ThredUp Inc. (NASDAQ:TDUP) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the thredUP Q1 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded today, Tuesday, May 9, 2023. I would now like to turn the conference over to Lauren Frasch, Head of Investor Relations. Please go ahead.

Lauren Frasch: Good afternoon, and thank you for joining us on today’s conference call to discuss thredUP’s first quarter 2023 results. With me are James Reinhart, thredUP CEO and Co-Founder; and Sean Sobers, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.thred.com. This call is being webcast on our IR website, and a replay of this call will be available on the site shortly. Before we begin, I’d like to remind you that we will make forward-looking statements during the course of this call, including, but not limited to, statements regarding our earnings guidance for the second fiscal quarter and full year of 2023, future financial performance, including our goal of reaching adjusted EBITDA breakeven, market demand, growth prospects, business strategies and plans, our ability to track new buyers and the effects of inflation, increase interest rates, changing consumer habits and general global economic uncertainty.

These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties and our actual results could differ materially from any projections with the performance or results expressed or implied by such forward-looking statements. Words such as anticipate, believe, estimate and expect as well as similar expressions are intended to identify forward-looking statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in our SEC filings, earnings press release and supplemental information posted on our IR website. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update the statements as a result of new information or future events.

In addition, during the call, we will present certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from GAAP measures. You can find additional disclosures regarding these non-GAAP measures, including reconciliations and comparable GAAP measures in our earnings press release and supplemental information posted on our IR website. Now I’d like to turn the call over to James Reinhart.

James Reinhart: Good afternoon, everyone. I’m James Reinhart, CEO and Co-Founder of thredUP. Thank you for joining thredUP’s First Quarter 2023 Earnings Call. We are excited to share thredUP’s financial results and key business highlights from our first quarter. In addition to our financial results, we will provide an update on the current conditions for resale and how the thread of customer is faring in a stubbornly challenging macro environment. Will then discuss key company-specific initiatives we’re pursuing to enable sustainable profits and growth, and we’ll provide an update on our Resale-as-a-Service business and remix. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our first quarter 2023 financials in more detail and provide our outlook for the second quarter of 2023.

We’ll close out today’s call with a question-and-answer session. Let’s begin with our Q1 results. We kicked off 2023 with a strong Q1, delivering revenue that exceeded the high end of our guidance. We achieved revenue of $75.9 million, increasing 4% year-over-year and gross profit of $51.1 million, increasing 2% year-over-year. Our consolidated gross margin was 67.3%, down from 69.1% a year ago. We attribute this to the continued growth of Remix in the more challenging promotional environment in Europe. However, we’re proud to report record U.S. gross margins of 74.5%. Active Buyers and orders in Q1 remained steady quarter-over-quarter at $1.7 million and $1.5 million, respectively, with both declining slightly year-over-year. Importantly, we have seen active buyer trends improve each month of this year, and we expect buyer growth to turn positive year-over-year in Q2 and throughout the rest of 2023.

We’re proud to share our Q1 adjusted EBITDA of minus 8.7%, which was an improvement of over 900 basis points or $6 million year-over-year. And to put a fine point on our improving operating leverage. Our operations, product and technology costs were down by 8% year-over-year, while our revenue grew 4%. And typically on these calls, I’d like to take a moment to share our perspective on what we’re seeing in the apparel landscape. For several quarters now, we based a combination of budget shoppers pulling back on discretionary purchases at the same time that retailers have been over performing with apparel and leaning into promotions to get rid of excess inventory. As a result, Resale’s value proposition has been weakened by the exceptional bargain being offered for new clothing.

We’ve been running the business under the assumption that these headwinds did not abate in the near term. But despite this backdrop, we are managing the variables that our control across our marketplace. We are leveraging our data-driven insights to optimize our unit economics. We’re evolving our consumer acquisition and retention play books to drive customer growth and focusing product and technology investments in areas we believe drive margin expansion. I’d also like to spend a few moments speaking to the budget shopper specifically. A few quarters ago, we provided insights on the budget shopper from our own data, I’d like to provide an update on what we’re seeing today. After pulling back on discretionary spend at the midpoint of last year, we’ve observed that by and large, the budget shopper has continued to fit on the sidelines into Q1, compared to the midpoint of last year, we’ve seen a 300 basis point decline in the number of big shoppers on thredUP.

Comparatively, we’ve seen a 700 basis point increase in the number of upscale shoppers buying with us during that same time period. We’re also continuing to see a clear bifurcation of thredUP customer purchasing behavior. With more premium shoppers leaning in and more value shoppers leaning out. Year-over-year, the average order value of our deep discount subsegment of thredUP customers declined 24% and while our upscale shoppers’ average order value increased 6%. So while we are benefiting from some shoppers, trading down. We’re also facing the headwinds of budget shoppers sitting out. While thredUP still offers excellent value to budget shoppers, we have been adjusting our strategies in the near term to target the non-budget segment as they are currently more engaged in the apparel market.

