December 8, 2021

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Shift Technologies, Inc. (SFT) Q3 2021 Earnings Call Transcript

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Shift Technologies, Inc. (NASDAQ:SFT)
Q3 2021 Earnings Call
Nov 11, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to Shift Technologies’ third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference may be recorded.

[Operator instructions] I would now like to hand the conference over to your host, Vice President of Strategy and Finance Henry Bird.

Henry BirdVice President of Strategy and Finance

Good afternoon, and welcome to the Shift Technologies third quarter 2021 earnings call. Joining me on the call today are Co-CEOs Toby Russell and George Arison, and CFO Oded Shein. 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 statements. 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 Toby. 

Toby RussellCo-Chief Executive Officer

Thanks, Henry, and thank you, all, for joining the call today. Over the years of Shift, we’ve had many team members who have served in the armed forces before choosing a civilian career ship. And I’d like to first take a moment on this Veterans Day to thank all members, bar arm services, past and present, for your sacrifice, courage, and the example of service, you set for us all. Thank you.

Turning to our quarterly results. The third quarter was another great quarter for Shift. Once again, our team performed exceptionally well across all components of our business. We continue to aggressively take market share, all while continuing to improve operating leverage toward our long-term financial goals.

A quick summary of our Q3 results. Revenue of $180 million, representing three times year-over-year growth. 6,487 e-commerce units sold, representing 10% sequential growth over Q2 and reporting our fifth consecutive quarter of exceeding unit sales expectations. Adjusted GPU of $2,021, more than 50% year-over-year growth.

With this, we exceeded the guidance we provided on our second quarter earnings call in August for all of our metrics. We are happy to once again be raising our full year 2021 revenue expectation now to over $620 million, which represents more than three times year-over-year growth and nearly 50% more revenue than we had signaled at the beginning of the year. Our top-line unit and revenue growth is driven by our rapidly scalable business model, coupled with the accelerating Shift in the used car market from offline to online. Our focus on operational excellence has enabled our team to navigate the current and unique and challenging market conditions very effectively.

Throughout Q3, we continued to observe complex dynamics in the consumer automotive industry, the first being a volatile pricing environment. Early in Q3, prices started to drop from Q2 peaks only to quickly rebound and remain elevated throughout the rest of the period. This was significantly different from the normal seasonality patterns the industry usually experiences. Secondly, competition for used inventory has been at all-time highs.

Throughout this, our team has continued to work with extraordinary dedication, exceeding targets and delivering on Shift’s industry-leading customer experience. I want to extend a huge thank you to every member of the Shift team for delivering yet another exceptional quarter. Our continued success can be largely attributed to our unwavering focus on providing world-class e-commerce experience for our customers and our firm commitment to our long-term strategic business objectives of: first, deepening penetration within our existing markets, where we continue to see significant opportunity, we’ve just entered into an agreement for a new Bay Area facility over two and a half times the size of our current hub in San Francisco that will expand service capacity for our Northern California market. Second, growing our geographic footprint, we are excited to announce that we have begun to expand into Houston, Texas and expect to have that offering fully operational as a two-sided market in the near term, we Shift buying cars for Houston customers in addition to selling them to them.

Third, building lasting brand awareness, which has been a successful strategy in its first several quarters and will continue to be a major area of investment for us. And finally, driving efficiencies in our full-stack operations while improving unit economics, as demonstrated by our Q3 F&I dollars per unit, reaching the highest point in Shift’s history. Looking forward, we expect to continue delivering on our growth objectives, and as such, are focused on investing in and building our team. Hiring across all industries has been challenging over the last 18 months, especially so in retail, and we’ve had to manage our way through that.

While our hiring throughout 2021 has kept pace with our goals and delivered outperformance on key metrics, we see opportunity in Q4 to set ourselves up for success in 2022 and continue building on our momentum. Accordingly, we have launched a major hiring program across the board from our customer-facing concierge teams to our inside sales and support teams, to our reconditioning technician. Finally, on the topic of investing in our team, I would like to take a moment to welcome Jeff Clementz to Shift. Jeff has been serving as Shift’s President since the beginning of October.

He brings over 20 years of experience leading e-commerce and marketplace businesses, including in senior leadership roles at Walmart and PayPal. He has an exceptional track record of leadership and operating efficiently, delivering customer value, and doing it with heart. We are excited to welcome Jeff to the team and believe he will lead sustainable growth at Shift for years to come. And I wanted to take a moment to acknowledge that for me personally, this will be my last earnings call as co-CEO at Shift.

As you know, from our announcement last week, as of February 1, I will transition to a role as a Board member and advisor. I would like to take this time to extend my heartfelt and deep appreciation to everyone on the Shift team today. Everyone has worked at Shift over the years, to our investors who put their trust in us and to our Board members for their unwavering support during our journey from an idea to a public company and industry leader. I would also like to reiterate my confidence in what this incredible group can and will accomplish continuing to transform the industry over the quarters and years become.

At this point, I’ll turn the call over to Oded, our CFO, to run through the quarter’s financial results. Oded?

