ThredUp Inc. (TDUP) Earnings Call Transcript & Summary

So good morning. My name is Trevor Young. I'm one of the Internet analyst here at Barclays. I'm pleased to be hosting the ThredUp team again. Thanks so much for joining us, guys.

So I guess just to start off, I just want to hit on some of the near-term trends towards the end of 3Q and into 4Q. It sounded like we're starting to see some diverging dynamics in the U.S. and European businesses. Just want to hit on that, each of those businesses individually, the various successes and challenges that you're facing in each of those regions today?

Yes. I mean I think Q3 in the U.S. was quite strong, right? I mean, it was first-time EBITDA breakeven, free cash flow positive. We joked with an investor earlier this morning that when we went public in mid-'21, we thought it would take about 6 quarters to sort of reach that milestone. And so despite all the choppiness, we're just a couple of quarters behind of achieving that milestone. So feel good about the U.S. It's still difficult out there in the operating environment, but I think we made a lot of progress. I think in Europe, Q4 tends to be their strongest biggest quarter. About 40% of their revenue comes in Q4. And so that business is just a little choppier, I think, than we expected. I think some of that is the seasonal trends, and then some of it just being the more promotional environment in Europe, which we've actually seen other retailers come out and talk about since we had earnings. So it kind of validated what we were seeing. And look, I think structurally, we feel good about the U.S. business, and I think the European business will get there [indiscernible] own it for a couple years.

And that's an important distinction, particularly on the U.S. side being profitable, which I think is, frankly, being underappreciated. It's obviously the path of reaching EBITDA breakeven consolidated basis is very important to you guys and investors, but I think in the U.S. there is -- the first step is a huge win?

Yes. And we expect Q4 -- we said we expect Q4 to also be breaking even on an EBITDA basis. And Q4, in the U.S., tends to be our slowest quarter. So the fact that we can do that back-to-back quarters with Q4 being slow, I think portends a pretty bright future into '24. And it's not going to be easy, but we expect to be able to continue on that momentum.

And I think it's like a true validation of the business model itself. And then I think something we don't show a lot of, but we know, is like the unit economics in the U.S. If we just -- we are sharing everything we possibly could. Showing that would be like, okay, you just need to sell more stuff because unit economics are amazing. Now Europe is just a little more immature of a business, and needs to catch up to that.

Yes. And actually sticking with the European business remix for a bit. A few moving parts there as you move more towards the consignment model comparable to what you've accelerated here in the U.S. with the core business as well as RaaS. Just any structural differences that would make consignment gross margin there materially different than in the U.S.? Is it just scale considerations, you just have to get that scaled up over the coming years? And then also, is there anything structurally in the market that would keep Europe from becoming 100% consignment or close to 100% consignment long term?

Yes. I mean, I think -- well, I'll start and jump in. I mean, I don't think there's anything like generally different in the European consumer around why they're going to have appetite for consignment. So we do actually see a similar long-term margin profile. There's obviously differences in price points, right, in those markets as well as the labor costs and logistics in those markets. And the labor and logistics is actually like a positive relative to the U.S. And labor costs there are 60%, 70% lower, right? And so like there are like pretty nice tailwinds once we get that engine going. And so I think the question that we are continuing to sort of figure out is, like what is the right sort of burn in rate of consignment to you? And so we want to make sure that it's steady and methodical and we don't shock the buyers or the sellers. And -- but we feel good about like the progress that business can make in '24.

And I think the consignment mix is important to understand because I think you asked about 100%. So I don't think -- even in the U.S., we're moving towards almost all consignment, but it's not going to be 100%. So I think we'll exit -- or we'll get into 2024, it will be about 90% consignment in the U.S. Europe will be about 20%. And we're going to go from essentially like 70%, 75% to 90% and 0% to 20% between the U.S. and Europe. So it's good to kind of think of how that model works.

Okay. And back to your point on the unit economics, maybe you have lower average unit prices in Europe, but you also have a commensurate lower cost. So there is some degree of...

You expect contribution. Yes, you expect contribution dollars, contribution margins to be similar.

Similar. Okay. That's helpful.

And actually, before we leave consignment because on that is like as consignment shift happens, the transition of where we record the cost of sales moves from or the payout moves from cost of sales up to contra-revenue. So it reduces kind of your revenue growth rate. And so we always get people to look at gross profit in dollar as kind of a true piece of the business.

