ThredUp Inc. (NASDAQ:TDUP) Q4 2022 Earnings Call Transcript

ThredUp Inc. (NASDAQ:TDUP) Q4 2022 Earnings Call Transcript March 6, 2023

Operator: Good afternoon, ladies and gentlemen. And welcome to the thredUp Q4 2022 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Monday, March 6, 2023. I would now like to turn the call 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 fourth quarter and full year 2022 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 first fiscal quarter and full year of 2023, future financial performance, market demand, growth, prospects, business strategies and plans, our ability to attract new buyers and the effects of inflation, increased 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 of 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 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 these 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 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 fourth quarter 2022 and fiscal year 2022 earnings call. As we head into a new fiscal year, we’re pleased to share thredUP’s financial results and key business highlights from our fourth quarter. In addition to the financial results, we’ll also share our commentary on the consumer environment, strategic focus areas of the company and our continued progress towards profitability. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our fourth quarter 2022 and fiscal year 2022 financials in more detail and to provide our outlook for the first quarter and fiscal year 2023. We’ll close out today’s call with a question-and-answer session.

Let me start with our Q4 results. We closed out 2022 with a strong quarter, generating revenue of $71 million, excluding a $2 million catch-up benefit related to annualized gift card breakage, which Sean will address in further detail later in the call, we achieved $69 million in quarterly revenue, far exceeding our own internal expectations. Our gross margins were 63%, 300 points lower than a year ago due to the strong growth of our lower margin European business Remix and the fact that Remix is becoming a larger proportion of our overall business. Year-over-year, our gross margins in the U.S. were actually up slightly at 71%. Active buyers and orders in Q4 reached $1.7 million and $1.5 million, respectively, both declining slightly year-over-year, as we reduced marketing spend and what we expected would be a highly promotional fourth quarter.

We also continue to make progress towards our profitability goals. Q4 adjusted EBITDA improved by 800 basis points or $5 million quarter-over-quarter. Even without the $2 million annualized gift card benefit, adjusted EBITDA improved 470 bps quarter-over-quarter. This is a significant step up compared to the previous quarter and we believe this quarter’s solid performance and the sequential EBITDA improvement demonstrate how we’re successfully navigating a tough consumer environment in apparel. I’d like to take a moment to briefly reflect on 2022 and how we’re anticipating the resale opportunity evolving into 2023. For the midpoint of 2022, we started to see significant headwinds in resale, macro conditions were deteriorating with inflation and higher interest rate squeezing consumers.

This was particularly true for the budget shopper, who represents the majority of thredUP’s customer base. As has been well documented, we saw the budget consumer pull back on discretionary spend during the second quarter of last year and continue to sit on the sidelines into Q3 and Q4. In addition to this demand pullback, we were also seeing elevated inventory levels across retail. For the second half of last year, retailers were aggressively liquidating their overstock via direct and wholesale channels, causing downward pressure on prices across the industry. This was especially pronounced in Q4 when brands leaned into promotions even further for holiday shopping. While we don’t face the same inventory risks as traditional retailers due to our consignment model and flexible supply chain, we believe we were affected by this influx of cheaply priced clothing.

The thredUP brand stands for the value and that message was being washed out in this hyper-promotional landscape. So to summarize, the operating context in Q4, we were facing a combination of budget shoppers pulling back on discretionary purchases, at the same time when retailers were overflowing with apparel. So we saw many of our core shoppers sitting on the sidelines and for those that were in market, resale value proposition was diluted relative to the exceptional bargains being offered for new clothing. Now a couple of months into 2023, we’re still in the midst of a challenging consumer environment and inventories remain elevated relative to historical levels, but we’re seeing a few things real-time that make us cautiously optimistic about the setup for resale in 2023.

For one, the dynamics in our marketplace today, particularly around the budget shopper, are much more stable and predictable compared to last year. Unlike last year, when we pretty much ripped up the playbook, now it’s clear how to delight, track and retain the customer in this new normal. And second, we believe inventories are getting leaner across retail and promotional activities are likely to decline. As we prepare the business for the year ahead, we think the conditions for resale could be quite favorable. When retailers eventually right-size their inventory balances and reset prices to normalized levels, we think there’s an opportunity for resale to shine. Consumers across income levels have been primed to expect significant discounts when shopping for their clothes.

We don’t expect that sentiment to wane in 2023, and if and when buyer health starts to slowly recover as we believe it does follow in every downturn, we are confident that our value proposition will enable us to capture wallet share from buyers across the income spectrum, as we’ve done for many years. So while we’re playing defense in the current environment, we’re also positioning the business for offense when buyer and competitive dynamics normalize. So with that backdrop, I’d now like to turn to a few strategic areas we focused on in the fourth quarter that we believe will set us up for success in 2023 and beyond. First, we are optimizing unit economics with continued experimentation in how we manage our marketplace. As a marketplace, we can make real-time adjustments to both the supply and demand sides of our business.