Oded SheinChief Financial Officer

Thank you, Toby. Our momentum continued into Q3 as our top line and profitability metrics came in ahead of our expectations. I will first review our third quarter results and then share guidance for the fourth quarter and the fiscal year. Total revenue for the third quarter grew to $179.8 million, an increase of 200% to last year’s third quarter and 16% compared to the second quarter of this year.

Total units sold were 8,111, an increase of 100% year over year, with the e-commerce channel growing to 6,487 units, up 120%. E-commerce average selling price was 24,086, 9% higher than last quarter as a strong price appreciation environment continued, especially later in the quarter. Adjusted gross profit was $13.1 million versus $3.9 million last year and $16.5 million in Q2. I’ll focus my remaining commentary on sequential changes.

Adjusted gross profit per unit reached $2021 in the quarter, down $788 from Q2. The Q3 GPU results were well above our expectations as market pricing remained elevated throughout the quarter. However, the impact of the market dynamic on GPU was less compared to Q2 where we saw unprecedented appreciation in car prices. I’d like to spend a moment on our acquisition and inventory strategy throughout the quarter as we are able to successfully manage our acquisitions while preserving profitability.

On our Q2 call, we talked about our plans to slow acquisitions in anticipation of the typically negative seasonality effects we see in late Q3. We executed on this strategy. And while we didn’t see typical seasonal depreciation, it allowed us to take advantage of the elevated prices resulting in stronger-than-expected front-end margin. Despite the unusual market dynamics, we exited the quarter with a healthy inventory mix, and we feel good about our position as we build our inventory heading into 2022.

Given our consumer-focused sourcing strategy, 95% of cars purchased in the quarter came from consumers and partners. Other revenue, mostly F&I was $6.2 million in Q3, compared to $5.1 million in Q2. We remain encouraged by the fundamental performance of our F&I business. Over-adjusted GPU per unit in Q3 was $982, our highest quarterly results to date.

Total marketing expense for the quarter was $10.8 million, customer acquisition cost was $1,659, 12% lower than Q2 as the new strategy emphasizing brand marketing took hold and yielded impressive results. This will continue to be an area of focus and investment for us. Adjusted EBITDA loss for the quarter was $33.3 million or 18.5% of revenue compared to a loss of 16.9% of revenue in Q2. But once again, ahead of the guidance range, we provided on our Q2 call.

Turning to the balance sheet and cash flows. We ended Q3 with cash and cash equivalents of $247.5 million. This represents a $9.3 million increase compared to the Q2 cash balance. This increase in cash was primarily driven by a decrease in our inventory position as we ended the quarter with $88.9 million, a $33.6 million decrease from our Q2 inventory.

A quick update on our floor plan facility. On October 13, our floor plan agreement with U.S. bank expired. We are actively pursuing a new floor plan facility since we view it as an important part of our capital structure and expect to put one in place by the end of this year.

Turning to guidance. For the fourth quarter, we expect revenue to be in the range of $180 million to $188 million or 145% to 156% higher than Q4 of 2020. Adjusted GPU is expected to be in the range of $1,600 to $1,700 for the fourth quarter, more than tripling our adjusted GPU in Q4 of 2020. Our adjusted EBITDA loss for the quarter is expected to be in the range of $40 million to $44 million.

As we discussed earlier, we will be making significant investment in Q4 across the business to prepare us for a successful 2022, which will impact our EBITDA for the quarter. This leads us to 2021 estimated revenue, which we are again raising due to the momentum we are seeing across our business. We expect total revenue to be in the range of $621 million to $629 million, an increase of approximately $40 million from our previous guidance. We expect to sell 23,000 to 24,000 e-commerce cars.

Adjusted GPU for the full year is expected to be greater than $2,000, a raise over our previous guidance of adjusted GPU greater than $1,800. We now expect adjusted EBITDA loss margin for the year to be around negative 22% versus our previous guidance of better than negative 23%. I will now turn the call over to George for closing remarks.

George ArisonCo-Chief Executive Officer

Thank you, Toby and Oded, and thank you, all, for joining our call today. In short, our third quarter results exceeded our expectations as we continue to capture market share, evidence of the fact that Shift’s mission and business model is resonating with consumers. We’re also excited about finishing the year in a very strong way while investing in key areas that will benefit Shift throughout 2022 and in the year as follow. Last week, we announced plans for Toby’s transition out of his current enrollments co-CEO.

I’ve had the great fortune to spend so many years working on best plan on building a company we both love. One thing I’d mind most about Toby is his determination to succeed and his inability to fail. Supercars have been instrumental in Shift’s growth and success over the years. Toby’s brilliant leadership, strategic insight, and sacrificing grit has made Shift what is today.

On behalf of all current and former employees, shareholders and supporters, thank you, Toby. As Toby discussed, we are fortunate to be welcoming Jeff to Shift as our new president. Jeff’s unique combination of technology and retail experience on a global scale will be instrumental in sustaining profitable growth at Shift in the years to come, and I’m just so excited to have him on board. With that, operator, please now open up the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Zach Fadem of Wells Fargo.

Your line is open.

Zach FademWells Fargo Securities — Analyst

Hey, good afternoon. And Toby, best wishes to you in the new role and going forward. So with that, can you talk about where you are on capacity and utilization today? And to what extent you’re seeing throughput and labor constraints? And then as you think about the elevated demand you’re seeing, can you walk us through the glide path for capacity expansion through 2022? And where do you think capacity goes from where we are today?