When macro conditions improve, the retailer promotion normalize, we anticipate budget shoppers will return to our marketplace and provide a nice tailwind for growth. As I noted at the top of our call, we are beginning to see the green shoots of this budget shopper momentum with sequential improvements each month of this year. Now let me turn to the specific initiatives we’re implementing to improve monetization in our marketplace and to optimize our unit economics. First, we’re experimenting with a variety of levers around inventory acceptance. We’ve recently started testing a new fee for our Clean Out Service to improve the quality of supply in our marketplace. Initial results indicate that our bag yield of resellable items and the sell-through of items we received have both increased since an [acting] has changed.

We’re also selecting high-margin fees that enable us to invest in a better Clean Out service for our sellers. Importantly, we’ve seen no reduction in demand for our Clean Out service. And this is no small feat. Better supply, better yield, better sell-through, higher fees. Second, in conjunction with these fees, we’re shaping inbound supply through seller incentives and messaging around the type of clothing we want. And when that supply is being processed at our distribution centers, we’re sculpting the inventory more aggressively to list a more desirable assortment online. Third, as we branch processing of cleanout kits, while becoming more selective in our acceptance and merchandising, our bag backlog has come down, now sitting at an average of 6 weeks this as low as 1 week if you paid for our VIP services.

This is the lowest our backlog has trended since before the pandemic. With a tighter backlog, we can better incentivize the right sellers, flex our fees and payouts to accelerate the right mix of goods and lower the overall tax of managing long backlogs in terms of storage, customer service and seller satisfaction. Fourth, we’re shaping a new vision for customer retention and returns reduction using our data platform. It’s called us thrift guarantee. And with it, we boldly envision a customer journey that aims to achieve the highest levels of customer satisfaction on thredUP. The thrift guarantee enables this by intercepting customers when they are most likely to be unhappy with their experience on thredUP, offering them easy, immediate and automated resolutions that drive them back to shop.

Our first project for thrift guarantee has been centered around reshaping our returns experience with a feature called Keep-for-credit with Keep-for-credit, we’re offering customers who would like to return low-priced items, the options to keep those items in exchange for shopping credit. With the keep-to-credit approach, we’ve seen a positive impact on customer satisfaction and repurchase rates as well as fewer cost of returns for items, whose price points don’t justify the return and reprocessing cost. Across [thrift guarantee] and [keep-for-credit,] our overarching goal is to delight our customers, drive attention and improve the margin profile of our business. Early signals show these strategies have been very effective in accomplishing these goals.

So to summarize, through the implementation of cleanout fees, supply shaping and thrift guarantee experiments, we are unlocking new and better ways to acquire and retain our customers while simultaneously bolstering our unit economics and positioning our business for sustainable growth. We believe that continued execution of these initiatives will result to enterprise value creation over time. Let me turn to Remix, provide an update on the progress we’re making with our European resale business. It’s been nearly 2 years since Remix became a part of thredUP, and we’re impressed with how resilient the business has been and it’s high inflation, high energy costs and the War in Ukraine. Q1 was a strong quarter for Remix. They continue to grow active buyers and net revenue year-over-year.

Remix also officially launches their consignment offering in Q2 and our goal is to shift an increasing portion of the business to consign that over time. This marks the start of a long-term strategic shift for Remix that we expect to improve Remix gross margins, generate further gross profit that contribute to long-term free cash flow. All in all, we remain excited about Remix positioning to take share in the secondhand market in Europe, a market which GlobalData expects to grow to $95 billion by 2027. Now I’d like to turn your attention to our Resale-as-a-Service business, also known as RaaS, we closed out 2022 serving 42 brand clients through RaaS, and strong momentum is carried into 2023 as more retailers look to adopt more circular business models and to track and retain customers.

Notably, we’re seeing more global brands entering the Resale ecosystem. We recently launched new programs with American Eagle, H&M, TOMS and SoulCycle as one of the lead end-to-end Resale providers, we’re thrilled to enable Resale for brands across the apparel ecosystem. We also recently announced an exciting partnership with the Container Store, where shoppers will be able to get a thredUP Clean Out Kit from any of the container stores, 97 retail locations across the country. It’s exciting to venture outside of the fashion industry and work with a nontraditional retailer to extend our impact by reaching a broader swath of American consumers looking to be more sustainable. This further cements thredUP RaaS as the go-to destination for Resale apparel, and we hope to expand our client roster with more strategic partnerships like this one.

