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spk06: Good afternoon, and thank you for joining us on today's conference call to discuss ThredUP's third quarter 2021 financial results. With us are James Reinhart, ThredUP's chief executive officer and co-founder, and Sean Sobers, chief financial officer. We posted our press release and supplemental financial information on our investor relations website at ir.thredup.com. This call is also being webcast on our IR website, and a replay of this call will be available on the website 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 guidance and future financial performance, market demand, growth prospects, business strategies, and plans. These forward-looking statements involve known and unknown risks and uncertainties, and our actual results could differ materially. 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. In addition, during the call, we will present certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our earnings release. Now, I'd like to turn the call over to James Reinhart.
spk12: Good afternoon, everyone. I'm James Reinhart, CEO and co-founder of ThredUP. Thank you for joining us for ThredUP's third quarter 2021 earnings call. As we head into the final quarter of the year, we're excited to share financial results and key business highlights from our third quarter. I'll start with some perspective on what we're seeing in the broader retail environment and how our strategy is evolving. I'll then discuss our marketplace dynamics and progress with our resale-as-a-service offerings And finally, I'll touch on changes in our product experience, how we're scaling our operations, and what we're doing internationally. Sean Sobers, our Chief Financial Officer, will follow with a review of our financials in more detail and provide our outlook for the fourth quarter and fiscal year 2021. We'll then close out today's call with a question and answer session. Let's start with the results. For the third consecutive quarter, we achieved record revenue, record gross profit, record active buyers, and record orders. Our revenue of $63 million is an increase of 35% year-over-year, while gross profits grew 41% to $46 million. This is our third quarter of accelerating revenue and gross profit growth. Active buyers and orders increased 14% and 28%, respectively. These growth metrics underscore ThredUp's resilience to the headwinds we've faced throughout the pandemic and indicate that our long-term investment strategy will lead to sustainable growth over time. Let me first address what we've been seeing in the broader retail sector. We concur with consensus that there was a dip in consumer spending at the beginning of the third quarter amidst Delta variant concerns, but that overall consumer sentiment was robust into September with a significant rise in retail sales. Having said that, supply shortages, labor costs, and logistics surcharges have continued to take a toll, and we see inflationary pressure and higher prices for the consumer as structural changes rather than temporary changes. And how this impacts ThredUP is unique. While many retailers have been forced to raise prices due to inflation or supply chain pressure, we do not have the same level of exposure. ThredUP's U.S. business is entirely domestically sourced from our sellers, and we do not rely on direct manufacturing for supply. This means that consumers can always find a vast and ever-fresh selection of secondhand items on our site, 100% of which are already in stock and ready to ship. As a result, we see a compelling customer acquisition and wallet share opportunity in the near term. We have chosen to strategically lower prices in order to engage as many customers as possible during a time when consumers are feeling price pressure in many other parts of their life. You can see this clearly in our average listed prices. They were 15% lower on average in Q3 of this year compared to the same time period last year. We expect to continue this strategy of providing the most competitive prices possible in the quarters ahead, leveraging our unrivaled access to high-quality, wholly domestic supply. If I dive deeper into recent demand trends, we've seen an uptick in sales for colder weather items on our site, including a 26% month-over-month increase in sales for both boots and tricotes, and a 20% jump in sales for puffer jackets over the same period. There are also early indicators that consumers are looking to dress up this holiday season. Cocktail dresses experienced 14% month-over-month growth in October, heels saw a 16% increase during the same time period, and handbags saw a 10% lift in sales last month. Last week, we launched a holiday shop with festive outfits, winter wear, gift ideas, and our always popular gift cards. I'd also like to take a moment to give a shout-out to a few brands who have built loyal resale followings on ThredUp, by making great products with important stories and missions. Brands like Keeks, Blurry, and Smartwool, Birkenstock, Rothy's, Aviator Nation, Crocs, Christy Dawn, Arc'teryx, and Icebreaker are all brands where 90% of the items that we listed in Q3 sold within 30 days. It's just remarkable sell-through of these brands. We love to see these types of brands who resonate so strongly with resale customers. Let me turn to supply. On the supply side, we continue to see strong demand for our clean-out service. We are processing more bags than ever, yet still managing to keep bag processing times around 12 weeks on average across our distribution center network. As we continue to invest in processing capacity and automation, we expect wait times to come down in 2022. In September, we announced the lease signing of our new 10 million item flagship distribution center just south of Dallas, Texas. This facility will be nearly 600,000 square feet and will be our largest and most automated distribution center. When fully scaled, this four-level facility will increase our total network-wide capacity by more than 150% to 16.5 million items. We expect to begin processing items in Q2 2022, with demand fulfillment to begin in Q3 2022. In addition, We have secured our first dedicated processing center in Grapevine, Texas. This facility will focus exclusively on clean out kit processing and will become an immediate feeder to our new Dallas facility. We expect to begin processing items