ThredUp Inc.

Good afternoon, ladies and gentlemen, and welcome to the ThredUP Q1 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today. Tuesday, May the 9th, 2023. I would now like to turn the conference over to Lauren Frasch, Head of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss ThredUp's first quarter 2023 results. With me are James Reinhart, ThredUp CEO and co-founder, and Sean Sobers, CSO. We posted our press release and supplemental financial information on our investor relations website at ir.threadbiz.com. This call is being webcast on our IR website, and a replay of this call will be available on the site shortly. Before we begin, I'd like to remind you that we will make forward-looking statements during the course of this call, including, but not limited to, statements regarding our earnings guidance for the second fiscal quarter and full year of 2023, future financial performance, including our goal of reaching adjusted EBITDA break-even, market demand, growth prospects, business strategies, and plans, our ability to track new buyers and the effects of inflation, increased interest rates, changing consumer habits, and general global economic certainty. 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 in 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 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.

Good afternoon, everyone. I'm James Reinhart, CEO and co-founder of ThredUP. Thank you for joining ThredUp's first quarter 2023 earnings call. We are excited to share ThredUp's financial results and key business highlights from our first quarter. In addition to our financial results, we'll provide an update on the current conditions for resale and how the ThredUp customer is faring in a stubbornly challenging macro environment. We'll then discuss key company-specific initiatives we're pursuing to enable sustainable profits and growth, and we'll provide an update on our resale as a service business and remix. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our first quarter 2023 financials in more detail and provide our outlook for the second quarter of 2023. We'll close out today's call with a question and answer session. Let's begin with our Q1 results. We kicked off 2023 with a strong Q1, delivering revenue that exceeded the high end of our guidance. We achieved revenue of $75.9 million, increasing 4% year over year, and gross profit of 51.1 million, increasing 2% year-over-year. Our consolidated gross margin was 67.3%, down from 69.1% a year ago. We attribute this to the continued growth of Remix and the more challenging promotional environment in Europe. However, we're proud to report record U.S. gross margins of 74.5%. Active buyers and orders in Q1 remain steady quarter-over-quarter at 1.7 million and 1.5 million, respectively, with both declining slightly year-over-year. Importantly, we have seen active buyer trends improve each month of this year, and we expect buyer growth to turn positive year-over-year in Q2 and throughout the rest of 2023. We're proud to share our Q1 adjusted EBITDA of minus 8.7%, which was an improvement of over 900 basis points, or $6 million year-over-year. To put a fine point on our improving operating leverage, our operations, product, and technology costs, were down by 8% year-over-year, while our revenue grew 4%. As I typically do on these calls, I'd like to take a moment to share our perspective on what we're seeing in the apparel landscape. For several quarters now, we've faced a combination of budget shoppers pulling back on discretionary purchases at the same time that retailers have been overflowing with apparel and leaning into promotions to get rid of excess inventory. As a result, resale's value proposition has been weakened by the exceptional bargains being offered for new clothing. We've been running the business under the assumption that these headwinds do not abate in the near term. But despite this backdrop, we are managing the variables that are in control across our marketplace. We are leveraging our data-driven insights to optimize our unit economics. We're evolving our customer acquisition and retention playbooks to drive customer growth and focusing product and technology investments in areas we believe drive margin expansion. I'd also like to spend a few moments speaking to the budget shopper specifically. A few quarters ago, we provided insights on the budget shopper from our own data. I'd like to provide an update on what we're seeing today. After pulling back on discretionary spend at the midpoint of last year, we've observed that by and large, the budget shopper has continued to sit on the sidelines into Q1. Compared to the midpoint of last year, we've seen a 300 basis point decline in the number of budget shoppers on ThredUp. Comparatively, we've seen a 700 basis point increase in the number of upscale shoppers buying with us during that same time period. We're also continuing to see a clear bifurcation of threat of customer purchasing behavior, with more premium shoppers leaning in and more value shoppers leaning out. Year over year, the average order value of our deep discount subsegment of our customers declined 24%, while our upscale shoppers' average order value increased 6%. So while we are benefiting from some shoppers, quote, trading down, we're also facing the headwinds of budget shoppers spitting out. While ThredUp still offers excellent value to budget shoppers, we have been adjusting our strategies in the near term to target the non-budget segment. They are currently more engaged in the apparel market. When macro conditions improve and retailer promotions normalize, we anticipate budget shoppers will return to our marketplace and provide a nice tailwind for growth. As I noted at the top of our call, we are beginning to see the green shoots of this budget shopper momentum with sequential improvements each month of this year. Now I'd like to turn to the specific initiatives we're implementing to improve monetization in our marketplace and to optimize our unit economics. First, we're experimenting with a variety of levers around inventory acceptance. We've recently started testing a new fee for our clean-out service to improve the quality of supply in our marketplace. initial results indicate that our bag yield of resellable items and the sell-through of items we receive have both increased since enacting this change. We're also collecting high margin fees that enable us to invest in a better clean-out service for our sellers. Importantly, we've seen no reduction in demand for our clean-out service. And this is no small feat. Better supply, better yield, better sell-through, higher fees. Second, In conjunction with these fees, we're shaping inbound supply through seller incentives and messaging around the types of clothing we want. And when that supply is being processed at our distribution centers, we're sculpting inventory more aggressively to list a more desirable assortment online. Third, as we've ramped processing of clean-out kits while becoming more selective in our acceptance and merchandising, our bag backlog has come down, now sitting at an average of six weeks. and this is as low as one week if you pay for our VIP services. This is the lowest our backlog has trended since before the