ThredUp Inc. (NASDAQ:TDUP) Q3 2023 Earnings Call Transcript

ThredUp Inc. (NASDAQ:TDUP) Q3 2023 Earnings Call Transcript November 6, 2023

ThredUp Inc. reports earnings inline with expectations. Reported EPS is $-0.17 EPS, expectations were $-0.17.

Operator: Good afternoon, ladies and gentlemen, and welcome to the ThredUp Q3 2023 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, November 06, 2023. I would now like to turn the conference over to, Lauren Frasch, Senior Director, Investor Relations and Strategic Finance. Please go ahead.

Lauren Frasch: Good afternoon, everyone, and thank you for joining us on today’s conference call to discuss ThredUp’s third quarter 2023 financial results. With me are James Reinhart, ThredUp’s CEO and Co-Founder; and Sean Sobers, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.thredup.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 fourth 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 attract new buyers and the effects of inflation, increase interest rates, changing consumer habits, climate change 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 or future 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 and 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 with 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 third quarter 2023 earnings call. We are excited to share ThredUp’s financial results and key business highlights from our third quarter. In addition to our financial results, we will provide an update on key company specific initiatives contributing to our growth, ongoing expansion of adjusted EBITDA and some early thoughts on 2024. I will then hand it over to Sean Sobers, our Chief Financial Officer to talk through our third quarter 2023 financials in more detail and provide our outlook for the fourth quarter and fiscal year 2023. We will close out today’s call with a question-and-answer session. Let me start with our Q3 results.

We achieved another quarter of strong financial performance to sped a highly dynamic environment. We delivered accelerating revenue growth, outperformed on gross margin and inflected our active buyer account for the first time this year to achieve a record number of active buyers. Our revenue of $82 million is an increase of 21% year-over-year. Our consolidated gross margin exceeded expectations at 69% driven by another record gross margin in our U.S. business of 78.5%. We are especially proud that our record active buyer account returned to growth in such a competitive retail environment, reaching 1.8 million, up 4% compared to the same quarter last year. We continue to be pleased with our improvements to adjusted EBITDA as we posted a loss of just $3.6 million and 1,180 basis point improvement year-over-year, and a sequential improvement of 170 basis points from the prior quarter.

Of note, we increased expenses across operations, product and technology just 4% while driving 21% revenue growth and 27% gross profit growth. We believe this best illustrates the ability for our marketplace to achieve increasing efficiency at scale. Finally, on top of record gross margins, I want to share that our U.S. business reached adjusted EBITDA breakeven and generated free cash flow in Q3 for the first time in our company’s history. While we still have some work to do in Europe, we are increasingly confident that executing on our U.S. playbook in Europe will yield similar success. I’d now like to provide an update on our progress towards EBITDA breakeven on a consolidated basis and some initial thoughts on 2024. With just one quarter left in our fiscal year, we have clear sight to achieving our goal of reaching quarterly EBITDA breakeven, but not on our original Q4 timeline.

There are a few primary reasons for this. First, there are accelerating headwinds in Europe. Since our European business is not a consignment-based business yet, there are fewer levers to manage gross margins. We expect this to change over time as we transition to consignment, but in the meantime, it is presenting a headwind to our consolidated margins. Second is an uncertain macro environment that’s continuing to pressure discretionary spending in both the U.S. and Europe, resulting in a weaker consumer landscape than we had anticipated. And third, given that challenging backdrop, in order to maintain momentum in our buyer growth into 2024, we’ve chosen to be incrementally more promotional to set us up for success next year. With active buyer growth returning, we made the decision to fuel our momentum rather than distinguish it in pursuit of short-term goals.

We remain committed to building a business for the long-term and will not optimize for short-term optics when faced with difficult decisions. It is these types of decisions that enable us to be extremely proud of the continued progress we are making towards our growth and profitability goals in the face of ongoing consumer uncertainty and a competitive promotional environment. We expect the U.S. business to again be EBITDA positive in Q4 despite Q4 historically being our slowest quarter in the U.S. At the midpoint of our annual guidance for 2023, we expect to grow revenue 11% and expand EBITDA by nearly 1,000 basis points. Quarter-after-quarter, we’ve demonstrated that we are one of the best performing companies in 2023 on a revenue growth and margin expansion basis, and we remain confident that we will be breaking even for the total company on an annual basis in 2024.

