ThredUp Inc.

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.

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.

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.