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spk05: 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.
spk08: 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?
spk16: 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.
spk07: Thanks, James.
spk15: And again, thanks everyone for joining us on our third quarter 2022 earnings call. I'll begin with an overview of our results and follow up with guidance for the fourth quarter and full year. I will discuss non-GAAP results throughout my remarks. Our GAAP financials and a reconciliation between GAAP and non-GAAP are found in our earnings release, supplemental financials, and our upcoming 10Q filing. We are very proud of our Q3 results. For the third quarter of 22, revenue totaled $67.9 million and increased to 7% year-over-year. Consignment revenue was down 4% year-over-year, while product revenue grew 74%. The decline in consignment revenue and outsized growth in product revenue is attributable to a mixed shift driven by our European acquisition and the relative growth of our RAS supply. Currently, the majority of our revenue from both RAS and our European business falls under product revenue, so we plan to transition these businesses towards consignment over time. We are focusing our inbound resources on supporting our RAS clients, which has the effect of fueling product revenue at the expense of consignment during this period of meticulous expense management. In addition, we see return rates move higher as consumers become more selective. We saw this trend continue throughout Q3, negatively impacting our revenue by an incremental $3 million over the same past year and is expected to persist in Q4. For the trailing 12 months, active buyers rose 18% to 1.7 million. Third quarter orders reached 1.6 million, increasing 24% as compared to the same period last year. For the third quarter of 2022, U.S. gross margins declined slightly to 72.4%, a 40 basis point decrease over the same quarter last year. Even as we continue to progress in shipping logistics and automation, we are facing a gross margin headwind due to the revenue mix shift into product revenue, which carries a lower margin. This shift is being fueled by the strength of our RAS channel, as I described earlier. Consolidated gross margin was 65.5%, a 740 basis decline over the same quarter last year due to the consolidation of our lower margin Europeans. We've begun to transition the European business towards higher margin consignment supply as we seek to improve its gross margin profile over time. In the near term, Europe's product margins are significantly lower than the U.S.'s. We see many opportunities to improve these margins through investments in automation and data science in order to be closer to the 50% range that the U.S. commands. For the third quarter of 22, gap net loss was $23.7 million compared to gap net loss of $14.7 million in the same quarter last year. Adjust EBITDA loss $1 million or a negative 16.2% of revenue for the third quarter of 22, an approximate 380 basis point decline compared to the same quarter last year. The deleverage was largely due to the consolidation of our European business. Our Q3 adjusted EBITDA loss improved over Q2 by $2.5 million or 150 basis points, exhibiting the work we've done to rationalize expenses. Turning to the balance sheet, we began the third quarter with $155.7 million in cash and marketable securities and ended the quarter with $130.6 million. Our cash use operations was $12.1 million while we spent $11.7 million on CapEx, largely attributable to our infrastructure build-out. We remain confident in our plans to reach adjusted EBITDA breakeven in the second half of 2023, assuming we achieve quarterly revenue of $80 to $85 million. We expect growth in the first half of 2023 to be broadly flat to the first half of 2022, but then believe that apparel markets and the consumer environment will be in slightly better shape in the back half of the year. We continue to make progress in reducing expenses and preserving cash during this period of uncertainty. As we described on our last conference call, we've undertaken a company-wide initiative to prioritize expense, rationalization, and cost efficiency. We continue to expect to realize $70 million in savings in 2023 based on our current forecast. We have also trimmed our CapEx plan in 23 to less than $15 million based on the current environment, reduced from our previously discussed $20 million. We do not expect this to negatively impact your growth in 23 or 24. In Q4, we expect to spend $5 to $6 million on CapEx. In fact, the bulk of our CapEx plans are related to our Texas Distribution Center and our annual maintenance CapEx, which excludes any new DC build, is approximately $3 million. We spent $25 million in cash in Q3 and expect this level of spend to steadily decrease in the coming quarters. Our plan to reduce cash burn will be driven by the diminishing needs of our DC network and our cost savings initiatives. Because of our ability to manage our expense structure, we expect to be able to fund the business through our existing cash balance and $70 million debt facility until we reach free cash flow positive. As a result, we want to reiterate that we do not anticipate our cash or marketable securities balance falling below $50 million without drawing down any further debt before reaching free cash flow positive, nor do we expect to turn to the capital markets before then.
