ThredUp Inc.

Good afternoon, and thank you for joining us on today's conference call to discuss ThredUP's first quarter 2022 financial results. With us are James Reinhart, 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 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, 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 first quarter 2022 earnings call. We're excited to share financial results and key business highlights from our first quarter. In addition to our financial results, we will discuss progress in Europe following last year's acquisition of resale leader Remix and updates on our resale as a service RAS offering. I'll also share a reminder of our strategy and the investments we're making to strengthen our position in the growing resale market, as well as how we were thinking about the consumer in the balance of the year. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our first quarter of 2022 financials in more detail and provide our outlook for the second quarter of 2022. We'll close out today's call with a question and answer session. Let's turn to the results. I'm proud to report that we kicked off 2022 with a strong Q1, achieving record results from multiple metrics. Our revenue of $73 million is an increase of 31% year over year, while our gross profits grew 26% to a record $50 million. Our gross margins were exceptionally strong at 69.1%, a 300 basis improvement over Q4. We attribute our strong gross margin performance to improvements in our logistics strategy as we push to consolidate orders. as well as progress within our European business. As expected, we posted an adjusted EBITDA loss of $13 million as we made planned investments across our operating infrastructure and technology stack. We finished the quarter with record active buyers and orders increasing 33% and 45% year-over-year, respectively. Even as we face rising inputs, labor costs, and logistics surcharges, our first quarter results reflect that our business model continues to benefit from the competitive advantages that we've developed in our supply chain and our culture of continuous improvement. I'd now like to take some time to acknowledge the current environment and its impact on the American consumer. As has been well documented, U.S. consumer prices jumped 8.5% year over year in March, the biggest year over year increase in more than 40 years. GDP declined in Q1, adding to already significant recessionary concerns. The conflict between Russia and Ukraine has continued. There are just a multitude of disruptive forces at play, squeezing consumers in many areas of their lives, from gas to food to housing to apparel. In addition, unpredictable category shifts in discretionary consumer spending are occurring as our lives are returning to a surge of social activity, travel, in-person events, and experiences this year. Regardless of how these crosswinds impact the threat of customer in the near term, we will relentlessly focus on providing great brands at great prices in a sustainable way. leveraging our unrivaled access to high quality supply speaking of great brands at great prices in april shoppers came to thread up for a variety of apparel needs workday wardrobe refreshes were in full effect sell through of wool pants wool blazers and formal skirts were all up more than 50 year over year 2022 is also expected to be the biggest year for weddings since 1984 And as a result, we saw sell-through of cocktail dresses and heels were both also up more than 50% year over year. And lastly, with sunny days ahead, the consumer appears to be ready for warm weather, with sell-through for sandals, halter tops, sunglasses, and sun hats all up over 65% year over year. The trends we observed in April we believe to be indicative of how customers are likely to shop resale today and into the future, which is to say trends and transitional moments may come and go, but we believe resale is increasingly becoming a go-to destination for more and more people each year. Yet at the same time that our customer is feeling pressure, the cost of doing business is rising for us as well. We've long discussed rising freight and wages, but as gas prices surge and the labor market remains tight, we continue to see rates increase, along with the cost of many other inputs in our business. There is much we cannot control in this environment, so we are proceeding carefully as we plan for the balance of the year. and staying focused on the same strategy we have discussed on every one of our earnings calls, investing to support our future revenue growth and widen our competitive mode in the U.S. and internationally, while at the same time making methodical progress towards our long-term margin goals. Despite the near-term uncertainty resulting from this dynamic macro environment, we view these challenges as transitory. We have always been a company that is focused on building for the long term. And as a result, we do not expect that what we are seeing today should alter our path towards profitability or our long-term targets. As Sean will discuss in more detail later, we are making significant headway in our path to profitability. Now I would like to provide an update on a few of these long-term growth initiatives. First, let's start in Europe. Our international efforts remain focused on Remix, the European fashion resale company that we acquired in Q4. As mentioned on last quarter's call, since the acquisition, we have moved swiftly to consolidate all of our ThredUp learning and are focused on driving supply growth and margin expansion. We've continued to leverage the ThredUp playbook that we've built over the past decade and are thrilled about the progress we've made since acquiring Remix two quarters ago. Specifically, we've generated meaningful wins around pricing, product optimization, sell-through, and data science that have yielded promising performance in our European business. The build-out for the