Shift Technologies, Inc. (NASDAQ:SFT) Q3 2022 Results Conference Call November 8, 2022 5:00 PM ET
Company Participants
Cheryl Liu – Manager of Corporate Strategy
Jeff Clementz – Chief Executive Officer
Oded Shein – Chief Financial Officer
Conference Call Participants
Sam Reid – Wells Fargo
Rajat Gupta – J.P. Morgan
Brett Knoblauch – Cantor Fitzgerald
Operator
Good afternoon. And welcome to the Shift Technologies Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Cheryl Liu, Manager of Corporate Strategy. Please go ahead.
Cheryl Liu
Good afternoon. And welcome to the Shift Technologies third quarter 2022 earnings call. Joining me on the call today is CEO, Jeff Clementz; and our 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 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 Jeff.
Jeff Clementz
Thank you, Cheryl, and good afternoon, everyone. I’d like to start up by thanking the Shift employees for their hard work and execution during the third quarter. It was no easy task to rapidly pivot to our new operating plan, but the team did a great job meeting the challenge. I’m incredibly inspired, by the way, our team pulled together and immediately set out to the task at hand, giving our customers a simple, fair way to buy used cars. As we talked about on our last call, the third quarter was a transition period for the company as we pursued our new strategy. The new operating plan prioritizes accelerated profitability and lower cash burn, though at lower unit volumes. As a reminder, the actions we took during the third quarter include the following: streamlining sales through our online checkout channel and eliminating test drive; optimizing our inventory mix and assortment to favor value vehicles, which have a more favorable front end GPUs and overall profitability; refocusing our physical footprint to our West Coast market, thereby, rationalizing from 10 hubs to three; reducing frontline roles in corporate positions by about 60% across remote and hub locations; and reducing corporate overhead costs. After tireless work during the quarter, our new operating plan is now in place and we have the foundation to execute. The third quarter transition does impact the financial results we are reporting today, but we expect the benefit to be evident in the fourth quarter results and beyond. Oded will discuss the third quarter results and guidance shortly.
Turning to our strategic priorities. First, we prioritized achieving positive unit economics from GPU expansion and from leverage in selling and marketing, while tightly controlling G&A expenses. As stated earlier, we have shifted our inventory mix to skew towards value vehicles. Now over half our vehicles are considered valued, which we define as vehicles older than eight years old or over 80,000 miles. As we’ve talked about, sell through on those vehicles are consistently higher and have greater front end and total margins. In this environment with rising interest rates and consumer affordability headwinds, we believe that consumers will naturally be drawn to more value oriented vehicles when making a car purchase in the coming months. Second, increase our penetration in West Coast markets to grow e-commerce units sold. As you know, we eliminated test drives in the third quarter and moved our focus to an online checkout channel. Not only this move improved profitability, but as expected, we have seen strong consumer response as more and more people are opting for a true e-commerce offering. We successfully rationalized our hubs down to three to focus on our West Coast markets. Although, we are still selling and fulfilling cars to anywhere in the US.
The team continues to focus on product innovation as we advance our mission of making car purchase and ownership simple. We rolled out several exciting product updates throughout the third quarter, including a new buyer checkout and dashboard experience that allows the customer to see what needs to happen next to complete their purchase and undergo those actions themselves, such as uploading required documents. We also made a number of other improvements to the online shopping and checkout experience, including substantial modernization of the vehicle detail page, new personalized shopping experiences and a more interactive price payment and shipping calculator. Our third priority was to scale our marketplace business. In Q2, we launched a beta version of the Shift marketplace powered by Fair with a number of inventory listings from our dealer partners in the Greater Los Angeles area. We’ve learned a tremendous amount from the data test and plan to relaunch in the first half of 2023 as we optimize and improve the platform. The team continues to buildout the shopping experience and we’ll add additional F&I partners and customer shopping options.
Additionally, over the past year, we’ve heard there are many dealers that have been very impressed with Shift’s sell your car flow, which enables Shift to sort greater than 95% of our inventory directly from consumers. We do this by providing instant quotes and by enabling the customer to conveniently sell their car to Shift at their home or by bringing it to our hub. Given this dealer interest, we’ve created and are launching the auto acquired platform that allows dealers to embed Shift’s sell your car flow into their Web site. We are also pleased to announce a significant partnership with Off Lease Only, a terrific dealership group based in Florida. We will initially focus on optimizing our platform for Off Lease Only sell your car flow, which will launch in Q4 and then open up the platform for additional dealer partnerships. We believe the combined value proposition of the auto acquired platform and the Shift dealer marketplace will provide significant value to dealer partners across the US. And finally, we’re looking forward to integrating the Shift and CarLotz businesses upon the close of the merger to create a profitable leading omnichannel used auto retailer. The executive team and Board of Directors remain excited by the pending merger, and believe that it will create value for both Shift and CarLotz shareholders.
