ThredUp Inc.

And welcome to the ThredUP third quarter 2022 earnings conference call. Today's call is being recorded. And now at this time, I'd like to turn the call over to Lauren Frasch. Please go ahead.

Good afternoon, everyone, and thank you for joining us on today's conference call to discuss ThredUP's third quarter 2022 financial results. With us are James Reinhart, ThredUP's CEO and founder, and Sean Sobert, CFO. We post our press release and supplemental financial information on our investor relations website at ir.thredUP.com. This call is also being passed on our IR website, and a replay of this call will be available shortly. Before we begin, I'd like to remind you that we will make forward-looking statements during the course of the call, including, but not limited to, statements regarding our earnings guidance for the fourth fiscal quarter and full year of 2022. future financial performance, market demand, growth prospects, business strategies and plans, our ability to attract new buyers and the effects of inflation, increased interest rates, 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 the rest are 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, uncertainties, and other factors that affect our operating results in our SDC filings, earnings press release, and supplemental information 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 and comparable GAAP measures in our earnings press release and supplemental information posted on our IR website. Now, I'd like to turn the call over to James Reinhart. James?

Thanks, Lauren. Good afternoon, everyone. I'm James Reinhart, CEO and co-founder of ThredUP. Thank you for joining ThredUP's third quarter 2022 earnings call. As we head into the final months of 2022, we are chair of ThredUP's financial results and key business highlights from our third quarter. In addition to our financial results, we will offer our perspective on the consumer environment, how resale is faring, and our path to sustainable profits and long-term growth. I'll then hand it over to Sean, our chief financial officer, to talk through our third quarter 2022 financials in more detail, and provide our outlook for the fourth quarter of fiscal year 2022. We'll close out today's call with a question and answer session. Let me start with our Q3 results. We achieved another quarter of strong financial performance, beating both the top and bottom lines of our guidance. Despite a challenging macro environment and lapping strongman last year, we saw continued growth in revenue, active buyers, and orders compared to the same quarter last year. Our revenue of $67.9 million is an increase of 7% year over year, demonstrating our ability to achieve growth even through a promotional retail environment. Q3 active buyers and orders increased 18% and 24% year-over-year, respectively, and our gross profit and gross margin both declined last quarter, shrinking by 3% and 750 basis points, respectively. The decline in our gross margins is primarily due to the outsized growth of Remix and RAS, as both become a larger part of our overall business. As a reminder, we recognize a majority of our RAS and European supply as owned inventory, which negatively affects our gross margin profile. And finally, our adjusted EBITDA loss of $11 million is primarily due to planned investments across our operating infrastructure and technology stack. Now let's turn to the road ahead. I'd like to acknowledge that we're still navigating through a challenging consumer environment. As we shared in our last earnings call, it's been difficult to predict exactly how the consumer was going to behave in the back half of the year, with persistent inflation continuing to pinch the budget consumer, a meaningful portion of our consumer base. As we said last quarter, we observed initial deterioration in consumer health towards the end of Q2, and this continued into Q3. In Q4, we're seeing the added impact of a highly promotional environment as retailers are moving through elevated inventory levels and the wholesale channel is flooded with excess product. While we were expecting a competitive landscape, Q4 is proving to be an even bigger challenge than we had anticipated. The product brand stands for value, and that message is being washed out in this hyper-promotional landscape. We're confident that this competitive dynamic is temporary, and we believe it will subside as retail inventory positions improve, but we expect revenue to be challenged in the near term. Given that backdrop, I want to take a moment to address a question I frequently get asked around how resale should fare in a recession. James, shouldn't it do well at a time like this? The answer is yes. we believe resale should do quite well in a typical recessionary environment as consumers look to find value. But it's not that simple this time around. That's because over the past 12 months, there's been a massive buildup of apparel inventories. So what we're seeing is a combination of demand pullback at a time when retailer inventories are overflowing with apparel, which is resulting in significant price compression in the apparel market. And while we don't have the same inventory risks that other retailers have, we're not immune to the pressure