new EU facility in Bulgaria is also well underway, and we're confident that the additional processing and storage capacity will further enable us to sustain broader European growth for years to come. The resale opportunity is a global one, and these investments will position us to capture market share outside of the US as the first phase of ThredUP's international expansion efforts. Finally, I would like to mention that while we do not sell to or source supply from Russia or Ukraine, we believe we may be subject to some volatility in our European business as the Russia-Ukraine war persists. Next, I'd like to share an update on ThredUp's resale-as-a-service business, also known as RAS. Given ongoing sales momentum, we expect roughly 40 brands on our RAS platform by year-end. As the leading provider of resale services to brands in the U.S., ThredUp is empowering brands and retailers to deliver quality, seamless resale experiences to their customers. We provide three main service modules – our clean-out service, our cash-out marketplace, and our full-service resale shops. This suite of offerings is called Resale360, and our core offering allows brands to get started in resale for free, in some cases within 30 days. As a reminder on how to think about RAS as it relates to ThredUp's core business, I'd like to reiterate two key elements. First, our clean-out kit and resale shop offerings for brands leverage our existing infrastructure, and amplify the competitive advantages that we've 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 may include deeper data intelligence, marketing, branding, pricing control, packaging, repair, or omni-channel integration. To summarize, by leveraging 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 recurring high-margin revenue. This brings me to the next topic I'd like to review, which is one you've heard me speak about each quarter, given its importance to our strategy. It's threat of 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 that we've solved. First, we've built a reverse logistics supply chain that has created a massive and seemingly endless supply advantage in the resale market. Second, We've built world-class infrastructure, technology, and software to process single SKU apparel at scale. Third, we've built a data-driven managed marketplace that connects buyers and sellers on our platform and gets smarter with each item that we process. Now more than 125 million items and counting. With our model, most of our clothing is listed on consignment, meaning we have little inventory risk and we boast a negative working capital cycle that's measured in months instead of weeks. Of course, every strategy needs to evolve as conditions on the ground change, and we continue to pay attention to macro conditions and their impact on market volatility. We will always aim to balance the demands of near-term scrutiny with our commitment to investing for long-term value creation. ThredUp remains a team that will provide transparency and remain focused as we forge ahead on our mission to build a generation-defining company, a company that changes the way the world shops and ushers in a new era of sustainable shopping. Let's turn for a moment to our investments. I'd like to spend the next few minutes reiterating where our investments are being made to widen our moat and strengthen our position in the growing resale market. First, we're investing in our infrastructure with four new facilities coming online across the business in 2022. In the U.S., the build-out for our new 600,000 square foot flagship distribution center outside of Dallas, Texas is making steady progress and remains on track to come online and begin processing this summer. Upon full completion, the new four-level facility will bring ThredUP's total network-wide capacity to 16.5 million items, a 150% increase from our current capacity. In addition, two new processing centers in the U.S., one in Grapevine, Texas, and one in Lebanon, Tennessee, are focused exclusively on clean out kit processing and have been up and running successfully since January. Both facilities will eventually serve as immediate feeders to our larger facilities in Dallas and Atlanta. With so much new processing power online, we have begun accepting more clean-out kits and have seen a surge in supply. In the first two weeks of reopening bag requests to our wider seller base, we received more than 150,000 requests, double what we expected. As inbound supply continues to exceed our expectation, our bag backlog has held at eight weeks, even as our processing power has reached all-time highs. We are confident we're unlocking ever higher steady state processing, a critical input to future steady growth. In Europe, we're building out our new larger processing facility in Sofia, Bulgaria, which is expected to come online later this year. This new facility will position us to more aggressively pursue the European resale opportunity, estimated to reach $39 billion by 2025, according to global data. Second, we're allocating capital towards research, development, and data science capabilities across our network. Ongoing investments in new systems is a key driver behind our ability to lower our per-unit processing costs, improve our pricing and payout systems to further expand margins, and upgrade our marketing, merchandising, and direct response expertise to supercharge customer acquisition at lower costs with higher lifetime value. I know that the consumer environment and macroeconomic conditions feel uncertain in the near term, but the tailwinds in the resale industry continue to blow, and capturing this momentum as volatility subsides will be dependent on the calculated investments we're making over subsequent quarters. I am very proud of the progress that our team is making across our investment portfolio, and am confident that each of these investments will ultimately translate into long-term value creation.