True growth of the business, right? And so that's how kind of your measuring performance versus the overall industry of like those GP dollars versus overall industry growth?

Yes.

Got it. Okay. Makes sense. More of a bigger picture one. You both seem to manage the business with genuine focus on the long term. James, you made comments last quarter, like you probably could be at a point where total company gets to EBITDA positive sooner, but that's not -- maybe not what's best for the business. Just talk us through how you think about that path to EBITDA breakeven? How important is it versus balancing those long-term goals? And just overall philosophy of managing the business and how it may or may not differentiate you from competitors?

Yes. Look, I think it's critical to get to breakeven and generate free cash flow, right? So unequivocally, like that is the goal. And I don't think you should be stupid in pursuit of that, right? And I think business is get into trouble when they become so short-term focused on something like that, that they really do things that are unnatural. And so the philosophy is, I'm just trying to balance to make sure we don't do anything that really will hurt us in an environment. You can imagine a world, Trevor, a year from now, where interest rates have come down, and all we're talking about is growth. And like, man, we really should have invested in some of these core things that would be growing the business right now. And so I'm just trying to balance that. And I think my point of view on '24 is that I still think it's going to be -- I don't think it's going to be an amazing, like, consumer environment, but I think it's going to look closer to 2019 than it looks to 2023. And so -- and in that environment, ThredUp was ripping. And so what I'm really focused on is like buyer momentum And I think if -- because the unit economics are strong in the business, and I think buyer momentum is what will drive returns in '24. And so I'm just trying to make that balance. If I understand, we got to be breakeven and we got to generate free cash flow, but [indiscernible].

And I think just to put like the less optimistic view on that a little bit, we're planning the entire '24 as if there is really no change in the consumer environment. I want James to be right more than anybody, trust me.

Yes. No, fair enough.

Well, and to that point, right, is kind of a murky outlook right now, right? I mean, we all saw the Adobe data for Black Friday. Cyber Monday was actually stronger than people thought. But then, we also, at the same time had worries about the impact from like Temu and Shein. How that's impacting e-com broadly? I guess, what are you seeing as we progress through 4Q and into the key holiday shopping window, both from consumer demand and competitive standpoint? I realized holiday is not a key part of your business, but you're also cognizant of the ad environment, promo environment and how you respond to that as you start to look into '24 as well?

Yes. I mean, I saw the Adobe data and I'm like -- my sense is that everything in Q4 was pulled forward, right? I think October was stronger than people maybe you would have thought. I think that the holiday was strong. It was strong for others. It was good for us. But I do think actually, when we netted out, Q4 is going to look kind of what people thought, it just might be -- the lumpiness might be a little different. I do think Q4 is always the weakest quarter in the U.S., right, because specifically, we have no gift-giving business. Nobody really buys secondhand gifts for others. We want to change that. That will be an amazing outcome, but that's not where it is today. So I think the holiday will be as expected for everyone. And -- but I do think it's a little bit of a last-gasp around discounts and promos. I do actually think inventories are in much better shape when you cross-retail. I think companies moving into '24 recognize they need to get a little sharper on the promotions. And so we expect that environment to be more normalized than it was in '23.

Got it. And on that competitive environment, particularly as you look at like the fast fashion and deep discount e-commerce players, you've obviously encountered competition before. Shein as well as just deep discounters is nothing new to you. Just help us understand how it does or doesn't impact demand on the platform? And whether you view these players as more of a threat than traditional apparel players just doing that heavy discount or getting maybe like more surgical on promo like you're saying?

Yes, I think people -- I think this is a slightly underappreciated change we made in the business over the last 18 months, which was shifting the buyer segment slightly more premium, right? I've said it like multiple times on the earnings call, which is, it wasn't that we were moving to a luxury by any means, but we were kind of moving the stack up. And I think the effect of that is that -- average price points on ThredUp are higher than they are on a Shein or on a Temu. And so we certainly have some impact on it. But I think it's more of the fast fashion, like in the truly deep discounters, that are probably going to be more impacted. So my guess is it's an Old Navy, right, that might like have to go more head-to-head with Shein than ThredUp. We've also started to try and attack a customer that's slightly older. So when you think about like premium, those customer -- a premium customer who has greater spending power, also tends to be like a few years older. I think both of those things now are putting us in a position that I think is that -- it's slightly better than where we were probably 2 years ago. As for the ad rates, I mean, we certainly see some effect. But again, because we're not focused on Gen Z specifically, we're not focused on $10 hoodies specifically, I think we have a slightly less impact.