We still view breakeven as a way point to our future, and we will continue to make decisions based on what’s best for building a sustainable and generation-defining company that endures long beyond arriving at this milestone. Though retail has been grappling with an extended consumer malaise, this challenging backdrop has only strengthened the underlying engine of our business. ThredUp is executing at a high level and returning to active buyer growth while expanding margins is key proof of this. As we look into 2024, we plan to pursue the clear opportunity to accelerate our current momentum in both the U.S. and Europe, while achieving breakeven on a full-year basis. While the consumer landscape continues to be choppy and retail remains highly competitive, we believe resale benefits as consumers continue to prioritize value and seek deals, and we are confident in the team’s ability to manage the business in this environment.

As we head into the final quarter of the year, we will maintain our focus and steady approach in controlling the controllables, how we spend our time, the quality of the decisions we make during times of uncertainty, the urgency we have to invent on behalf of our customers, and the willingness to keep learning what’s different this time around. I’m grateful to the exceptional team at ThredUp who shows commitment and grit every day in service of delivering on our goals. I’d now like to provide an update on some of the key company initiatives that are enabling us to drive revenue growth, active buyer growth and margin expansion. First, we are continuing to make progress towards our vision to create a marketplace experience that achieves the highest levels of customer satisfaction.

Over the last few quarters, I’ve shared initial tactics related to our Thrift Promise, which aims to do right by the customer with every order. And in Q3, we debuted our delivery promise with the goal of delivering purchase to doorstep shifting in three days or less. Our dedication to delivering a delightful post-order experience is not only improving retention, but also improving the margin profile of our business. Our return rate in Q3 decreased by more than 700 basis points compared to the same quarter last year. And since we first launched Thrift Promise, we’ve generated millions of dollars in logistics savings. Second, we are deepening our commitment to our community of sellers with a renewed focus on providing the easiest and most convenient way for people to resell apparel online.

We have a diverse seller base, but whether you are an everyday seller who wants to just get it out of the house, a VIP seller seeking expedited processing times, or a resell-as-a-service client customer interested in getting credit to your favorite brands, we are expanding our offering to cement ThredUp as the go-to destination for all types of sellers. Third, as we continue to apply learnings from our U.S. business to our European business, we are driving more active buyers in Europe. Of note, we’ve rolled out key for credit to our primary European markets after seeing success in the U.S. and we made meaningful progress with the shift to consignment sales. Short-term, the transition to consignment will present a real headwind to revenue due to the accounting treatment, which Sean will discuss more in a minute.

Long-term consignment will significantly improve gross margins, expand the selection of high quality supply, and ultimately yield ongoing net revenue growth. Fourth, a Resale-as-a-Service business or RaaS has added several new brands to its client roster, including Beyond Yoga, part of the Levi Strauss Company, Smartwool, part of VF Corporation and Journeys. As a reminder, RaaS enables brands and retailers to deliver customizable and 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 expands our long-term profitability metrics by adding sources of recurring high margin revenue. Finally, we are continuing to deploy artificial intelligence across our distribution center network and our product experience, seeking new applications that lower processing costs and lead to greater economic value.

To give an example, we are using AI to build a robust product catalog with millions of unique items and to surface a more personalized selection from that inventory, all allowing customers to seamlessly shift through our vast assortment to find items they love faster. By evolving and executing against these initiatives, we believe we will create enterprise value over time. Turning to impact. In our pursuit of enterprise value creation and profitability, we are also proud of the social impact our business has on our people, our communities, and the planet. In Q3, ThredUp was named the TIME’s 100 Most Influential Companies of 2023, and Digiday recognized us for exemplary workplace and company culture in its WorkLife 50 Awards. As a team, we aim to balance purpose and profit and believe holding these with equal importance is critical in furthering our mission to inspire a new generation of consumers to think secondhand first.