pandemic. With a tighter backlog, we can better incentivize the right sellers, flex our fees and payouts to accelerate the right mix of goods, and lower the overall tax of managing long backlogs in terms of storage, customer service, and seller satisfaction. Fourth, we're shaping a new vision for customer retention and returns reduction using our data platform. It's called the Thrift Guarantee, and with it, we boldly envision a customer journey that aims to achieve the highest levels of customer satisfaction on ThredUP. The Thrift Guarantee enables this by intercepting customers when they are most likely to be unhappy with their experience on ThredUP, offering them easy, immediate, and automated resolutions that drive them back to shop. Our first project for Thrift Guarantee has been centered around reshaping our returns experience with a feature called Keep for Credit. With Keep for Credit, we're offering customers who'd like to return low-priced items the options to keep those items in exchange for shopping credit. With the Keep for Credit approach, we've seen a positive impact on customer satisfaction repurchase rates, as well as fewer cost of returns for items whose price points don't justify the return and reprocessing costs. Across Thrift Guarantee and Keep for Credit, our overarching goal is to delight our customers, drive retention, and improve the margin profile of our business. Early signals show these strategies have been very effective in accomplishing these goals. So to summarize, through the implementation of clean-out fees, supply shaping, and thrift guarantee experiments, we are unlocking new and better ways to acquire and retain our customers, while simultaneously bolstering our unit economics and positioning our business for sustainable growth. We believe that continued execution of these initiatives will result in enterprise value recreation over time. Let me turn to Remix, provide an update on the progress we're making with our European resale business. It's been nearly two years since Remix became part of ThredUP, and we're impressed with how resilient the business has been amidst high inflation, high energy costs, and the war in Ukraine. Q1 was a strong quarter for Remix. They continued to grow active buyers and net revenue year over year. Remix also officially launches their consignment offering in Q2, and our goal is to shift an increasing portion of the business to consignment over time. This marks the start of a long-term strategic shift for Remix that we expect to improve Remix's gross margins, generate further gross profits that contribute to long-term free cash flow. All in all, we remain excited about Remix's positioning to take share in the second-hand market in Europe, a market which Global Data expects to grow to $95 billion by 2027. Now I'd like to turn your attention to our resale as a service business, also known as RAT. We closed out 2022 serving 42 brand clients through RAT, and strong momentum is carried into 2023 as more retailers look to adopt more circular business models and attract and retain customers. Notably, we're seeing more global brands entering the resale ecosystem. We recently launched new programs with American Eagle, H&M, Tom's, and SoulCycle. As one of the leading end-to-end resell providers, we're thrilled to enable resell for brands across the apparel ecosystem. We also recently announced an exciting partnership with the Container Store, where shoppers will be able to get a thread-up clean-out kit from any of the Container Store's 97 retail locations across the country. It's exciting to venture outside of the fashion industry and work with a non-traditional retailer to extend our impact by reaching a broader swath of American consumers looking to be more sustainable. This further cements ThredUP's RAS as the go-to destination for restyling apparel, and we hope to expand our client roster with more strategic partnerships like this one. As a reminder, RAS enables the world's leading brands and retailers to offer scalable resale experiences to their customers. By leveraging ThredUP's 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. Next, I'd like to provide an update on our goal of reaching adjusted EBITDA break-even. We have made significant progress each quarter since we announced our intention, and I want to reiterate our plan to achieve EBITDA break-even on a quarterly basis, and specifically in Q4 of 2023. The performance we've had in Q1 and what we're seeing in Q2 only confirms our confidence in achieving this milestone and importantly increases our confidence in achieving free cash flow break even shortly thereafter. With that in mind, I want to emphasize that as a management team, we have turned more of our attention to the opportunities in front of us to grow faster and to delight more customers over time. We see a number of ways to invest in growth this year that we believe create improved free cash flow dynamics in the future. We've played good defense over the past year We look forward to sharing more of our offenses playbook in the quarters to come. While we remain steadfast in our progress towards profitability, we recognize that profits alone do not encompass the entirety of our mission. ThredUP is a company that also has a strong sense of purpose, which is evident in the impact we're making on the fashion industry and the planet. We take pride in our business and brand-aligned ESG strategy. Today, we reaffirmed our commitment to balancing purpose and profit, by dual listing on the Long-Term Stock Exchange, or LTSE. The LTSE was designed to align businesses like ours with investors who support long-term value creation and good governance with a social and environmental conscience. Given the growth of the second-hand market, we see an opportunity for ThredUP to make an outsized impact. We believe the next wave of generational enterprises will lie at the intersection of purpose and profits, and we are excited to be at the forefront. So let me wrap up. But before I turn it over to Sean, I want to close by restating the strength of our Q1 results, despite a choppy environment out there. In particular, I want to highlight the flexibility and strength of our marketplace business model. It is precisely the fact that we run a marketplace that has allowed us to react and flex everything from the customer mix to the supply mix to our monetization. Second, as I said in our earnings from a year ago, we will continue to balance the demands of near-term scrutiny with our commitment to investing for long-term value creation. I believe we are delivering on this commitment. And while we aren't done yet, I'm immensely proud of our progress. And I want to take this opportunity to applaud the whole ThredUP team for their incredible work over the past nine months, meeting every challenge with grit and grace. I want to give a high five to each of you for your creativity, your resilience, adaptability, and the relentless pursuit of profits and purpose. I am looking forward to what we will invent next, ushering in a more sustainable future for fashion. It's an exciting time to be at ThredUp right now, and I'm fired up about the road ahead. And with that, I will turn it over to Sean to go through our financial results and our guidance in more detail.