in the new Grapevine facility in Q1 2022. As you might expect, Bringing our Dallas Distribution Center online, our Grapevine Processing Center online, and investments in technology, data science, and automation will all pressure operating expenses in the near term. However, our history shows that these J-curve-like expenses ultimately drive up overall processing rates and thus our potential revenue in future quarters. Now let's talk about RAS. I'd like to share some progress in our resale-as-a-service business. We recently launched new RAS programs with Adidas, Crocs, and Michael Stars, bringing our total number of paying RAS clients to more than two dozen. Brands and retailers are turning to RAS to support not just their business strategy, but also to improve their sustainability footprint. As a reminder, our RAS platform enables brands to offer a quality and seamless resale experience for their customers across three main areas, our clean-out service, our cash-out marketplace, and our full-service resale shops. We've taken to calling this suite of offerings Resale 360, and we'll continue to update you as our client roster grows and our service modules evolve. Now, I've been getting asked a lot lately about how to think about RAS as it relates to ThredUP's core business. And while we're still in the early stages of scaling this business, I think it's important to highlight two elements. First, our clean-out kit and resale shop offerings for brands leverage our existing infrastructure, and amplify the competitive advantages that we've already built in our marketplace. As more brands sign on as clean-out kit clients, we deepen our long-term supply advantages at lower cost. As more brands launch online resale shops powered by our technology, we drive faster sell-through and higher returns on the same asset base. Second, for brands who wish to launch premium or enterprise resale services, either on the clean-out side or on the resale shop side, we charge recurring platform and usage fees. Some examples of premium or enterprise offerings include deeper data intelligence, marketing, branding, pricing control, packaging, repair, or omni-channel experiences. So in summary, using our marketplace infrastructure, RAS amplifies our supply advantage, increases our sell-through and return on assets, and expands our long-term profitability metrics by adding sources of high margin revenue. Now let me turn to some developments on the product front. After a business review in late August, we decided to discontinue our goodie box offering in October. We first explored goodie boxes four years ago with the goal of lowering the barrier to thrift by making it less time consuming to sift through the millions of products in our marketplace. And while we had some success, we typically recorded revenue of two to three million per quarter, Goodie boxes were proving difficult to scale efficiently as they consumed outsized labor in our distribution centers. The hours and capacity freed up by not running our goodie box business, we believe can be better used to scale bag processing and ultimately serve the core marketplace customer. Yet, importantly, learning how the customer valued goodie boxes one-to-one styling service helped us immensely, and it's led us to launch Thrift the Look, Thrift-A-Look is not one-to-one styling like goodie boxes, but one-to-many styling. Thrift-A-Look leverages the algorithms and the data science assets we've built through the goodie box experience, but makes it easy to recreate our community's favorite outfits with similar secondhand styles across our vast assortment. I encourage you to check it out at www.thread-up.com backslash looks. Moving on to international. Last quarter, we announced the initial phase of our international expansion strategy with the agreement to acquire Remix, one of Europe's leading fashion resale companies. The transaction officially closed in October. Our acquisition of Remix accelerates ThredUP's international growth plans and enables us to gain an established foothold in Europe, where global data estimates that the secondhand market will grow to 39 billion by 2025. Remix currently operates in nine countries across Central and Eastern Europe. We plan to leverage Remix's custom single-skew logistics that can process millions of secondhand items efficiently. And over time, we will introduce our automation technology to strengthen their offering. We also believe their market intelligence and technology platform will accelerate our growth into the broader European market. One area we will address more quickly is moving Remix's business model from a direct sales model towards a predominantly consignment-based model over the next few years. This means we will undergo a transition, very similar to what we've done in the U.S., that will ultimately deliver better gross profits over time, but is likely to mute revenue growth in the near term. In late October, ThredUp announced a strategic investment in Vopero, a managed resale marketplace serving Latin America. Vopero caters to consumers seeking a seamless, fun, convenient, and sustainable way of buying and selling secondhand clothing online. Their technology platform also handles single-skew logistics. and it also offers brands and retailers resale experiences that can either be plug-and-play or customizable to their specific audiences. As early investors in Volpero, we will share our expertise in enabling resale at scale and advise their team as they grow and transform the future of sustainable fashion in Latin America. Resale is a global phenomenon and a force for good in the world, and we see ThredUp facilitating the industry's growth for many years to come. In conclusion, we are committed to building the world's leading resale company. I'm proud that ThredUP is raising awareness about the benefits of resale and elevating the conversation around circularity by educating consumers and brands alike. In October alone, we were recognized for the impact we're creating with award recognitions in Fortune's World Changing Ideas, Good Housekeeping's 2021 Sustainable Innovation Awards, and Fast Company's Brands That Matter. Every day, we are inspiring a new generation of consumers to think secondhand first and creating a more sustainable future for fashion. With that, I will now turn it over to Sean to walk through our financial results and our guidance.
