ThredUp Inc. (TDUP) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Trevor Young. I'm one of the Internet analysts here at Barclays. I'm pleased to be hosting the thredUP team, James Reinhart, Co-Founder, CEO; Sean Sobers, CFO. Great to see you again. Helping wrap up the second day here at the conference. So thanks so much.

You guys are probably having to be macro prognosticators just like we have been in the last couple of quarters. We're in an environment where a lot of our companies are a lot more focused than ever on what their competitors are doing because frankly, a lot of the signals we're getting across retail and e-com are mixed. I realize you may not provide comments on how you've been doing quarter-to-date. But what are you seeing across your peers or some of the competitors just in terms of promo from big retail? And how is that impacting your business? I know in the 3Q print a few weeks ago, you flagged some impact earlier in October. Just what do you find particularly encouraging or concerning as you start to look into '23?

Sure. I mean if you go back like a year, right, like and you go back to sort of '21, '21 was a year where you finished with inventories like quite constrained, right? And I remember the conversation we had internally was make sure we put in-stock ready to ship on all of our products because it was a time in the markets when nothing was in stock and the inventories were constrained. And so that was a great time for the business. Our business in Q4 last year grew 60-plus percent, right? You fast forward to a year, I think there was just this massive overcorrection, right, with the expectation that '22 would be as good as '21. And so I think when we look across the peer set, what we see is inventory is like significantly elevated, not just in apparel but in a lot, across the board. And so at least what we've heard from the peers, and I think what we sort of start -- have digested and seen as inventories were really up, therefore, the promotional environment has been brutal. And but I think what's happening is that we're going to digest all of that quicker because I think that our peers are of the mindset of like let's just digest it and move on. And so I think the setup for us in '23, when the inventory environment is better, is probably pretty good, but that's what we're seeing now.

Okay. So it sounds like almost like a bit of a faster flush of that inventory to kind of get it out before year end so we could start '23 cleaner.

I think so because I don't think if you're a traditional apparel or retailer or not even apparel, but you're a traditional retailer, I think everybody has expected this to be bad this coming season, but I don't think you want to carry over into '23.

Yes. So you just own it now and move on.

Own it now, move on.

Yes. Got it. Makes a lot of sense. On the customer side, one of the areas of concern we've heard over the last couple of quarters is some of your commentary around the budget or value-oriented consumers stepping to the sidelines and apparel altogether. I mean, the reason should be pretty well understood, just inflationary pressures. They don't have as much discretionary income to allocate to more discretionary like apparel. So that's pretty straightforward. But the big question is, when does that alleviate? What do you think it takes for those consumers to kind of step back in here?

Yes. I mean, I think you can't discount the discounting effect, right? So I think some of those shoppers are going to Walmart and buying jeans for $1, I think, to be realistic. The competitive environment is real. But I think those budget shoppers, I think if you look at the consumer sentiment, really, it's really pretty bad. Even though it feels okay, like the general sentiment is like, s*** is going to get worse, right? And so I think what you really need to see, Trevor, is like sentiment to improve. And I think that comes on the back of $3 gasoline. I think it comes on the back of interest rates stabilizing. So I think there's a bunch of things that could be catalysts in '23 that will make the consumer feel a little better. And I think that's what you would have to see, to see like a real rebound. But I think the inventory headwind is probably the bigger one for us.

Yes. And so in light of what you were saying about that inventory headwind maybe abating more quickly than you had even previously contemplated. You've said in the past about how you feel like you're positioned to ramp up marketing to take share. You want to make sure your own business is well positioned on inventory levels and be in a position of strength for when that demand does come back. What sort of signal are you actually waiting for to trigger when you ramp up that marketing spend? Is it an increased organic buyer traffic or some other signal that you're looking for there?

Yes. I mean, generally, we're looking for signals of organic traffic generally improving and then conversion rates, right? So you see a lot of people that are coming to the site, not just us but broadly Internet, coming and doing a lot of browsing, a lot of window shopping. And then like maybe I don't need this right now given the environment. And so I think we're watching for sort of conversion of those budget shoppers sessions to kind of continue to reset. And I think those will be indicators that we could be a little more aggressive. But our expectation is that things aren't going to get really too much better in '23. Like maybe they get a little better towards the end of the year, but our bet is really more than the competitive environment that pressure eases and then the value proposition for resell is better.