Thanks, James. And again, thanks, everyone, for joining us on our first quarter 2023 earnings call. I'll begin with an overview of our results and follow up with guidance for the second quarter and 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 10Q filing. We are very proud of our Q1 results. For the first quarter of 2023, revenue totaled $75.9 million, an increase of 4% year-over-year. Consignment revenue was down 2% year-over-year, while product revenue grew 17%. The outsized growth in product revenue is attributable to a mixed shift driven by the growth in our European business and our RAS supply. Currently, the majority of revenue from both RAS and the European business falls under product revenue, but we are at different points in the process of transitioning each of these businesses towards consignment. We expect the majority of our RAS clients to operate on a consignment basis by the end of the year, though the process of transitioning Europe to U.S. levels of consignment will take place over the next few years. As a result of these changes, we would expect consignment trends to improve in the second half. While the transition of these businesses to consignment should be a tailwind to gross margins over time, we would expect it to slightly mute revenue growth due to the accounting treatment. As a reminder, consignment payouts reduce net revenue, while owned payouts are in COGS and reduce gross margins. Active buyers declined to $1.7 million, a decrease of 3% for the trailing 12 months, while orders declined $1.5 million, a decrease of 8%. These declines were due to a difficult macro environment in which our budget customer remains on the sidelines. as well as a reduction in our Q1 marketing spend. As we expect to see the promotional environment subside and the return on these dollars improve in the second half, we plan to increase our marketing spend on a year-over-year basis. For the first quarter of 2023, gross margin was 67.3%, 180 basis point decline over the same quarter last year. We are proud to report that our U.S. gross margin reached a record 74.5% despite an aggressive promotional environment. The decline in our consolidated gross margin was entirely due to the dynamics driven by our European business. The continued outperformance of Europe's lower margin operating model continues to pressure our consolidated results as it becomes a larger portion of our total revenue. We are excited to pursue the meaningful growth opportunity in Europe, even though it will come with a near-term drag on growth margins. However, when we look down the road to expanding our consignment revenue base and driving sustainable profits, we believe this is the right strategy for our long-term goals. For the first quarter of 2023, gap net loss was $19.8 million compared to a gap net loss of $20.7 million in the same quarter last year. Adjusted EBITDA loss was $6.6 million or negative 8.7% of revenue for the first quarter of 2023. This represents an approximate 910 basis point improvement compared to the same quarter last year as we tightly managed expenses and leveraged our investments on higher revenue. In fact, we are proud to report that our hard work drove a 4% year-over-year revenue increase on a 7% decline in operating expenses. Turning to the balance sheet, we began the first quarter with $111 million in cash and marketable securities and ended the quarter with $99.5 million. Our cash usage from operations was $4.5 million while we spent $5.7 million on capex as we wind down the first phase of investments in our Dallas, D.C., Based on our Q1 progress and strategic initiatives we are executing in our business, we now believe that we'll be able to reach adjusted EBITDA breakeven in the fourth quarter of 2023. For us, reaching breakeven is just a waypoint on our path to free cash flow and profitability, and we believe this timeline balances our commitment to breakeven with foundational investments and our long-term goals of growth and expanding profits. When modeling our cash flow, adjusted EBITDA and our capex spend are the key drivers of positive cash flow, given that our working capital needs are minimal. We believe that both of these will improve materially in the second half of 2023. We significantly reduced our cash burn by nearly half in Q1 versus the previous quarter and expect this spend level to decrease even more significantly in the second half of the year. Our plan to reduce cash usage will be driven by diminishing CapEx needs and improving EBITDA as we implement a number of strategic initiatives across our business, streamline our cost structure, and leverage our investments. After spending $43 million in CapEx in 2022, we continue to plan to significantly reduce our CapEx in 2023 to about $15 million and then to maintenance levels until 2025. We currently expect to spend approximately $6 million in Q2 and then ramp down to maintenance levels of about $1 million per quarter in the back half of the year. Due to our significantly reduced CapEx needs and our ability to manage our expense structure, we expect to be able to fund the core business through our existing cash. As a result, we want to reiterate that we do not anticipate our cash and marketable securities balance falling below $50 million before reaching free cash flow positive, nor do we expect to turn to the capital markets or draw on our existing debt before then. We are pleased to provide guidance that reflects both our ability to operate in a challenging environment and the strengths of our marketplace model. Though the promotional landscape remains competitive and the stability of our consumer remains uncertain, We are not only flexing the advantages of our marketplace, but also executing on strategic improvements and managing expenses to ensure that we adapt to this environment and emerge a stronger, more profitable business. Turning to guidance. For the second quarter, we expect revenue in the range of $80 million to $82 million. Gross margins in the range of 64.5% to 66.5% due to our growth in our European business. An adjusted EBITDA loss of 9.5% to 7.5% of revenue. and basic weighted average shares outstanding of approximately $104 million. For the full year of 2023, we now expect revenue in the range of $320 million to $330 million, gross margins in the range of approximately 65% to 67%, as we now expect our European business to grow faster than originally anticipated, and adjusted EBITDA loss approximately of 7.5% to 5.5% of revenue, and weighted average shares outstanding of approximately $106 million. In closing, we believe that our first quarter performance demonstrates our ability to flex our marketplace model in response to a highly dynamic environment. Our model allows us to react to the environment in which we find ourselves, a feature which we believe has allowed our results to distinguish themselves in the current landscape. We are also excited to deliver a Q2 outlook and a full year guidance that convey confidence in our ability to make substantial progress towards breakeven and ultimately profitability. We believe that Q1's results and our Q2 plan demonstrate our capacity to execute on a variety of strategic initiatives that enable us to control our destiny, even amidst a challenging consumer environment. James and I are now ready to take your questions. Operator, please open the line.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2. And if you are using a speakerphone, please lift your handset before pressing any keys.