spk13: Thanks, James. And again, thanks, everyone, for joining us on our third quarter earnings call. I'll begin with an overview of our results and follow with guidance for the fourth 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 on our 10Q. We are extremely proud of our Q3 results, especially delivering our third consecutive quarter of accelerating revenue and gross profit dollar growth. For the third quarter of 2021, revenue exceeded our expectations, totaling $63.3 million, an increase of 34.8% year-over-year. Consignment revenue increased 42.8% year-over-year, while product revenue grew 14.5%. Active buyers and orders are amongst the most important KPIs that we use to track our business. For the trailing 12 months, active buyers rose 14% to 1.4 million. Third quarter orders reached 1.3 million, increasing 28% as compared to the same period last year. Gross margin expanded to 72.8%. This is a 300 basis point improvement over a 69.8% gross margin for the same quarter last year. Gross profit totaled $46.1 million, representing growth of 41% year-over-year. Gross margin expansion has come as a result of expanded automation, larger distribution centers, and more items per order, offset by continuing headwind from wage inflation and increasing logistics and shipping costs. We believe gross profit dollar growth is the best way to measure our business growth as we continue to transition to a mostly consignment-based business. For the third quarter of 2021, gap net loss was $14.7 million compared to a gap net loss of $11.0 million for the third quarter of 2020. Adjusted EBITDA loss was $7.8 million or 12.4% of revenue. a 350 basis point improvement compared to the adjusted EBITDA loss of $7.5 million, or 15.9% of revenue for the third quarter of 2020. Q3 gap operating expenses increased $18.2 million, or 42% year-over-year. This includes $3 million of stock-based compensation. We continue to invest in the expansion of processing capacity, marketing efforts, and technology infrastructure to support our growth. Turning to the balance sheet, we began the third quarter with $233.5 million in cash and investments and ended the quarter with $266.9 million. The Q3 ending balance includes $45.5 million of net proceeds from our follow-on offering that closed in August. Third quarter basic and weighted average shares were 97.3 million shares and included 2 million shares issued by us in our August follow-on offering. We closed our acquisition of Remix in October. Remix provides the platform to accelerate our international expansion into the European resale market that is predicted to be $39 billion in 2025. We funded the Remix acquisition with a mix of cash from our balance sheet and shares. Total cash paid at closing was approximately $19.2 million. Shortly after closing, we also paid approximately $6.2 million of other Remix liabilities, bringing the total payment to $25.4 million. Subject to customary purchase price adjustments, we will pay approximately $3.5 million in the form of 131,000 shares of newly issued Class A common stock to be issued 18 months following the closing of the Remix acquisition. Remix operates in nine countries with Bulgaria and Romania representing approximately 70% of revenue. Remix has a smaller footprint in Austria and Germany, which we view as a longer-term opportunity. Remix sells both secondhand apparel and slightly worn returns from brands and retailers. Plus, Remix also operates in the men's category. At Remix, gross margins are in line with ThredUp margins of about five years ago, leading us to believe that there is ample runway to leverage the ThredUp model and expertise to generate meaningful profitability improvements over the long term. For example, historically, a significant portion of the Remix business has been direct sale, in which they own their own inventory. This is lower margin than consignments. In addition, a significant portion of their supply has been from wholesalers, which is also lower margin than individual sellers. Over time, we plan to migrate the business towards higher margin consignment and away from the wholesale supply in order to be more in line with the current ThredUp business model. At the same time, while the acquisition is modestly accreted to EBITDA as previously disclosed, we plan to aggressively invest in the business to accelerate top-line growth and gain share in the European market. Including these near-term investments in Remix, we remain confident we will achieve our previously discussed long-term financial targets. Since this is our first Q4 as a public company, I would like to note some unique aspects regarding the seasonality of our business. Seasonality in resale purchasing differs from traditional retail. This is particularly true in the back half of the quarter as resale is not leaned on for holiday gift giving. As a result, Q4 is not typically our strongest sales quarter. Furthermore, we actually tend to pull back on marketing as a percentage of sales due to its high cost during Q4 and reallocate those dollars towards our processing efforts. In December, we tend to shift our associates to aggressively process bags and build selection in advance of Q1 and Q2 of the next year. This acceleration of inbound processing tends to increase our operating expenses in Q4, which pressures EBITDA. Uniquely this quarter, I would also remind you of what James said earlier, and that we decided to discontinue our goodie box program in late August and expedited this full wind down by mid-October. We estimate goodie boxes would have contributed approximately $2.5 