Yes. I think we really tried to set up that model for '23 internally to be the promotional slash too much inventory isn't cleaned up until about halfway through the year. And we feel like that's fairly conservative. And then we don't assume anything like there's this massive consumer recovery in the back half of the year. It's just like you get to some -- nothing is getting worse.

Yes, pretty reasonable base case. So when you see that improved conversion signal, what forms of spend do you think you're going to be looking at? Is it going to be like direct response advertising? Is it going to be more search related? Or is it going to be even like promo type spend to get people kind of reactivated on the platform.

Yes. I mean we continue to do -- I think we'll probably ramp up direct response in relation to kind of the growth kind of the new buyer segmentation as we tend to spend more money in the first half of the year. We tend not to spend a lot of money in Q4 because of just the more traditional environment. But I think we'll probably move upper funnel. Because I think one of the things that you need to make sure that we do is customers who may be on the sidelines who may not be opening our e-mail or getting our push notifications, right, we need to be sort of out of home. And so you'll see us probably do more top-of-funnel brand campaigns as you get into Q2, Q3. More influencer work, more stuff that feels like traditional media because I think you have to sort of break through the log jam a little bit.

It sounds like that's more to target potentially new to thredUP customers rather than like reactivations. But...

It is reactivations too. It's sort of because it's just people -- what you're trying to target is people who are not actively in your ecosystem. So maybe they were shoppers in '21 and they turned, right? And when we survey people and ask them, "Hey, why didn't you come back?" When we -- the reply we often get, "I just forgot." And that tends to be a proxy for like out-of-home advertising.

And what can you do to reactivate those buyers? And then also on the inventory side, potential sellers that maybe did a bag once and then haven't come back and probably have refreshed their wardrobe in, whatever, 12, 18 months and...

We don't have any problem with sellers. So we spend very little time talking about sellers. We're just trying to get them to not knock down the gates. So sellers is like a true competitive advantage for us. I think on the buyer side, it is much more of a traditional storytelling campaign when buyers are going to be back in market because I think what's going to play out, in my murky ball, is everybody -- we're all -- we've gotten used to now buying stuff 65%, 70% off. Like everything is on sale all the time. And then you're going to have quite a bit of sticker shock 9 months from now when J.Crew is not on sale for 45 straight days at 70% off. And I think that's going to be this moment of inflection where consumers are still going to feel a little bit pinched looking for value. And resell, I think, will look pretty good then.

Yes, you'll be in a good spot there. Shifting gears a little bit, I want to hit on Resale-As-A-Service, RaaS. It's one of the key differentiators of your platform. Frankly, I think it's going to be a bigger part of the business over time. It's a great way to partner with brands and retailers to help solve a problem for them. Can you just talk about where we stand with RaaS adoption among those bigger brands or large retailers? How should we think about sizing the opportunity moving forward? And how big can it be within thredUP over some period of time?

Yes. I mean I think -- just for those who don't know, I mean, RaaS, Resale-As-A-Service, does 2 things. So one is we power sort of take back recycling programs for brands that then help them help us monetize those goods in the form of gift cards that are captive to the brand. And we do that now for dozens of brands. I think we're still on track to have more than 40 by the end of the year. So despite a very tough environment for apparel, we managed to like achieve our client goals for '22, which has been great. And then we power resell shops. So from everybody from Target, to Athleta, to PacSun, to Tommy Hilfiger, to Madewell, Vera Bradley, Walmart, like a pretty broad set of folks and we enable those brands to do a circular strategy. So I think over time, what you'll see is almost every brand will have a resale strategy. And I think we are well positioned to meet those brands like needs because I think we're the only real scale player doing Resale-As-A-Service. I think there are some start-ups. But there's a big difference between being a start-up that can process 10,000 goods and a company like thredUP that can process millions. And so I think we'll have a pretty big competitive advantage as this plays out. And I think it will be a big part of what we do.

And to that point on having the scale consideration, I mean, is that part of the moat? Are some of these arrangements exclusive for some period of time? Because I can imagine a lot of them don't want to work with multiple providers. They'd rather have you do it.

For sure. Yes. I mean they are exclusive. Many of them are a year agreements, but some of them are multiyear agreements. And yes, I mean, I think our job is to provide sort of best-in-class experience. Look, I think you rolled the thing forward 3, 5, 7, 10 years, I think you have hundreds and hundreds, and hundreds of brands that have resell strategies that are all built on top of thredUP's technology.

Right. It solves a real pain point from what I imagine.

It does.

