ThredUp Inc. (TDUP) Earnings Call Transcript & Summary

Hello, everyone. I am excited to be joined this morning by James Reinhart, thredUP CEO and Co-Founder; and Sean Sobers, thredUP CFO. Thank you both for being here today.

Yes. Sorry I'm late.

Okay. Quick disclosure, please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the registration desk. So with that out of the way, maybe James, for investors who are newer to the story, talk about your founding vision for the business and sort of how it's evolved over the past 10 years.

Yes, sure. Yes. So I mean, the true founding story of the business is, I was in business school at the time, and I didn't have any money because I was a teacher before that. And I went to sell my clothes at the local consignment store, and they wouldn't take them. They said, we just do luxury. And I thought, but this is a J.Crew cashmere sweater and a Brooks Brothers sweater, I remember it so vividly. And they're like, yes, not our problem. And I, at the time, like my insight was like, well, but this is like a market failure because this stuff is not worth 0. And it should be worth $10 or $20, but there was not a mechanism in place, this is back in 2010, to do that. And so that's how the business got started. How do you like rethink secondhand goods online? And that's how we got started. And then the other key insight was consumers are really lazy. And so the idea of selling something online, like how many of you like sell on eBay on a regular basis? Like the idea was, that's really hard. But man, people are really good at putting s*** in a bag and putting stuff in a box. And so the idea was, how do you make it really easy for the consumer to get rid of the things they're no longer wearing. And so that was the core consumer insight on the selling side. And so fast forward today, now it's hundreds of thousands of bags of clothes that come into our facilities every quarter. And we process those bags, put those items online and have built this incredible marketplace.

Okay. Great. I mean, the resale space has definitely received increasing investor interest over the past couple of years. Not only is it one of the fastest growing subsectors of apparel but retail broadly. There are competitors out there. So maybe talk about the competitive moats of the business and sort of your relative positioning.

Yes. So we do 3 things that I think are really hard. So the first is, we invented a new supply chain for secondhand. So we invented the Clean Out Kit that has become the industry standard for how people clean out their closets. And so that whole supply chain to get processed goods back. And so to put that in context, I mean, people fill a bag, a thredUP branded bag. And typically, that bag has 25 or 30 items in it. We don't ask them to do anything. But we take all that clothing back through our supply chain and we bring it to one of our distribution centers. And so that whole mechanism was important. And then we built all the technology and software to process all those goods, so single SKU logistics. So if you think, if you guys all look at your clothing, I challenge you to find a barcode on it, which means there's no structured data set on any of this stuff. So it's not like you're scanning an ISBN number. You are literally making a data set. And so we're now 125 million pieces of clothing through our network, incredible data set, 35,000 brands, 100 categories, essentially building an arbitrage business. That's the software and technology. All of that stuff was built by the guys who built the Netflix DVD business. I mean, literally, the guys, not like the 25th guy on the engineering team, right? Like the guys who orchestrated Netflix's 52 distribution centers. Those are the guys who built thredUP's business. So not just new supply chain, now like new processing, automation, software, data. And then the third thing is we built the marketplace. And so marketplaces are hard to build. You need suppliers. You need sellers. You need buyers. And so bringing those 2 pieces together, millions of consumers now come together on thredUP to buy and sell. And so what I'd like to tell people is, it's not that we've done like one hard thing. Like you put those 3 hard things together and it's a pretty defensible opportunity. That's the way we think about the business.

Okay. Maybe for you, Sean, you reported earnings earlier this week, talked about sort of EBITDA margin year-over-year being relatively flat with 2021. Maybe talk about some of the investments that you're making in the business this year.

Yes. I think the biggest thing we're doing is we're adding to the processing power of the entire company. And by that, we're opening a large DC in Dallas. It's going to hold 10 million items. But we signed the lease in December and you start paying for it before you're ready to go. So there's a bit of a drag as you go through that investment. And it's going to take a few years, maybe a couple of years before we get that up to speed and at kind of an efficient capacity. So as we exit the year, it will still be lower than our normal contribution margins for a distribution center. And at the same time, we're adding a distribution center in Bulgaria as well for our Remix acquisition. And that is, we're going to replace their existing facility, about double the capacity. And I'll step back to the U.S. for a second, we've opened already 2 processing centers in Dallas to help us process as well and get through all of that supply that we have and get more items on the marketplace. And in addition, there's some small minor investments in people related to the SG&A side.