spk06: Turning to Q4,
spk15: Though the competitive environment is proving to be especially difficult to navigate, we see a clear path to the other side. Our top line continues to be affected by weakness in our core lower consumer. On top of that, the current promotional environment in the retail industry is impacting us more severely than we had expected. Beginning in mid-October, we saw an unprecedented degree of early holiday promotion pressure on our business, and our updated outlook assumes that this trend continues through the balance of the year. With this in mind, the fourth quarter, we now expect revenue in the range of $62 to $64 million, gross margin in the range of 62 to 64%, as we now expect revenue from RAS to be a larger portion of sales, which carries a lower margin, an adjusted EBITDA loss of 16.5 to 14.5% of revenue, and basic weighted average shares outstanding of approximately $100 million. For the full year of 22, we now expect revenue in the range of approximately $279 million to $281 million. Gross margins in the range of approximately 66% to 67%, and adjusted EBITDA loss of approximately 17% to 16.5%. And basic weighted average shares outstanding of approximately 100 million. In closing, we are pleased with our third quarter performance, and though Q4 is proving to be more competitive than we originally expected, we are confident in our ability to navigate this challenging environment. We expect this hyper-promotional landscape to subside as retailers right-size their inventory levels, permitting us to once again compete with resale's compelling value proposition. As apparel and the ongoing improvements we're making in our business materialize, we are confident we can deliver on our breakeven goal in 23. As James mentioned, we are not sure when the consumer environment will recover, but we know that when it does, we will be in a position to emerge as a stronger, more profitable business on the other side. James and I are now ready for your questions. Operator, please open the line.
spk05: Thank you. If you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is to allow your signal to reach our equipment. Once again, press star 1 at this time. We'll pause for a moment. And we'll first hear from Ike Burchell of Wells Fargo.
spk13: Hey guys, this is Jesse Sobolson on for Ike. You guys mentioned flat growth in the first half of 2023 is expected and are confident in your ability to reach $5 million in the back half of the year to achieve break-even in each quarter. What sort of macro expectations underpin that view?
spk15: Yeah, this is Sean. Yeah, I think the one thing to keep in mind is that we do not expect a consumer recovery to get there. The only thing that we are assuming in our plan for 2023 is that the extreme promotional environment and the inventory excess will subside. That's how I would think about how we go through 2023.
spk16: Yeah, Jesse, the only other thing I'd add is that we, you know, during this very competitive sort of Q4 environment, you know, we continue to pull back on some of our growth investments. And we'll kind of get back to some of those as we get into the first half of next year and see those things compound as we get into the back half of next year.
spk07: Cool. Thank you. Our next question comes from Trevor Young of Barclays.
spk17: Great. Thanks. James, I think last quarter you had flagged that the budget value consumer kind of stepped away from apparel broadly. Can you talk about how they trended quarter and now into 4Q in light of the updated 4Q guide? And then on the other end, just what's trending on the upscale shopper? Is that holding up better than expected?
spk16: Yeah. Hey, Trevor. Yeah. I mean, both of those things continue through Q3 and then have continued through the first part of Q4. I think the only difference is that, you know, beginning in October with kind of second prime day, Walmart promotions, Target promotions, You just saw this real move earlier on the consumer's wallet. And I think that caused a little bit of friction for us in the business. And so right now, our guidance says that we expect that to continue through the end of the year. But the same sort of trends on the budget shopper and the more premium shopper are consistent. That really is a customer that's sitting out right now from what we can tell.