Can you talk a little bit about the advantages to these brands from partnering with you rather than trying to figure it out in-house? Like a Walmart, for example, they're great at logistics. Over time, they could probably figure it out, but why would they choose to partner?

Yes. I mean I think they -- everybody could, in theory, figure it out with enough time and enough capital. But the analogy I can give is store -- brands that have stores, you want to open a new store in San Francisco, you don't go buy the building. You want to add a supplier in Asia to make more clothing. You don't go and like buy the supplier, right? You contract. And most brands and retailers have a lot of these contracts and licensing arrangements across their supply chain. So to then think like resale is the one thing that they will own soup-to-nuts, sort of doesn't like hold up. And so what these guys tend to be is quite smart around where can I get the best service at the lowest cost. And I think where thredUP is positioned is we've done this for 10 years. We're very, very good at it. We have a great supply chain to do this, and so we're better off utilizing their infrastructure than building redundancy because all the infrastructure of the traditional retail environment, whether they manage their own logistics like a Walmart or they're using 3PLs, none of that is designed for single SKUs. So everything is designed for 1,000 black dresses, 10,000 pairs of shoes. Our systems are designed for 1s and 2s. And I think that's unique to resell.

And so once you get in with some of these brands or retailers, maybe a one year agreement, multiyear agreement, execute well, kind of land-and-expand type strategy, and hopefully, you get longer term, more exclusivity.

Yes. Yes. And I think resell will ultimately become a bigger part. So it's not just as our client base grows, it's that this will become an increasingly bigger part of their businesses over time. And so I think what you'll see from us over the next couple of years is, and I think what people should watch is, okay, how many clients, right? And how much is resell becoming a bigger part of their business as more of them try and get younger and be more circular?

Right. Right. It takes it from a cost center currently to a potential revenue stream.

Definite revenue stream, it's like it's -- we tell them often like it's an ESG approach, circular area that's cash flow generative and not a cost center.

Right. Yes, makes a lot of sense. Shifting gears a little bit on the international strategy and the Remix deal. We've heard a little bit of pushback from investors on whether that made sense given where your scale in the U.S. so far and given the huge opportunity still here, whether it's RaaS or just from your core business. Just help us understand why the deal made sense and why the timing was right to go international when you did the Remix deal.

Yes. I mean it's always easy to Monday morning quarterback these things.

You're talking to a sell sider so...

Yes, as a New York Giants fan, I do a lot of Monday morning quarterbacking. But if you go back to the summer of '21, right, as we were starting to put the deal together, things looked very good across consumer Internet. And the Remix team, I had known for about 5 years at that point. And we always believed that Europe was a good opportunity. And it just came together that we thought, great team, right opportunity, right price, and that we could essentially double the TAM in a way that would be accretive to the business over the long term. I still believe all of that. And despite the war in Ukraine, which was not in the investment memo, right, despite like double-digit inflation and a recession, like the business has still executed very, very well. We've been really pleased, and I think they'll prove it on the field, so to speak, how good it was over time.

And what do you think you got right about that deal? And what do you think you still need to improve upon or maybe as you've gotten in the weeds on it, you've realized like, hey, this is more than what we realized?

It's better than we thought. And it's a testament to the entrepreneurs are the single most important thing and great entrepreneurs and operating in a low-cost center, right? So Bulgaria is a very cheap place to do business, and their operations are cost-effective. Their talent is great. And I think, yes, I mean, we continue to be happy with what they've been able to do.

So a good core to build off of for the rest of international.

Definitely. Definitely. And then I think we'll do less -- we're not going to go buy something else anytime soon. So I think -- but I think having a footprint in Europe and a footprint in the U.S. are strong options for us.

Yes, makes a lot of sense. Just shifting back to the rest of the core business and the path forward in '23, a few quarters ago, you flagged getting back to EBITDA breakeven at some point later in '23, kind of predicated on quarterly revenues of $80 million, $85 million. Obviously, you've taken steps to improve the cost base, you're going much more modular on the CapEx front, which obviously helps preserve cash in this environment. Meanwhile, revenue and gross margin remained under pressure just given some of the macro that we've talked about. That's pretty well understood at this point. Can you just talk through what needs to go right from here to get to that breakeven point, that $80 million, $85 million? And what's within your control versus, as you said your base case is kind of just stable, but no improvement in macro?

You want me to start?

Sure.