million in revenue in Q4, with minimal impact to EBITDA. As we look ahead to Q4 2021 and next year, we are actively investing in the business both here in the U.S. and in Europe. We've begun building out our Dallas DC as well as continue to invest in additional processing capacity to process our backlog of supply and facilitate new listings. As we bring on our Dallas DC, investments in technology, data science, and automation in the near term will drive long-term value in this facility and eventually across our global network. While we expect Dallas to eventually be our largest and most automated DC yet, we know from experience that the build-out process tends to be less cost-efficient as we ramp to scale. We expect to see this dynamic play out in particular in the early part of next year, but would also expect the additional processing capacity to accelerate sales growth in the second half. We are also expanding Remix processing infrastructure, investing in its technology and data science stack, and spending marketing dollars as we seek to capitalize on the large opportunity in Europe. Additionally, like other U.S. companies, we are dealing with the ongoing wage inflation and competitive labor markets, as well as rising freight costs. In Q4, we anticipate an incremental $4 million negative impact to EBITDA versus Q3 as a result of higher labor and freight expenses. While we are planning for these quarter-to-quarter increases to moderate from Q4, we continue to expect elevated levels on both the labor and freight front for the foreseeable future. However, we plan to continue to offset the rising labor rates and shipping costs as we expand our DC automation, scale into larger DCs, and innovate on shipping logistics. Now I'd like to share our financial outlook for the fourth quarter, including Remix, since the acquisition closed in October of 2021. For the fourth quarter of 2021, we expect revenue in the range of $69 million to $71 million, gross margins in the range of 65% to 67%, an adjusted EBITDA loss of 17% to 15% of revenue, and basic weighted average shares outstanding of approximately $98 million. For the full year of 2021, we now expect revenue in the range of $248 million to $250 million, gross margin of approximately 71%, an adjusted EBITDA loss of approximately 15% of revenue, and basic weighted average shares outstanding of approximately $77 million. In closing, we are very pleased with our third quarter performance. We remain highly confident that we can continue to execute on our model and make our planned progress towards achieving steady growth aligned with our long-term targets. James and I are now ready to take your questions. Operator, please open the line.
spk03: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Erin Murphy of Piper Sandler.
spk07: Great. Thank you. Good afternoon. A couple questions for me. First, James, I was curious if you could share a little bit more about your strategy of lowering prices here as a competitive advantage. How are you marketing this change to the consumer? Have you seen kind of a new consumer come into the top of the funnel? And then maybe for Sean, what is this doing potentially to the margin structure in the near term? And then I've got one follow-up.
spk12: Sure. Hey, Erin. Yeah, I mean, I think customers come to us for predictable, particularly low prices and great deals. And so I think what we've tried to do with our messaging and the storytelling we've done on site and in email and our app is just let people know the great deals that they're getting. And I think where the sort of broader sense that people aren't getting promotions and aren't getting discounts at other places they're shopping at We just keep hitting hard that, like, ThredUp is the place where you can find, you know, the best prices on the brands that you love, you know, in a sustainable way. And so I think it's more of us just doubling down on the idea of how great our prices are and reminding people that while they're feeling the pinch in other parts of their life, you know, we're going to kind of be there to support them. And I'll let Sean talk about the margins.
spk13: Yeah, Aaron. Yeah, no, on the lower prices, I think some of the dynamics there that work with it is, The fact that, you know, with lower prices, we're going to discount less. So we'll have less discounts. We're going to be less promotional. So you'll have less sales happening at the same time. So you don't end up with kind of a lower overall pricing charts. You also get returns coming down as well because we know there's a direct correlation between the ASP and then returns happening. I think generically, if you think longer term, what I think this drives is more new customers, which drives better growth and more revenue over time. So we think that all works together really well.
spk12: Yeah, and you're definitely seeing it, Aaron, in the conversion rates and sort of how new customers are coming onto the platform. And I think we feel like the whole strategy really holds together with that in mind.
spk07: Great. Super encouraging. And then my second question is, one thing we noticed during the quarter is the seller could no longer request a clean-out bag. And I'm sure it's just given the backlog you have at 12 weeks now, but should we expect that 12-week processing time just to continue until the new Dallas DC ramps, or just help us think about the interplay there between what you're attempting to do to reprioritize labor into processing bags with, you know, that new DC opening up. Just curious on expectations there. Thanks so much.