One moment please for your first question.

Your first question will come from Ike Boruchow at Wells Fargo. Please go ahead.

Hey, everyone. Thanks for taking the question. One for James, and I have a follow-up, I think, for Sean. But, James, just at a high level, so clearly, you know, the retail environment out there is slowing. People are struggling. But you guys seem to be kind of inflecting, bucking the trend, guiding up the reps for the year. So I guess can you just maybe speak to the confidence that you're gaining in real time, and then also what gives you the confidence to – for the expected further inflection in revenue growth that you're guiding for the second half of the year?

Yeah, sure. Yeah, I mean, I think, look, we've said for a number of years, you know, we don't think about ourselves as a retailer. You know, it really is a marketplace. And I think what's working is all the elements of our marketplace business model. And so, you know, I would say it's all the stuff we're doing internally around everything from sellers and improving the merchandise, to how we're changing the mix to address what buyers want, to the curation that we're working on the site, to the improvements we've made in returns with our Keep for Credit initiative. So I think it's really just showing the power and flex of the business model at a time like this, which I think is causing that distinction from a traditional retail environment. And I think all those things are still relatively early in their cycle for how they're impacting our P&L. And so I think all those internal improvements you know, compounded with what we're seeing with sequential improvements on the buyer front, I think are giving us increased confidence that the pieces are coming together for the business to really work quite well, even despite really a choppy environment in the back half. So, you know, I think, you know, the team is pretty confident in the guide and what we're thinking for the back half of the year. You said you had a follow-up? Got it.

