ThredUp Inc.

Good afternoon, and thank you for joining us on today's conference call to discuss ThredUP's fourth quarter and full year 2021 financial results. With us are James Reinhart, ThredUP's CEO and co-founder, and Sean Sobers, CFO. 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 site 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, markets on 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 about these risks, uncertainties, and other factors that can affect our operating results in our FCC 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 fourth quarter of 2021 and fiscal year 2021 earnings call. We're excited to share another quarter of strong financial results and business highlights. In addition to our financial results, we will offer some perspective on the performance of Remix, the European resale company we acquired last year, as well as progress in our resale-as-a-service RAS offerings. Beyond our results, given we're one year into being a public company, I thought it would also be useful to remind investors of our strategy, sustainable competitive advantages, and the investments we're making to widen our moat and strengthen our leadership position in the still-nascent resale market. To conclude today's call, Sean Sobers, our Chief Financial Officer, will talk through our fourth quarter and fiscal year 2021 financials in more detail and provide our outlook for the first quarter and full year 2022. We'll close out today's call with a question and answer session. Let me start by acknowledging that since we last reported earnings in November, the world and investor sentiment have changed significantly. I want you to know that we get it. We are operating in a different macro context. While volatility like this can stress a young public company, we welcome this increased scrutiny. I believe great companies with winning strategies in high-growth markets with strong management teams Always outperform when times are difficult. We at ThredUp are committed to being the kind of team you can count on for predictability and transparency. I also want to make it clear that we are on a mission to build a generation-defining company that changes the way the world shops and ushers in a new era of sustainable shopping. We will always aim to balance the demands of near-term scrutiny with our commitment to investing for long-term value creation. Now to the results. For the fourth consecutive quarter, we achieved record revenue, record gross profit, record active buyers, and record orders. Our revenue of $72.9 million is an increase of 68% year over year. This is our fourth consecutive quarter of accelerating revenue growth. We finished the quarter with active buyers and orders increasing 36% and 69% year over year, respectively. We also expanded year over year EBITDA margins by a record 1,400 basis points in Q4, shrinking our EBITDA loss from minus 28% to minus 14% in a quarter that still included heavy operations investments. Now let me talk about Remix. In Q4, we closed the agreement to acquire Remix, one of Europe's leading fashion resale companies. Since the acquisition, we have moved swiftly to consolidate all of our thredUP learnings in support of Remix's growth and margin expansion. Dan DeMeyer, one of ThredUp's first employees and formerly our SVP of Engineering and Chief Product Officer, now leads our international effort alongside Lubo Klenov, Remix's founder and CEO. Rebecca Ullman, who reported to me while leading ThredUp's new Ventures Department and who helped incubate our resale-as-a-service business here in the U.S., is supporting Dan and Remix as we drive supply growth and expand further into Western Europe early next year. To expand beyond Remix's current operations in nine Central and Eastern European countries, we are building a new facility in the EU with processing and storage capacity to sustain broader European growth. We remain confident our acquisition of Remix will accelerate ThredUP's European growth plans and enable us to capture share in the emerging European resale market, a market that Global Data estimates will grow to 39 billion by 2025. Turning to ThredUP's Resell as a Service, or RAS, business, we recently launched a number of new resale shops and clean-out kit programs, bringing our total number of RAS brand clients to 28, making us by far the leading provider of resale services to brands in the U.S. We have visibility to adding as many as a dozen more brand clients by year-end, with some very prominent and large brands moving onto our platform. Keep in mind, our RAS platform enables us to power white-label enterprise solutions for global brands like Walmart and Adidas, as well as lightweight solutions for smaller brands like Madewell and heritage brands like Michael Starrs. With RAS, brands and retailers are empowered to deliver quality and seamless resale experiences to their customers across three main service modules, our clean-out service, our cash-out marketplace, and our full-service resale shops. This suite of offerings is called Resale 360, and our new core offering now allows brands to get started in resale for free, in some cases within 30 days. RAS enables brands to drive revenue, drive customer growth, and circularity in ways that were previously not possible. RAS has also begun to exhibit the flywheel network effect that we expected would come over time as more brands join our platform. we gain access to a greater share of closet clean-outs happening across America. This supply that comes in from our varied RAS clients can then be sorted and used to power the growth of branded resale shops of other clients, which is to say the more RAS clients, the wider the sources of supply, and the larger the potential growth of each client's resale shop. Recall that ThredUp benefits from RAS not only because it amplifies our ongoing supply advantage, but also because it increases our sell-through and our return on assets. In addition, our premium and enterprise platform solutions are designed to support the expansion of our long-term profitability metrics by creating a recurring high-margin revenue stream. We continue to believe that every brand will have a resale strategy, and ThredUp will be the leading provider of end-to-end resale solutions for the retail industry. This brings me to the next topic I'd like to review, which is ThredUP's sources of ongoing competitive advantage and the investments we're making to