Okay. Maybe just pivoting off of that for a minute, the Bulgaria distribution center. Can you talk about Remix's exposure to Russia, Ukraine, Eastern Europe broadly, if you're seeing anything there? And ultimately, from a Remix investment perspective, how that could impact profitability maybe over the next couple of years?

Yes. I think the simple answer on do we sell or do we get supply from Ukraine and Russia? No. But it is in Europe and is in Eastern Europe. So there's a bit of a general overhang with what's going on, and we don't know what's going to happen. So hopefully, it gets better in the near term and in the long term, too. But again, there's a little bit of just general concern across the board. It is a brand-new acquisition, brand-new business for us. So I think we're very logical about how we forecast that business, and we're appropriately conservative. So I think we're okay there from that perspective.

Okay. And then maybe on the Texas distribution center, you sort of talked about the step function increase in capacity that it allows. Short-term headwind from a profitability perspective, but what should that allow you to do over the next couple of years and how would we expect those margins to scale there?

Well, I'll start. I know James wants to finish, I'm sure. But I think the great thing about what we're seeing now is, we're doing all this investment in '22 and we're not going to do another DC until the earliest of '25 for the U.S. So we'll have all that investment made in '22 and we won't need to open another box. We'll have great processing with the processing centers. And you'll start to reap those benefits as you go through '23, '24 and then '25. And I do think the other side of it is, even when you get a facility with all the slots in, and so let's say the 10 million storage capacity is there, you're not at peak efficiency yet. You're not filled in. The team there isn't operating a business or isn't operating a box that holds 10 million items that they've done over and over again. So efficiency continues to grow. And I just point back to Atlanta where we have 3.5 million item capacity there. We're not full there. And we haven't been running it at what I'd say functional capacity. So there's a lot of opportunity just to get that business or that side of the business contribution margin better than it even is now.

Okay. So I guess taking, James, do you want to add anything on?

No, no. That's great.

So I guess taking all these things together, how should we think about time line to profitability?

I would say focus, I'm not going to say a date, obviously, but we're going to focus on our quarterly sequential improvement to EBITDA rate and then eventually dollars as we go through this process over time. We're very focused. I sit in James' staff meeting, obviously, every week. It's a bullet point we talk about as a group. So it's a very, very key focus for us.

The thing I would add though from a strategic point of view is like the point isn't to break even. Like I think we've lost the plot. Like the point isn't to break even. We don't care about that. The question is, what are the investments you're making so that every quarter you are in a position to expand margins and expand those profit dollars. And to do that, you need to make very thoughtful investments over a medium to long-term horizon. And so what I spend most of my time thinking about is not what the quarter we're going to break even, although I know that's what Sean has to like answer lots of questions about, but like how do we make sure that the next quarter, we say, hey, remember that massive facility we built? Yes, we expanded gross profit. That went down to the bottom line and we're making more progress. And the next quarter, we say the same thing. And the next quarter, we say the same thing. So like what I'm after, as a founder, is like a sustainable growth engine that can grow and expand margins over 3, 5, 7, 10 years. And I think sometimes you get lost in the like, when are you going to be profitable? And like that is not the question. The question is, how are you going to sustain profits over time in an evolving market. And like the thing I think people forget about thredUP's business is, look, we're building a massive moat. And so a year from now or 2 years from now, we're going to look up and be like, man, it's really hard to compete with these guys. And I think sometimes investors forget that. That like at the end of the day, building a huge competitive advantage that can expand profitability over time is the most important thing. So very much like the Amazon playbook, right, it isn't sufficient to just break even, it's how do you use that moat for your competitive advantage.

I guess maybe on that, can you talk about like the core unit economics of the business on a per order basis, and maybe that will help people sort of think about the contribution.

Yes. I mean, I think we've reported that the thredUP stand-alone margins, gross margins are in the 70%, 71% for the year. We continue to expand in the U.S. above that. When I started the business, the gross margins were negative, right? Like we'd like staple the $20 bill to every outbound order, right? But I think like what I was really passionate about was like, I had conviction on like this evolving market opportunity and the evolving point of view around like how you can build advantage over time. And so from negative margins to 71% last year and expanding to our long-term targets of 75% to 78%, like that's pretty good. And I think that how that translates through to the bottom line is really important because as a marketplace thredUP is going to sell close to 30 million-ish, 30 million pieces of clothing this year. That's a lot of clothing. Do you know how many merchants we have with the company? One. Do you know how many we have producing clothing at the company? Zero, right? So like we're not forecasting trends. We're not doing any of that stuff that like a traditional retailer does. It's a marketplace. And so when you have those types of gross margins in a marketplace context, it leverages really nicely.