Yeah, and James, I'm not sure if this is for you or Sean, but I'm just trying to make sure I understand the ins and outs of the P&L. So you've been talking about now for almost a year about the run rate of 80, 85 million kind of getting you to that adjusted EBITDA break-even, making sure you're confident on that for Q4, but So you're guiding 80 to 82 million in Q2, and still there's an EBITDA loss there. So I guess I'm just trying to reconcile. I kind of thought that if that run rate of revenue, there would be an ability to break even. But maybe I'm just trying to understand why you wouldn't see that sooner. Is there something seasonally about the second quarter from a cost perspective that's different in the back half? So that's kind of my question. Okay.

Yeah, I'll take it. And Sean, you jump in if there's anything else. But I just think, as we said in our prepared remarks, we see opportunities to invest in the business, specifically on sort of the customer acquisition and at the macro level, what we're seeing with budget shoppers coming back sequentially to the platform, opportunities to invest further in what we're doing on the operations side that I think drive unit economics improvements over the next several quarters. I think we thought we could pursue two strategies. I mean, one would be to be much more conservative, you know, and achieve those breakeven targets, you know, based on the prior communication. But frankly, we see opportunities to build a better business, not just for the next quarter, but for the next couple of years. And so given our confidence in the cash position and breakeven in Q4, you know, I told the team and we feel confident we can step on the gas. And so I think that's what's driving it. But we certainly could have done it in those contexts, but I think the strategy is to lean in here.

Great. Thank you.

Your next question comes from Tom Nickies at Wedbush. Please go ahead.

Hey, everybody. Thanks for taking my question. James, Sean, it sounds like you're pretty happy with how Remix is progressing, and I think you said that you expect Remix to grow faster than you previously thought. How should we think about the profitability of Remix, I guess, maybe relative to what you thought it would do? I know when you made the acquisition, you kind of said that the gross margin was lower, but that, you know, they were actually, you know, profitable because, you know, they're, you know, maybe a little underinvested. Are you finding that you're able to drive growth of Remix with less investment than you originally thought? And that's, you know, contributing to the path to profitability?

Yeah, Tom, I mean, I think Remix continues to exceed our expectations. And I think given the relative size of that business and the opportunities for the size of the market in Europe, we just see continued ways to deploy capital to grow that business. And very similar to what we did in the US, because there was a time when ThredUp wasn't a fully consignment business either. We could acquire lots of customers and then expand margins over time as we moved more and more to consignment. And we see a similar playbook can come to come to fruition in Europe. And so we don't want to turn down opportunities to really grow that business, given the paybacks that we're seeing and how the customer LTVs are playing out. And so I think we're leaning in to the European business and believing that we have the playbook to convert, you know, improve the gross margins over time. I don't know, Sean, if there's anything on that.

Yeah. I mean, I would just double down on the fact that they are exceeding our original expectations. So in a very tough environment and I think, Jamie, you pointed out is just like their paybacks on their marketing spend is really pleasing and it looks really good. So that's how we're being able to do it.

Thanks very much. Best of luck the rest of the year and best of luck getting to break even at Q4.

Thanks, Tom.

Thanks, Tom.

Your next question comes from Dylan Cardin at William Blair. Please go ahead.

Thanks. I just wanted to dig in on the fees business. Can you just give us a sense sort of how broad that trial has been? And then it's a bit counterintuitive, I think, for people to the comments about how that hasn't really impacted demand. Is that kind of on a net basis, just given the improvements that you've seen in the business? Just anything to kind of help understand that. how that impacts the model and how broad it is and how maybe broad it could be given kind of what you've seen initially from it.

Yeah. Hey, Dylan. It's still early in the deployment of, you know, fees across the business. So we expect to continue to generate more fees over time from sellers, but I would still bucket it in the experimental phase. But we are seeing really promising results. And I think what it points to is, just how, uh, how strong a product market fit the threat of cleanup experience really is. Uh, consumers are willing, uh, to pay the fees because they value the service, uh, so highly. And, um, and so I think we're starting to, to really be able to, uh, process more bags, um, you know, increase our processing times. And so sellers really appreciate that. And so, you know, we see the fees as a nice tailwind, you know, over the next, over the next few years. And yeah, while it seems counterintuitive that there would be no pushback, remember that people really value the clean-out service for its convenience, and it's not necessarily just about making money. And so I think for a period over the last few years where we had to turn sellers away on a regular basis, I think so many are really glad to have the service available at all times for them, even with a little bit of this fee involved. So, yeah, I think it's all around really positive for our seller community, and it impacts the P&L in a positive way.

And, Dylan, I would probably add in, too, just to give you a little clarity on, for all those out there trying to model it and see how it works, remember, you know, Europe doesn't charge fees, and then our RAS suppliers don't. We aren't charging them fees as well. So there's a piece of the population that is just not covered from a fees perspective, and we're still in kind of the testing phase, too, so it's not at 100%, but as you look forward into 24, 25, think of those two things, keep those two things in mind as you model out what fee revenue could be for sellers.