As a reminder, RaaS enables the world’s leading brands and retailers to offer scalable resale experiences to their customers by leveraging thredUP’s marketplace infrastructure, RaaS amplifies our supply advantage, increases our sell-through and return on assets and expand our long-term profitability metrics by adding sources of recurring high-margin revenue. Next, I’d like to provide an update on our goal of reaching adjusted EBITDA breakeven. We have made significant progress each quarter since we announced our intention, and I want to reiterate our plan to achieve EBITDA breakeven on a quarterly basis and specifically in Q4 of 2023. The performance we’ve had in Q1 and what we’re seeing in Q2 only confirms our confidence in achieving this milestone and importantly, increases our confidence in achieving free cash flow breakeven shortly thereafter.

With that in mind, I want to emphasize that as a management team, we have turned more of our attention to the opportunities in front of us to grow faster and to delight more customers over time. We see a number of ways to invest in growth this year that we believe create improved free cash flow dynamics in the future. We’ve played good defense over the past year, and we look forward to sharing more of our offensive playbook in the quarters to come. While we remain steadfast in our progress towards profitability, we recognize that profits alone do not encompass the entirety of our mission, thredUP is a company that also has a strong sense of purpose which is evident in the impact we’re making on the fashion industry in the planet. We take pride in our business and brand align ESG strategy.

Today, we reaffirm commitment to balancing purpose and profit by dual listing on the long-term stock exchange or LTSE. The LTSE was designed to align businesses like ours with investors who support long-term value creation and good governance with a social and environmental conscience. Given the growth of the secondhand market, we see an opportunity for thredUP to make an outsized impact. We believe the next phase of generational enterprises will lie at the intersection of purpose and products and we are excited to be at the forefront. So let me wrap up. But before I turn it over to Sean, I want to close by restating the strength of our Q1 results despite a choppy environment out there. In particular, I want to highlight the flexibility and strength of our marketplace business model.

It is precisely the fact that we run a marketplace that has allowed us to react and flex everything from the customer mix to the supply mix to our monetization. Second, as I said in our earnings from a year ago, we will continue to balance the demand for near-term scrutiny with our commitment to investing for long-term value creation. I believe we are delivering on this commitment. And while we aren’t done yet, I’m immensely proud of our progress. And I want to take this opportunity to applaud the whole thredUP product team for their incredible work over the past 9 months, meeting every challenge with grit and grace. I want to give a high five to each of you for your creativity, your resilience, adaptability and the relentless pursuit of profit for the purpose.

I am looking forward to what we will invent next, be offshore in a more sustainable future for fashion. It’s an exciting time to be a thredUP right now, and I’m fired up about the road ahead. And with that, I will turn it over to Sean to go through our financial results and our guidance in more detail.

Sean Sobers: Thanks, James, and again, thanks, everyone, for joining us on our first quarter 2023 earnings call. I’ll begin with an overview of our results and follow up with guidance for the second quarter and full year. I will discuss non-GAAP results throughout my remarks. Our GAAP financials and a reconciliation between GAAP and non-GAAP are found in our earnings release, supplemental financials and our 10-Q filing. We are very proud of our Q1 results. For the first quarter of 2023, revenue totaled $75.9 million, an increase of 4% year-over-year. Consignment revenue was down 2% year-over-year, while product revenue grew 17%. The outsized growth in product revenue is attributable to a mix shift driven by the growth in our European business and our RaaS supply.

Currently, the majority of revenue from both RaaS and the European business falls under product revenue. But we are at different points in the process of transitioning of each of these businesses towards consignment. We expect the majority of our RaaS clients to operate on a consignment basis by the end of the year, through the process of transitioning Europe to U.S. Levels of consignment will take place over the next few years. As a result of these changes, we would expect consignment trends to improve in the second half. While the transition of these businesses to consignment should be a tailwind to gross margins over time, we would expect it to slightly mute revenue growth due to the accounting treatment. As a reminder, consignment payouts used net revenue, while on payouts are in COGS and reduced gross margins.

Active buyers declined to $1.7 million, a decrease of 3% for the trailing 12 months, while orders declined $1.5 million, a decrease of 8%. These declines were due to a difficult macro environment in which our budget customer remains on the sidelines as well as a reduction in our Q1 marketing spend. As we expect to see the promotional environment subside and the return on these dollars improved in the second half, we plan to increase our marketing spend on a year-over-year basis. For the first quarter of 2023, gross margin was 67.3%, a 180 basis point decline over the same quarter last year. We are proud to report that our U.S. gross margin reached a record 74.5% despite an aggressive promotional environment. The decline in our consolidated gross margin was entirely due to dynamics driven by our European business.