Okay. Maybe talk about how you acquire customers, acquire supply. IDFA has been a headwind that a lot of people have talked about. You guys have navigated it pretty well. So talk about what kind of allows you to be that insulated.

Yes. So really importantly, for people to understand is we've never spent a single dollar, right, directly acquiring sellers. All great marketplaces are built on a competitive advantage around supply, right? What constrains Airbnb's growth, right, is new listings. What constrains OpenTable's growth was like new restaurants. Like all two-sided marketplaces tend to be supply-constrained. And thredUP has built an engine where we do not have that constraint. The opposite is true. We have more supply than we can process today. So a really important part of our like strategy. And as far as like how we acquire customers, what's so surprising about the IDFA piece is that people were surprised about the IDFA piece. It's not as though like this happened overnight. Like this has been coming. It has been telegraphed. And so when we knew it was coming, we then put the pieces in place to kind of build and be defensive around it. And so we did not see real meaningful changes to our business. We've always had a diverse mix of supplier channels and buyer channels. And I think the team has done a fabulous job of navigating around it. And what I would say is that the team is built to navigate these things not just today but in the future, right? And I think that's what having a diverse set of channels means.

Okay. One thing we haven't talked about is Resale-as-a-Service, the RaaS piece of the business. I think one of the most differentiated assets of your business. You've onboarded a lot of new partners like Farfetch, LG, adidas this year. Talk about the strategy, how it's evolving and how big of an opportunity you think it could be.

Yes. I think over the last 10 years, what you have seen is marketplaces really drive resale penetration and growth in the industry. And my thesis is that the next 10 years will be much more driven by brands because I think every brand and every C-suite is saying, man, as you said, Lauren, right, man, the resale industry is growing 11x faster than our business. Like how do we get into that business? And so the work that we've been doing over the last couple of years, the reason why we're making these massive investments in infrastructure is very much to serve the next generation of resale, right, which is brands. And so what that means, Resale-as-a-Service, is we help brands launch take-back programs that amplify like our supply. And so we work now with 28 clients. You can go to Athleta. You can go to Madewell. You can go to adidas. You can request a co-branded thredUP Clean Out Kit, put all your items in there. And then the differentiator is instead of getting cash at thredUP, you actually get credit at the brand. And so every brand loves this. Those brands want to give out as many Clean Out Kits as possible because it's credit back to their brand. So the brands love that piece. That amplifies our supply advantage. And then we're building white label resale shops for brands where a brand can turn on a resale shop that's fully powered by thredUP in the back end to sell their secondhand products. And so we've launched with a number of folks. We'll have a bunch of big ones coming this year. And my vision is like a year from now if you are so gracious to have us come back, right, a year from now, you're going to say, hey, how are all those clients doing? And I'm going to say, look, we've got 40, 50 clients, and all those resale shops are driving huge circularity. And the magic of that is that we don't spend any time worrying about how those businesses do because that brand is ultimately driving that. And I think people misunderstand that.

Okay. Anything you can share on the economics of those partnerships?

We're not disclosing too much on the economics, but the basic way to think about it is there's variable costs in the supply chain. So the fees that we charge a brand to kind of do the take-back program. There are platform fees we charge based on the services that they use. And then there's some fees on like usage on the demand side. So think about it as variable across the board and then platform like subscription, like SaaS revenue for brands that are utilizing our platform.

And think about, I think to add in on that is, everything that we do for a RaaS client is what we do for our normal suppliers and sellers. So it's just, the process isn't any different inside the DC for adidas. So I think that's the key thing too. We're going to make money on stuff that we already do, more money.

Right. Okay. One more for me and then if anyone has a question in the audience, we can certainly take those. Maybe just talk a little bit about the ESG story of the business. Some of the key KPIs that you've shared of what you're doing from an environmental perspective.

Yes. I mean, it's an exciting part of like our story because as thredUP gets bigger, we just do more good in the world. And I think, I remember having a conversation on the roadshow like, do you give profits for the things you sell? I was like, no. Our mere existence is good for the world. Like the bigger we get, the more clothes we recycle, like the better it is for, oh, right, yes. And so I think, one, I think the point is like our ESG strategy on the E side is just we want to recycle and circulate as many clothes as possible. And so everything we do, and that's why RaaS is such a passionate part for me is, we can teach the world to fish, right? We can teach brands how to be more sustainable over time. And on the S and the G side, I mean, I think all the work we're doing in our communities. I mean, we have employees in the Ukraine, right, that we're trying to relocate. We spend a lot of time on workforce development in our distribution centers, on our corporate office, equity across our workforce. And on the governance side, we just added our fourth female Board member. The Board is now 44% female. We just announced 2 Board members stepping down, so it'll actually go up close to 60%. So trying to be like a really good corporate citizen across all those categories.

