ThredUp Inc.

Good afternoon, and thank you for joining us on today's conference call to discuss ThredUP's second quarter 2022 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 the not limited to statements regarding our earnings guidance for the third fiscal quarter and full year of 2022, future financial performance, market demand, growth prospects, business strategies and plans, the effects of inflation, changing consumer habits, and general global economic uncertainty. These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties, and our actual results could differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. 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 and certainties and other factors that could affect our operating results and our SEC filings earnings press release, and supplemental information posted on our IR website. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. 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 press release and supplemental information posted on our IR website. Now, I'd like to return 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 second quarter 2022 earnings call. We're pleased to share ThredUP's financial results and key business highlights from our second quarter. In addition to our financial results, I'll give a closer look at how the threat of customers is faring in this difficult economic environment, discuss the unique advantages of our marketplace business model, and provide some details on our progress towards profitability. I'll wrap up with a discussion of investments in our customer experience, our progress in Europe following last year's acquisition of Remix, and updates on our resale as a service offering. I will then hand it over to Sean Silvers, our Chief Financial Officer, to talk through our second quarter 2022 financials in more detail, and provide our outlook for the third quarter of 2022. We'll close out today's call with a question and answer session. I'd like to start by acknowledging that we are facing a consumer environment that is much different than it was just two months ago. All the data that we're seeing indicates that consumer health is deteriorating, especially among the budget consumer, who makes up a meaningful portion of our customer base. As such, we saw our business slow in the final weeks of Q2, a trend that has continued into Q3. Given the volatility we're seeing with the consumer, it's incredibly hard to predict exactly how the customer is going to behave in the back half of the year, a period during which we also have challenging year-over-year comparisons. With that said, our priority in the coming quarters and into 2023 is reaching break-even on an adjusted EBITDA level, and we are planning to get there by managing the variables within our control. We are actively making adjustments to reduce our cost structure and modify our CapEx plans to not only weather this challenging economic period, but importantly, to come out profitable on the other side, positioning us for share gains when consumer health returns. I'll provide additional details on our path to profitability later in the call. But first, let's turn to our Q2 results. We achieved another quarter of strong financial performance, seeing record revenue, resilient gross margins, and continued growth in active buyers and orders compared to the same time last year. Our revenue of $76.4 million is an increase of 27% year over year, even with a deceleration beginning in mid-June. We are particularly proud of our gross profit, totaling $52.6 million, representing growth of 19% year-over-year. We finished the quarter with gross margins at 68.9% on a consolidated basis and record gross margins in our U.S. business of 74.2%, as our progress in our logistics strategy more than offset a highly promotional environment. Active buyers and active orders this quarter increased 29% and 40% year-over-year, respectively. Our adjusted EBITDA loss of $13.5 million is primarily due to planned investments across our operating infrastructure and technology stack. Let's turn to the macro environment and the consumer. Our second quarter results were solid, building off a strong first quarter. But as I noted, our consumer began to really struggle in the back half of June, and that persists today. As has been well documented, the American consumer, and particularly the budget consumer, has pulled back on discretionary spending amidst today's economic climate. Inflation continues to squeeze the purchasing power of all but the wealthiest Americans. Recall that approximately 60% of our customer base has a household income below $100,000. And our customer data is telling us that this budget consumer is feeling particularly pinched. As a rigorous data-driven company, we're sharing some incremental learnings this quarter to demonstrate how consumer behavior in the U.S. has evolved in our marketplace. We're witnessing a clear bifurcation of threat of customers. with premium shoppers trading up and value shoppers trading down. Year over year, the average order