on prices. But I think it's really important to step back for a moment and ask, how might this play out in the future? Two things to keep in mind. One, what's getting overlooked in this environment is that consumers are becoming accustomed to buying apparel at extremely low prices. When retailers sell through their excess inventory, prices normalize, we believe there's a significant opportunity for resale to take share. For a customer that's been conditioned to expect 60 to 80% off retail for their clothes, If you're still feeling the effects of inflation, resale is going to be a go-to for value. Two, and then when that consumer health starts to slowly inflect, as we believe it does following every economic downturn, we're confident that ThredUp's value proposition will enable us to cap meaningful wallet share from shoppers across the economic spectrum, as we have done many years in the past. Sometimes in the noisiness that is the financial markets, it's easy to lose the plot. So I wanted to reiterate five things for those thinking a bit longer term. One, we have 1.7 million active buyers. And on average, each of those active buyers are spending nearly $170 each year. Before the pullback just a couple years ago, our business witnessed five quarters of accelerating growth, with Q4 last year growing 68% year over year. This is a business that knows how to grow. Two, We have a structural supply advantage where we have never had to spend direct marketing dollars for suppliers, ever. Three, we have spent many years building infrastructure, expertise, proprietary data, and a winning brand that is increasingly hard to replicate. Four, we are competing in a total addressable market in the US and Europe for secondhand apparel that is expected to top 150 billion by 2026. Now, you can try the total size, and you can trifle with the timing, but virtually all new market innovations are undersized in the beginning until they are not. The growth in this market is powered by young people who are just now starting to flex their purchasing power. Five, our business is founder-led on a management team whose average tenure is more than eight years. We have navigated through much more challenging environments than this and relentlessly driven by our mission for profits and purpose. Now that I've gotten that out of the way, let me focus on two areas, driving profits and investing in the future. As we shared during our last earnings call, our priority remains reaching adjusted EBITDA break back half of 23 and making prudent investments to create long-term shareholder value in 23 and beyond. We are operating in an environment where we need to play both offense and defense skillfully. And to put it plainly, we are playing to win, not just to survive. So let me first emphasize that we have many tools in our toolbox to manage expenses and drive the business to adjust the EBITDA break-even. First, our processing cadence, inventory sourcing, and selection. As mentioned earlier, we're restricting the number of clean-out bags we're sending to suppliers to flex supply, as well as evolving the mix of goods we put online to meet a more sober demand environment. However, we're keeping up our RAS partner clean-out program. And as a reminder, we charge brands a fee for each RAS bag that we process through our clean-out program. Our RAS business has continued to accelerate with Q3 being our best quarter yet in terms of the high margin fees that we generate. Second, we are leaning into the advantages of our marketplace model. As a marketplace, we believe we have structural advantages and built-in resiliency compared to traditional retailers. Unlike traditional peers, we have a flexible, responsive supply chain and the variety of levers we can pull around prices, payouts, recommendations, and mix position the business to navigate a dynamic environment. Third, we are shaping our distribution network in the U.S. to best support our growth. We have pushed out the opening of our Dallas distribution center as we focus on better aligning current demand with expenses. We expect to bring the facility online in the next few months. Upon opening with the completion of phase one, we expect our CapEx investments to slow considerably. In light of scaling down the volume of inbound bags we accept, we recently closed our remaining dedicated processing center in Tennessee and have shifted those resources strategically to Dallas, which will be our largest flagship facility upon completion. Reminder, at full build-out, the facility in Dallas will bring our network-wide storage capacity to 16.5 million items. We expect to be able to methodically expand into its full capacity when consumer purse strings loosen and increase the number of clean-out bags available. Fourth, we remain focused on maintaining our strong unit economics which will be key to expanding our profits over time. Despite rising labor and logistics costs and higher returns, we expect to continue to deliver expanding contribution margins as we improve automation and efficiencies in our process. Lastly, we have reduced operating expenses amidst an uncertain demand environment. We are rigorously managing variable expenses and CapEx in pursuit of our profitability targets and to regulate levels. 