want to be building momentum going into 2021 as we look to grow. So we've actually operationally ahead of schedule as it were, announced our new spokesperson, put together our new brand strategy and we're rolling that thing out.

So really, what you're seeing there is an acceleration of our brand application agenda. We're super bullish on that, and we wanted to take the opportunity to do that earlier rather than later because we've been putting together a great team, and they've been able to execute up against that agenda.

Last question, and I'll let others get on, is just regarding the GPU guidance for the fourth quarter. Relative to the third quarter, GPU seems to be much lighter in your new anticipated guidance. Can you give us some thought as to what's going on besides the outsourced labor?

Well, outsourced labor and over time are the primary reasons the GPU guidance is slightly lower, and it's still positive. It's 100% to 200% growth from last year, but we provided the recon disclosure to inform what the updated range for GPU should be and what is driving that.

We believe that in this environment, when hiring is not as easy as it normally would be, it is still critical to service consumers, and we think there's a lot of benefits to driving growth and capturing share and servicing all the customers that come our way. And so we're purposely choosing to continue to fulfill all the demand that we're getting, even if it means outsourcing reconditioning for a portion of our inventory and continuing to meet the demand that we have.

So the purpose behind sharing the recon disclosure, which is a onetime event, which we think will be very helpful for investors and analysts in terms of understanding GPU, was specifically that. But we're very, very confident about the long-term GPU information that we've shared in the past in terms of getting to that $2,500 per car in GPU over the next 2 years.

And as a onetime event, you're not expecting this to occur beyond the fourth quarter?

To clarify that it's a onetime disclosure for the details for those specific metrics that Cindy spoke to during the prepared remarks. We continue -- we expect this to continue through Q4, but we do not obviously expect to be utilizing outsourced recon for the long term. This is a near-term decision we're making to satisfy and fulfill the demand we're seeing.

Our next question comes from Marvin Fong with BTIG.

Just a couple. Just to drill down a little further on the marketing spend. Just curious, if we take away the brand marketing investment, how did cap evolve in the third quarter? and what are you envisioning for the fourth quarter? Perhaps if you don't want to be too specific, you can just give us a directional indication of how that might be trending? And then I have a follow-up.

Absolutely. So thank you for the question. I think at a high level, because I don't think we can get into the specifics, we've been fairly clear in all our communications throughout the summer and the fall that we expect cap to go up in 2020 versus 2019, because we believe that Shift has dramatically underspent on marketing, partly because we've been capital constrained, and that has been to the detriment of businesses growth.

And so post the transaction, now that we are extremely well capitalized, we will be investing and driving growth in the business. And part of that investment will be in investment in marketing. We have seen with our peers what the powerful effect that can have on the business long term, both in terms of driving GPU and driving price to market in terms of where they transact. And so we believe that it is a valuable thing to do over the next 2, 3 years to invest in marketing and drive the growth in the business, and we'll continue to do that.

George, I guess what I was getting at is, it seemed at least that from your prior presentation, you were able to kind of separate out the brand marketing component from sort of the returns you're seeing on, say, paid searches or something like that. That was kind of what I was more getting at, but that's okay if you if you feel like that's not something you can speak to.

But my other question was just on the decision to enter the Austin market, what was it about that market that appealed to you? I think you were perhaps considering the Midwest versus the East Coast, maybe you could speak to that? And then secondarily, just any thought about how you might expand from Austin or from Texas in general, might you go into the Southeast or more out the Midwest?

Great. That's a good question. So we are really excited about our announcement to start acquisitions in Texas. There's a lot of reasons why Texas made sense to us, and I'll start and then let Toby chime in as well. For 1 thing, having Mark come on board is a huge advantage in this regard. He ran the Texas dealerships for AutoNation, which is the nation's largest automotive retailer. So he knows the market extremely well. And that obviously gives us very strong confidence about Texas.

Secondly, Texas allows us to think about building an interlocking relationship between markets as we scale there, similar to what we've done on the West Coast, and that's also really exciting. Toby?

I would say we're super bullish on that. The interlocking and independently sustaining regional structure has served us very well. We are launching Austin with a similar approach that we took to other markets, for example, Seattle. We mentioned that we're now fully live with our 2-sided marketplace, buying and selling in Seattle, causing us to be able to really sell cars all the way from Canada to Mexico, up and down the West coast.

Tremendous footprint, great interlocking regional structure. And we see Texas as a fantastic next spot, Austin being the beginning of us expanding another similar interlocking regional structure. So we're really bullish on that as a platform for growth.

And as George mentioned, Mark McCollum, who's joined as our CRO, has just extraordinary experience there, having run both Texas and Arizona for AutoNation, one of the top retailers in the country.

Our next question comes from Zack Fadem with Wells Fargo.

A quick follow-up on the Austin market. And just given that it's a one-way market today. Curious how that works as far as you're acquiring vehicles. Where do you sell those vehicles today? And then what's the time frame towards turning to a 2-way market over time?