extend our leadership in the resale industry. The power of our competitive advantage comes from the compounding effects of three hard problems we've solved. First, we've built a reverse logistics supply chain that has created a massive supply advantage in the resale market. Remember, ThredUP has still never spent any direct marketing dollars acquiring sellers. and yet we have seemingly endless supply in our marketplace. Second, we have built world-class infrastructure, technology, and software to process single SKU apparel at scale. When our Dallas, Texas facility is complete, ThredUP will have network capacity to hold up to 16.5 million unique items in the U.S. alone. Third, we have built a data-driven, managed marketplace that connects buyers and sellers on our platform. Our managed marketplace removes friction between buyers and sellers, enabling us to significantly grow the number of customers we serve over time and to increase the number of orders they place. Importantly, the success of our marketplace is built on the foundation of the proprietary resale data that we've collected over the past decade. We ingest millions of data points on the items we process, sell, and reject, the items that are added or removed from carts and so forth. It's this vast trove of data combined with the algorithms and the models that sit on top of that data, that help us improve our acceptance rate, merchandising, photography, pricing, and marketing capabilities with the goals of consistently growing our active buyers, expanding our margins, and driving increased sell-through. Of course, the not-so-secret, but I think often misunderstood, economic engine that underlies our model is that most of our clothing is listed on consignment. This means we have little inventory risk and we boast a negative working capital cycle measured in months, not weeks. As I have said from our very first public filing, our strategy has been developed with a deeply calculated approach about what it takes to build and sustain competitive advantage over time. We believe that every day our supply advantage increases, our infrastructure mode widens, and the network effects of our marketplace grow. Given this context and my earlier remarks about the greater scrutiny on young companies, regarding capital allocation and path to profitability, I want to specifically call out the investments we're making in service of our strategy. First are three U.S. infrastructure investments. As we discussed last quarter and earlier in my remarks, our flagship distribution center just south of Dallas, Texas, is coming online later this year. We have been making steady progress since commencing the build-out in Q421. The facility is nearly 600,000 square feet and will be our largest and most automated distribution center. When fully scaled, we expect our four-level facility will increase our total network-wide capacity by more than 150%. We expect to begin processing items towards the end of Q2 this year, or early Q3, with demand fulfillment to begin sometime in Q3. Beyond our flagship distribution center, we opened two processing centers, one in Grapevine, Texas, and one in Lebanon, Tennessee. Both of these facilities focus exclusively on clean-out kit processing. and will serve as immediate feeders to our larger facilities in Dallas and Atlanta. As a result of this increased capacity, we are exiting Q1 hitting our internal processing targets after facing some headwinds from Omicron earlier in the quarter. Our bag backlog is trending down nicely and now sits at eight weeks from 12 weeks just a quarter ago. We expect these three U.S. infrastructure investments, Dallas, Grapevine, and Lebanon, will negatively impact our EBITDA by approximately $6 million in 2022. Note that these investments are all in service of growth in 2023 and beyond, as only a small percentage of revenue will flow through our Dallas, Texas facility this year. Importantly, given our expectations for improvements in automation and total throughput capacity, we do not expect to add any new distribution centers to our network until 2025. Second, we will continue to invest in Remix's growth in Europe. Our European investments include a new, larger processing facility in Sofia, Bulgaria, that comes online later this year, in addition to growing the headcount to scale our broader business in Europe. We believe these expenses are essential as we grow ThredUp's European opportunity. Third, we are investing in research, development, and data science capabilities across our network. We believe these investments in new systems, new technologies, and added headcount will yield several benefits. First, we will be able to lower our per unit processing costs. Second, we'll be able to improve our pricing and payout systems to further expand margins. And third, we can upgrade our marketing, merchandising, and direct response capabilities such that we can acquire customers at lower costs while at the same time increasing lifetime value. Fourth and finally, Anticipated headcount growth from 2021 to 2022 is highly concentrated in areas that support being a new public company, like HR, legal, finance, and accounting. We expect these incremental costs to total $3.1 million in 2022. We expect meaningful leverage in SG&A as we digest these costs over time. In conclusion, as I wrap up, let me speak to a bright spot of the last few months, the New York Fashion Act. At its core, this bill aims to hold major retailers accountable for their environmental and social impact. I think this is an important milestone. To me, it indicates that government and policymakers are starting to understand the critical role they play in reducing the fashion industry's environmental impact. Consider this the opening salvo in what is likely to evolve into emission standards for fashion. Whether pushed by government or pulled by consumers, I believe every brand will look to resale as a way to reduce their impact on the environment and to drive fashion circularity. ThredUp's platform will be well-positioned to serve these emerging interests over time. In the meantime, we're going to stay focused on doing what we do best, unlocking high-quality supply, building increasingly automated infrastructure, and leveraging our technology, software, and data to serve our growing base of buyers, sellers, and RAS clients. With that, I'll now turn it over to Sean to walk through our financial results and our guidance. Sean?