spk17: That's really helpful. And if I could just follow up on that, you'd flag before, you know, expecting to flex, you know, on price promo discounts as well as seller payouts to stay competitive. Is there any one of those that's performing particularly well or better in this environment than another?
spk16: Yeah, I mean, I think, you know, we're trying to make sure that we can flex promotions on and price on all the stuff in Q4 that sort of In season holiday themes, you know, on trend. I think we're really trying to make sure that we can flex around the stuff that the consumer wants right now. And so I think a lot of our efforts is is flexing price and promotion around those, you know, hot categories. And I think, you know, it's incumbent on us to continue to source. that high quality stuff for the Q4 holiday season. But again, you know, Q4 has always been, it's always in the U.S. been the slowest quarter in our business. You know, customers don't turn to thrift around the holidays. And we think that's even more acute today as customers' wallets are feeling pinched and they think about gifts around the holiday. We think they're, you know, they're focused more than ever on new than used at a time like this.
spk07: Great, thanks. Our next question comes from Alexander Steyer of Goldman Sachs.
spk01: Thank you for taking my questions. Can you maybe share what you're seeing across the ThredUp customer base in the US versus Europe over the past few weeks in terms of what these customers are purchasing on the platform and how they engage with the platform given the macro headwinds you laid out? Did you notice any change in order frequency versus order value? And then just on user growth, You saw negative quarter-over-quarter user growth versus fairly solid growth over the past few quarters. Can you just walk us through the underlying drivers behind that decline? Thank you so much.
spk16: Yeah, hey, Evander. I mean, on the second piece, I mean, I think, again, the budget shopper, I think as a customer who has slowed right now given sort of in the competitive environment, I think that's what's really hit the user growth number. But we expect that to kind of roll over as we get into 23. To your original question, US versus Europe, I think in the US, the trends we were seeing were, it's been this incredibly promotional environment that kicked off in mid-October, as I said. And I think that has really changed the dynamics for apparel purchasing. you know, in our expectations in Q4. I think Europe has been a little different. I mean, you know, I think the inflation numbers have been higher there. So I think consumer wallets have been a little bit more stretched. You have impending, you know, winter coming with the cost of gas prices. And then also, you know, unseasonably warm conditions in a bunch of parts of Eastern Europe where Remix operates. sort of pushed back what typically is a move into winter clothing and outerwear. And so, you know, I think that is starting to change right now. I think last week was the coldest it's been in that part of the world this year. And so we expect to see some movement as we get through the rest of the quarter.
spk07: Thank you. Tom Nikic of Web of Securities.
spk11: Hey, everybody. Thanks for taking my question. James, Sean, I guess obviously a lot can happen between then and the second half of 2023, but kind of based on what your Q4 guidance is for this year, to get to an 80 to 85 million run rate in the second half of 2023. So just fairly healthy year-over-year revenue growth in late 2023. Is it just that you kind of think that the customer comes back to you guys when they can't find deals in the primary market? I guess kind of what sort of informs the you know, the growth that you're kind of assuming comes late next year to get to the EBITDA breakeven?
spk16: Yeah, hey, Tom, sure. I mean, you know, keep in mind, right, the last couple of quarters we've pulled back pretty significantly on processing and on marketing, right, on the growth side, as we think that this is a consumer environment that where, you know, leaning in on processing, leaning in on growth doesn't make a lot of sense, especially right now, you know, given the given where inventories are across retail. It almost feels like it's not a fight worth fighting with how we spend some of those dollars. I think that really changes as you get midway through next year where the processing ramp, the demand curve improves, we spend more dollars on the growth side. I think those things really come together, but I think it then catches a consumer in just like a slightly different environment that's not nearly as promotional And it's painful, you know, for the budget chopper it is right now. So that's kind of the thesis. And, you know, we've been through this before, right, Tom? I mean, similarly, go back to 2020, you know, 2020, very similar type of dynamic in the back half of 20. And then the business really ripped for five quarters. And so I'm not suggesting that that's what's going to happen, but we've been through these types of cycles before and feel like we can kind of meet the Meet the moment as we get into 23. Understood.