Examples of this include testing a new fee for our cleanout service, experimenting with how we manage returns and calibrating our promotions and merchandising mix based on the real-time data we observe in our marketplace. Many of these experiments started to take shape in Q4 with early indicators that we’re successfully positioning the business to attract and keep more shoppers in 2023 as improving unit economics. Second, we have increased our processing capacity by officially opening our newest distribution center in Dallas. The opening of our flagship Dallas facility increases our U.S. network-wide storage capacity from 6.5 million items to 9 million items. This facility has some of our most advanced technology, building upon our years of learning from creating best-in-class infrastructure for single SKU apparel.

Such technology includes a multilevel garment storage system, providing 25% higher storage density, while consuming 40% less energy than previous versions and automated tag photo studio that automates size and brand identification and redesign inspection studios optimize for future automation and inbound processing. This new distribution center will enable us to quickly scale processing when we start to see consumer recovery and already has this pacing to hit our four-week backlog processing target by mid-summer. As we process bags in real-time, we can better scope on the mix of seasonal goods we put online and we think increased buyer engagement, purchase frequency and satisfaction. Third, we are reinvesting in growth now that the consumer environment appears more stable and is set up for resale more promising.

Many of our customers pulled back on overall spend or were able to shop new apparel at bargain prices last year. We think those dynamics are largely behind us and we see an opportunity to earn more wallet share in the year ahead. Turning to our Resale-as-a-Service business or RaaS. We’re gaining momentum as brands and retailers increasingly adopt resale as a way to engage new and younger customers. RaaS now serves 42 brand clients and we have recently launched new programs with J. Crew, Kate Spade, Francesca’s. Those retailers now joined brands like Tommy Hilfiger, Madewell, Athleta, Pacsun, Vera Bradley, Michael Stars and Fabletics, among many others who are choosing our RaaS platform as the go-to resale provider for apparel. 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. Turning to Remix. Many of you are familiar with Remix, the European fashion resell company we acquired in 2021. A year and a half in, we are thrilled with Remix’s performance and the progress we have made driving consignment supply growth, increasing marketing efficiency and improving the business’ margin profile. As shared last quarter, we opened a new 320,000 square foot hi-tech distribution center near the company’s headquarters in Sofia, Bulgaria. This distribution center is expected to triple Remix overall output at full capacity by the end of the year.

Despite economic turbulence amidst inflation, rising energy costs and a war in Eastern Europe, we believe Remix has proven to be resilient and has maintained a strong growth trajectory. Now I’d like to provide an update on our goal of reaching adjusted EBITDA breakeven in the back half of 2023 and our progress towards being free cash flow positive. I’ll start by saying that we remain confident in our path forward to achieve these goals. In past earnings calls, I shared with you how our marketplace model allows us to flex our processing cadence, inventory sourcing, prices, seller payouts, return policies and merchandising mix. I also shared how we significantly reduced expenses across headcount, R&D, discretionary spending and CapEx to position the business for the uncertain economic environment in which we find ourselves.

One area I’d like to put a finer point on is CapEx, with our Dallas distribution center now open, we are planning to reduce our CapEx spend by more than 60% in 2023 versus last year and do not expect further significant CapEx investments until at least 2025. We believe this past quarter’s results and sequential improvements in adjusted EBITDA are indicative of our ability to execute across all of these areas. As we look ahead, we remain committed to rigorously managing expenses and CapEx to position the business to not just achieve breakeven, but also expand free cash flow over time. While we expect a challenging consumer and discretionary environment to persist, we will also be preparing our product, operations and growth strategy, take advantage of a broader recovery.

I’d like to take a moment to connect thredUp’s core purpose and mission with our ESG strategy. As we continue our journey to inspire a new generation of consumers to think secondhand first, we are keeping social and environmental impact at the forefront. In Q4, we published our inaugural Impact Report, outlining how we are helping our people, communities and the planet while growing a sustainable business. We also announced an exciting partnership with the AZEK Company to recycle all of our return cleanout bags in AZEK defy products, which are recognized for their innovative and environmentally sustainable design. We’re also thrilled to have joined The American Circular Textiles coalition. ACT will serve as a much-needed advocate for policies to accelerate the adoption of circular fashion business models and solutions in the U.S. For example, we recently endorsed a Maryland Bill that eliminates sales tax on secondhand items under $20.