Thanks, James. And again, thanks, everyone, for joining us on our fourth quarter and full year 2021 earnings call. I'll begin with an overview of our results and follow with guidance for the first 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 our upcoming 10-K filings. We are extremely proud of our Q4 results, especially delivering our fourth consecutive quarter of accelerating revenue and gross profit dollar growth on both an organic and consolidated basis. One of the most exciting Q4 developments was our acquisition of Remix. While we plan to report and guide on a consolidated basis going forward, in some cases, we will speak more specifically about ThredUP US and Remix individually during the transitional period. For the fourth quarter of 2021, revenue exceeded our expectations. driven by the acquisition of Remix and growth in ThredUp US. Revenue totaled $72.9 million, an increase of 68% year-over-year. Consignment revenue increased 31% year-over-year, while product revenue grew 205%. Product revenue's outsized growth is largely due to our Q4 acquisition of Remix, a business that currently derives the majority of its revenue from direct sales opportunities. For the full year, we are proud to deliver revenue of $251.8 million, an increase of 35% year over year. Active buyers and orders are amongst the most important KPIs that we've used to track the business, and we finished 2021 achieving record levels for both. For the trailing 12 months, active buyers rose 36% to 1.7 million. We ended the fourth quarter and full year reaching 1.7 million and 5.3 million orders, increasing 69% and 34% year-over-year retrospectively. Since we believe that gross profit improvement is the best way to measure our progress, we will provide additional details this quarter in order to illustrate the strength and opportunities in both of our individual businesses. For the fourth quarter of 21, ThredUP US gross margins expanded to 71.3%, a 280 bps increase over a 68.5% for the same quarter last year. ThredUP US gross profit in the fourth quarter of 2021 totaled $44.1 million, representing growth of 48% year-over-year. Offsetting a $6 million increase in freight, gross margin expansion came as a result of expanded automation, larger distribution centers, and more items per order. Remix gross margins were 37.2%. Remix's structurally lower gross margin profile is primarily due to their direct sales model, wholesale outsourcing, and the lower level of automations. Over time, we plan to migrate the business towards higher margin consignment away from wholesale supply and invest in increased automation in order to be more in line with the current threat of business model. Driven by our fourth quarter acquisition of Remix, consolidated gross margin was 66.1%, a 240 basis point decline over the same quarter last year. Gross profit in the fourth quarter of 2021 totaled $48.2 million, representing growth of 62% year over year. For the fourth quarter of 21, gap net loss was $17.9 million compared to a gap net loss of $17 million for the fourth quarter of 2020. Adjusted EBITDA loss was $10.5 million or 14.5% of revenue for the fourth quarter of 21, an approximately 1,400 basis point improvement compared to the adjusted EBITDA loss of $12.2 million or 28.2% of revenue in the fourth quarter of 2020. This improvement was largely driven by operating leverage at ThredUp U.S. Q4 GAAP operating expenses increased by $20.5 million, or 45% year-over-year. Approximately half of this increase is related to higher operations, product, and technology costs, while the remaining is split equally between marketing and SG&A. Of the total increase, a quarter was related to the addition of Remix. 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 fourth quarter with $266.9 million in cash and investments and ended the quarter with $213.1 million. Keep in mind that the acquisition of Remix reduced our cash by approximately $30 million. In addition, we spent about $5 million related to CapEx in Q4. Next, I would like to provide some thoughts on our commitment to top-line growth while walking through our path to profitability. We remain focused on our belief that investing ahead of growth not only fuels our top line in future quarters and years, but is also an investment in our ever-widening competitive mode, the combination of which are the foundation for strong growth and increasing profits over time. Our business model necessitates this approach. In order to grow sales, we must first have the processing and storage capacity in place to support future listings growth and accelerated turns. We believe the investments in technology, data science, and Automation's Day will further strengthen our advantages, which we expect to be the drivers for strong top-line growth and profit improvements over the long term. Just to illustrate that we build out our infrastructure to support our future, not our current demand, I highlight the fact that we ended 2021 with a DC network capacity utilization rate of 77% among our three operational DCs. Put another way, by the end of 2021, we were using only 5 million or so slots of our fully scaled 6.5 million unit total capacity. This includes our 3.5 million unit capacity Atlanta, D.C., currently our most automated D.C., which opened in 2020. This is to say that in 2021, we were carrying the cost of a 6.5 million unit D.C. network, but only using 77% of it. By the end of 2022, when our Texas DC is included in our DC network, we expect to be utilizing less than 7 million slots of our ultimate 16.5 million unit total capacity, representing a utilization rate of less than 50%. Though we