So let me wrap up.

I want to take a moment to highlight a few recent activities that speak to ThredUP's progress towards our mission to inspire a new generation of consumers to think secondhand first. In April, we threw a climate-positive concert for Earth Day right in the middle of Coachella, all to raise awareness around single-use fashion waste. According to GreenStory, Inc., buying an item used in ThredUP's marketplace can reduce the item's carbon footprint by 82%, making resale one of the most powerful solutions to the industry's wastefulness. Educating consumers about the impact of choosing youth continues to be a core pillar in achieving our mission, and our goal is to keep elevating thrift, growing the resale market overall, and driving large-scale industry change. Speaking of which, last month, we also debuted the ReCommerce 100, a comprehensive review of brands and retailers with dedicated resale programs. The monthly index tracks brands' adoption of resale and top brands' estimated resale shop size. We believe shining a light on what's really happening in branded resale is critical to ensuring that companies remain vigilant about their commitments to circularity and sustainability. The inaugural list shows that the number of new branded resale shops launched in 2022 is expected to exceed the number of all other resale shops launched to date. Yet the flow of resale goods remains very small. We estimate less than 0.1% of revenue today is coming from branded resale. There is much work to do. As more brands look to enter the resale ecosystem, we are committed to being the go-to enabler to scale these important offerings. During our next earnings call, I look forward to sharing the results of our 10th annual resale report with you, which further suggests that resale adoption is increasing, its growth trajectory is promising, And its environmental impact potential is tremendous. With that, I will 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 first quarter of 2022 earnings call. I'll begin with an overview of our results and follow with guidance for the second 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 10Q filing. Similar to last quarter, while we continue to report and guide on a consolidated basis, in some cases we will speak more specifically about our U.S. and European businesses individually during this transitional period. We are extremely proud of our Q1 results. For the first quarter of 2022, revenue exceeds our expectations, despite COVID-constrained listings following Q4's COVID surge, plus lapping stimulus-driven growth last year in our U.S. business. Revenue totaled $72.7 million, an increase of 31% year-over-year. Consignment revenue increased 6% year-over-year, while product revenue grew 130%. Q1 consignment revenue was most impacted by constrained listings due to Q4's COVID disruptions, while product revenue's outside growth is due to the growth in our RAS channel in addition to our Q4 European acquisition. Currently, the majority of revenue from both RAS and our European businesses is fall under product revenue, though we plan to transition these businesses towards consignment over time. For the trailing 12 months, active buyers rose 33% to 1.7 million. First quarter orders reached 1.6 million, increasing 45% as compared to the same period last year. For the first quarter of 2022, U.S. gross margins expanded to 74.1%, a 280 basis point increase over 71.3% for the same quarter last year, representing our highest gross margin ever. This result exceeded internal expectations as we made significant progress in outbound shipping logistics, most notably moving towards consolidating items per shipment and thereby reducing outbound shipping costs per order. At the same time, we continued to drive gross margin improvements from our ongoing work in improved automation, larger distribution centers, and expanded utilizations. Consolidated gross margin was 69.1%, a 220 basis point decline over the same quarter last year due to the consolidation of the lower margin European business. Over the next few years, we plan to migrate the European business towards higher margin consignment away from wholesale supply and invest in increased automation in order to be more in line with the current US business model. For the first quarter of 2022, Gap net loss was $20.7 million compared to gap net loss of $16.2 million for the first quarter of 2021. Adjusted EBITDA loss was $13 million, or 17.8% of revenue for the first quarter of 2022. An approximate 140 basis point decline compared to the adjusted EBITDA loss of $9.1 million, or 16.4% of revenue for the first quarter of 2021. The deleverage was largely the result of