George ArisonCo-Chief Executive Officer

Hi, Zach, good question. Good to talk to you. So I’ll start and then I’ll let Oded take it from here. So we’ve had obviously to deal with the same labor issues that everybody else in the world and the country has.

But so far this year, we’ve been very happy with how things have been. And we’re very happy with the team’s performance and our ability to hire folks we need to. Obviously, it’d be better if the labor market was not as tight, but we can of it really well. As we think about the future, as we mentioned in our prepared remarks, we are working really hard to ensure that we have the team in place for a really successful 2022.

Part of that entails changing our approach to how we hire. Normally, we hire just in time, meaning we aim to bring people in a few weeks before we need a specific role filled, especially when it comes to the field operations or reconditioning, logistics, etc. Obviously, probably that’s to manage for cost. But the decision we’ve made for entering 2022 is tactual higher folks ahead of the curve.

So we’re going to do a lot of hiring in Q4 in preparation for Q1 and 2022. That’s like a one-time big push to bring a lot of folks onboard a few months earlier than we normally would. Once we do that once and kind of have this larger team, we’ll be in a really good place for the rest of the year. We thought that that was a prudent decision in light of the very tight labor market that we’re dealing with.

So it’s kind of a high level on where we are. Now I’ll hand over to Oded to talk through some of the more details.

Oded SheinChief Financial Officer

So an important facet of capacity and where we made great progress has to do with reconditioning. We have, again as I mentioned, made great progress to a point that reconditioning is no longer a constraint on our ability to buy process, and sell cars. We have increased capacity steadily throughout the year, and we continue to do this, working on opening a new facility in Texas, and then as we launch further new markets, we’ll be able to open facilities there as well. As we said in our remarks, we are also in the process of putting a new facility in Northern California to replace the San Francisco facility, and that would increase our capacity even further.

So at this point, as I said, not a constraint. 

Zach FademWells Fargo Securities — Analyst

Gotcha. And then for the full year GPU outlook of about $2,000 per unit. I presume the breakout is about $1,100 retail, about $900 in F&I. And the question is whether you think these levels are a fair jumping off point for 2022? Or if you think some of these unique 2021 dynamics result in any departure from these levels one way or the other?

George ArisonCo-Chief Executive Officer

Well, we clearly exceeded our expectations for GPU for this year. Yes, there was price appreciation and favorable market conditions, but the key secret sauce for our success has to be our operational efficiency improvement. I talked about reconditioning before how much we reduce the cost there, but also F&I. So F&I is a difficult area to grow, but we have done really well in growing it steadily and gradually by small steps every quarter.

We had a good success in Q3, and we expect to see further improvement in Q4. So as we end the year, it’s around $2,000 GPU, it’s an important stepping stone to get to our midterm goals of $2,500 GPU. In order to get there, as we shared in the past, we need about $1,200 to $1,400 in F&I. So we still have some ways to go.

And you need reconditioning to be $1,200 or below. We’re approaching that as well. So we are in a good position to be able to hit the midterm goal in the coming several quarters.

Zack FademWells Fargo Securities — Analyst

Got it, very helpful. Appreciate the time.

Oded SheinChief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Marvin Fong of BTIG. Your line is open.

Marvin FongBTIG — Analyst

Great. Thank you for taking my questions. So first question, just wondering specific to the fourth quarter GPU guidance, I believe at 1,600 to 1,700. Just wondering if you could just break that down a little further.

And my thought is what you just did over $2,000 this quarter, and the environment looks pretty favorable, why the step-down? And specifically, as a secondary question, are you forecasting any drag from wholesale has occurred in the third quarter, in your fourth quarter guidance? And then I have one other follow-up.

Oded SheinChief Financial Officer

So, 1,600 to 1,700 in Q4 is still what more than triple of last year’s results. So we are obviously very happy about that. In the fourth quarter, you see the impact of seasonality, people focus their discretionary spending on holiday spend rather than purchasing these cars. So there is some pressure from that point of view on GPU to some extent.

And the last thing I would say is that there is a level of conservatism here just because of the experience we had in previous Q fours, we wanted to make sure that we gave you our best estimate at this point. So that’s where we are. The wholesale, I don’t think you’re going to see a lot of impact of — or negative impact of wholesale on our numbers in the fourth quarter.

Marvin FongBTIG — Analyst

OK. Great. Thanks, Oded. And then just looking at the inventory for sale, I realize you have cars, you’re working on that aren’t yet on the site.

Just curious if you could comment on your outlook for the — how — if you’ll be in good shape for inventory for the seasonally strong first quarter? Thanks so much.

Oded SheinChief Financial Officer

So —

George ArisonCo-Chief Executive Officer

Go ahead, Oded.

Oded SheinChief Financial Officer

Look, on the inventory side, we entered the quarter in a really strong position. We spoke in August about the fact that we had a strategy for how we would approach inventory going into Q3 and Q4, which was to sell through inventory that we had bought over the summer at what we thought was very high prices, and slowdown acquisitions in late August and September when normally you see a decrease in pricing. And we execute on that strategy and that benefited us dramatically with GPU in Q3, and we’re really happy about that. And then we also were able to enter Q4 in a very strong position with inventory, and are really happy with that at this point.