Great. Anyone have any questions?

Come on.

Maybe what do you think is the most underappreciated aspect of the story?

I think people like, I think it's sometimes hard to appreciate like a generational like structural change in like how people shop, like those habits. Like some people are like, well, I don't shop secondhand, right? Or my wife doesn't shop secondhand. And I think like what you have to keep in mind is, if you talk to people who are basically under the age of 25, 2 things are true. One, they buy a lot of secondhand. And two, they don't have nearly as much money today as they're going to have in 10 years. And when you think about like how a market is constructed over time, all those people with slim wallets but like big hearts to shop sustainably, I think those people are going to age up and they're going to be a disproportionate share of like how this market is going to evolve. And I think it's really hard to see that sometimes in the near term. It tracks like, same thing with like electric cars, right? Like we're still in the Prius stage. Like the Prius stage like I'm willing to buy an electric car but it's ugly. Like we're now like, we're still a decade away from the Tesla stage where it is really cool. And I think investors don't appreciate like when that happens, how profound the impacts are going to be for traditional retail and like how consumer demand shifts.

Sean, anything on the financial side?

No. I don't want to take away from that.

Maybe on international expansion, obviously, Remix is sort of kickstarting the European expansion. You talked about sort of launching the thredUP brand. I guess part of that, what's the plan with Remix from an integration, keeping the brand or not? And then how do you think about international expansion from here?

Yes. I mean, Remix operates primarily in Central and Eastern Europe where they operate in 9 countries there. They don't operate in any traditionally like in large Western European markets. I mean, they do have a small presence in Germany, but like you have to like really look. And so I think the plan for the next year is to really focus on the core markets that they operate in and then build the strategy to deploy into Western Europe. The European market is large, right? It essentially doubles our TAM and looks like we have an incredible team there. So that's kind of the plan in Europe. And then we're just, we're continuing to sort of keep an eye on the rest of the world, right? And I don't think secondhand is a U.S. phenomenon, right? It's a first-world phenomenon. And so I think we'll keep our eyes open for interesting opportunities, but we're very focused on the U.S. and Europe today, and we think those markets are massive.

And what about new categories? I think the business is women's apparel, so shoes, handbags, kids, men's, I guess.

Yes.

And how are we probably towards international versus new categories?

Yes. I mean, we do all of women's apparel today. We do shoes. We do handbags. We do, do kids. I think men's is probably on the horizon, primarily from a Resale-as-a-Service business. So we have a lot of clients, let me say 2 things. We have a lot of clients that they sell men's and women's clothing and they really want to build a take-back program that reflects like the diversity of their community. And so we want to make sure we can serve those clients with their men's business. The second is, and my team always reflects this back to me, the men in the company. They're like, hey, the mission is inspire a new generation of consumers to think secondhand first. And what we're doing is inspiring a new generation of women to think secondhand first. And so where can you like build an opportunity with men over time? But I think we're going to tread lightly into that because I think women disproportionately drive this market, but you could see men's down the line.

We do, do men's in Europe.

You do. Okay. And then from a market share perspective, who do you think you're taking share from or are you creating the market?

Yes. I definitely think like we're creating a lot of new consumers in this market. We didn't do this last year. But in 2020, we surveyed consumers and said, hey, if thredUP didn't exist, where would you have purchased this item before? We've done that survey for a number of years, like 70% say TJMaxx or Off-Price. So we're definitely like, I think, eating into like dollars that might have gone. That's the way I would phrase it is like those are dollars that might have gone to TJ and maybe now like we're getting some of those dollars. But I think disproportionately over the next 10 years, it's going to be taken from department stores and specialty retail, where the value proposition for secondhand is really powerful.

Okay. And from a customer demographic perspective, your customer's lower, middle income? Kind of what does the average person look like?

Our customer profile looks like the people who shop at Target, which is everyone, right? Like rich people will shop at Target. You have less rich people who shop at Target. I have been shocked by how the penetration is evenly distributed among people of different socioeconomic classes. So yes, that's my answer. That should do it.

All right. Maybe we'll wrap it there. Thank you so much for coming, really appreciate it.

Thanks for having us. Thank you.