operations, product, and technology investments as we stood up our two processing centers and began to build out our Texas DC, which will increase our current unit capacity by over 150%. Q1 gap operating expenses increased by $16.4 million, or 30% year-over-year. Over two-thirds of this increase was related to higher operations, product, and technology costs related to our infrastructure expansion in both the U.S. and Europe. Turning to the balance sheet, we began the first quarter with $213.1 million in cash and investments and ended the quarter with $191.1 million. Our cash flow from operations was approximately a negative $7 million, while we spent approximately $15 million on CapEx attributable to our infrastructure build-out. We are proud of our Q1 results, but are electing to take a more careful approach the remainder of the year, as a variety of external factors are at work on both the consumer and our input costs. As James discussed earlier, the consumer is feeling pressure from all sides. I'm not the first to break this news, but it remains unclear how rising inflation, year-over-year declines in consumer sentiment, shrinking GDP, recession fears, and global geopolitical tensions will impact our consumer in the near and medium term. In this inflationary environment, we are not immune to the impact of rising input costs. We anticipate that the cost of doing business will be even higher in the coming months than it was when we first outlined our expectations for the year. Specifically, the cost of labor and shipping have mounted further. Most notably, in 2022, we are now expecting a negative rate impact of approximately $9 million year-over-year, largely as a result of rate increases. This is particularly impactful to our inbound costs that sit in our operations product and technology costs. This is not as impactful to our outbound costs that sit in COGS as we are able to offset the impact with the progress we are making in consolidating shipments. Finally, while maintaining our 12-month payback targets and fiscal discipline, we anticipate being able to spend more on marketing for the remainder of the year due to improvements in our gross margin and its flow-through to our payback calculation. Despite the macro uncertainty in the near term, we remain confident in the long-term resale opportunity and are committed to our long-term profitability goals while continuing to invest in infrastructure that supports our future revenue growth and widens our competitive moat. Disinvesting in growth dynamic is a prominent theme for 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. These incremental expenses will continue to pressure our P&L throughout this year, but we expect an outsized impact in Q2 of approximately $2 million. We look forward to leveraging these assets as we drive up our capacity utilization over time. With these factors in mind, I would now like to share a financial outlook. The second quarter of 2022, we expect revenue in the range of $75 to $77 million, gross margin in the range of 67 to 69%, and adjusted EBITDA loss of 19 to 17% of revenue, and basic weighted average shares outstanding of approximately $99.6 million. For the full year of 2022, we now expect revenue in the range of $315 million to $325 million. reducing our outlook due to the complex and highly dynamic nature of the current macro environment. We are raising our gross margin expectations to be in the range of 67% to 69% as we expect to see ongoing benefits from our logistics improvement, improved automation, larger distribution centers, and data-driven pricing optimization. We now expect an EBITDA loss of 16% to 14% of revenue, in large part due to the lower revenue base and rising input costs, as well as our plans for higher marketing spend. We continue to expect meaningful sequential progress in our EBITDA rate from the first half to the second half of the year. At the midpoint of our ranges, we would expect an EBITDA loss in the first half of the year of approximately 18%, while we expect the second half to improve approximately to 12%. And basic weighted average share is outstanding of approximately $100.3 million. In closing, we are pleased with our first quarter performance but are taking a cautious approach to the balance of the year. We view the challenges we are facing today as short-term and are staying focused on laying the foundation for steady growth while making our planned progress towards our long-term targets. James and I are now ready for your questions. Operator, please open the line.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you'd like to ask a question. We'll take our first question from Ike Brochow with Wells Fargo. Please go ahead.