And just to recap. Part of that shift to go more up market, more to like the premium consumer, maybe a little bit older demo was in response to what you were seeing where that budget consumer was really pulling back with no clear line of sight as to -- hoping they would resume, so a proactive move.

Yes, it was totally proactive, and I think we've proved to be kind of right with that strategy. But I think what's happened then is that, that has switched a little of the active buyer growth where we were willing to sort of shed some of those active buyers at that lower price point as we pursued buyers at higher price points. And so I think that transition has happened successfully so that our buyer population is in better shape.

And as you think actually about the buyer population, what are some of the recent developments you're seeing with respect to like retention, purchase frequency, basket size? It sounds like average unit price is up, but how about like units per order and that sort of thing?

Yes. I mean, I think units per customer, I think, are relatively flat. Orders are up. I don't know off the top of my head what the growth in orders year-over-year has been relative to buyers. But look, I think, generally speaking, we feel good about the sort of underlying unit economics of the business. I do think there's areas where we're going to experiment with shipping, we're going to experiment with how we think about returns in all areas where I think on the margin we can tweak and improve the economics further.

And just back to the point on kind of the segmentation of your consumers, like what's happening with those budget shoppers that had pulled back last year? Are they kind of finally coming back in? Or are they still out of market? And how does that compare versus the mid-market and then those higher income consumers that you're going after?

Yes, we haven't really seen the budget shopper like meaningfully come back to the platform and -- but also Trevor, like we've -- honestly, because we've shifted the mix slightly more premium, we probably -- we've created that event, right? But the unit economics on that product was not as good, right? That budget shopper was less [oil], right? And so I think, ultimately, it's been the right move for the business. And I think we'll see over time as we get into '24, if you think about the stuff on ThredUp that is -- that we listed, but then is on sale, I think that probably appeals to the budget shopper a little bit more. But it remains to be seen. I don't think chasing budget shoppers in '24 is going to be a core part of what we do.

And actually, as we talk about '24, are there any trends or competitive pressures that are standing out as different from '23? You mentioned you think '24 is going to look maybe more like '19. Just for the benefit of the audience, like what are those specific that you're seeing, whether it's promo competitive pressure, anything like that?

Yes. I think it is just -- I think the promotional environment, I think the inventories being cleaner and brands and retailers understanding that they were able to sort of explain '23 as a promotional year where inventories were heavy. But I think if you were a buyer at the beginning of this year buying for '24, I think you were getting much sharper. And so I think that, that same story of we had to move stuff, we had to be more promotional, it's totally going to be reset. And so I think what will remain to be seen is like whether cutomers are willing to tolerate incrementally higher prices or not. And we're prepared for either scenario.

Yes. And we've definitely seen it with inventory to sales growth rates starting to converge, get back to more sensible levels.

More sensible levels. And in a more sensible environment, that's a winning opportunity for us.

Yes. Makes sense. You mentioned early on in your comments about the increased need for promote, in particular to what you're seeing from competitors. And it does sound like that's a bit unclear how that trend is going forward since inventories are a bit cleaner. But just help us understand how far you're willing to go chasing that promo to maintain order growth momentum and the buyer growth versus pulling back to maybe set out any sort of irrational behavior if you're seeing that irrational behavior or not?

I don't know if we're seeing irrational behavior. But look, we like -- I think everybody has had to be like, if you had a panel of a dozen [indiscernible] like, I wish I could promote just a little less, right? Like so I think we all would agree that it would be better. And so I wouldn't go to the point of -- I think it was more rational a year ago. I think it's like, every quarter it feels like it's gotten a little better. And -- but the customer has been the winner and all of that. It's never been a better time to buy stuff, but I think that's going to change. And I think like where we are positioned is to really deliver great value in 2024, and I think that's where we're focused.