Obviously going into next year, we will need a significantly more — a larger amount of inventory than we have going into Q4 because we are going to be aiming for a strong growth here in 2022. And we’re doing what we need to do in order to grow our inventory. All year, we’ve actually never had a problem with inventory, I think for folks in the industry, generally, they’re used to people having a chance, but we’ve not really had a challenge. Our natural position has been very strong and we’ve been very happy with that.

And it’s really exciting to see the reconditioning to able keep up with our inventory as needed, and be able to get it ready to be sold in a quick way. So I think one other thing I will say, I think it ties to the point that you made regarding wholesale, which is that we sell a much broader set of cars retail. Like cars all the way from zero years to 11-12 years in age, so that really kind of helps us with inventory position as well, but resulted that we sell a lot less cars on [Indiscernible], because a lot of cars that to come our way, we sell retail. So that — I think that’s hopefully answered the questions.

I also am excited hopefully to a day when we can do this going one room over than many different rooms, and we don’t have speaking over each other. 

Marvin FongBTIG — Analyst

So yeah, I’m looking forward to that. Thanks so much, George and Oded.

Operator

Thank you. Our next question comes from Alex Potter of Piper Sandler. Your line is open.

Alex PotterPiper Sandler — Analyst

Perfect. Thanks, guys. First, congratulations, Toby. Good luck.

I had a couple of questions following up on F&I, encouraging, obviously, to see the trends there. I guess, this can be a relatively high friction sales process, at least in the context of the traditional automotive retailing industry. So I’m wondering kind of the strategies you’re using there to get those higher F&I attach rates? 

Oded SheinChief Financial Officer

Ales, so yes, F&I is definitely not an easy thing to sell. And there’s an actual sale involved versus people just kind of choosing to do it. I think that’s true across virtually every service type of component like a vehicle service contract or anything else outside of the automotive industry. We are, I think, making really good progress in increasing our tax rates, but we need to continue to do that, including providing the right type of training for our team.

This is something that the team needs to learn how to do. And obviously, in an environment where you’re trying to grow the team here are kind of keeping up with both growth and training, and there’s a little bit of a drag on that. So we’re working through that, and we think that we’ll be in a good position for that in 2022. Additionally, we’ve spoken before about the fact that there are opportunities in the kind of contracts we have with our partners, and that’s another area where we’re working through.

And, you know, overall, we think we’re on a good path increasing our numbers to where we want them to be by midpoint, which is about $1,299 to $1,400. It’s not the kind of thing where like one thing you do, results in an additional 200, 300 more. It’s a lot of small things that add $25, $50 at a time, that ultimately adds up to the number they do want to get. 

Alex PotterPiper Sandler — Analyst

OK. Great. And then maybe one follow-up here also on F&I. Is it possible that, obviously, we’re seeing high transaction prices now? Some of that is market-driven.

I don’t know the extent to which maybe some of that is also favorable mix. Generally speaking, you have higher F&I attach rates on higher-priced vehicles. So if you subscribe to this idea that vehicle prices are going to come back down or normalize, do F&I attach rates go down with them? Or is that not a risk? Thanks.

George ArisonCo-Chief Executive Officer

I think it’s certainly true that for really inexpensive cars, F&I attach rates are slightly lower, especially when it comes to vehicle service contracts, but it’s like you have a $7000 car, or maybe now it’s selling for $9000 in light of inflation, the likelihood of a vehicle service being attached to that vehicle because it’s 10-year-old or 11 or 12-year-old car is lower. There’s also a possibility that the loan attach rate is lower on that as well because people have that kind of money to spend. So that’s certainly true on what we would call value on your value inventory. Attach rates are generally lower and we’ve spoken about that in the past.

But for everything else, price, I don’t think is the driver of attach rates. The way people buy automotive vehicles is like thinking about their monthly payment. What can they afford to pay on a monthly basis? And obviously, they look at it at the whole picture. What are they paying for vehicle? What are they paying for any add-ons that I might add? So while I don’t have a proof for this, you could actually considerably argue that as prices increase much more quickly than people’s salaries do.

Actually, folks are more concerned about being able to do a monthly payment as larger and might not do attachments as much because they need to have certain monthly payment. And then in a — in that scenario, actually you could see that it’s quite — it’s normalized and there’s some depreciation in prices as a result of this attention in the market ending. You could see higher attachments of people’s monthly payments would then be able to absorb both vehicle service, kind of data to back it up, but I think that’s a hypothesis that [Inaudible] about internally, and how this works. But overall, I think the goal for us is to increase our tax rates.

And as we do that, we think that F&I numbers will go up as well. 

Alex PotterPiper Sandler — Analyst

OK. that’s super helpful. Thanks a lot, George. Good quarter. 

Operator

Thank you. Our next question comes from Rajat Gupta of JPMorgan. Your line is open

Rajat GuptaJPMorgan Chase and Company — Analyst

Great. Thanks for taking my questions and congratulations, Toby. I would echo other comments on the call as well. You just had a question, maybe a couple of questions.