Hey, everyone. Two questions for me. On the lower revenue outlook for Q2 in the year, is there something we're seeing within your customer cohorts? We've heard a lot about the low-end consumer possibly being under more pressure than the middle to high. Can you just kind of talk to what you're seeing in real time there? And then, Sean, on the freight part – component of the guidance. I think you said 9 million headwinds for the year. Can you just remind us what your expectation was three months ago, I'm afraid, even if it was supposed to be a headwind, but can you remind us what it was before? Thanks.

Hey, thanks. I'll start now. I'll kick it over to Sean. Yeah, I mean, I think that, you know, we're just trying to be cautious through the end of the year. I mean, there's nothing, you know, there's no big warning signs or anything from the customer, but, you know, site traffic is still good. Conversion is still good. We just get to the sense that the consumers, you know, are being pinched in lots of places. And so we thought, you know, we should be prudent as we look ahead and think about the guidance. But, you know, no big red flags on our end, just the general softening across the stacks.

Yeah, the simple piece, it went from the freight went from about $6 million impact to a $9 million impact. So a $3 million increase. Thank you.

Thank you. We'll take our next question from Ross Sandler with Barclays. Can you hear me, guys? Yep. Hey, Ross.

Hey. All right. I just got three quick ones. So first, thanks for that additional color on, like, the enterprise RAS business. James, how big could that be in five years? I'm assuming it's pretty small today, but what's your current thinking on that as far as the licensing fee component of RAS? Second one is just curious, kind of related to that last question on the macro, but do you think that the value prop that you guys offer at the lower ASPs in an environment like we're in, holds up better or worse than the higher ASP resale platforms like Poshmark or RealReal. Just any commentary on that would be helpful. And then it looks like, Sean, you're cutting about $25 million of REV out of the second half and about $15 million of GP, if I did the math right, out of the back half. So I assume most of that's just out of the core, but given that Remix is kind of a gross REV rec, Is there also like a dialing back of your expectation in Europe? Could you talk about the Europe versus U.S. outlook and how that's changed? Thanks a lot, guys.

Hey, Ross.

Yeah, let me start and then I'll kick it to Sean. Yeah, I think as I noted in the remarks, you know, RAS is still pretty small, right? It's 0.1% of branded resale, you know, broadly. You know, we think that there, you know, could be 100 or more enterprise clients out there. But there could be thousands of premium clients and then 10,000 core clients. So there are 35,000 brands that we sell at ThredUP today. So the universe of brands getting into resale, I think, is pretty compelling. We're certainly positioned to provide infrastructure, whether you're a small brand or a very large brand. We really think about RAS as our version of AWS. And so any brand can plug into our infrastructure. But we'll have more to share on the enterprise side as we deploy more enterprise clients. On the macro question that you asked and the value proposition, lower prices, I'm not sure whether it's better or worse than other resale platforms. I think what's unique about what's going on in the world today is it's not only the inflationary and recessionary concerns that are hitting the consumer, it's It's the fact that consumer discretionary spend is going to other things like travel, like experiences. So I think in a traditional depressed environment or a pullback, resale should perform exceptionally well as consumers trade down. I think this is just kind of a unique time when share of wallet is going to other places. But I think if that normalizes over the next couple of quarters and you see more of a steady state consumer discretionary environment, I think that's where resale you know, actually can take share, you know, as off price took share, you know, in the 2008-2009 pullback. So, and then on the third, I'll let Sean talk about, you know, full year and gross margins.

Yeah, Ross, yeah, no, I think that the reduction on the revenue outlook is about 15 million out of the 25 that you mentioned, but And the split between core in Europe or U.S. and Europe, think of it as the business in the U.S. is still 80% to 90%, so most of that is coming from the U.S. side. And I think we have the opportunity, as you know, the European business is underinvested, so as we invest more, there's more opportunity for growth there, and it's newer. So I think you're right in a sense it's more on the U.S. side.

Thank you. We'll take our next question from Dylan Carter with William Blair.

but just trying to square some of the early comments about, you know, these different categories that are seeing 30, 40, 60 plus percent growth, swim back to work, wedding and engagement type stuff. And then just the consignment revenue growth in the quarter, you know, were there certain categories where that were sort of pandemic heavy that then were in decline, or I guess how, how best to think about those comments in relation to the actual growth of the consignment business. And then any color you can provide specifically, I know that inflation is a relatively new input on the pricing algorithm, but any sort of input or color on how the pricing algorithm handles or adapts to inflation across the broader industry? Thanks.

Yeah, sure, Dylan. Yeah, as I noted in the remarks, we did see, I think the reopening categories perform exceptionally well. I think they're lapping a time last year where I think it was less obvious how the reopening was going to play. And so I think COVID certainly feels like it's more in the rear view mirror for many consumers as they plan vacations and holidays right now. So I think that's probably what drove it. And to your second question around consignment, if you recall, remember, Significant parts of our RAS business, our Resell as a Service business, not all of those have been transitioned to consignment. And so some of those sit in direct revenue. And so that's probably what you're seeing in the consignment and product piece. And then obviously Remix is almost 100% product direct revenue. And so that sort of accounts for the difference between consignment and product. And then I think your last question was around the pricing algorithms and how it relates to inflation and so forth. Yeah. Yeah. Go ahead.

Yeah, exactly. No, I just, yeah, you know, it's relatively newer input, I imagine, for the algorithm. So how it handles, you know, if other brands are taking up price, whether or not it follows along with that or how it works.