That makes sense. And I guess more of a bigger picture one. How do you view kind of the health of supply and demand at this point? Do you feel like that's pretty well and balanced? How is the backlog of Clean Out Kits trending? And do you feel like you have enough depth of the product that's actually selling through? Because I know, obviously, shaping the inventory has been important over the last year.

Yes. Yes, sell-throughs have been strong. Backlog, I think, is under 6 weeks -- 5, 6 weeks. You can go to the website, get like real-time updates. We do update it like regularly. But look, I think the backlog has never been in better shape. The suppliers are getting a great buying -- processing experience. I think the mix of goods is as good as it's been. So we feel like the engine is in good shape. Again, it's hard. I don't want to -- like it's hard. And I think the consumers, like it's not in an amazing shape, but I do feel like it's getting like a little bit better.

I think it's always good to remember like the supply side, we're not doing much to try to get this supply. And actually, we're charging people, right, just [indiscernible]. So I think there's always -- we still have a lot of things in our playbook where it was like, hey, what if we needed 50% more supply. We can go do that. So as demand ratchets up, and it will, it's just a matter of when, billing on the other side of the marketplace with supply, we got that.

Isn't a worry. Yes, that definitely makes sense. Shifting gears, RaaS. Obviously, it's an important area of growth. Can you talk a little bit about how that is performing? Obviously, you have several dozen partners now, obviously in various stages of their ramp. And how this product differs from kind of the core consignment supply? Do you see faster sell-through there? I know much of this business is now actually -- on a go-forward, going to be consignment and so...

Yes. Yes. I mean, I think we have over 50 RaaS clients right now. Yes, I would say, that the supply coming from those RaaS partners is sort of on par with what we're seeing in the U.S. business. I think one distinction now is that with fees on the core business, we can actually shape the mix a little better on the direct business than we can on the RaaS side. So we're working with our RaaS partners to help them figure out how to like shape the mix to be a little bit better. But yes, it continues. I think in our annual impact report we talked about close to 25% of our Clean Out Kit processed last year came from RaaS partners, which was something we hadn't disclosed previously. But we are always like, hey, how big a part of the business is RaaS? It's like, 25% of the supply is coming from RaaS. So like it's a big part. And I think what we're trying to figure out right now is I think we have a really strong stable of clients and how do we get each of them to grow their businesses. So I think we're probably in the optimized phase of the business where we grew to 50 clients over a couple of years. Okay, let's get those businesses really humming, and then invest more in adding new clients which I think is the right cadence.

Yes. Makes sense. On the 3Q release, you called out Thrift Promise as improving retention, reducing return rate and driving logistics savings. So pretty good trifecta there for any e-comm marketplace. How far along are we in terms of improvements in each of those 3 areas? Is there still more room to run? And where are return rates today? And where do you actually see that going over time?

Yes. I mean, returns themselves are sub-20. And so I think you could probably say prior to that because we already said that we had about 700 bps improvement. So it kind of peaked up. But with all the focus on Thrift Promise, including key for credit and really allowing the customer to do things that they normally wouldn't do where if they wanted to return one item, we would be like, great return it. It would cost us as much to ship it back and ship it out again. It wasn't a good financial outcome, but also I think the experience from the customer itself wasn't great either. So now we give them credit. They come back, they shop. It's a much more improved experience. And I think it really helps with retention and just overall customer happiness, which is, I think, a big win for us, and it's a huge focus for us.

Yes. And remove that pain point for them. Yes. Makes a lot of sense.

And I would add like -- so related to how much like work we're doing on delivery, so we're now testing 2- and 3-day delivery in a bunch of markets across the Southeast. So there's a number of customers now out of our Atlanta hub who are getting close to next day delivery, which is a really like powerful thing in secondhand. And we're -- so I think -- we think about Thrift Promise as an umbrella for what we're trying to do around customer service, returns and delivery. And on the customer service side, we've built now like a really slick interface, where if you've got any issues with ThredUp, you can go into a user interface and either get self-help, so real time helping yourselves. I sort of describe it to somebody like, if you ever had like a DoorDash order where like you're like [indiscernible], like didn't come, right? You can go right to DoorDash and like, I didn't get this and instantly you get your credit, right? And that feels so good. And so we're sort of taking a page out of that and trying to make people feel really good that they should -- can trust ThredUp. So you add that, plus you add on fixing the unhappiness around anything they want to return and then you add speed, and we think like those are three really powerful things to lean into as we get into '24.