spk12: Yeah, I mean, we're also keep in mind that we're also scaling out our RAS partnerships, Erin. So there's a lot of demand coming from what we've launched with Adidas and Crocs and Michael Starr. So there are a lot of sort of bags out in the ether that are coming back to us. But as you know, not everyone can request one online. And, yeah, the idea is that we're opening our new processing center in Dallas. Those will both come online Q1, Q2. And then we should start to make progress on driving that backlog down. But I would sort of be consistent with sort of what we said last quarter is, you know, the demand for our clean-out service continues to rise. And as ThredUp's presence becomes even better known in the market. So we're trying to get it down, but we don't have a timeline to commit to as far as when that will happen.
spk07: Got it. Well, you're going to get a new bag from me this week, so I'm going to track your time. All right. Thank you so much. I'll let someone else jump in.
spk03: We'll take our next question from Ike Borochow of Wells Fargo.
spk02: Hey, congrats, James, Sean, and welcome, Lauren. Two from me. I guess, James, I think you know we've spent a lot of time thinking about the potential sales opportunity that RAS could be for ThredUp over the long term. But could you maybe help us all understand the most impactful ways that RAS can drive profitability for the business?
spk12: Yeah, sure. Yeah, and I appreciate the note. I think you captured a lot of the sentiment correctly. I think the two ways to think about that are, one, all the ways that it amplifies our supply advantage allows us to leverage other people's supply chains to get supply in the door. And so that means on the backs of the distribution, whether it's in-store or it's online, and the way we work with our RAS partners on the payouts to the supplier and what the RAS partner contributes. So I think that really helps sort of lower our supply costs. And then, of course, you know, with our pro shops and our premium and our enterprise versions, you know, the brands that we're working with, you know, are going to pay over time SaaS-like fees, right? And so whether that's for the types of customizations that they want or the omni-channel experience that they want. And so, you know, as I've joked, RAS rhymes with SaaS for a reason. And so we think there's high margin revenue to monetize on a client-by-client basis and as well as just lower operating costs as RAS partners work in our supply chain. So that's really the two ways that we think about it, and we're going to continue to try and give folks more information as we bring new clients onto the platform.
spk02: Got it. And then just one follow-up to follow Aaron's anecdote. I placed the order last week, and I got three bags in the mail today. I guess what I want to understand is how atypical is that to see that level of split shipment? Is that just because of, you know, what happened with COVID and opening up a new processing center? Like at this time next year, if someone places a bundle order like that, should it all come in one bag? Or can you just kind of help explain how that all should work?
spk12: Yeah, it depends a little bit on what you're buying and where you're buying it from. And we continue to kind of experiment with, you know, how we move goods around through our network. But certainly there's an experience where, you know, you get things from multiple distribution centers. But ideally over time, you know, as we bring on a facility like Dallas that will hold 10 million items, you know, our expectation is that the customer, you, for example, would be able to find a selection of items for your basket all out of that facility. And so instead of getting three packages, you would get one. And sort of part of the strategy over time is to really reduce logistics costs by having people shop out of one facility and not three. So that's sort of the plan. And we're excited to bring Dallas online middle part of next year. Got it. Good luck.
spk03: Our next question comes from Ross Sandler of Barclays.
spk04: Hey, guys. Sean, so it sounded like the labor costs and the freight were most of the headwind from 3Q going into 4Q, but just can we confirm if that's the case? And then Remix, what's baked in in terms of revenue, gross margin impact, and EBITDA margin impact for the 4Q guide? How should we think about Remix for next year as well? and then maybe one for James. On all these new RAS partnerships, you've got a bunch of different strategies or different versions of your offering. So for someone like Adidas, could you just give us a little color on like which one are they getting? And do you guys have the capability of, you know, having these partners send product into all your facilities or do you have to set up, you know, dedicated facilities like Dallas that can handle more RAS volume? Just any color on like how the, The bag processing works on that versus the regular business. It takes a lot.
spk12: Sure. Russ, let me start with the RAS one, and then I'll kick it over to Sean to talk labor and freight and remix. Yeah, I mean, on the resale side, there's really the three ways that we work with folks. It's our clean-out kit partnership, the cash-out marketplace, and then the resale shops. Ideally, we bring people on on either side of the clean-out kits or the resale shops, but we really become a full-service offering on both sides. Because I think to really drive circularity in the resale market, you want supply and demand kind of working together. And so I think, for example, with Adidas, we've started with the clean-out kit partnership, and we're going to move to a resale shop strategy, similarly with what we did with Madewell, same idea. And I think as we bring partners online... In some ways, it's easier to get them started on the clean-out kit side, and then we help use that to build supply to launch real high-quality resale shops. And so that's how we think about Resale360, and that's the way we talk about it internally, and I think that's the way brands are – why it's resonating so well with brands, because we can really provide a full-service experience. And as for where the bags and the fulfillment flows – You know, we can do it out of all of our distribution centers, but I think over time we will probably consolidate some of those operations, you know, in our larger facilities just to provide, you know, simplicity, you know, in the processing approach. But we have flexibility to do it across our network. And I think what's exciting is as we've launched in Europe, we see a lot of opportunity for RAS, for partners we work with in the U.S. to work with them as well in Europe. And so I think Not only can we provide a full service offering on supply and demand, we can do it in the U.S. and we can also do it abroad. And so a lot of good momentum on the RAS side, what Sean talked about.