Yeah, it's an astute question. I mean, we generally are looking at this, we go through a sample of brands every quarter. where we're looking at it algorithmically and also spot checking. We've accelerated our review of brands and have certainly found that the broader retail environment is taking up prices pretty significantly. And so we're able now actually to have the algorithm update using some of our manual adjustments to capture some of that while trying to make sure that we remain a great place to deliver customers great value. So that's sort of how we're using human intervention, you know, alongside the data to have it respond even quicker.

Interesting. Thanks a lot.

Thank you. We'll take our next question from Ana Angigo with Niem.

Great. Thanks so much. Two quick ones for us. You guys talked about EBITDA margins in the 18% range here in the first half and then 12% for the back half. Can you just remind us what's driving that improvement? Are you pulling back on any of the investments just given the environment? We saw marketing growth moderate pretty significantly here in the first quarter. How should we expect marketing for the rest of the year? And then secondly, I just wanted to follow up on the balance sheet.

Yeah, I'll start, Ana, and then I'll let Sean chime in. You know, look, I think we expect to leverage all of the investments that we've been making. I think as we've said now a couple quarters, we had heavy investments in the fourth quarter, big investments in the first quarter here as we bring on new processing centers, new distribution center, investments in Europe. And so a lot of those things are front loaded. And so as our business continues to grow, we lap a lot of those things as we get into the back half of the year. So I think the team has a lot of confidence in that steady progress on the EBITDA line as we move to the back half of the year. and you said you had a balance sheet question?

And I would add into on the EBITDA leverage, Anna, just to keep on that, is that, you know, if DCO7 basically opening up in the summer, if DCO6 getting it at higher utilization, which is driving, you know, better EBITDA across the board, as well as just levering across OPEX as well in the second half of the year. And I don't know if your question is specific to the balance sheet related to cash or something else.

Yeah, no, on the balance sheets, just on the inventories, looks a little elevated compared to the sales growth. So just wanted to make sure you guys don't have any carryover to worry about. And then part of the earlier question was about marketing. Looked like the dollars moderated in one queue. Just how should we think about marketing growth embedded in two queue and the annual guide?

Yeah, I'll just jump in on the marketing side. So what you saw in Q1 was a little bit as Omicron reduced processing in the first part of the quarter, we often spend marketing dollars behind processing. And so as processing wasn't quite where we wanted it to be, we actually pulled back a little bit on the marketing spend. So that's why you see it be a little softer in Q1. We don't expect that to continue. In fact, with gross margins expanding the way that they have, it actually frees up more dollars. to deploy into investments and to deploy in growth, and that's what we expect to do back after the year.

And from an inventory perspective, it's really wholly related to Europe. As we bring on more inventory items, remember, most of our business in the U.S., we don't carry inventory. It's all in consignment. And so with Europe processing more, we're able to bring on more inventory, and that's kind of the step up that you see in Q1. Okay.

That makes sense. Appreciate it, guys.

Thanks. Thanks.

Thank you. We'll take our next question from Tom Nietzsche with Wedbush Securities.

Hey, good afternoon. Thanks for taking my question. To follow up there on the marketing, I guess two-part question. First off, can you contextualize for us at all like how much you would expect marketing to grow this year or to grow in the back half or anything like that? And then secondly, you know, Given that you're seeing better than expected performance on the gross margin line, but you do have these sort of question marks around, you know, state of the consumer and other sources of cost inflation and so on and so forth. What's driving the decision to invest more heavily in marketing instead of kind of letting some of that gross margin upside drop to the bottom line? Thanks.

Yeah, Tom, I mean, I think we, you know, we've been very consistent with, you know, when we feel like the paybacks are strong and the, you know, the selection of product that we have on the site, you know, makes sense, it's a good time to expand, you know, our customer acquisition efforts. So I think, you know, our expectation is as we continue to ramp up processing and selection gets better, right, there's going to be opportunities to deploy dollars to acquire customers, you know, that that generate long-term value. And so I think we want to be in a position to do that. And the advantage of having gross margins expand the way they have is that flows through the contribution margins, which allow us to generate faster and faster paybacks. That's really the power of the gross margin expansion. So I think we'll watch and see, but I think the team has confidence that the consumer environment you know, can normalize a little bit in the back half of the year, and with our selection and gross margins where they are, we'll be in a good position relative to where others might be.

Got it. Thanks, James. Thank you.

We'll take our next question from Kylie Kohu with Guggenheim Partners.