And on that speed of delivery since you mentioned it, how do we think about the balance of that? Because obviously, it's about better customer experience but also incremental costs there. So how are you balancing that?

Yes. What's great about it is it's not really -- it's really redoing some of the activities in our supply chain to consolidate orders differently in our DCs to change our pickup times with our partners. And so it's not actually costing us like materially more than what we're doing right now. It's just reordering some of the ways we did. So for example, we may have consolidated an order in Atlanta and put it on the 5 p.m. [indiscernible], right, the 5:00 p.m. truck, right? And now it's like, oh, as long as that order is in by 6 a.m., you can actually put it on the 6:30 a.m. truck. And then asking our partners to pick it up and turn it into their last mile delivery. And so it's reordering the value chain I think is driving that opportunity.

So your own optimization not incurring incremental cost?

Yes. I mean, it costs like a little bit more in this experimental phase, but we think the customer service -- the customer experience is so much better.

So much better, yes.

I mean, some of these things are as simple as -- we use a variety of shippers. And the same shipper in Atlanta versus Dallas is vastly different. And it's very interesting to think about. Like they're not small, but the Atlanta one, amazing. Dallas, we should use somebody else. Then there's tiny little companies that are like, they do Metro Atlanta. I guess, you can take advantage of that and they're trying to compete with these big guys. So it's very competitive and it's been very helpful in the shipping speed.

And we're also optimizing. I think one of the other things we've learned over the last year on the customer is customer is definitely more urban and suburban, right? Our best customers like they live in urban and kind of suburban areas around major metro areas. And so really optimizing our customer experience, customer delivery around that customer has made us change some of the things we do in the supply chain to delight that customer. And so what that really means is that if you're a customer who lives in a rural area, you're probably getting incrementally worse service from us, right? But when we look at the data, the density of the customers we're able to serve by switching these things is much improved.

It's kind of like an 80-20.

Yes, exactly right. Yes.

Yes, totally makes sense. On margin, we look at the long-term guide you put out there, gross margin gets 75% to 78% versus 67% today. That comes predominantly, I think, from consignment mix. That seems pretty straightforward.

Consignment in Europe.

In Europe, right. And then on marketing, 15% to 18% of revs is the goal versus 20% today. That also seems fairly straightforward, just kind of optimizing your spend. SG&A, you expect a pretty big jump there. You're targeting 7% to 9% of revenues versus about 14%. And then the ops and product and tech, also upwards of a 10- to 15-point improvement. These latter two obviously are the key drivers of getting to your long-term EBITDA goals. How do you drive that? How do you drive those improvements? Is it just further scaling the business? Or is there some actual structural improvements, things that you can control besides just top line leverage that gets you there?

I think on the SG&A side, it's scale. In the sense that for every extra $1 million, $10 million that we do, we're not adding SG&A dollars at any incremental closeness at all. So I think that one, I feel very confident. That's just about natural scale as the business improves. When you get to operations, product and technology, it's really about operations, in the sense that product and technology will scale similar to like SG&A, but the operations is really inbound processing. And all of the opportunities for automation improvement really start to drive from that area. We're really good about automation across the DCs, but it still means a little heavy on outbound, which is COGS. So the more we can automate on the front end really starts to drive that inbound processing. And for example, and I think we talked about it is we do things like image capture or photo capture, which basically takes a picture of the garment that we're going to put online, not for going online, but just so we can cross-check our database of 130-plus million items. Have we seen that item before? The answer is yes, we can go pull that picture from the first time we saw it or at the last time we saw it and skip the whole manual photo process where someone's actually take a garment off, putting on a man, again taking a picture, flipping the [indiscernible], taking a picture and then putting back on the hanger and setting away. So we're talking in that $0.50 plus kind of savings per item when you're doing 20-plus million items. It's a big driver on the cost efficiency. So that's one of the things as well. I think you can pull in the European side, too, is that, that business is just further behind in automation and efficiency and pricing improvements and things like that. All that will start to help across the P&L, but in the OPT side.

Okay. And on the European side, it's basically just taking the same blocking and tackling that you learned in the U.S., apply it there as that scales, but in a thoughtful way without disrupting the business too much?