I appreciate that. And it's, it's on the backend, right? So it's actually deducted from, I guess, functionally, how does it work as well? There's nuance there, right? Yeah. Yeah. Yeah. Sorry.

Oh, no, go ahead, Sean. So you don't, you don't give your credit card up front or anything like that. It comes out of your payout so that there, there's no friction on the front end other than, you get to know that you're going to pay some of your payout for the seller fees or the supply fees. And what's really good about that is what we found out is not only does it really create more items in a given kit or given bag, it's actually higher quality items. So what we're able to accept out of a bag is a higher number. So it's been really fruitful, not just from a fee generation test, but also on the quality of supply and the amount we get out of per shipment in.

Great. And then just quickly on the sort of budget versus higher income customer, can you just remind us kind of how your customer base historically is skewed between those two buckets? And I guess following on from the fee initiative, is the intention here or is the actuality that you're kind of shifting that further up the ladder?

I mean, I think, you know, when we, when we talked last year, we, I think we, we communicated that about a third of our customers, you know, fell into that budget chopper segment and, And I think, you know, now the budget shopper makes up a smaller portion of our customer base. And I think, you know, many of them are getting squeezed on a discretionary basis, you know, given inflation. So a number of those, I think, are sitting out. But the goal isn't to become, you know, a luxury business by any means, but subtly shift the mix of goods that we're getting. you know, to meet a slightly more premium shopper. And again, I think that speaks to the power of our marketplace, which is we can evolve subtly the customer mix, both on the buyer side, the seller side, we can subtly shift the mix of goods, the price points to meet sort of the moment of where we are in this cycle. But we feel very confident that, you know, as the budget shopper returns, we will have an incredible assortment to meet their needs as well. But I think it speaks to the power and flexibility in the business right now.

Excellent. Thank you very much, Seth.

Your next question comes from Anna Andreeva at Niedemann Company. Please go ahead.

Great. Thank you so much, and good afternoon, guys. We had two quick questions, I guess, to Sean. First, I wanted to understand the gross margin pressure a bit that you were expecting in the second quarter. Is that entirely driven by Remix and the U.S. gross margins are expected to be up? And then what's driving the recovery in the back half as implied by the annual guide? I guess especially if Remix now is growing faster than expected, which is great. And then secondly, with processing times, I think you're at six weeks currently. Is that the right number to think of for the second quarter? And curious on the fees, what are some of the learnings when the seller picks up the rush option? I think that's about $23 in cost currently. Is the rush growing as percentage of the mix? Thanks so much.

Thanks, Anna. I'll start and then James can finish. But on the gross margin pressure, I think you said it is really the Europe mix that's driving pressure in Q2 and a little bit for the full year. And it's not just the size of the business. It's the promotional environment that's in Europe as well. So I think there's kind of a double hit there from Europe. But when you look out into Q3 and Q4, you start to see the gross margins improve in Q3. And really it's from the fact that the U.S. business starts to become a bigger portion compared to Q2. So that is the driver there. As well as Europe overall, we're improving gross margins generally. So that helps. I think once you, if you're thinking it out to how we get to Q4, the other side of it is, and maybe too much detail, is Q4 is Europe's largest quarter. So we kind of swing back a little bit there if you're modeling that Europe business is bigger. So we have a little bit of headwind in Q4. So if you're thinking Q3 will be better than Q2, Q4 will be a little lower than Q3.

Yeah, and on the processing times, you know, I think, Ana, we've said in the past, we really want to look at that two to three week. window as being, you know, being ideal. And I think, you know, I think that still remains true. I think being under a month is probably the right timeline for the consumer. And we continue to make to make progress. But we have found that just even getting down to six weeks has been a really nice positive sign that we're hearing from sellers. So that's sort of the target. And on the VIP side for rush processing, that has always been a modest part of what we do. And that tends to be a seller who is more professional, tends to have higher end luxury items. And, you know, they're trying to monetize them at a higher rate. They're less of our normal selling population. He's really looking for convenience. And so we want to meet the needs of that seller. But we're really focused on the majority of our sellers, which are looking to clean out their whole closet and do it in the most convenient way.

All right. Thank you. Thank you so much. Super helpful.

Your next question comes from Alexandra Steiger at Goldman Sachs. Please go ahead.