At Shift, we are building a powerful ecosystem. Car sellers and buyers love our ever evolving e-commerce capabilities. In the coming months, we will continue to expand our ecosystem by becoming a leading e-commerce platform that enables our dealer partners to build deeper, more engaging relationship with their customers. And in doing so, we’ll increase the access to high quality inventory to buyer leads and sales. We will then further build out our platform by adding the CarLotz stores and capabilities to create a leading omnichannel retail customer experience. I will now hand it over to Oded to review our financials.
Oded Shein
Thank you, Jeff, and good afternoon. I’ll start with our third quarter results. Our team continued to perform very well in pivoting to the new strategy while executing the restructuring and inventory liquidation required by the [change]. Our third quarter adjusted results met or exceeded our expectations despite facing macro headwinds in a slowing economy, including rising interest rates and elevated gas prices. We were also able to successfully manage the mix into higher demand value vehicles. Total revenue for the third quarter was $161.9 million, a decrease of 10% versus the prior year period. Total units sold was 6,709 compared to 8,111 last year, a decrease of 17%, mostly due to the closure of several hubs in August 2022 as part of the transition to the new operating plan. The mix between retail and wholesale was unusual due to increased use of the wholesale channel to liquidate inventory as we adjust to a smaller geographic footprint. Wholesale was 28% of unit sold in Q3 versus 20% last year. Adjusted gross profits per retail unit was 1,925 in the quarter versus 2,056 last year. Our F&I income or other gross profit per retail unit was 1,243, 26.6% higher than last year.
As we transition to a higher penetration of value vehicles with lower ASP, we expect our F&I performance to moderate. However, the increased front end margin on value cars is expected to offset the reduced F&I, resulting in higher total retail GPU. Adjusted SG&A expenses were $39.4 million, which compares favorably to adjusted SG&A expenses of $46.6 million last year. The decrease was primarily due to lower operating costs and marketing expenses as a result of the restructuring. Lower SG&A this quarter also contributed to improving our adjusted EBITDA loss. Adjusted EBITDA loss for the quarter was $30 million compared to $33.3 million in the prior year period. We ended Q3 with total cash of $56 million, which includes cash and cash equivalent of $44 million and restricted cash of approximately $12 million. Cash balance declined against the second quarter, primarily due to the cost of restructuring, liquidating inventory and operating loss. Our debt outstanding under the floor plan facility decreased by $52 million from $94 million in Q2 to $42 million at the end of Q3. The decrease was a function of our lower inventory as a result of the liquidation of inventory in closing hubs.
Now turning to guidance. For 2022, we now expect revenue in the range of $665 million to $675 million. This implies Q4 revenue to be in the range of $60 million to $70 million. The totals for the fourth quarter and the year are lower than previously provided as we adjust to the new strategy with lower e-commerce units and also lower ASP due to the focus on lower priced value segment. We expect 2022 adjusted GPU to be in the range of 1,700 to 1,800, higher than our prior guidance of 1,600 to 1,700. The implied fourth quarter adjusted GPU guidance is 1,800 to 1,900. The GPU benefit is the result of pivoting towards the value segment with higher front end and total margin. We still expect 2022 adjusted EBITDA loss to be in the range of $133 million to $138 million. This implies fourth quarter adjusted EBITDA loss of $20 million to $25 million.
With that, I would now like to turn it over to the operator for Q&A. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will come from Sam Reid of Wells Fargo.
Sam Reid
Maybe something high level to start out here. You’ve essentially cut your business down to three markets, and you prioritized those geographies. What are you doing differently to build scale at this hyper local level versus what you were doing across your 10 markets prior? And then maybe just to kind of dig a little bit deeper here, do you have a sense as to how your market share in those three core markets compares to where you might have been say a year ago on a like-for-like basis?
Jeff Clementz
On the first question, and we addressed this last quarter and it remains our strategy that, by operating three hubs along [Technical Difficulty] LA, we’re able to talk to or to serve customers across the West Coast from Seattle to San Diego. And we can do that because we’re able to enable the customer to pick the car up at our hub or to ship the car to them, and we are finding that there is customer demand for Shift’s inventory and assortment across all of those markets. In terms of the market share, I do not have the market share top of mind or top of hand at this time, but we can follow up on that.
Sam Reid
And I guess one more question about the strategy shift, now that we’re a quarter in here. Can you give us any guideposts around conversion now that you’ve shifted to the fully e-commerce [modded] model versus the hybrid model that included test drives before? Just curious kind of what you’re seeing sort of on a like-for-like basis there as well.