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, discretionary spending not pertinent to the current growth of the business. Now I'd like to turn to the investments we're making in the business to drive sustainable growth in years to come. We believe the consumer is going to come out of this pullback with higher wages, improved sentiment as inflation subsides, an eye for value, and an ever greater commitment to sustainability. Of course, the when is not entirely clear, but we want to be prepared to capture that moment and to win chair. We did this coming out of COVID. Remember, we grew over 50% in the back half of 2021, and we are planning to do it again. Let me highlight a few of the investments we are making to position our business to capture the apparel market recovery. One, we're making significant improvements to the buying experience. We've doubled down on curation efforts, building tools like visual filters, style matching algorithms, occasion-based recommendations, mobile swiping and favoriting features to empower the customer to more easily find the right items for them, no matter what they're looking for. We're proud that Thrift the Look, an AI tool that allows customers to shop outfits through image-based search technology, was recently named one of Time's Best Inventions of 2022. Two, We're continuing to focus on Remix, the European fashion resale company we acquired a year ago. Earlier this year, we invested 11 million US dollars in a new 320,000 square foot high-tech processing and distribution center in the company's headquarters in Bulgaria. Expansion plans are on track as they moved all inbound and outbound operations over to the new facility. In the full capacity, this facility will be able to triple Remix's overall output. We're also investing in expanding Remix's consignment inventory. as well as their data science capabilities to improve market efficiencies and its margin profile. Though we are seeing the impact of inflation, rising energy costs, and FX, we remain impressed with the resiliency of Remix's business model and growth trajectory and continue to believe it is well-positioned to take share in Europe over the long term. Three, we're continuing to grow our resale-as-a-service business, or RAS. By leveraging our marketplace infrastructure, RAS amplifies our supply advantage, increases our sell-through and return, and expands our long-term profitability metrics by adding sources of recurring high margin revenue. We recently launched new resale programs with Tommy Hilfiger, Athleta, Vera Bradley, Francesca's, and Hot Topic. Of note, Athleta and Vera Bradley both expanded their resale programs from clean-out to full-scale resale shops. Over time, We expect to be able to convert clean-out only partners to resale shops as we build full 360 resale experiences for brands. We remain on track to serve 40 brand clients through RAS by year end. I'd now like to take a moment to celebrate that ThredUP released our inaugural impact report last month. The report outlines our business and brand aligned environmental, social, and governance strategies and details the progress we made across ESG initiatives in 2021. We frequently discuss the eco-impact of choosing used. For example, every time you shop and wear secondhand instead of new, you reduce carbon emissions by 25% on average. The bottom line is, as startup grows, so does our impact. We're also focused on ensuring our own operations are sustainable, fostering a high-integrity workplace culture, and supporting an ethical corporate governance framework. For those interested in learning more about our ESG strategy and disclosures, I encourage you to learn more at our revamped impact website, thredUP.com backslash impact. Lastly, I want to share some of our exciting recent efforts to educate consumers about the impact of their fashion habits and fight fashion waste. Last quarter, we launched a fast fashion hotline designed to help Gen Z resist the temptation of fast fashion and embrace more sustainable shopping habits. We also partnered with Heinz. Yes, Heinz, the iconic ketchup company, to launch a vintage drip collection with, quote, ketchup-stained apparel. Together, we created a campaign that celebrates the one-of-a-kind, statement-making nature of used clothes. Just last week, we launched our first-ever upcycled holiday collection with designer Zero Waste Daniel, made entirely of secondhand clothes that weren't fit for resale and thread-up. The collection includes fun items like pet beds and coasters, and it demonstrates our commitment to closing the loop by finding new ways to improve our aftermarket business. Through these efforts, we are inspiring a new generation of consumers to think secondhand first and ushering in a more sustainable future for fashion. Before I turn it over to Sean, I want to close by restating our confidence in our ability to navigate this challenging consumer environment. When the consumer environment recovers and the, quote, great apparel liquidation of 2022 is over, we're confident that ThredUp's mission of providing great brands at great prices in a sustainable way will shine brighter than ever. With that, I'll now turn it over to Sean to walk through our financial results and our guidance.