Firstly, just to follow up on the $2,500 medium-term GPU, on what kind of volume level, is that based? Any thoughts on that? 

George ArisonCo-Chief Executive Officer

So the 2,500 is not volume specific. It has to do with the progression of our ability to be efficient on the operational side. Now obviously, scale helps to that end. But we need to be able to staff and train and learn and improve on all facets of operations in order to be able to increase F&I and reduce reconditioning costs.

And we’ve done a really, really good job there over many quarters, and we should continue to do that. 

Rajat GuptaJPMorgan Chase and Company — Analyst

Understood. Got it. That’s helpful. And then just on the hiring and the staffing, you’re ramping up investments significantly here in the fourth quarter.

In the shareholder letter, you mentioned adding sales support. How do you manage, like all the other functions, too? You’re investing ahead of growth, you’re adding salespeople, but also hiring reconditioning stacks and like logistics, trucks, drivers? Like how do you manage all those other pieces of the puzzle just so you’re not caught in a situation where you have one end of the funnel fully equipped, but you’re having throughput issues on the other side. So how should we think about that in the context of, you know, just the fourth quarter SG&A pick-up? 

George ArisonCo-Chief Executive Officer

And I want — or totally. Our hiring focuses across all the needs that we have as a company, that includes drivers, that includes mechanics. It includes concierge, salespeople, customer service, etc., across kind of all areas where we need people to execute on the business. And I think the really important thing here is that almost everything we do is in-house, are conditioning that in-house our logistics in-house, etc.

So we have a pretty good sense of what we need and unfortunately, we don’t have dependencies on one of people. I also want to mention this think’s really important as a differentiator for how we operate. We get into our concierge or driver gets into the car and takes that drive that car out to the customer, right? So we don’t put the car on a truck and then drive it that way. So the type of labor force is hiring there is different.

And then just how we operate in the field, logistically different as well. So we are investing across all those pieces and ensuring that we have the right amount of people that we need for going into Q1. And obviously, as you can imagine, that really be focused to manage it very carefully and deliberately. And I think we’re doing, I think, very well in that regard.

Like I said, the market is not an easy market to hire in. One of the things that we wanted to do by diversifying our locations and going into Texas, for example, etc., we’ll still be able to not have a dependency in hiring just a on location, including the fact that California, obviously is a lot more expensive than a lot of places. And so we’re definitely going to benefit from that as well because now we’re not hiring just in California but are also hiring in the new locations that we launched. So that’s kind of my overall.

Hopefully, that answers the question. 

Rajat GuptaJPMorgan Chase and Company — Analyst

That’s helpful. That’s helpful. 

George ArisonCo-Chief Executive Officer

Sorry to interrupt, just a shout out to our people ops team, about seven or eight months ago, we hired a new CPO, and she brought in a whole team of seasoned professionals who really attack the issue of hiring, hiring across the economy is difficult right now, and they’ve done a fantastic job in addressing each part of our organization and really helping us. So we feel very confident with them in place leading us forward. 

Rajat GuptaJPMorgan Chase and Company — Analyst

Great. And then just on the Ecom center, the large one that you’re opening, in that case, too, it’s going to be the concierge due delivery. And just — I mean, is that an approach that you plan to replicate across other regions as well in terms of like just the size and scale of the Ecom center? Thanks.

Oded SheinChief Financial Officer

Yeah. So our approach to refinishing facilities is, I think, quite unique among our peers. We rent space, and then we put in a lift into that facility. And then we operate that facility.

This lift can be moved from one facility to the other. Our leases are generally on the shorter side so that we can move from one location to another location based on our need as we grow and the capital investment that you can make to get into a body is fairly limited as well. So I think we said in our shareholders at about 80% of the equipment can be reused from one facility to the next. And that’s kind of the approach we’ve had for a long time.

This is not to criticize an approach of building kind of a factor or massive recognitioning facility, and there’s definitely value to that as well. In the long term, there are cost savings that you see from that, but the upfront investment that you make for that is much larger. And at the scale that we are at today, we don’t think that’s necessary. In California, Bay Area, obviously, are a very large market for us.

And we had a facility in — or we have a facility in South San Francisco. We needed to go to a micrologicality to be able to continue to grow almost all the growth that we’ve seen this year a same from existing markets. And we think there’s a ton of opportunity to continue growing into the market. And so our approach has been — we need a bigger facility to achieve that.

And that’s why we are moving to a facility that is two and a half times bigger than what we have now. But the capital investment to do that is pretty limited. And it will service primarily bay area locations, plus potentially a little bit of supplemental so in the northern California more broadly. Now obviously, consumers can buy car from Shift anywhere, and then we’ll ship that car to them.

That is a kind of way to buy from us. It’s not a majority by any means, but people choose to do that. And so in that case, we’ll put a chromatic and ship it to the consumer wherever the customer is across the country. But for the overall majority of customers will buy within our geographic footprint regions.

We will drive a car to them with a consider like we have always done.

Rajat GuptaJPMorgan Chase and Company — Analyst

Got it. OK. Great. Thanks for all the color and good luck.