spk06: Thanks, James. Best of luck for the holiday season.
spk07: Thanks.
spk05: Next, we'll hear from Rick Patel of Raymond James.
spk02: Thank you. Good afternoon, guys. Hoping you could provide color on the outlook for return rates. I'm just curious how much of a drag You have embedded in the fourth quarter guide and any initial thoughts on 23. And then, you know, can you talk about any initiatives underway to improve this, whether it's being more selective with the product that you take on or maybe leaning into data to improve customer satisfaction to lessen that drag?
spk15: Hey, Rick, this is Sean. I'll start and I think James will finish. Our assumptions in Q4 would be very similar to what we saw in Q3. There's about a $3 million drag on revenue. So, you know, we've seen the return rates continue to increase as times have got worse and things have been a little more challenging. The consumer's obviously, you know, maybe a little more focused on cash back or buyer's remorse, whatever it is. But we've seen the return rate kind of spike up and we're working on quite a few different things internally to help resolve that. And I'll let James talk about those.
spk16: Yeah, Rick. I mean, I think, you know, across, you can see across, you know, many retailers, you know, rethinking, you know, how, how to retain, how to, how to returns work, you know, in this new environment. And we have a bunch of stuff we're working on right now. Not even, not just like changing the, you know, the price equation to the consumer, but, you know, how do we present the product in better ways that reduce returns and, Or how do we change what can be returned and what can't be returned? As well as like, you know, waiving some of the items that get returned to us and letting you keep them. So there's a bunch of things that we're working on that I think will take returns down as we get into 23. But it is 100% a real headwind here in the back half of the year.
spk02: And you're pushing forward with resale as a service on track for, I believe, 40 clients by year end, which is great progress. Can you give us any initial thoughts on RAS for 2023? I'm curious if you see potential partners moving ahead with their circular economy strategies or if they're just pausing given the uncertain economy.
spk16: Yeah, I mean, I think 2023 is going to be a really important year for RAS. I mean, I'm thrilled that we've managed to continue to meet our our goals of new client signings. I mean, getting to 40 by the end of the year in this apparel environment, I think, really speaks to the value proposition of Rath. So, I actually think into 23, you're going to see more retailers think about this, especially as their inventory positions get better into focus. They don't have quite as much excess. So, no, I don't think I have any news to share on how we're thinking about client growth in 23, but I think 23 will be a good year for RAS. And, you know, we've already signed a number of clients this year that we're ready to launch in the first part of next year. So good momentum, I think, on that, Rick.
spk06: All right. Thanks very much. All the best in 4Q. Thank you.
spk05: Edward Yuma of Piper Sandler.
spk12: Hey, guys. Thanks for taking the question. I guess two for me. First, on the ops product and tech side, I noticed that it actually fell sequentially. I just want to click down on that a little bit and understand. I know you've been doing cost cuts. So is this the level we should baseline going forward? Should we expect this to ramp up at all? And then second, I know you delayed some of your CapEx. Could you just help us understand exactly when that incremental CapEx will hit the cash flow? And as you guys kind of talk through some of the cash flow dynamics, I think you said that you wouldn't need to raise capital. But do you expect to have to draw on that bank line, or do you think that your existing cash is sufficient? Thank you.
spk15: Yeah, this is Sean. So we do think our current cash is sufficient. We don't expect to draw on the bank line. I think from a CapEx perspective, we kind of lowered what we had talked about spending in the last earnings call. I think we're at 5 to 6 for Q4 and under 15 for all of 23. And if you think of just kind of a quick comparison of what we spent in 24, what we're talking about spending in, sorry, in 22, we're going to spend about $45 million in CapEx, where now we're talking in 23 under $15 million. So a significant reduction in the amount of CapEx we're going to spend. And I think the first question maybe was on OPT. Yeah. And the OPT piece is pretty much what you saw in Q3 is fully impacted for what you're going to see in Q4 and beyond, except for the fact that it's truly variable. So as demand increases, we're going to process more items in, so we have more items to sell. So that's one area where I would say is as you see revenue go up, you're going to see the OPT line go up, similar to marketing.