It’s exciting to see policymakers amplify the power of circular business models to drive sustainability and to benefit the American consumer. Before I turn it over to Sean to walk through our financial results and guidance, I want to reemphasize the strength of our 2022 results amidst the challenging macro environment. We’ve shown adjusted EBITDA improvements quarter-over-quarter and are balancing those efforts with our long-term strategic investments to drive growth in the business. When the consumer discretionary environment recovers and apparel liquidation moderates, we’re confident that thredUP’s mission of providing great brands at great prices in a sustainable way, will shine brighter than ever and we’ll be ready to capture that moment with an incredible selection of clothing in an ever-improving marketplace with stronger unit economics, a leaner cost structure and increased profit elasticity.

With that, I will now turn it over to Sean to go through our financial results and guidance in more detail.

Andrea Meling/Shutterstock.com

Sean Sobers: Thanks, James. And again, thanks everyone for joining us on our fourth quarter and full year 2022 earnings call. I’ll begin with an overview of our results and follow-up with guidance for the first 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 upcoming 10-K filing. As a reminder, our results now include our Europe business for one full year after the 2021 acquisition. We are very proud of our Q4 results. For the fourth quarter of 2022, revenue totaled $71.3 million, a decrease of 2% year-over-year. This includes a catch-up benefit of $2.1 million related to gift card breakage and we expect an immaterial benefit from this going forward.

Excluding this, we delivered fourth quarter revenue of $69.2 million, a 5% decline, still exceeding the high end of our guidance. Consignment revenue was down 16% year-over-year, while product revenue grew 20%. The decline in consignment revenue and outsized growth in product revenue is primarily attributable to a mix shift. This is driven by an outstanding performance from our European business during their seasonally strongest quarter and the relative growth of our RaaS supply. Currently, the majority of revenue from both RaaS and our European business falls under product revenue, though we are continuing to transition each of these businesses towards consignment over time. On top of a difficult macro environment in which our budget customers remain on the sidelines, we also pulled back on marketing spend in Q4 as the highly competitive environment led to a decline in marketing efficiency.

These factors resulted in a 2% decrease in active buyers to $1.7 million for the trailing 12 months. We ended the fourth quarter with 1.5 million orders in the full year reaching 6.5 million orders, a decline of 8% and an increase of 22% year-over-year, respectively. For the fourth quarter of 2022, gross margin was 63.1%, a 300-basis-point decline over the same quarter last year. Excluding the $2.1 million breakage benefit, our gross margins came in at 61.9%, while our U.S. gross margins were up slightly to 71.4%, the 420-basis-point decline in our consolidated result over the same quarter last year was due to the outperformance in our lower margin European business, which is a large portion of our consolidated results for the fourth quarter.

As a reminder, we plan to transition the European business towards a higher margin consignment supply as we seek to improve its gross margin profile over time. In the near-term, Europe’s product margins are significantly lower than the U.S. However, we see many opportunities to improve these margins through investments in automation and data science in order to be closer to the 50% range that the U.S. business commands. For the fourth quarter of 2022, GAAP net loss was $19.5 million, compared to a GAAP net loss of $17.9 million in the same quarter last year. Adjusted EBITDA loss was $5.8 million or a negative 8.2% of revenue for the fourth quarter of 2022. Excluding the breakage benefit, our adjusted EBITDA loss was $8 million or a negative 11.5% of revenue, an approximate 300-basis-point improvement compared to the same quarter last year as we tightly managed expenses and leveraged our investments.

We are incredibly proud that our Q4 adjusted EBITDA loss even without the breakage benefit, improved over Q3 by $3 million or 470 basis points, exhibiting the work we’ve done to rationalize our cost structure. Turning to balance sheet. We began the fourth quarter with $130.6 million in cash and marketable securities and ended the quarter with $111 million. Our cash usage from operations was $15.2 million, while we spent $3.9 million on CapEx as we began to wrap up the first phase of investment in our Dallas DC. Based on our Q4 progress, we remain confident and continue to believe that we are on track to reach adjusted EBITDA breakeven in the second half of 2023, assuming we achieved quarterly revenue of at least $80 million to $85 million. As we’ve mentioned, reaching breakeven is just a way point on our path to being free cash flow positive and expanding profitability.

Given that our working capital needs are minimal, adjusted EBITDA and our CapEx spend are the key drivers of free cash flow, both of which we believe will improve materially in the second half of this year. We spent $20 million in cash in Q4 and expect this spend level to decrease slightly in the first half of the year and then decreased more significantly in the back half. Our plan to reduce cash usage this year will be driven by the diminishing CapEx needs and improving EBITDA as we implemented strategic initiatives and streamline our cost structure. After spending $43 million in CapEx in 2022, we are planning to significantly reduce the CapEx to less than $15 million in 2023. We’re planning to spend approximately $6 million in Q1, $5 million in Q2 and the ramp down to maintenance levels of about $1 million per quarter in the back half of the year.

