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.