Hey, guys. It's actually Seth on here. I just wanted to circle back on the EBITDA guidance for the year and just clarify. So you're raising the gross margin guidance by about 250 basis points at the midpoint. You're lowering EBITDA by about 50 basis points. So there's around 300 basis points of more OpEx D leverage. I think 100 of that you said was shipping. Is the rest just the fixed cost D leverage from the lower sales and then maybe a little bit of marketing? Like, can you just break down that last component for us? Just want to clarify those numbers first.

No, I think it only one commend you for doing the math correctly. So appreciate that. I do think it's related to processing as we increase our processing as well as invest more in marketing. I think that's the missing piece that you have.

Okay. Got it. And then, you know, how do we think about maybe some other levers here to manage on the cost side? So for example, we did see recently that you raised the shipping fee. You also added in that bundle option, which is a little bit higher than what the shipping fee was in the past. I'm just curious, What was the consumer's reaction to that, if any? What have you factored into the guidance from that? Thank you.

Yes, Ed, we did finally change our shipping rates. We hadn't made any change in seven years, so we thought it was time to kind of get with the times, so to speak. Bundling has existed on ThredUP for many years. We found that that's what consumers love because we're always listing new product every day, and so they like the idea that they can shop and then keep adding items to their cart over time. We did a bunch of research. We've explored different ways to deliver shipping options to customers for a long time. And I think customers understand that shipping on ThredUP has been quite low from an industry perspective for a long time. And I think there'll be some transition here with the consumer, but we feel pretty confident that it's not going to have a material impact as we move forward.

Great. Thanks very much.

Thank you. We'll take our next question from Ashley Helgens with Jefferies.

Hey, good afternoon. Thanks for taking our question. On the active buyer growth, how much was related to the Remix business versus growth from the core business? And then also we wanted to ask on pricing. A couple quarters ago, you had strategically lower prices. Is this still the current strategy and any color on expectations for the balance of the year? Thanks.

Yeah, we don't break out the buyers from remix versus thread up. So that's not available in the guidance or in the results. As for pricing, I think as I said back when we made the announcement, we're constantly looking at ways to optimize price to deliver great value to buyers and then also great payouts to sellers. And so just as we raise prices on some products, we lower them on others. Ultimately, we're looking at the data to help figure out the best way to deliver to our customers. So no, no real meaningful change on the pricing side. I think the strategy remains consistent, which is to follow the data and try and deliver a great customer experience.

Okay, great. Thank you.

Thank you. We'll take our next question from Alexandria Steger with Goldman Sachs.

Thank you so much for taking my questions. So one follow-up on a prior question. Could you maybe share some of the takeaways or what you're seeing across the threat of customer base in the U.S. versus Remix over the past few weeks in terms of how they're engaging with the platform given the macro headwinds you laid out? And then second one on RAS and specifically on long-term margins, could you also discuss some thoughts about like the underlying costs of the business and to which degree they're fixed versus variable in nature? Thank you so much.

Yeah, I think on the customer experience side, I mean, I think, you know, noted in our guidance as we think about the coming year, I mean, I think we're just trying to be thoughtful about, you know, where the consumer is at. The European customer experience Certainly there was some pullback in Q1, right, as the war between Russia and Ukraine sort of kicked off. And so there were some headwinds there. I think those have persisted. We don't think it's like a huge impact on the year, but I think it's real. And then I think in the U.S., the customer, same as I said before, there's no specific pocket where it's worse. Given everything that's going on, we just feel like taking a thoughtful and smart approach to the rest of the year makes sense. You can clearly see where inflation is making it harder, and you can see where customers are spending their discretionary dollars. On the RAS side, we've not commented at all yet on the variable costs associated with RAS. RAS does rhyme with SAS for a reason. It is a fee-based business, which traditionally has higher margins. And so we expect to have 40 clients by the end of the year. And so we think that there are strong recurring fee revenue that will come with those clients over time. And we think it leverages really nicely in the organization. Remember that everything we do on the RAS side sits on top of our existing infrastructure. So it's really important that it's not as though we're taking on new things to deliver the RAS experience to our clients. It leverages all of the technology, software, product experience, infrastructure that we use in our core marketplace.

Thank you so much.

Thank you. We'll take our next question from Brian McNamara with Barenburg Capital.