spk13: Yeah, Ross, on the labor and freight, yeah, you're right. There's about $4 million impact to Q4 from Q3. So that's a big chunk there. And then I think the other piece to not miss is that we are going to continue to process more focused. So you'll see that in the OPT lines. So as we crank through Q4 to get more things online and processed, you'll see some pick up there in that expense line. And, again, think about that as investment for tomorrow's revenue. So it's a really good thing. It's what we'll continue to do as we go through our process. And then I think you asked about Remix. On the Remix side, I think you can give some directional stuff on how big they were. They were about $33.5 million on last full year. So you can kind of figure out they weren't really investing a lot of growth dollars in, so the business probably hasn't changed that much. The gross margin itself has a pretty good headwind when you consolidate in, mostly because what I talked about in the prepared remarks is they're all owns. There's no consignment. They also have some wholesale, which is also lower gross margin. But overall, they were operating the business at a relatively better EBITDA than us, so there's a little bit of a tailwind from EBITDA. But we're going to turn around and invest pretty heavily on the marketing side and the infrastructure side as it relates to Remix to really capture that growth opportunity that's there in Europe.
spk03: Our next question comes from Andrea Vaugh of Needham.
spk08: Hi, great. Good afternoon. Congrats, guys. Great results. I have two quick ones for James, another one on Ross for you. Can you talk about the economics of each structure versus your initial expectations, maybe what have been some of the surprises, and how should we think about the cadence of these partnerships as we look into 2022 And congrats also in the Texas, D.C. Just for the modeling purposes, I guess this is for Sean. As we look into next year, can you remind us how we should think about the incremental rent expense as part of ops and technology line, I guess, for 1Q and 2Q? Thanks so much.
spk12: Sure. Thanks for the questions. I think on the RAS side, we're not breaking out the discrete economics by partner, but what I would say is that, again, I think it provides us leverage on the supply side, and obviously as we sell things in branded resale shops, it increases our sell-through and improves our return on assets. I think the other piece is if you think about what retailers or brands are paying for SaaS vendors, that are enabling new distribution channels, I would think about it like that. And so we think that these are large revenue opportunities that scale over time and that they are high margin. And so as for cadence, I mean, ultimately we think there are hundreds, if not thousands, of brands, you know, that could participate in our resell-as-a-service offerings. And so I think you should see us continue quarter after quarter to announce new ones and then deepen the relationships with those brands over time. Again, not just in the U.S., but as we think global with the scale of those opportunities.
spk13: And then on the Dallas PC, and I would say throw in the Dallas PC, the Processing Centers Club. Those will both start impacting rent expense for the full facility starting in Q1. So you think about it, it takes a while to ramp up, and we don't really even start processing in Dallas to D.C. until Q2, and that's going to be 500,000 items once we're in Q2, and then it'll ramp up quarter after quarter after quarter. So there's a decent level of headwind and inefficiency, certainly through 22, and probably more heavy-weighted to the front end. So if you're thinking about modeling, it's a 600,000-square-foot building, eventually 2,000 employees, 10 million items. But it starts off, you know, at half a million and not getting processed until Q2. So there's a level of inefficiency there on the OpEx side as we kind of roll into and scale out that facility.
spk08: Okay. Super helpful. I'll take the rest offline. Good luck, guys. Thank you.
spk03: Our next question comes from Ed Ruma of KeyBank.
spk11: Hey, guys. Thanks for taking my question. I guess two questions. First, on the changes in pricing, Is it your intention that over time the consignor is the one that's really bearing it, so it's margin neutral? I guess this is a call to Aaron's question. And second, you know, I know you guys have been doing a lot of investment. The unit economics in some of your more recent vintage DCs, I guess relative to your expectations, how are they trending? Thanks so much.
spk12: Yeah, Ed, on the pricing side, yes, the supplier, I think, on the margin makes a few less pennies on the supply side, but ultimately what it does is I think it creates predictable pricing for the buyer. Unlike the environment where it's promotional and customers are waiting for sale days and that's what's really driving the magic, I think now we're in an experience where consumers are really seeing, hey, these prices are just structurally lower. And so what we want to do is create that experience where buyers think, hey, I should just go to ThredUp first because they have the best prices. I don't need to wait for stuff on sale. Every item we have is a snowflake. And so we do think that ultimately the economics are at its margin neutral, but the key to that is we drive a lot more buyers into the funnel. So new buyers, retaining existing buyers at higher rates, more orders per buyer. So I think that's really part of the pricing strategy, at least in the near term. And I'll let Sean talk a little bit about the investment side.