value of the deep discount segment of our customers declined 7%, while our upscale shoppers' average order value increased 15%. When we look at the items being purchased, the bifurcation is even more pronounced. The deep discount shoppers are trading down to items that are 24% less expensive, and the typical budget shoppers trading down to items that are 8% less expensive. Meanwhile, the upscale shopper is doing the opposite, trading up to items that are 8% more expensive. While we've only seen a slight dip in the number of upscale shoppers buying with us, we've seen a 23% decline across discount and budget shoppers in July compared to the same period in May. Discount and budget shoppers make up about one-third of our customer base, so essentially nearly one in four of them are siloing themselves from apparel purchases right now. Across all our shoppers, we've seen return rates climb over the past several months, which we believe is an indicator that customers are being more selective when it comes to their discretionary purchases. What this tells us is that while there are many customers on the sidelines right now, even the customers in market are behaving differently. We expect these trends to continue for some time. Given this backdrop, I want to call your attention to two areas. First, the advantages of our marketplace model and how we can flex our platform to adjust to demand. And second, how we're approaching variable expenses in our march towards both sustainable growth and sustainable profits. Let me start with the structural advantages and built-in resiliency of being a marketplace. I want to remind everyone that we're not a retailer or direct-to-consumer e-commerce company. Unlike traditional retailers whose brand equity around pricing, inventory commitments, and fashion manufacturing lead times can become a liability in a hyper-promotional and swelling macro environment, Our consignment structure and flexible responsive supply chain enable us to take minimal inventory risk. We don't set trends or have to bet on trends many quarters into the future. We can let the data drive our decision making. We think of every listed item in our marketplace as a snowflake, which means we have the flexibility to adjust our prices, seller payouts, processing cadence, recommendation algorithms, and merchandising mix to adapt to the consumer environment. For example, If we see resilience in spending from higher income customers, we can adjust our assortment and pricing strategy toward items that are trending with that demographic. If customers are trading down into lower priced goods, we can adjust our selection and payouts for those items to drive sell-through while protecting margins. One of the lessons learned coming out of the pandemic was how to flex our mix of goods to meet the moment. Right now is a prime example of how we can flex. While traditional retailers have overbought and must work through a glut of inventory, we can more easily dial back inbound supply and shape our assortment from our customers to best match the forecasted demand environment. As macro conditions begin to improve, we can dial back up our processing to meet the demand curve. Next, I'd like to address in more detail the steps we've taken to reduce expenses across the organization as a proactive step towards our profitability goal. It's very important to note that, again, as a marketplace, many of our expenses are variable, not just in supply processing, but more broadly across the P&L. This past quarter, we reduced expenses across headcount, R&D, CapEx, and discretionary spending not pertinent to the current growth trajectory of the business. This includes making the difficult decision to lay off about 15% of our corporate workforce, as well as shutter one of our processing centers. We believe these actions will position us well for the uncertain demand environment ahead and accelerate our path to profitability. While we've prioritized a new approach to expenses, it's proving hard to predict exactly how the customer is going to behave in the back half of the year and into the first part of 2023. With that in mind, we thought it best to be conservative and to guide investors to three operating principles on which we're running the business. First, we are focused on maintaining our active customer numbers and engaging our core buyers and sellers through continuous improvements in the product experience. We will seek to acquire new customers as acquisition costs continue to come down, and we will plan to be spring-loaded to surge item processing and growth spend as we've seen green shoots of a recovery. Second, we are focused on maintaining our strong gross margins, pricing power with buyers, our payout power over sellers, and reducing inventory risk to provide maximum flexibility as the customer recovers. We plan to drive our processing backlog down to allow us to be nimbler in sourcing and shaping the best possible assortment. Three, we will rigorously manage variable expenses and CapEx as needed to achieve our profitability