Great. Thanks for taking my question, and congrats on making progress on a number of initiatives. So as a follow-up to the first question on revenue trends, can you maybe comment on the month-over-month cadence for Q1, specifically the exit rate versus January levels as it relates to some broader consumer trends, but also some of the internal KPIs you're tracking And then second, I also want to follow up on the cost reduction initiatives you've laid out. Can you give us an update on where we are and have you eventually identified any opportunities that could end up being incremental? Thank you.

Sure, Alexandra. I'll start with the first couple and then I'll turn it over to Sean on the cost reduction piece. I think we saw January be reasonably strong out of the gate. I think you know, we saw February and March, you know, be a little bit, a little bit, you know, slower than January, but I think that's sort of at a macro level. And I think a lot of the work that we were doing internally, I think was countering, you know, some of those macro trends. So I think the work we've been doing on, on sculpting and improvements to returns and keep for credit and all those internal initiatives, you know, those started right towards the end of Q4 and then really started to gain some momentum as we moved through the first quarter and then have continued, into the second quarter. And so I think it's the internal dynamics in our business, the marketplace dynamics that I think we're sort of leveraging on both sides that are allowing us to perform, I think, better than a more traditional retailer would. And so we continue to feel good about how those continue to trend into Q2 and throughout the year. Sean, I don't know if there's anything else on the cost side.

Yeah, on the cost side, Alexandra, you know, what we laid out last year at the end of the year we discussed is pretty much in full force now. So it's impacting Q1 and it'll impact Q2. But I think also just to put emphasis on, we're being very mindful of every new dollar that we spend, whether it's a new hire or travel or anything associated with cost in general. So we're being hyper-focused on that. And then I think if you also look at things like returns, we often talk about improving returns and that improves revenue. But there's also a cost aspect there. So as we improve returns and have less returns, we have less operations around bringing an item back in, and that ends up being a cost. So I think we're working on all facets on overall cost control.

Great. Thank you.

Your next question comes from Trevor Young at Barclays. Please go ahead.

Great. Thanks. First one for James, just on the RAS model with more retailers and brands skating in that direction of embracing that as an opportunity, when brands come to you or you go to them, in those instances where you don't win that partnership, what are like the two or three reasons why they might opt to work with another partner or maybe have greater involvement, higher touch versus you kind of powering it for them? And then second question on the buyer side, the new buyers that are coming in changing behavior at all in terms of like average order value number of items in an order or how frequently they come back you know for a follow-on purchase just wondering if there's any change either given the macro or given the composition of your inventory shifting away from that you know budget oriented shopper yeah sure trevor um yeah on the rat side i mean i think generally if a brand um goes with somebody else i think it's on two dimensions

One is they want to test and explore in a peer-to-peer environment. And so they would really prefer to test with a fully hands-off approach. But we're finding increasingly that brands that start that direction are finding there's not enough liquidity in those marketplaces given the friction on the seller side. And so we're starting to see some of those brands and retailers come to us to say, okay, we tried some of that. It doesn't appear to be working. Um, you know, how can, how can ThredUp support us? So, you know, I feel like that, that is one of the things that happening. And then the other is brands that are really committed to refurbishment and repair and a much more higher touch, um, you know, premium experience. And ultimately we think that that is a very tough model to scale, uh, on the refurbishment retouching repair side. And so, you know, those are deals that, that frankly, I don't think we're interested in winning because we don't think the margins are are there in those models. So those are the two reasons, Trevor, that we tend to lose deals. And then on the new buyer side, the new buyers that we're adding into the marketplace, the unit economics and the dynamics of their performance is all quite positive. So they tend to be buying the price points that make the most sense for us. Their LTVs look good. The CACs have been, you know, have been strong. So we feel very good about the customers that we're adding in and, you know, commensurate that we need to have the right mix for those customers. And I think that's where the changes in supply have really worked. But at the same time, we also have a great assortment for that budget shopper. And so I think if that budget shopper comes back, you know, whenever it is over the next few quarters, we feel good about supporting them as well.

That's helpful. Thanks.

Your next question comes from Rick Patel at Raymond James. Please go ahead.

Thank you. Good afternoon, guys. Well done on the progress. Question on the mix shift between budget and upscale shoppers. How much of this reflects natural market conditions as budget consumers get squeezed, and how much of it is by design as thread up markets to those more specifically?

Rick, you were sort of breaking up there.

Was that the end, just the mix on the budget versus upscale shopper?

Sorry about that. Yeah, just sorry about that. Just a question on the mix shift between budget and upscale shoppers. I'm curious how much of it reflects natural market conditions as budget folks get squeezed and how much of it could be by design as the company goes after those consumers.