Importantly, as we’ve improved efficiency within our DCs, we do not expect to expand beyond our current global unit capacity until 2025 at the earliest and are planning for maintenance levels of CapEx and so then. Due to our significantly reduced CapEx needs and our ability to manage our expense structure, we expect to be able to fund the business through our existing cash balance. 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 down on our existing debt before them. Though we’ve seen 2022’s deteriorating trends stabilized, we believe that the pressure of elevated retail inventories will ease throughout the year, there remains a high degree of instability in the macro economy.

Even as spending may shift as shoppers adjust to the new normal, we are managing expenses and refining our model to ensure that we adapt to this environment and emerge a stronger, more profitable business. Turning to guidance. For the first quarter, we expect revenue in the range of $71 million to $73 million, gross margin in the range of 66% to 68% and adjusted EBITDA loss of 12% to 10% of revenue and basic weighted average shares outstanding of approximately $102 million. For the full year of 2023, we expect revenue in the range of approximately $310 million to $320 million, gross margins in the range of approximately 66% to 68% and adjusted EBITDA loss of approximately 8% to 6% of revenue and basic weighted average shares outstanding of approximately $105 million.

In closing, we are pleased with our fourth quarter performance and are confident we can deliver on our growth and breakeven goals as apparel markets normalize and ongoing efforts to improve our business take shape. James and I are now ready for your questions. Operator, please open the line.

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Q&A Session

Operator: Thank you. Your first question comes from Trevor Young with Barclays. Please go ahead.

Trevor Young: Good results. When you guys gave guide around mid-November, obviously, halfway through the quarter, it seemed like you’ve been a bit more cautious on the outlook at that point and the guide, now coming in well ahead of that even excluding the gift card impact. Was that a result of December picking up more than you expected or maybe not seeing a deterioration in further trend? That’s my first question.

James Reinhart: Yeah. Hey, Trevor. It’s James. Yeah. I mean I think October was reasonably strong and then I think November and December we expect it to be a little softer than they were. So I would say that the business performed better than we expected. I don’t think it was that December was amazing by any stretch. I also think a number of the things that we started to work on across kind of the portfolio of products on the front end, just started to work a little better and I think you can see in our guidance for Q1, like, it’s reflective of we think things are working better and so that’s sort of the approach.

Trevor Young: Got it. That makes sense. And then on the inventory coming out of 4Q, I think, it was up kind of mid-high-teens Q-on-Q. Is that where you expect it to be and do you feel good about the kind of the quality of inventory as you head into 2023?

Sean Sobers: Yeah. No. I think that’s about where we expect it to be. I think keep in mind that the business that — the inventory shows up on the balance sheet is the owned inventory only. So that’s going to be a small portion of what’s related to the U.S. and probably over 50% of it relates to the European business.

Trevor Young: Got it. Thank you, both.

Operator: Your next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

Kate Fitzsimons: This is Kate on for it. I’m wondering if you could just elaborate a bit more on the stabilization that you called out with your budget shopper? Just anything that you’re seeing from like a behavioral or a category perspective that you’re finding encouraging? And then, James, you mentioned it in your remarks, you guys are just getting sharper at appealing to that customer. Just any key learnings kind of coming out of the holiday that you were particularly pleased with that you’re even more encouraged by looking towards 2023?

James Reinhart: Yeah. Sure. Yeah. Kate, I mean, I would characterize it more as the transition of budget shoppers who were maybe not in market is often right or who are on the sidelines, as that starts to stabilize, you just have better data both quantitative and qualitative around what that shopper is looking for. So then we can start to bend the mix, the promotions, the marketing messages, everything can sort of work a little bit better once you really understand the context that you’re living in. And so I think as we move through 2022, we just got sharper around that type of messaging and the storytelling we were doing to those budget shoppers. And I think a lot of that work in Q4 is really informing how we’re moving into 2023.

And so I think in a world where the environment is very competitive and consumers are feeling pinched, you can just get sharper around what you’re discounting, how you’re discounting, the types of messages you’re putting in market that I think really allow that shopper to relate to the product offering. And so like any management team, I think, now that we understand where we are and what we’re dealing with, we can make the right moves to make the business work better and I think that’s where — I think we’re feeling some confidence as we move into 2023.

Kate Fitzsimons: That’s helpful. Thanks very much.

Operator: Your next question comes from Anna Andreeva from Needham & Company. Please go ahead.