Hey, thanks for taking our questions. Just two quick ones from me. In your view, how fast did the U.S. and or global digital resale market grow in 2021, and what is your expectation for market growth in 2022? Do you believe you guys are taking market share? And secondly, and apologies if I missed this, what's driving the gross margin guidance increase for the year? Is it simply mix, assuming perhaps lower European revenues than originally planned, or is it things like consolidating shipments, which you mentioned in your preparative remarks? Thank you.

Yeah, Brian, I don't have the total resale market growth for 21. You'll have to look at it in our resale report. So thredUP.com backslash resale has all those stats. We also have our 10th annual resale report coming out next week, which actually will have stats on 21, 22, and actually we'll talk a little bit more about what the global opportunity looks like in resale. So kind of stay tuned on that. On the gross margin side, I'll let Sean handle.

Yeah, on the gross margin expansion is definitely what we talked about on the prepared remarks. Basically, more items per shipment, so consolidating items really drives, you know, the expansion there, right, where less shipments per order really helps in addition to our normal overall automation across our processes.

Great. Thanks, guys.

Thank you. We'll take our next question from Lauren Schenk with Morgan Stanley.

Hey, this is Nathan Sutherland for Lauren. Can you, you called out some macrons a few times. Any way to more explicitly frame out what kind of macro backdrop you're assuming in the full year guide? And then on a separate note, now that the processing centers have been online for a few months, really helpful color and kind of the impact on the supply those had. Can you talk to the difference in unit economics when a clean out kit goes to a processing center versus straight to a DC? Thanks.

Yeah, I mean, I mean, I think that the if you look at the full year guide, you know, it's come down a little bit from where it was, you know, 60 or 75 days ago. So, you know, I think that's our that's our point of view on where the consumer is. You know, I don't think the idea is that the sky is falling, but I think the consumer is is a little bit weaker than it was, you know, the last time we issued issued guidance. And I think that's, you know, consistent with, you know, other retailers in the US who have that type of exposure. So we think it'll be a little bit softer, but I think our business is in great shape and I think we're making progress on all the key areas. As for the unit economics in the processing centers versus the larger facilities, we haven't sort of breaking out that level of detail, but our steady state gross margin targets continue to be 75 to 78% over the long term. which suggests that we're in great shape and well on our way to those. And those reflect gross margins that would happen in those processing centers. So I think we feel very good about the progress that we're making there. And then the dollars that are flowing from those gross margins, we think we can deploy really effectively into the business to support sustainable future growth. So that's kind of how we think about the cycle.

Great. Thank you.

Thank you. Once again, that's Star 1. If you'd like to ask a question, we'll hear next from Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone, and thank you for all the detail. As you think about the consumer and the consumer health, are you noticing anything by region? And how does Europe differ than the United States? Are you seeing anything different there, even though it still is early days in the integration of Remix? And then lastly, on Remix, gross margin of consignment and product gross margin. How are you thinking about the growth of that going forward and the adoption with Remix? Thank you.

Yeah, hi Dana.

You know, we don't see any big change, you know, by region. You know, we look at that data, but I think, you know, as I said before, I think it's just a broad, you know, you know, incremental softening of the consumer, not just in what their apparel shopping, but just how they're spending their dollars on gas and travel and all the other things that I think are eating up their wallets. So I think that's pretty universally shared across our customer base. I think the challenge in Europe is we've owned Remix We closed on the deal in Q4. We obviously do not anticipate the war between the Ukraine and Russia. And so we've had to learn a little bit what those impacts might look like. We obviously don't source or sell to Russia or Ukraine, but there's definitely some macro headwinds in that region. So I just think we're being smart and cautious about the investments we're making in that business and how we think it scales over time. But continue to remain pretty confident in what we're seeing in that business and in how that translates over time. So, you know, I think on the gross margin side, again, we're sticking to our long-term targets on the gross margin side. We expect Remix to get to the gross margin profile that supports that. And we continue to see ThredUp really shine, you know, with our gross margins in the U.S. and feel like that's a winning formula.

Thank you.

Thank you. And at this time, it appears there are no additional questions in the queue. I'd like to turn the conference back over to management for any additional or closing remarks.

Great. Thanks, everyone, for joining us for our call. Appreciate all the good questions. I wanted to give a big thanks to the team here at ThredUP, who's working very hard. It's tough out there. We appreciate all of your hard work. And we look forward to talking to you next quarter. Thanks.

Thank you. And that does conclude today's conference. We thank you all for your participation, and you may now disconnect.