Yes. I think the assumption I talked earlier about the '23 plan is that the promotional environment and the excess inventory resolved itself essentially in the first half. And that doesn't seem outlandish or outrageous. So that's our -- that's essentially our biggest assumption in the plan. We'll be able to go back in and process more and market more and overall growth will start to come back and start to get you there. I think if you look at Q2, we did like $76.5 million in a point where the quarter was kind of getting weaker on the tail end. So getting to that $80 million to $85 million from what was kind of -- or like a semi-okay quarter is not that far off, and so that's how we think about as we migrate to the back half of the year. We took -- take about $70 million out of the business in an OpEx perspective or an expenses perspective. Half of that is really variable tied to revenue, but the other half of that is costs that don't need to come back. So that can stay out of the business for a good long time, right? Incrementally, pieces come back. And that's how you march your way to that not only a revenue number but that EBITDA breakeven as well.

And James, to your earlier remark, it sounds like the inventory kind of flushing through is maybe starting to happen faster than you had originally contemplated when you first put that out.

Yes. I mean I think it's in everybody's interest to kind of put '22 behind them on the inventory side. So I think there's like -- there's general like public cohesion around. Let's not let this leak into '23. I think the other thing that's important is like all the CapEx, we spent about $50 million in CapEx in '22. We'll spend another sub-$15 million, really, in '23. Almost all of that's going to be in Q1. And so as you get into Q2, your CapEx, at least for the next few years, is behind you. And so you're not just the -- because I don't think adjusted EBITDA is like the point, right? It's free cash flow generation. And so free cash flow generation comes quickly thereafter the adjusted EBITDA. And I think that's where we're focused, and I think that's why you can't just play defense.

Right. And to that point, just remind us how much cash flow should lag EBITDA kind of on a go-forward basis in light of that improving CapEx.

Yes, I would say, think of it as like EBITDA -- adjusted EBITDA is going to be pretty close to cash flow from operations. So maybe it's a quarter or something like that. Because we just don't have that big of a net working capital drag. And then its free cash flow is essentially you just got to cover CapEx at that point. And we do probably $3 million of maintenance CapEx throughout the year, so sub $1 million a quarter. So you don't have to do a lot to go from cash from operations to free cash flow, and that's exactly how our model works. So we kind of migrate to the point where we're self-sufficient.

Yes. And back to the earlier comment, a lot of the CapEx is much more modular going forward. So as demand comes back, as you need more processing capacity, you could probably flex that up with a bit less lead time than you might not have had 12, 18 months ago.

Yes. And a lot of the CapEx that would come in '25, for example, would be carousels, right? And what we're seeing in the RaaS business and some of the work we're doing is generating faster turns of all that product. So you could get to a point where your turns are growing at a rate where you can push that CapEx out even further. And so we feel like that's a really good cash flow generation opportunity.

Okay. Great. So fast forward to 1Q or 2Q '23, maybe macro's improved, maybe it's just steady, consistent with kind of your base case, so we're in the same place, consumers are still on the sidelines. Not looking for the macro call here, but what sort of levers do you have within your control to further limit EBITDA losses if things aren't panning out how you expect? Is there more to potentially flex up or down...

Yes, for sure. I mean we still spend about $100 million in SG&A and marketing. So there's $100 million of discretion in there, right? It's not all variable. But I think in a business that's going to -- where we've already removed so much of that cost, to take another $10 million out of that, take 10% out of that $100 million, is not difficult.

So why is that spend still in there? Is that because you're focused on being positioned more offensively next year rather than, like, hey, we really need to pare this back to get to breakeven as quickly as possible?

If you told me we're heading into a deep dark recession, we would already have removed that. If you told me we're heading into like a 6-month-like pullback, we probably wouldn't have pulled back, right? So we're trying to find that Goldilocks plan where we can play offense and defense because what we want to avoid is cutting so that if things do get better, we're on the back heel again. And so that's the hardest part about running a business right now, is trying to do offense and defense at the right time. But I think if we get it right, we're going to be well positioned.

For share gains and -- yes.

Yes. And if we don't -- and if things are worse than we thought, then we can cut it, but I felt like the opportunity costs in there, we thought it made sense to not be too draconian right now.

Yes, yes, makes a lot of sense. That exhausts my questions. I do want to open it up to the audience to see if we have any questions before we wrap up here. But if not, we'll wrap it there. Thank you. Thank you very much, guys. I really appreciate the time.

Thank you.

Have a good holiday.

Yes. You, too.