targets and regulate our cash levels. While we expect a challenging consumer environment for the foreseeable future and can reduce variable expenses further if needed, we will also be positioning our product and growth strategy to take advantage of a recovering consumer. Importantly, we expect to be adjusted EBITDA breakeven in the back half of 2023. This is assuming a quarterly revenue run rate between $80 and $85 million and on a clear path to sustainable profits thereafter. Now that we've covered the consumer, the advantages in our marketplace, and our path to profitability, I'd like to update you on what we're doing to improve the customer experience and provide some commentary on our progress with our European and resale-as-a-service businesses. Let's turn to the customer experience. Across our marketplace, our team has honed in on high-impact, high-conviction improvements to thread a product experience that will pay dividends in the short and long term. First, it's all about delivering a world-class shopping experience that keeps customers coming back. We offer a one-of-a-kind catalog where fresh, new items across thousands of brands, categories, styles, and price points get listed every day. With our expansive assortment, one area we're particularly focused on is curation. We're building tools like visual filters, style matching algorithms, occasion-based recommendations, and mobile swiping favoriting features to empower the customer to get exactly what she wants in an increasingly effortless way. If you've used a ThredUp app lately, you may have seen some of this already in beta form. Of course, we also remain disciplined on acquiring new customers and delighting them the first time they engage with ThredUp. To that end, I'm excited to share that Noelle Sadler has joined ThredUp as our Chief Marketing Officer. Noelle comes from online fashion retailer Lulu's, where she served as Chief Marketing Officer. Her deep expertise in e-commerce marketing and merchandising will be immensely beneficial as we look to capture an even larger mindshare of Gen Z consumers. Shifting to the international front, we remain focused on Remix, the European fashion resale company we acquired in Q4 of last year. As mentioned on last quarter's call, we are focused on driving supply growth and margin expansion within the Remix business. We're also learning to manage and optimize the more seasonal nature of its operations in Central and Eastern Europe, where Q3 tends to be sales of low-priced tees, tanks, and shorts, and Q4 tends to be sales of higher-priced pants, jackets, and outerwear. As we learn more about these customer preferences, we're leveraging the ThredUp playbook to improve pricing, merchandising, payouts, and sell-through. We are pleased at how well Remix continues to exhibit resiliency in its top line and margins, despite economic turbulence in Europe. Turning to ThredUp's resale-as-a-service business, also known as RAS, we recently launched Resale360 for Tommy Hilfiger, a classic American brand dedicated to embracing circularity. At the same time, we launched Oak & Fort, a minimalist sustainable fashion brand, showing that our RAS platform can effectively serve brands across the apparel ecosystem. In addition, Madewell, one of our early RAS clients, expanded into 15 categories outside of denim, growing listings on its resale shop by over 400%. Despite a tough environment for retailers, we remain on track to have more than 40 brands on our RAS platform by year end, and many of our existing clients are expanding their businesses with us as we prove out the value of our model. By leveraging our marketplace infrastructure, RAS amplifies our supply advantage, places our brand in front of new customers, increases our sell-through and return on assets, and expands our long-term profitability metrics by adding sources of recurring high-margin revenue. In conclusion, let me reemphasize that our priority in the coming quarters and in 2023 is reaching breakeven on an adjusted EBITDA level, and we are planning to get there by managing the variables within our control while positioning us for share gains when consumer health returns. I also want to acknowledge the mission of ThredUP, which is to inspire a new generation of consumers to think secondhand first. Our mission of our company ultimately comes to life through the incredible work of our team, and I'm really proud of their collective resilience. the year-to-date corporate employee retention rate remains a remarkable 96%, with the average tenure of our most senior executives approaching eight years. This quarter, we also released our 10th annual 2022 resale report, conducted by third-party retail analytics firm Global Data. According to Global Data, the resale market is expected to exceed $80 billion by 2026. And while we remain confident in its long-term growth prospects, we are acutely aware of the near-term economic challenges in front of us. One final comment before I turn it over to Sean. I'd like to note that while this is a challenging moment