Zack, thank you for that question. I'll hand that question to Toby.

Thanks for the question, Zack. So as you know, in all of our markets, we have 2 fundamental disposition channels. One is after we buy the car, we sell that car at retail back to the consumer. The other is we buy that car, and we sell that car to wholesale.

Right away, we have the ability in Austin to be able to do the second. We do have a unique value proposition, whereby we will put a price on just about any car that a customer brings. That means that actually, the majority of those cars are not what we would call meeting our retail standard. So at the outset, the majority of the quotes we get actually makes sense to go to wholesale.

The retail cars, what we do is we will either sell them as part of our national network or, in Austin's case, store them for a period of time until we hit a critical mass where we feel like we will take them out together in retail. We have not shared either the timing for when that will happen, as that's kind of competitively sensitive or what markets we will go to after. But we've used this playbook in multiple markets that we have launched, including San Diego and Seattle, most recently. We've seen it work really well, and we're very bullish on the model.

Got it. And then I'm curious if you could talk a little bit more about the value segment. How those vehicles are performing versus other vehicles in your arsenal? And maybe you could talk about your competitive mode there and why you think other peers haven't tapped into the value opportunity or why they might not tap into that opportunity in the market?

It's a great question. We are very happy with the value business. We have announced previously that through the end of August, 29% our sales were in the value segment. That's higher than we had initially anticipated, but partly driven, I believe, by the environment that we are in economically today. We continue to be very bullish on that, and we see a lot of demand in the value segment.

We think that not offering a test drive is one really big factor that plays into why our peers can't really touch those cars. When you're dealing with an 8-year-old car or a car with 80,000 miles or more on it, most consumers want to sit in that car, touch it, feel it, drive it before they buy it. And so having the ability to manage logistics locally and offer a test drive is really crucial to one's ability to be able to sell that car, which differentiates our model from everybody else. And that's fundamentally, I think why our peers do not touch that vehicle, while we think it's a huge advantage.

And as we've spoken before, there is a huge opportunity with front end on those cars, right? So those cars have much better front end than an average core vehicle in the used car market. And so we think investing in value makes a ton of sense, and we expect that to be the case as we scale.

(Operator Instructions)

Our next question comes from Sharon Zackfia with William Blair.

Question on the marketing campaign. And obviously, you must feel good about it to pull forward more spending. I mean, how are you seeing the consumer respond across your markets? I mean, is there any segment of consumer, any region that seems to be responding more strongly to the messaging?

Thanks, Sharon. It's a good question, and I'll pass it on to Toby.

We haven't, Sharon, shared publicly the cohort performance by segments or by marketing campaign. So I'm going to have to speak in more general terms on that one. We are seeing uptick from the new creative are very excited about that new creative. It is, in my opinion, and objectively in the data we're seeing, higher quality and more impactful across the board than anything we have done in the past. But we don't see that as the end of our journey. We're going to continue doubling down on that brand.

Again, we did pull forward a lot of that activity in terms of things like video shoots, creative creation, spokesperson, engagement, et cetera. So we've pulled that forward and are excited to be beginning that journey. And we're just going to continue investing there as we look to grow and expand our brand presence because brand brings, as George mentioned earlier, a lot of positive impact, both in terms of our growth as well as upward momentum on our price to market.

I guess a follow-up on that. I saw that you're doing a Black Friday sale. I don't know if that's something new to Shift or if that's something you do every year. But can you talk about how your marketing that? Is that part of the broader ad campaign, or is that just digitally? And is that part of what we're looking at in the sequential GPU calculation?

It is indeed. So we -- while we're recognized that I believe some of our peers have announced they won't be doing Black Friday campaigns. We are in an earlier growth stage and we're going to use Black Friday to expand, to meet the demand that we're seeing, grow our sales, build our brand and in practice, that does have an impact on our GPU in 2 ways.

First, when we're doing a sale, there is obviously a discount involved. And second, as George mentioned earlier, as we've stretched our in-house reconditioning and are doing overflow with third-party reconditioning that has increased our cost to fully meet the demand. But we are very deliberately saying we want to drive growth, and take that impact because of our strategic goal of expanding and driving continued growth both in Q4 and into next year.

And just one last housekeeping question since you're so newly public. Some of your guidance was year-over-year, could you give us what the EBITDA, adjusted EBITDA margin was for the fourth quarter of last year?

This is Henry Bird, Sharon. That information can be found in some of the previously filed investor materials so I would...

Okay. So no change to that?

No change to that.

And I'm not showing any further questions at this time. I would now like to turn the call back over to George Arison for any closing remarks.

Great. Thank you very much. I'd like to thank the operator and everybody who listened for their questions. I would like to thank everybody at the Shift team for helping us put together our first earnings call as a public company. The team, Toby and I are all super excited about the opportunity that we have ahead of us. And we look forward to many more conversations in the quarters ahead as we build the business and create shareholder value. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.