spk13: Yeah, on the unit economics piece, that's where your focus is. I think from what we put out early on when we were looking at DCO2 or Phoenix and Mechanicsburg, we're well past that with Atlanta coming on, so I think the overall order economics have gotten better than what you guys saw last. I do think there's that headwind that we've been talking about, shipping as well as the labor costs that are a bit of a headwind, but we're continuing to innovate our way around that. James talked about innovations where we can have more items coming from 1DC that helps in shipping, and then just general automation where we're less reliant on manpower and helping reduce the risk of the rising labor wages.
spk11: Thanks so much, guys. Thanks, Ed.
spk03: We'll take our next question from Dana Telsey of Telsey Advisor Group.
spk00: Good afternoon, everyone. Just to go back to the pricing one more time, the 15% lower average price, is that going to remain that way, or how do you see the pricing architecture of how you maneuver with the lower prices? And then I see you made another acquisition in Latin America. What do you see as that opportunity? Is it as significant as Remix? Thank you.
spk12: Thanks, Dana. Yeah, I mean, Dana, on the pricing side, I think we've always believed that ThredUp, because the product is high-quality used product, that we can always provide the best prices on a relative basis when the consumer is looking to shop new versus used. And we've always tried to target prices up to 90% off. I think generally speaking, what we want to try and do is that we're able to drive lower operating costs, through automation, through technology, through uses of our data, what kind of price power can we pass on to the consumer so that we can provide an incredibly wide selection at always great prices? And so I think what's exciting for us now is when you open the newspaper every day and it feels like prices are going up everywhere all around you, and we can say with confidence that that's not going to happen on ThredUp and that you can count on us and you can trust us to do everything we can to create the best prices possible, I think you build a lot of trust with the consumer. And I think you leverage that trust over time. And so I want to be able to do that consistently. Switching to Latin America and Vopero, we did not acquire Vopero. It's a relatively new company that started in Uruguay, now operates in Mexico. A wonderful founding team. And we are a minority investor alongside Grupo Axo, which is a great partner of ours in Latin America. And so together, we're minority shareholders. But I think what's exciting is that we see a lot of opportunities with the Latin American market and with Vopero and are interested in watching that business grow and flourish.
spk00: Thank you.
spk03: We'll take our next question from Tom Nikich of Wedbush Securities.
spk09: Hey, everybody. Thanks for taking my question, and then congratulations, Lauren, on the new gig. So, Sean, I wanted to ask, or Sean or James, So the new distribution center, historically you've kind of opened a distribution center every two years or so, but obviously the scale of this one is far larger than anything you've opened before. I mean, I'm assuming it's safe to assume that you're not going to need another distribution center two years from now. I guess kind of like how many years of growth do you think the Dallas Center can support?
spk13: Yeah, no, it's a good question. You know, I think it's really interesting to think about it because we have a lot of data that talks about how much clothes are just ending up in landfills that could be reused. And I think the estimate that we've seen is something like the equivalent of a billion thread-up clean-out kits on an annual basis. So if you think about that equivalent to 10 million items in the Dallas, D.C., We're going to have to open more DCs. But your question, I think, is very specific in what is the timing. And I think that's TBD here. So how fast can we process? How fast can we sell? How fast can we ramp up? So you're right. We've been doing one every 18 months. We'll just have to wait and see and see how fast Dallas actually comes up to speed.
spk09: Understood.
spk12: But, Tom, I think you're going to see us continue to invest a lot, right? I mean, I just think we see the opportunity is so large. You know, and I think you can see a little bit with the processing center, it feeds into Dallas. And you'll just see us continue to try and scale to attack the supply opportunity.
spk09: Got it. And if I could, you know, I'll throw a follow up in, you know, it sounds like, you know, 2022 will be a fairly heavy investment year between, you know, investing in the international business and new DC. And, you know, there's probably some cost inflation that, you know, rolls through the P&L next year as well. I mean, you know, how do we think about like the EBITDA line next year? I mean, you know, is it possible that, you know, the EBITDA, you know, kind of takes a step backwards before it starts moving forwards again? Or just is there any directional help you can give us?
spk13: Yeah, I wouldn't think of it as a step back period. I do think we're investing for what I call earlier tomorrow's growth, but it's not four quarters out. It's literally sometimes one quarter out or less And I think we're going to really focus on continuing to drive the actual growth revenue and the rate at which revenue grows. But I don't think, you know, you should take away anything that we're not driving towards expansion of the EBITDA margins or closing of the EBITDA loss.