Before I turn it over to Sean, I want to reemphasize the strength of our Q3 performance and our commitment to balancing the demands of short-term scrutiny and long-term value creation. The macro environment remains uncertain, and the retail landscape is highly promotional, but we’ve never been afraid of a challenge and have always persevered when things get tough. We believe we are focused on the right strategic initiatives as we close out the year and expect positive momentum into 2024. I’m excited about how far we’ve come, but more importantly, I’m excited about where we are headed next. With that, I’ll now turn it over to Sean to go through our financial results and guidance in more detail.

Sean Sobers: Thanks, James. And I’ll begin with an overview of our results and follow-up with guidance for the fourth quarter and the full-year. I’ll 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 Q3 results, which we believe reflect our ability to execute in a challenging retail environment. In the third quarter of 2023, revenue totaled $82 million, an increase of 21% year-over-year. Consignment revenue grew 39% year-over-year, our product revenue shrank by 8%. We are pleased with the accelerating growth in consignment revenue as we continue to make progress in transitioning our RaaS supply and our European business to a consignment model.

So we are still early in our Europe transition, we are proud to report that as of this month, all of our RaaS partnerships are on a consignment basis. While the transition of these businesses to consignment should be a tailwind to gross margin over time, we expected to slightly meet revenue growth simply due to the accounting treatment. As a reminder, consignment payouts reduce net revenue while owned payouts are in COGS and reduced gross margin. We are happy to report that we achieved a record number of active buyers this quarter, reaching 1.8 million growing active buyers for the first time this year. Orders increased 11% year-over-year to 1.8 million. For the third quarter of 2023, gross margin was 69%, a 350 basis point increase over the same quarter last year.

Given the ongoing transition to consignment and the resulting shift in the accounting for revenue, we believe that gross profit dollars are the best indicator of our underlying growth and are pleased to report that our Q3 gross profit grew an impressive 27%. Our consolidated results exceeded our expectations driven by record U.S. gross margins of 78.5%. This outperforms was the result of converting our RaaS business to consignment sooner than expected and continued improvements in how we optimize our marketplace, including pricing, promotions, returns, payouts, and fees. For the third quarter of 2023, GAAP net loss was $18.1 million compared to a GAAP net loss of $23.7 million in the same quarter last year. Adjusted EBITDA loss was $3.6 million or a negative 4.4% of revenue for the third quarter of 2023.

We reduced our EBITDA loss in Q3 by two-thirds versus last year, representing an approximate 1,180 basis point improvement as we tightly managed expenses and leveraged our investments on higher revenue. To this point, we are proud to report that our hard work drove a 21% year-over-year revenue increase and a 27% gross profit increase on just a 4% increase in ops, products and technology expenses, illustrating the powerful leverage of our marketplace model. Turning to balance sheet. We began the third quarter with $82.6 million in cash and marketable securities and ended the quarter with $80.2 million. We are proud to report that we use just $2.5 million in cash in Q3. Our significantly reduced cash burn is due to reaching cash flow positive from operations in addition to spending maintenance levels of CapEx of just $1.5 million.

As a reminder, in Q3 of last year, we used $25 million in cash, illustrating the enormous progress we’ve made over the last four quarters. We have made significant progress this year on our path to profitability, reducing our EBITDA loss in every quarter this year, allowing us to achieve EBITDA breakeven and free cash flow in the U.S. in Q3. While we expect the U.S. business to continue to be EBITDA breakeven in Q4, we will not be enough to overcome losses in Europe and reach consolidated breakeven on our targeted timeline. However, we expect to achieve breakeven on an annual basis in 2024. As we look to 2024, we believe there are two important factors to consider when contemplating revenue growth. First, our ongoing transition to consignment will drive gross profits and margin improvement, but mute revenue growth due to the accounting treatment.

Second, as James mentioned earlier, we are operating in a highly competitive retail environment that continues to challenge ThredUp’s value proposition, which we would expect to continue through 2024. Due to our reduced CapEx needs and our ability to manage our expense structure, we were able to significantly reduce our cash burn in Q3. We expect to continue at maintenance CapEx levels of approximately $2 million per quarter until 2026, which provides us with a high level of confidence that we can fund the business with our existing cash until we reach cash flow positive. 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 down on our existing debt before them.