Yeah, I mean, I would say it's a little bit of each. I think what we're finding is that that customer who potentially fits the trade-down narrative, who's looking for great brands at a slightly more value price, I think those are the customers that we see the threat of value proposition resonating particularly well with. And so I think we have a mix of goods that supports conversion rates among those customers. So So I think that naturally speaking, the platform is more attractive to those trade-down shoppers. And I think that's where you're seeing the mix grow. And I think on the budget shopper side, it's less that the mix isn't attractive to the budget shopper. It's just that it's harder for them to take the plunge as a new customer, given the discretionary consumer environment. But at the end of the day, we sell 35,000 brands. you know, across 100 categories. We want to make sure we have a platform that meets that broad section of customers. And I think that's what we're building for the long term. But in the near term, I do think we'll, you know, we'll probably shade a little bit more towards that slightly more premium shopper. And that's what the data suggests.

And can you also provide a little more color on what's embedded in guidance for both 2Q and the year for the OPEX line items? So as we think about option tech, marketing, SG&A, you know, how should we think about modeling those? And if the momentum that you have does get disrupted, how do you feel about finding new expense savings?

Yeah, Rick, this is Sean. You know, I think on the OP&T side and marketing, it's very tied to revenue. So it's consistently variable. So how you've been modeling it previously as revenue goes up, it's fairly linear at that point. I think you get a lot of leverage out of SG&A. And then I think you're Broader question is if the market, let's say, is more challenged, do we have levers and dials to turn to make sure that we continue to improve and get to break the DAW? And the answer is yes. Not only is it the variable side that we talked about already, but I think there's overall, you know, improvement, sufficiency, and cost reductions that we can do that we haven't done yet to help us get there if we need to. That's kind of how I'd answer that.

Thank you. All the best. Thanks.

Thanks. Your next question comes from Ed Iruma at Piper Sandler. Please go ahead.

Hey, guys. Thanks for taking the question. Back on the topic of this more upscale customer, I know you guys do have some authentication capability. But as you think about this upscale customer, you're talking about kind of more premium brands or like true luxury that has to go through an authentication process. And then as a follow-up, in terms of that lower-end customer, are you seeing kind of increase in performance if you run more promos or sharper price points? Is there anything you can do kind of in this environment to stimulate that lower-end consumer to consume more? Thank you.

Yeah, Hayad. No, I mean, we're definitely not moving more into luxury products that need to be authenticated. That's not part of the strategy at all. I think it's just incrementally being you know, accepting brands and sculpting stuff that we get out of the bag, you know, for a slightly more premium shopper. And so not luxury, you know, by any means. So, you know, call those sort of the bridge brand crowd. And I think that's resonating very well with that trade down shopper. And, you know, as for, you know, do customers respond or responding more to the promotional environment? You know, for sure, we definitely see some elasticity around discounts and around promotions. And I think actually, Ed, what we're starting to see is that as retailer inventories, you know, in the traditional, you know, retail environment start to get leaner and the price going start to eke up a little bit, you know, as sort of they spent through their glut of inventory. I think the thread up value proposition is starting to resonate more. And so even our stock offerings of, you know, up to 70, 80% off of a traditional retail environment is starting to resonate. I think, incrementally more as we've moved sequentially through the year. And I think we've been consistent where we think when retailer inventories normalize, I think the threat of value proposition really does sing. And we see opportunities for that throughout the year.

Thank you.

Ladies and gentlemen, once again, if you would like to ask a question, please press star 1 at this time. Your next question will come from Lauren Shank at Morgan Stanley. Please go ahead.

Great. Thanks. I just wanted to follow up maybe on the first question. I think last quarter we talked about achieving EBITDA profitability in the second half of the year, and now it sounds like it's more fourth quarter. Just wondering if there's certainly any timing shifts of investments that you're expecting, or is this really just what you talked about earlier in terms of leaning in a little bit more? If any color there would be great. Thanks so much.

Yeah. Hey, Lauren. No, I mean, we'd always said the back half and Q4 was something that you know, we had been anticipating for some time. And so we just wanted to clarify since we were getting lots of questions about is it Q3 or Q4? So, you know, we wanted to be clear that it is Q4. And right now we see a number of ways to invest, you know, across the business that I think, you know, generate, you know, better returns, you know, not just this year, but as we move into 2024. And we want to take advantage of that operating environment now, which, you know, I think is reflected in the guidance and the numbers throughout the year. So I We feel very good about the breakeven opportunity in Q4 and even better, frankly, about our ability to continue to grow free cash flow as we get into 24.

Great, thank you. There are no other questions, so I will turn the conference back to James Reinhart for any closing remarks.

Yeah, thanks everyone for joining us for our Q1 earnings call.

asking thoughtful questions and your continued interest in direct business and we'll see you next time thanks ladies and gentlemen this does conclude your conference call for this afternoon we would like to thank you all for participating and ask you to please disconnect your