Jeff Clementz
We’re continuing to work hard on conversion. So as I mentioned in the opening remarks, both in terms of our product experience and our process, selling process, we have continued to innovate. I will say that we are still aiming to get to kind of a normalized steady state as we had a significant amount of transition throughout the quarter as we were shifting our inventory and also selling through the inventory that was excess from our — the hubs we were closing. So I think we are still working towards getting to a steady state, but we’re feeling very good about where conversion’s at. And our product pipeline for the remainder of the year is quite strong as well.
Operator
The next question comes from Rajat Gupta of J.P. Morgan.
Rajat Gupta
On the fourth quarter, it looks like the volume outlook is much lower than what was previously expected, given your focus on unit economics, especially in the gross margins. But the SG&A cost per unit at that low level of volume is still going to look very bloated. I mean, when should we expect you to ramp back volumes or refocus on volumes, or if you want to like continue to maintain this level of volumes in order to maintain gross margins? I mean, has there been enough restructuring done or is there opportunity for more cost actions in order to lower that SG&A per unit? And I have a follow up.
George Arison
I would say that the third quarter was a quarter of transition where we executed the transition from the old strategy to the new and included, of course, the hub restructure, the liquidation of the inventory, so a lot of heavy lifting. As we’re thinking going forward, we have a model that, yes, will have lower volume. We are only in — and we are less markets than we used to be. We also narrowed our channels to the online channel. So it’s going to be a different operation. And what we have seen is that with inventory being highly reduced, volume was reduced as well, especially in, I would say, in the September, October period and it’s already rebounding at this point. So we think that as we go into next year, and we are going to provide next year guidance and information on future calls, you’re going to see improving volumes and better unit economics definitely on the SG&A side. So just to answer your question, we don’t see further restructuring from this point going forward.
Rajat Gupta
And any color on what’s the — on your latest SG&A base, what’s the fixed versus variable competent?
Jeff Clementz
We haven’t shared exactly what is the split between fixed and variable, and it’s pretty straightforward. As we think about our lease cost and some of our facilities and some of the staffing, of course, is fixed. But there is some variable components as well.
Rajat Gupta
And maybe just lastly on the cash balance despite the restructuring, I thought like the cash came in a little higher or the cash drag was a little higher than what we had expected in the third quarter. I believe the announcement of the merger, you had mentioned that you expect the combined entity, CarLotz and yours to have roughly $125 million in cash and $15 million of that would be coming from Shift. Is that equation still correct? It looks like CarLotz cash actually might have come in a little better looking at their press release. But just curious like if you can update us on that and if we should still be expecting the $125 million, and what’s the split between yours and the CarLotz?
Jeff Clementz
So we didn’t anticipate that this is going to be an expensive process for us, because the restructuring, all the human resource expense that had to go into it, also the liquidation of the inventory, especially in a tough wholesale market. But when we think going forward assuming that the merger will occur it’s a lot of date with a vote in early December. We believe that we are going to have at least $125 million combined between the two entities. I’m not going to go which is going to bring how much, but I think in total, we’re going to have at least $125 million at the close.
Operator
[Operator Instructions] And our next question comes from Brett Knoblauch of Cantor Fitzgerald.
Brett Knoblauch
Maybe just another one on SG&A, $50 million in the quarter. I know you’re not going kind of tell us how much is fixed versus variable. But I guess even if we assume, say gross margins are like 5% this quarter on the GAAP basis, SG&A has to come down quite considerably to kind of back into that adjusted EBITDA range that you’re talking about. I guess, where should we expect SG&A to come down to this quarter?
Oded Shein
So what we shared was SG&A in the third quarter was on an adjusted basis was about $39 million. And just remember that when we think about that, we include July, that was before the restructuring and then two of the restructuring months. So I would anticipate the fourth quarter to be even lower than that. We didn’t give specific guidance of what SG&A is going to be, but I’m sure you can imply it from the other components of gross margin and EBITDA.
Brett Knoblauch
And then it seems like you talked about volumes are picking up kind of at the — in October start of 4Q. I guess, do you attribute that to maybe the mix shift of your inventory being more skewed towards value?
Jeff Clementz
I would say that it’s a combination of having the right assortment, having the right mix of assortment, so the assortment levels, as well as the improvement in our e-commerce selling process that we’re continuing to drive and the conversion rates. So all of those have helped us as we’ve started off into Q4 and give us confidence in the guidance that we’ve put forward.
Oded Shein
I think there’s also a seasonality factor in here. As you know, September and most of October are among the lowest months in the year, and then it picks up towards the holiday season. So I think that that’s part of it.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Clementz for any closing remarks.
Jeff Clementz
Thank you. I just want to take an opportunity to again, thank the entire Shift team for all the hard work to transform the business in Q3, and to continue innovating and executing in Q4. And as well to thank everyone on the call today for their time. Thank you.
Operator
The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.
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