Turning to guidance. We are adjusting our Q4 outlook to account for mounting headwinds in Europe and a challenging consumer buyer environment in the U.S. For the fourth quarter, we now expect revenue in the range of $79 million to $81 million, which is a 12% growth rate at the midpoint, gross margin in the range of 61% to 63% of revenue, adjusted EBITDA loss of 2% of revenue to breakeven, and a basic weighted average share of approximately 108 million. For the full-year of 2023, we now expect revenue in the range of approximately $319.5 million to $321.5 million, gross margins in the range of approximately 66.2% to 66.7% of revenue, adjusted EBITDA loss of 5.3% to 4.7% of revenue and basic weighted average shares outstanding of approximately 105 million shares.

In closing, we are extremely proud of the progress we’ve made towards our growth and profitability goals, even if not on the timeline we had originally planned. Despite ongoing consumer uncertainty, we remain confident in the underlying ThredUp engine and look forward to delivering results that demonstrate our capacity to navigate this difficult environment and emerge a stronger, more profitable business on the other side. James and I are now ready to take your questions. Operator, please open the line.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] Thank you. And your first question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.

Irwin Boruchow: Hey, guys. Just a couple of questions for me on the outlook for 2024. Understanding the headwinds to revenue, I guess a couple of questions, is the revenue guide that’s more muted now for 4Q? Is that a good baseline to kind of think about how we should think about fiscal 2024? Maybe to follow-up to that would be Sean, based on the headwinds that are in there based on the consignment – the mix of the consignment. Can you give us roughly what you’re expecting the consignment mix to look like in 2024? Yes, those are my two questions. Thank you.

Sean Sobers: Yes. So I think the basis – sorry the Q4 basis is fairly good. We’re still migrating more revenue to the consignment model because even though we’ve moved all of our partners from RaaS over to consignment, we still have inventory we need to sell through. So that actual consignment percentage of revenue will continue to go up as we go through 2024 in addition to we are actively migrating the business in Europe also to consignment. So yes, I would expect that ratio between consignment and owned to continue to increase all the way through 2024, which will…

Irwin Boruchow: Yes. I guess I’m just curious, can you give a little bit more detail, like, is like 65% of rev, 70%, like I’m not sure, just understand how much – like the context of how much mixed benefit there in pressure on revenue and then benefit our margin?

Sean Sobers: Yes. I mean, the U.S. business kind of collectively is about 80% of the business, and that by the time we exit 2024, it’ll be almost entirely consignment at that point in time. And Europe will just basically start transitioning now, and I think by the time we end, 2024 you can think of it’s going to be something like around 80 in total as a percent of consignment.

James Reinhart: And I think to your question on the revenue piece, I mean, I think, yes, I think Q4 is a baseline, as we think about going into 2024, I mean, we still feel very good about the momentum into 2024. It’s just as you got into a little bit of back to school holiday season, especially in Europe, it was just a little bit softer than we had anticipated. And so rather than try and lean into those numbers, we thought, let’s make the smart decisions and set ourselves up for 2024 in a smart way. So that reflects in the guidance.

Irwin Boruchow: Got it. Cool. Thanks, guys.

James Reinhart: Yes.

Operator: Thank you. And your next question comes from the line of Dylan Carden from William Blair. Please go ahead.

Dylan Carden: Thank you. Couple ones. I guess just curious the gross margin that you achieved in the third quarter and the sort of the step down in the fourth quarter looks to be a little bit bigger than the seasonality that we might otherwise expect. Anything to call out there particularly as you’re – I mean, is that just reversal of some of the – what you just were speaking to as the consignment versus product revenue?

James Reinhart: Yes. Dylan, definitely some of it is the consignment piece and the mix in Europe, right? Because Europe is – Q4 tends to be their biggest quarter and so you have a little bit of that revenue at lower gross margin sort of coming in. And then the other piece is we’ve just – as we we’ve said, I mean, it’s a promotional environment out there and we’ve made the conscious decision to be incrementally, I think, more promotional to continue to grow active buyers and maintain buyer engagement. Because we ultimately think that’s the right strategy as you get into 2024. And so on the margin, I think we’re being a little bit more discounting than we were in Q3. But again, we think that’s the right approach in this environment. And I think that’ll play out well for us in 2024.