for the budget shopper in a discretionary category, the American consumer has proven to be incredibly resilient over time. And when discretionary spend comes roaring back, as it has in every other previous recovery, we will be poised to serve that surging demand with an incredible selection of great clothing in an ever-improving marketplace with strong unit economics, and with a meaningfully improved cost structure. With that, I'll 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 second quarter of 2022 earnings call. I'll begin with an overview of our results and follow with guidance for the third quarter and the full year. I will discuss non-GAAP results throughout my remarks, our GAAP financials, and our reconciliation between GAAP and non-GAAP, are found in our earnings release, supplemental financials, and our upcoming 10Q filing. We are extremely proud of our Q2 results. For the second quarter of 2022, revenue totaled $76.4 million, an increase of 27% year-over-year. Consignment revenue was flat year-over-year, while product revenue grew 145%. Q2 consignment revenue saw an outsized impact from slowing demand in the U.S. in the final weeks of the quarter, a deceleration that so far has continued into Q3. Product revenue's growth is due to our Q4 2021 European acquisition and growth in our RAS channel. Currently, the majority of revenue from both RAS and our European business falls under product revenue, though we plan to transition these businesses toward consignment revenue over time. For the trailing 12 months, active buyers rose 29% to 1.7 million. Second quarter orders totaled 1.7 million, increasing 40% as compared to the same period last year. For the second quarter of 2022, U.S. gross margins expanded to 74.2%, a 60 basis point increase over 73.6% for the same quarter last year, representing our highest U.S. gross margin ever. Our progress in outbound shipping logistics, along with our ongoing work in improved automation, larger distribution centers, and expanded utilization, despite elevated returns and a more promotional strategy towards the end of the quarter. Over the course of Q2 2022, we did see return rates move higher, as consumers became more selective, negatively impacting our revenue by an incremental $2.5 million over Q2 of 2021. We have seen this trend continue in Q3. Consolidated gross margin was 68.9%, a 470 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 consignments. In the near term, Europe's product revenue margins are materially lower than ThredUp U.S.' 's product margin, and we see ample opportunities to improve its product revenue margins through investments in automation and data science in order to be closer to the 50% range the U.S. product margins command. For the second quarter of 2022, gap net loss was $28.4 million compared to gap net loss of $14.4 million for the second quarter of 2021. Adjusted EBITDA loss was $13.5 million, or 17.7% of revenue for the second quarter of 22, an approximate 265 basis point decline compared to the adjusted EBITDA loss of $9 million, or 15.1% of revenue for the second quarter of 21. The deleverage was largely the result of operations, product, and technology investments as we continue to build out our Texas DC, which will ultimately increase our current unit capacity by over 150% in the U.S. alone. Q2 gap operating expenses increased by $23 million, or 40% year-over-year. Just over half of this increase was related to higher operations, product, and technology costs related to our infrastructure expansion in both the U.S. and Europe, while stock-based compensation accounted for $7 million of the increase as we awarded employees our annual RSU refresh. Turning to the balance sheet, we began the second quarter with $191.1 million in cash and investments and ended the quarter with $155.7 million. Our cast usage from operations was $18.2 million, while we spent $14.9 million on CapEx, largely attributable to our infrastructure build-out. As we look forward, our priority in the balance of the year and into 2023 is to direct the business towards adjusted EBITDA breakeven on our way to profitability. With the acknowledgement that the challenges in the macroeconomy are something we cannot control and that we will likely be facing a slower demand environment in the near term, we believe We have mapped a path to adjusted EBITDA breakeven that's dependent upon what we can control, expenses. Threatic is clearly aligned on our adjusted EBITDA breakeven goal with the entire organization prioritizing expense rationalization and cost efficiency. At the same time, we remain dedicated to investing in our customer experience and operations so that we are well-positioned to take share when consumer health returns to steadier footing. We acknowledge that the timeframe to reach adjusted EBITDA breakeven on a quarterly basis could shift depending on the macro environment. But based on our current assumptions, we believe that we'll be able to reach break-even by the back half of 2023, assuming we reach a quarterly revenue base of $80 to $85 million. An example of the work we have done in reexamining our expense structure is that we have made the difficult decision to lay off 15% of our corporate workforce towards the end of Q2, closed one of our processing centers, and eliminated a significant portion of discretionary spending. We are continuing to find opportunities to reduce costs, and we expect many of the expense rationalization initiatives we put in place will materialize over future quarters. We are also pulling back on variable spend in response to slowing demand in areas such as marketing and inbound processing. In Q3 and Q4, we expect to realize approximately $12 million and $18 million of savings from these initiatives, respectively. Based on the current revenue trends in 2023, we expect $70 million in savings over half of which are operations and marketing related, which we expect to redeploy when revenue trends improve. Even in the slowing demand environment that we are facing, we are confident in our ability to reach adjusted EBITDA break-even due to the fact that our expense structure is highly variable. This expense flexibility is a key of our business model that can serve us well in a weaker economic environment. For example, inbound costs that sit in operations, product, and technology are responsive to revenue trends. If we're selling fewer items, then we need to process fewer items in, naturally reducing our expenses. Furthermore, we have the ability to react to revenue trends and defer or reprioritize our CapEx commitments as well. For example, we have taken a modular approach to building our Texas DC. This means we can push out the second phase and the associated CapEx and costs until demand requires additional capacity. Based on the current environment, we expect to spend $12 million to $13 million in Q3 and $5 to $6 million in Q4, and are planning for less than $20 million in total for 2023. Though we spent $33 million in cash in Q2, we expect the spend level to significantly decrease by Q4 as our CapEx expending eases as we near the end of completion of Phase 1 of our Texas DC. Combined with the significant improvements in EBITDA, we are expecting due to the ongoing cost-saving initiatives we're implementing. Even in a slower growth environment, the variable nature of our expenses combined with the ongoing work we're doing to drive out excess costs provides us with the confidence that we expect to be able to fund the business through our existing cash balance and or debt facility until we reach free cash flow positive. In fact, we believe our recently refinanced $70 million debt facility can entirely finance our near-term CapEx requirements if needed. As a result, we do not anticipate our balance of cash, cash equivalents, restricted cash, and marketable securities falling below $50 million before reaching free cash flow positive, nor do we expect the need to turn to the capital markets before then. We are electing to take a highly conservative approach to the second half as visibility consumer behavior is low, particularly among the low-end consumer. In addition, we are facing a difficult second half comparison to the step-up in processing power in 2021. Our outlook assumes that the trends we are seeing today extend through the balance of the year. With these factors in mind, I would now like to share our financial outlook. For the third quarter of 2022, we expect revenue in the range of $64 to $66 million, gross margin in the range of 65 to 67%. Keep in mind that our Europe business is highly seasonal with its lowest gross margin quarter in Q3 during the summer selling periods. In addition to our weaker-than-expected U.S. performance, our lower-margin European business will be a larger portion of our business in K-3. An adjusted EBITDA loss of 18% to 16% of revenue, which is a 75th sequential improvement at the midpoint of our outlook, and basic weighted average shares of approximately $100.4 million. For the fourth quarter of 2022, we expect revenue in the range of $70 to $72 million, gross margin in the range of 64% to 66%, Our lower margin European business has their seasonally strongest quarter in Q4, making it the greatest percent of total revenue for the year, pressuring gross margins. An adjusted EBITDA loss of 10% to 8% of revenue, which is an 800-bip sequential improvement at the midpoint, as we expect to benefit from a full quarter of our cost-saving initiatives. A basic weighted average share is outstanding of approximately $101.3 million. For the full year of 2022, we now expect... revenue in the range of approximately $283 million to $287 million. Gross margins would be in the range of approximately 67% to 69%. An adjusted EBITDA loss of approximately 16% to 15%. We continue to expect sequential progress in our adjusted EBITDA rate and dollars until we reach break-even. Despite the top-line pressures to our business, we are expecting an improved EBITDA loss versus the midpoint of our previous guidance due to the meaningful actions we have taken to reduce expenses across the organization.