Operator

Thank you. Next question comes from Seth Basham of Wedbush Securities. Your line is open.

Seth BashamWedbush Securities — Analyst

Thanks a lot, and good afternoon and congrats to Toby as well. I just want to dig deeper into a couple of the prior questions. The first is on retail, e-commerce, GPU, and the guidance for the fourth quarter. I’m trying to understand why there’s such a step-down, understand the seasonality effects, but the pricing environment continues to strengthen from the level which you bought vehicles over the last couple of months.

So I think that your margin should be stronger than you’re forecasting. Is this just conservatism? Or is there something else that’s going on from additional reconditioning or transportation cost perspective or something else?

George ArisonCo-Chief Executive Officer

So thanks for the question, Seth. As I mentioned before, we are very pleased to be able to guide to $1,600 to $1,700, just because it’s more than three times our number from last year, so that’s the starter. And then what happens in the fourth quarter is that there is a seasonality impact. Just people spend their money in different ways and spending its own cars is sometimes not their first priority.

So — and if they decide to do so, it becomes more competitive, and it has an impact on the final price you get for the cost. And then finally, is there an element of conservatism here? Yes, just because we had some more challenging experience in previous years in fourth quarter. And we wanted to make sure that we guide you to the best of our ability and give you our best take as of now. 

Seth BashamWedbush Securities — Analyst

OK. That’s helpful perspective. And then as it relates to F&I improvement in this quarter, the third quarter, how much of that was simply from higher ASPs relative to improvements in attachment rates?

George ArisonCo-Chief Executive Officer

Well, obviously, it’s a little bit hard to tell exactly, but the improvement was in many different ways, and you can see it in many different products as we were able to increase the attachment, both on the financing side and the other products that we sell. So I would say it was a poster board and was not that’s not necessarily focused on one thing, and I don’t think ASP is the main culprit there.

Seth BashamWedbush Securities — Analyst

Got it. Thank you

Operator

Thank you. Our next question comes from Naved Khan of Truist Securities. Your line is open.

Naved KhanTD Securities — Analyst

Hi, thanks a lot. We are hearing about more and more car buyers just getting priced out and not ending up buying. Do you think the marketing efficiency can be higher in a sort of a more normalized car-buying environment? And maybe just talk about the advertising channels, which ones are you seeing that are more effective?

George ArisonCo-Chief Executive Officer

Great, thanks for the question. Look, we certainly realize that as prices on costs have gone up and, it’s creating a complete environment for a lot of people. And frankly, that’s one of the reasons why we hope that eventually things kind of go back to where they were before and normalize. We are fortunate that our inventory is very broad.

I mean, you can buy a brand-new car from Shift, that’s six months old, all the way to a 10 or a 12-year-old car with 100-plus thousand miles. And so the price diversity that people can find it shipped very broad. And so hopefully, that’s an opportunity for people who might not be able to afford a two- or three-year-old car, given the price increase to buy and really good Shift certified, four or five-year-old diesel. And so we hope to serve them that way.

With regards to marketing, as you know, and we’ve spoken to in detail, last Q1, we fundamentally changed how we approach marketing. Historically, we’ve been very focused on marketing through digital channels, whereas with this transition, we have refocused ourselves much more on brand and building a long-term sustainable brand that will pay off book today and over the long term. The primary way in we to do that is through video advertising. Obviously, television is one area, and I don’t mean just television in a normal sense where you’re watching CNN cable, but also over-the-top television where people consume on-demand, as well as other channels that people use to both brands.

That’s where a lot of our focus is. We obviously haven’t stopped doing digital. We just do a lot less of it than we used to as a total percentage of our spend. And the digital channels that was always deployed continue to work really well for us, and we’ll continue to utilize the need.

Naved KhanTD Securities — Analyst

Thank you, George.

Operator

Thank you. Next question comes from Brian Nagel of Oppenheimer. Your line is open.

Brian NagelOppenheimer and Company — Analyst

Hi, good afternoon.

George ArisonCo-Chief Executive Officer

Hi, Brian.

Brian NagelOppenheimer and Company — Analyst

Congrats on the moves and congratulations on the nice quarter.

George ArisonCo-Chief Executive Officer

Thank you.

Brian NagelOppenheimer and Company — Analyst

So, one question just to begin. It’s relatively basic. I mean, we’re all talking about — we stressed here maybe with the significant elevation of used car pricing. As you look at your business, I mean, assuming that used car pricing will eventually normalize.

If you look at your business out, is the increase in the elevated used car prices, is that more of a positive or a negative for you? 

George ArisonCo-Chief Executive Officer

I’ll start, and then Oded, do you want to chime in, I’ll let them speak as well. So certainly, in Q2, and we saw a really strong tailwind for that call we bought cars before price elevation started, and then we had appreciation in car prices virtually every week throughout the quarter. And so that really helped us, and we talked a lot about that during our call with you guys in August. In Q3, then we saw some pressure on car prices for a little while, but then this is kind of in back in September, and that tailwind helped us a little bit in Q3 as well.