Yes. And we've probably made 484 mistakes in the U.S. We don't have to make those, right, in Europe. Just the one small thing like, I think often, sometimes people forget like [indiscernible] marketplace. We aren't merchants. We don't make stuff, right? And so that whole part of like what happens in other retail businesses doesn't exist for us, and that's what allows SG&A [indiscernible] to really scale.

Okay. Got it. Just a couple left in our last few minutes. One shifting back to the competitive environment, but specific to the privates, because there are some privates in this space. And obviously, keeping -- we've seen in recent years is not getting funding risers as quickly or at all. And a lot of these companies happen to focus on their burn rate. Just what are you seeing in the competitive environment from privates? And also, what are you seeing specific from the brands and retailers that are bringing resale in house now that they may be [pilot] maybe with you or your competitors, how do you see that trending in the coming years?

Yes. I mean, most of the competition we see is on the RaaS side. And because I think people attempting to compete with us directly with -- building a new supply chain, building like distribute -- like -- yes, I wish you luck, right? But that's like a natural segue into the retailer conversation, which is, if you're a retailer who wants to take this on yourself, I also wish you like a lot of luck. And it's not because they can't do it, it's just that given the chance to build or buy, they're better off working with someone for whom this is like a unique activity, right? And so I think we're being patient in the competitive environment. I do think it will be very tough for a number of these guys to raise money. And -- but there's some good -- potentially there's some good roll-ups out there. But I don't spend a lot of time worrying too much about it.

Okay.

I mean, the good news is -- I guess, this is hard to say it's good news, but let's assume some of these guys struggle getting funding, they're all servicing generally, each one -- each little one has one good client. And it's like those guys are going to want to continue on this path likely. So I think we're a great destination for that.

And are you seeing some of those wins on RaaS where maybe a brand has been working with someone else and they kind of see the writing on the wall? Like, hey, they're not able to fulfill our needs or able to scale with us and they're coming to you guys?

Yes. Well, there's great entrepreneurs out there, right? And so great entrepreneurs, like they find a way to get things done. And so I don't think it's going to happen overnight.

Got it. Last one from me. I have to hit on AI. It's like 23 buzzword. I know everyone's had enough of it. But look, obviously, you guys have a great moat in terms of your physical infrastructure, but you also have a huge data advantage because you have all this product one-off coming in, you've partnered with a lot of the manufacturers to kind of pull in some of their data as well to help that kind of triangulate. How do you see some of these developments that we're seeing real-time in AI impacting your business over the medium term? Is there anything where you're like, wow, hey, if we can layer in XYZ, we're going to be like way ahead of the competition or way ahead of where we thought we would be 2, 3 years ago, whether it's like able to determining the right items that are going to sell through at the right rate, dynamically pricing, anything like that?

Yes. I have thought about this. I think the 2 things that are kind of bubbling to the top. One is -- one of the things that makes shopping secondhand online different than shopping new online is just the photography, right? You're not able to see it necessarily on a model. You're not able to get on that style. Like it's just -- you get a different experience. I think generative AI is going to change all of that. Our ability to put product on people in settings, in scenes is going to make shopping secondhand over the next couple of years, if we're right, feel indistinguishable from shopping new. I think that's a step function improvement in the buyer experience, and it was not possible 3 or 4 years ago. That's one which I'm very bullish on. The second is, I think, changing the way search works. So I think instead of trying to use a structured data set and using attributes and allowing customers to kind of filter by those, I think big LOMs are going to allow us -- sort of the next generation LOMs are going to [indiscernible] search tremendously. And so I'm excited about that because I think the 2 areas for the buyer are really -- that can I find what I want? And can I get a sense of how it's going to look on me and look amazing? And I'm pretty excited about those because we had this conversation 2 years ago, those things were not -- those things were not in play. And now I'm pretty excited that 2 years from now, we're already talking about how good they are.

Yes. And not tough to envision is that buyer gets a better sense of like how this could look on me, the likelihood of them...

Yes, conversion, willingness to pay, right, like all that stuff improves.

Right. Got it. Totally makes sense. And I see that we are out of time. So thanks so much, guys, as always.

Thanks, Trevor. Thanks, guys.