spk16: Yeah, and the only thing I would add, Ed, is just, I mean, I think as you get through Q1 of 23, you're really, the infrastructure for the business is pretty well built out for the next few years. You know, I don't think we expect to do much on the CapEx side. Even in 2024, it'll be pretty small. So by the time you exit Q1, we're going to be in very good shape with what we need from an infrastructure perspective for a number of years, which, as Sean said, significantly reduces the burn. And so that puts us in a really nice position to invest and grow the business as we get into the back half of 23. And ultimately, I think we get to adjust the EBITDA break even in the back half of the year. And I think free cash flow positive, you know, a couple quarters after that.
spk07: Great. Great. Thanks so much.
spk05: Our next question comes from Dana Telsey of Telsey Advisory Group.
spk10: Good afternoon, everyone. As you think about the marketing budget, not only for but going to next year, how are you planning that marketing budget? And also, as you think about the levers, fixed and variable expenses, what adjustments are you making as we go through this environment? Thank you.
spk16: Hey, Dana. Ms. James. I mean, I think on the marketing side, we continue to see very attractive acquisition costs. You know, and typically, you know, back on marketing in Q4, as I said, you know, because of the holidays and how resale is not, you know, top of mind necessarily during the holiday period. And then we kind of get, you know, we get going then again in Q1. And look, I think the acquisition environments are going to be very attractive next year. And so I think the combination of apparel pricing, normalizing acquisition economics being good, I think is actually a very nice setup for the back half of next year. And then I think on the, you know, fixed versus variable, I think as Sean said, you know, much of our business is variable when it comes to processing and growth investments. But I think the infrastructure and the fixed investments are, you know, we're pretty much done once we get through Q1 of next year. And I think that's a really, really good position to be in for the foreseeable future in an environment where the customer is going to be looking for value And we're going to have all of the opportunity to meet that demand.
spk10: Got it. And then just on the DCs, how do you think of the capacity utilization, whether it's Dallas or the European DCs? Anything you could do to manage that cost through this time period?
spk16: Yeah, I mean, I think we have now built, you know, we have plenty of capacity, I think, in 23, 24, you know, potentially, you know, even beyond that. And so we will continue to sort of ramp up, you know, processing and marketing investments, you know, given where the consumer environment is. I think, again, I think this is a really tricky time with where apparel inventories are. And so I don't think this is a time when we really want to lean in. But I think that that's really going to inflect as you get into 23. I think it's going to be great that we have the capacity and the processing capabilities to do that in a time when the consumers are going to be searching for value. Again, I think that's a really nice setup for us as we get into 23.
spk07: Thank you.
spk05: And our next question comes from Noah Zatkin of KeyBank Capital Markets.
spk14: Hi, thanks for taking my question. Just to drill down a bit on RAS, could you provide any color on how you're thinking about the P&L impact there over time? Relatedly, as partnerships ramp from a timing perspective, how should we be thinking about any upfront costs versus the timing of revenue flow? Thank you.
spk16: Yeah, hey Noah. Yeah, I mean on the RAS side, You know, remember, you know, RAS does a couple of things for us. It amplifies sort of our supply advantage. To think about that as, you know, we take a fee for every bag that we process on behalf of a brand. And that is, you know, very, very high margin revenue. It nearly drops to the bottom line. And so it has implications on, you know, the bottom line as we scale RAS supply. And then I think on the resale shop side, as we launch them, you know, ultimately it's continuing to build incremental points of distribution where the same product that's sitting in our facility can be sold across many different websites. And so ultimately that increases turns and sort of return on fixed assets in our DC. So, you know, I think in both areas, RAS really amplifies like what the business is doing and it continues to, to grow nicely. And I think 23 will be, will be a good year as we continue to expand the 40-plus clients that we've signed in 2022. So I'm pretty bullish on how RAS plays out over time.