That said, so from that point, those are kind of positive. On the flip side, though, you’re operating in an extremely unusual environment, an environment that we’ve never been in before. And a lot of the patterns and kind of history that we’ve noticed about how pricing works throughout the year are no longer applicable. It would have been telling this to us for months that just throughout the history book and assume that you don’t know what’s going to happen based on history.

And that makes things much more complicated. And so from that perspective, I’m actually even more proud of what the team has been able to do because in this very complicated environment, that’s executed extremely well. And so from that point of view, would we prefer to — for things that would turn back to normal, in many ways, of course, because we could then use our historical patterns and things that we’ve learned over the years to predict better what is going to happen with pricing. And that would make everyone’s lives a little bit easier.

And frankly, consumers would be in a better place as well because they wouldn’t be paying this higher price for cars.

Oded SheinChief Financial Officer

I would just add that look, I’m fairly new to the car industry specifically, but what it occurred to me is that when you have change in the trajectory of prices, then you’re going to get headwind that we saw in Q2 or it could turn into a tailwind at some point in the future, as long as prices continue in their trajectory for a long period of time. So you have to pay more to buy cars and you get more when you sell cars. Maybe it’s a small appreciation in between that you can gain on, but if you get to normalize pricing. So right now we are in more normalized pricing versus what we saw in Q2 for example. 

Brian NagelOppenheimer and Company — Analyst

That’s all really helpful. I appreciate it. Then the second question I have, just with respect to new markets, I think in your script you talked about Houston. But I guess — maybe a two-part question, but let me — let’s discuss in kind of the performance of these new markets.

And I know you’ve said in the past that your mostly growth still comes from your legacy markets. Is that still the case and is there any change in timing of when the new markets could become bigger contributors to your overall growth?

George ArisonCo-Chief Executive Officer

Certainly this year, vast majority of the growth has come from our existing markets. Markets that we had prior to, say, November of last year, which makes sense because the other ones we’re starting on such a small end. That said, we’ve seen really strong momentum in some of the markets that we launched. Seattle went to cited in, I think, November of 2020.

And then some of the Texas markets in Q2. They’re doing really well, and we would expect them to be bigger contributors to the business next year, not to in any way, suggest that the market that we had prior to that in California or Oregon won’t grow. We expect those markets to continue to grow very well. There’s still a ton of market share to be captured in these markets.

But given just the fact that they’re growing and the end from which they’ll be growing will be bigger, we would expect markets that we launched in late 2020 and first half of 2021 should be big contributors to the business in 2022.

Brian NagelOppenheimer and Company — Analyst

I appreciate it. Congrats again. Thank you.

George ArisonCo-Chief Executive Officer

Thank you.

Operator

Our next question comes from Ben Sherlund of Cantor Fitzgerald. Your line is open.

Ben SherlundCantor Fitzgerald — Analyst

Hey guys, thanks for the question. I was wondering if the increase in PPU is entirely related to price appreciation or if you guys are also increasing the mix of higher relative price point vehicles? 

George ArisonCo-Chief Executive Officer

So I think are you implying on that that cheaper cars might have lower GPU? Is that kind of how you’re thinking about? 

Ben SherlundCantor Fitzgerald — Analyst

No, it’s not related to GPU. I’m just kind of trying to think about PPU going forward. So if we were to say, used vehicle pricing would remain at the current level, should we assume your PPU would kind of remain at that $24,000 range going forward? 

George ArisonCo-Chief Executive Officer

OK. Yes. So we’ve — there are two things that happened this year that resulted in ASP being higher than it was previously. One was a choice that we strategically made.

So in 2020, kind of as COVID started, we saw a really significant spike in demand for lower-cost cars, which makes sense. People sound like they needed a vehicle because they don’t want to be in public transportation, but they also didn’t want to spend a lot of money for a car because they had no idea where the economy would be. And so we lean into that. We have a unique ability to sell cheaper cars.

And so we may that be a really big percentage of our cars sold. Going into 2021, we wanted to reduce that cheaper vehicle percentage of our cars sold. And we did that probably because of reconditioning and partly because we got was a better mix to have as a business. And so we have chosen throughout the year to reduce the mix of cheaper cars as a percentage of total, which obviously drove our idea.

Now controlling with that, we saw this massive appreciation in car prices, which then led to what we’ve seen this year, which is that everybody goes to jump pretty significantly. So those are the two things that kind of drove price appreciation in our ASP over the course of the year. That said, we still sell a very broad second inventory. We have a ton of cars that are below $10,000 in price.

For example, even in an environment where prices have been up as much as they have. And so we can predict what’s going to happen in the future from the choices that we can internally make, we don’t expect to make any changes. We think that the mix that we have on inventory today is generally good, and we’ll continue to have that same mix in the foreseeable future. Obviously, demand from consumers changes like it did in 2020, and we’ll respond to that demand and get a different set of inventory based on that. 

Oded SheinChief Financial Officer

Does that answer the question? 

Ben SherlundCantor Fitzgerald — Analyst

OK, great. Yeah, that’s helpful. And maybe a follow-up, if I could. As you continue to scale and expand into new markets, is there a point where you need to acquire more inventory from wholesale channels? Or are you thoroughly unconstrained on the number of cars you can source from consumers? 