will be carrying many of the costs of a 16.5 million unit network in the near term, we will have ample runway to leverage these costs as we grow into our capacity and expand our utilization over time. This investing for growth dynamic is a prominent theme this year as we take on a number of significant infrastructure investments in both the U.S. and in Europe that will impact our margins before they contribute to the top-line growth. The largest of these is our Texas, D.C., which will more than double our current capacity and eventually be our largest and most automated facility. It is currently in the process of being built out, will begin processing midway through the year, and will ramp toward peak efficiency over time. We also recently opened two processing centers, which can open faster with fewer costs than DCs, while also diversifying the geography of our labor needs. They will be entirely dedicated to processing clean-out kits, which will help us further make progress on our supply backlog, facilitate new listings, and accelerate turns. We are also investing in our European business by expanding the team and building out a larger and more automated distribution center in Sofia, Bulgaria. With all this in mind, I would like to now share our financial outlook for the first quarter of 22. We expect revenue in the range of $70 to $72 million, gross margin in the range of 65 to 67 percent, an adjusted EBITDA loss of 19 to 17 percent of revenue, and basic weighted average shares outstanding of approximately $99.4 million. For the full year of 2022, we expect revenue in the range of $330 to $340 million. gross margin in the range of 64% to 66%, an adjusted EBITDA loss of 15.5% to 13.5% of revenue, and basic weighted average shares outstanding of approximately $100.5 million. In addition to lapping stimulus-driven growth from Q1 of 21, we also expect COVID-related staffing disruptions to pressure in Q1 as well. As you know, listings are a key driver of future revenue in our business. When COVID surged in December of 21 and January of 22, we experienced unprecedented levels of personal leave among our DC team, slowing down processing and thus listings growth, a dynamic that negatively impacted revenue in early Q1. Since then, as the surge has subsided, we have returned to expected processing capacity and plan to exit Q1 processing clean-out kits at record rates. As discussed, we have a number of investments this year that will pressure EBITDA. In Q1, our ramp-up of our Texas DCM processing centers will account for approximately an extra $1.5 million in operations, product, and technology expenses. Finally, we anticipate an incremental $1 million negative impact year-over-year as a result of higher freight costs. For the full year of 2022, we expect revenue growth to be driven both by ThredUP US and Remix. While we continue to expect ThredUP US's gross margins to improve in 2022, As we have done consistently over the past several years, we expect consolidated gross margins to contract year-over-year due to Remix's structurally lower margin profile. We would expect consolidated gross margins to be broadly stable this year, though Remix's offsetting impact will increase throughout the year as it grows as a percentage of sales. We are planning to thoughtfully transition Remix towards a mostly consignment model over the next two to three years, which we would expect to improve gross margin performance over the longer term. We are expecting 2022 EBITDA margins to show a slight improvement year-over-year as we digest a number of expenses associated with our Texas DC build-out, processing investments, and European expansion. We expect that the DC and processing centers will impact EBITDA by approximately $6 million, weighted towards the first half of the year. Additionally, we expect a $6 million negative impact from elevated break costs, which we will partially offset as we expand our automation, scale into larger DCs, and innovate on shipping logistics. We are planning to spend approximately $35 to $40 million in CapEx this year of an estimated $80 to $85 million to support our U.S. infrastructure growth. Given the scale of our 22 investments, we believe this year's capital expenditures and expenses are laying the groundwork for commensurate future revenue growth and ultimately profit growth. As a result, we expect that the step-up change in capacity that we are building out this year should push out the need for another similarly capital-intensive distribution center until 2025. In closing, I want to reiterate that we remain focused on the same strategy we have discussed since our IPO nearly a year ago. We continue to invest in infrastructure that supports our future revenue growth and widens our competitive mode, while at the same time making planned progress towards our long-term margin goals. In line with this, we are making several outside investments in our infrastructure this year. These will result in incremental expenses that will pressure our P&L primarily in the first half of 2022, but we look forward to leveraging those assets as we drive up our capacity utilization rate over time. Finally, our commitment to growing our capacity by 150% with our Texas DC reflects how firmly we believe in the magnitude of the global resale opportunity and should support our planned growth until 2025 before we need to build an additional distribution center in the U.S. We remain confident that we are laying the foundation for steady growth and ultimately increasing profits and are excited for the year ahead. James and I are now ready for your questions. Operator, please open the lines.