spk07: Thanks a lot. Anna Andreva, Needham.
spk03: Great. Thanks so much, and good afternoon, guys. Two questions, I guess, to Sean. Just curious, what was the cadence in the business in the third quarter, and what are you guys seeing quarter to date? You mentioned elevated promotions in October, but curious if you already saw a step down in the business or just expecting that ahead as we get through the holiday. And then secondly, I guess this is to James, what are you seeing in the resale space just in terms of new entrants? Feels like it's getting a little bit more competitive. Maybe not so much at your price point, but just curious about your thoughts there. Thank you. Thank you.
spk15: Yeah, so hey, Ana. Yeah, from the Q3 monthly cadence, it was pretty much what we have seen historically. There wasn't anything like a big outlier. I mean, back to school, nice. It looked pretty good. I think once we got to October, that's where we started to see everybody get promotional and get promotional early. I think we talked about Black Friday was – you know, started in early October, middle of October, whatever it is, or Walmart's Black Friday every Monday. So I think that's where we started to see the impact on the business was really happening in October. And we've gotten to a point now, I think, where we feel like it's leveled off. But it's definitely a promotional environment out there.
spk16: Yeah, and I mean, you know, to... you know, to echo that, I mean, I think we feel like Q4 is now, you know, you know, pretty stable, uh, you know, but in our guidance is we just think it's going to continue to be, to be promotional. Um, and now what was that? Can you say the second part of your question again?
spk03: Um, just, just what are you seeing in the resale in terms of new entries?
spk16: Oh, got it. Yeah. I mean, I think that there are, um, you know, there's always going to be startups, uh, that attack any kind of big, big category. Um, I don't think we're seeing anything in our business that's, you know, where we feel like, you know, competitors, you know, are making inroads. So, but I think, look, I think in general, as I said, you know, with a market that's this big, you expect there to be, you know, some push and some innovation. And, you know, I think over time, you know, the more resale, the better. And I think we'll take our chances with our model over time, you know, and the opportunities to scale that.
spk07: All right. Thanks so much, guys. And next we'll hear from Lauren Schmeck of Morgan Stanley.
spk09: Great, thanks. One for Sean. Just on the fourth quarter guide versus the previous implied guide, I think revenue down $8 million and EBITDA losses down an incremental four. I think sort of the change in the top line outlook is clear, but I guess just given the variable nature of the model, where is that incremental $4 million coming versus your previous expectations? Thanks.
spk15: Well, yeah, no, I would think it's you have the kind of the impact to the businesses. Europe becomes a bigger portion of the business. So that comes down as well. I think you're seeing the promotional environment. So that's starting to hit it as well. I think you're dropping some of the overall impact to the bottom line on EBITDA.
spk16: Yeah, I think you see contribution margins come down, Lauren, as the environment gets more promotional. And so even though you're taking revenue down, that revenue is less productive than it would have been in prior periods. And look, I think we're sort of tucked in and prepared for things in Q4 to continue to be challenging. And so I think that's also reflected in the guide. And so we felt like it was prudent you know, as we think about, you know, what is it going to look like for retailers over the next 45 days? Like, it could get bloody out there, and we want to sort of level set expectations for that.
spk07: Understood. Thank you.
spk05: And it appears there are no further questions at this time. I'll turn the call back over to our presenters for any additional or closing comments.
spk16: Great. Thanks, everyone, for joining us on the Q3 call. Thank you to all the employees who are doing all incredible work here at ThredUP and to the broader team. And, you know, we'll get through this. It's a difficult time in Q4, given the environment, but we'll get to fight another day on the other side of it. So thank you all, and we'll see you next time. Thank you.
spk05: That does conclude today's conference. Thank you all for your participation. You may now disconnect. Everyone else has left the call.
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