George ArisonCo-Chief Executive Officer

So going into this year, if you kind of look back at the modeling that we were doing in Q4 of last year, we were planning on having roughly 15% of our cars come from auction, which we thought was reasonable. Now if you look at what actually has happened this year, we have not bought 15% of our cars from auction because we saw prices go up dramatically at auction, and we just did not think it made sense to pay retail prices for auction cars, which is what a lot of people had to do. We made up for the cars that we didn’t buy an auction from consumer. And we actually — ultimately we know we’ll end up selling more cars than we thought was possible this year.

So we were able to meet the demand for cars that we had from consumer cars. That’s a unique competitor that Shift’s had for a long time, and we are able to do very well. And we don’t see any reason why we can’t continue to scale that in a very strong way in the quarters to come. Now obviously, prices normalize and wholesale prices are not as high as they are today versus retail prices, which we would expect eventually to happen once new car production kind of increases again, then we would probably buy more cars at wholesale.

Historically, Shift has chosen not to buy a lot of cars wholesale because those cars have less front-end margin. And you have to have much better F&I to be able to get to the GPU that you want when you sell wholesale because that you bought at an auction. So when we didn’t have very with F&I, we were not able to win into that as much. Now that our F&I numbers are a lot better and will continue to improve, we think there’s an opportunity actually to grow our auction purchases and then turning them into retail sales, but we need the price an option to normalize before we’re able to do that.

Ben SherlundCantor Fitzgerald — Analyst

Great. Thanks, guys.

Operator

Thank you. Our next question comes from Mike Grondahl of Northland Securities. Your line is open.

Unknown speaker

Hi, guys. This is Owen on for Mike. I have one quick one. I know the lockup or share is getting closer, but do you guys have an exact date yet?

George ArisonCo-Chief Executive Officer

Sure. So lockup expires on November 15, which is on Monday, and that’s been public for a long time ever since the transaction. 

Unknown speaker

Great. Congrats on the quarter.

George ArisonCo-Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Tania Anderson of William Blair. Please go ahead.

Unknown speaker

Hi. Good afternoon. Could you talk a little bit more specifically about your reconditioning capacity? I think it was at 600 a week last quarter, and you mentioned increasing capacity. So I was wondering where it stands now.

And then when you put in the new — you move to the bigger facility in California where you expected to be. And then can you remind me — maybe I missed this, what’s the timing on switching over to that bigger facility? 

George ArisonCo-Chief Executive Officer

OK. So let me start by saying we did not update the capacity numbers, as I’m saying, it continues to grow. It’s not a constraint on our capacity to produce and recondition cars. So we’re doing really well and going to grow into next year.

So this is one of our, in my opinion, strength in the business is our ability to do this efficiently and scale up as we expand. As for the new facility, it takes a little bit to just retrofit it and put all the equipment that we need in the place and hire the staff, even though we’re going to move some from the current facility. There will be some overlap in the 2. So at some point in the first half of next year will be full year operational. 

Unknown speaker

OK. And then can I follow up on the F&I, you see some improvement this quarter. And your midterm goal is 1,200, 1,400. Can you remind me of maybe the timing of that? And I guess, since your — you mentioned like hiring initiative that includes like better training, new partners.

Is this reasonable to — I know you talk about its incremental improvement. Is it fair to think about it being a little bit incremental improvement, being a little bit better each quarter with all these things you’re doing and toward that goal? And then the other thing is I think you’re going to probably cross the $1 billion in revenue maybe next year. So you can you update us on your thoughts on the timing of captive [Inaudible]? 

George ArisonCo-Chief Executive Officer

Sure. So I’ll start with the last point first. We always said that to be able to build counting, i.e. to be at least at $1 billion in revenue just from security point of view.

We don’t really have a concrete update on that, but only — you’re correct, I think next year is when we will actually set after we think about when to go after this and how and hopefully, we’ll be able to provide an update to you guys in a few quarters on that. As far as F&I, generally, if you look at our F&I results, we’ve improved quarter after quarter. I mean, the improvement is pretty significant from the last two quarters, so from last Q3 to this quarter. Obviously, it’s not exactly linear, some part of there might be a slight decrease as well.

But overall, we think that to get to that 1,200 to 1,400 in number, our goal is to do that in 2023. And we think we’re well on our way to kind of make that happen.

Unknown speaker

OK, thanks.

Operator

Thank you. At this time, I’d like to turn the call back over to George Arison for closing remarks, please. 

George ArisonCo-Chief Executive Officer

Great. Well, thank you, everybody, for joining us. And we all appreciate your questions and look forward to speaking to you again in Q1. 

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Henry BirdVice President of Strategy and Finance

Toby RussellCo-Chief Executive Officer

Oded SheinChief Financial Officer

George ArisonCo-Chief Executive Officer

Zach FademWells Fargo Securities — Analyst

Zack FademWells Fargo Securities — Analyst

Marvin FongBTIG — Analyst

Alex PotterPiper Sandler — Analyst

Rajat GuptaJPMorgan Chase and Company — Analyst

Seth BashamWedbush Securities — Analyst

Naved KhanTD Securities — Analyst

Brian NagelOppenheimer and Company — Analyst

Ben SherlundCantor Fitzgerald — Analyst

Unknown speaker

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