spk09: Understood. All right. Well, thanks very much, and best of luck the rest of the year.
spk12: Thanks, Tom.
spk03: Our next question comes from Brian McNamara of Barenburg Capital Markets.
spk01: Hey, thanks for taking my question. Congrats on the strong results. So my remix question was already answered, but I was also wondering if you're currently seeing any benefit or if you contemplate in your Q4 guidance any benefit as the primary apparel market deals with shortages driven by supply chain headwinds?
spk12: Yeah, Brian, I mean, I think that there's a lot of bluster out there around the supply chain markets or the supply chain in the traditional apparel markets. I think in a normal quarter, we might see some tail end from that. But again, I think in our prepared remarks, Q4 typically is not our strongest quarter because of the way gift-giving trends around the holidays kind of play out. So I don't think that we're counting on benefiting from some macro trend at the moment. But I think if the supply chain challenges persist into Q1 and Q2 next year, then yes, I could imagine us benefiting from some of those macro tailwinds.
spk01: Got it. Thanks. And then secondly on RAS, can you provide some color on your white label offering and what common characteristics a white label partner has relative to your more traditional RAS partners? Sure.
spk12: Yeah, I mean, I think it's a classic white label distinction. So I think when the offerings are white label, I think ThredUp sits in the background and you don't really see us in the partnership. So I think far-fetched. would be a good example of, you know, a white label strategy where, you know, ThredUp powers, you know, Farfetch's clean-out kit program, but you really wouldn't know it. You'd have to dig for it. Whereas I think in Crocs, for example, which we just announced, you know, I think ThredUp is really a key partner, and it's, you know, it's ThredUp plus Crocs delivering you kind of the resale relationship. So that would probably be the distinction, and I think as brands – you know, want to be more white labeled, right? You know, there's, you know, obviously the fees go up. And so that's the way we think about sort of our role and, you know, in fees and white label as it relates to sort of a more generic partnership.
spk01: Great. Thank you. Best of luck.
spk03: Thanks. Once again, if you would like to ask a question, please press star one now. We'll take our next question from Lauren Schenk of Morgan Stanley.
spk10: Hey, this is Nathan Feather on for Lauren. You know, as you've seen, you know, a pretty tight labor market, is that impacting your ability at all to ramp up processing power? And then on the Europe side of the business, you know, you've noted you're really investing into Remix as a brand. What are the key areas of investments you're making in that business in 2022? And then more from a logistics and infrastructure side, are you able to expand the RAS Partners tier up with just Remix's current infrastructure, or do you need to take additional steps in order to really bring the RAS platform there? Thank you.
spk12: Yeah, hey, Nathan. Yeah, I think, yeah, I mean, I think with respect to the labor, and I think as Sean noted, I think that the headwind in Q4 relative to Q3 of that $4 million, I think part of that is just you know, overall increased cost to hire folks, you know, hourly rates and so forth. So I think it's a combination of, you know, trying to get, you know, great, you know, people in the door, you know, what it costs to do that on the recruiting and the retention side. So, you know, that is the tailwind. I mean, that is the headwind that we noted. I think on the Remix side, you know, I think the infrastructure investments, you know, we're going to move them likely into a new facility that can do more processing, faster outbound. So I think there'll be some costs there. We also think that the business can grow much faster than it's growing. And so on the marketing side, I think we'll invest dollars there. And I think similar to the way it works throughout up in the U.S., as you process and have more supply coming online, you can spend more marketing dollars. And so those two things we think will ultimately drive you know, nice growth from Remix in 22 and beyond. And then your last question is, can you scale RAS in Europe with Remix's existing infrastructure? You know, the answer is no. I mean, we have to continue to invest in their infrastructure to support you know, the growth in the RAS clients that we have in Europe. But I think we have some time to really focus them, at least in 22, on kind of core marketplace growth. And then we can layer in RAS clients over time in the back half of 22 or even into 23. But we see just an incredible amount of potential in the European business, you know. But having said that, we've owned Remix for like 30 days. So, you know, I think it's going to take some time, but I think we're excited.
spk10: Great. I appreciate it. Thank you.
spk12: Thanks.
spk03: That concludes today's question and answer session. James Reinhart, at this time, I will turn the conference back to you for any closing remarks.
spk12: Thanks, everyone, for tuning in to our call and for the great questions. I'm very excited about the quarter ahead and the year ahead, and I look forward to talking to all of you again in the new year. Thanks.
spk03: This concludes today's call. Thank you for your participation. You may now disconnect.
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