The continued outperformance of Europe’s lower-margin operating model continues to pressure our consolidated results as it becomes a larger portion of our total revenue. We are excited to preserve the meaningful growth opportunity in Europe even though it will come with a near-term drag on gross margins. However, when we look down the road to expanding our consignment revenue base and driving sustainable profits, we believe this is the right strategy for our long-term goals. For the first quarter of 2023, GAAP net loss was $19.8 million compared to a GAAP net loss of $20.7 million in the same quarter last year. Adjusted EBITDA loss was $6.6 million or negative 8.7% of revenue for the first quarter of 2023, this represents an approximate 910 basis point improvement compared to the same quarter last year as we tightly manage expenses and leverage our investments on higher revenue.

In fact, we are proud to report that our hard work drove a 4% year-over-year revenue increase on a 7% decline in operating expenses. Turning to the balance sheet. We began the first quarter with $111 million in cash and marketable securities and ended the quarter with $99.5 million. Our cash usage from operations was $4.5 million, while we spent $5.7 million on CapEx as we wind down the first phase of investments in our Dallas DC. Based on our Q1 progress and strategic initiatives we are executing in our business, we now believe that we’ll be able to reach adjusted EBITDA breakeven in the fourth quarter of 2023. For us, reaching breakeven is just a waypoint on our path to free cash flow and profitability. And we believe this time line balances our commitment to breakeven with foundational investments in our long-term goals of growth and expanding profits.

When modeling our cash flow, adjusted EBITDA and our CapEx spend are the key drivers of positive cash flow, given that our working capital needs are minimal. We believe that both of these will improve materially in the second half of 2023. We significantly reduced our cash burn by nearly half in Q1 versus the previous quarter and expect this spend level to decrease even more significantly in the second half of the year. Our plan to reduce cash usage will be driven by diminishing CapEx needs and improving EBITDA as we implement a number of strategic initiatives across our business, streamline our cost structure and leverage our investments. After spending $43 million of CapEx in 2022, we continue to plan to significantly reduce our CapEx in ’23 to about $15 million and then to maintenance levels until 2025.

We currently expect to spend approximately $6 million in Q2 and then ramp down to maintenance level of about $1 million per quarter in the back half of the year. Due to our significantly reduced CapEx needs and our ability to manage our expense structure, we expect to be able to fund the core business through our existing cash. As a result, we want to reiterate that we do not anticipate our cash and marketable securities balance falling below $50 million before reaching free cash flow positive nor do we expect to turn to the capital markets or draw on our existing debt before them. We are pleased to provide guidance that reflects both our ability to operate in a challenging environment and the strengths of our marketplace model. So the promotional landscape remains competitive and the stability of our consumer remains uncertain, we are not only flexing the advantages of our marketplace, but also executing on strategic improvements and managing expenses to ensure that we adapt to this environment and emerge a stronger, more profitable business.

Turning to guidance. For the second quarter, we expect revenue in the range of $80 million to $82 million; gross margins in the range of 64.5% to 66.5%, due to our growth in our European business. An adjusted EBITDA loss of 9.5% to 7.5% of revenue and basic weighted average shares outstanding of approximately 104 million. For the full year of 2023, we now expect revenue in the range of $320 million to $330 million. Gross margins in the range of approximately 65% to 67% as we now expect our European business to grow faster than originally anticipated and adjusted EBITDA loss approximately 7.5% to 5.5% of revenue and weighted average shares outstanding of approximately $106 million. In closing, we believe that our first quarter performance demonstrates our ability to flex our marketplace model in response to a highly dynamic environment.

Our model allows us to react to the environment in which we find ourselves a feature which we believe has allowed our results to distinguish themselves in the current landscape. We are also excited to deliver a Q2 outlook and a full year guidance that convey confidence in our ability to make substantial progress towards breakeven and ultimately profitability. We believe that Q1’s results and our Q2 plan demonstrate our capacity to execute on a variety of strategic initiatives that enable us to control our destiny even amidst the challenging consumer environment. James and I are now ready to take your questions. Operator, please open the line.

Q&A Session

Operator: [Operator Instructions] Your first question will come from Ike Boruchow at Wells Fargo.

Operator: Your next question comes from Tom Nikic at Wedbush.

Operator: Your next question comes from Dylan Carden at William Blair.

Operator: Your next question comes from Anna Andreeva at Needham & Company.

Operator: Your next question comes from Alexandra Steiger at Goldman Sachs.

Operator: Your next question comes from Trevor Young at Barclays.

Operator: Your next question comes from Rick Patel at Raymond James.

Operator: Your next question comes from Ed Yruma at Piper Sandler.

Operator: [Operator Instructions] Your next question will come from Lauren Schenk at Morgan Stanley.

Operator: There are no other questions. So I will turn the conference back to James Reinhart for any closing remarks.

James Reinhart: Yes. Thanks, everyone, for joining us for our Q1 earnings call, asking thoughtful questions and your continued interest in thredUP’s business, and we’ll see you next time. Thanks.

Operator: Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask you to please disconnect your lines.