ThredUp Inc.

Good afternoon. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the thread up fourth quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. I would now like to hand the conference over to Lauren Fraj, Head of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss ThredUp's fourth quarter and full year 2023 financial results. With me are James Reinhart, ThredUP CEO and co-founder, and Sean Sobers, CFO. We posted our press release and supplemental financial information on our investor relations website at ir.thredup.com. This call is being webcast 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 this call, including, but not limited to, statements regarding our earnings guidance for the first fiscal quarter and full year of 2024. Future financial performance, including our goal of reaching adjusted EBITDA break-even on a consolidated annual basis. Our expectations for capital expenditures and other developments in our business in the U.S. and Europe. Market demand, growth prospects, business strategies, and plans, and our ability to cost-effectively attract new buyers. Words such as anticipate, believe, estimate, and expect, as well as similar expressions, are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties, including our ability to effectively deploy new and evolving technologies, such as artificial intelligence and machine learning, in our offerings, and the effects of inflation, increased interest rates, changing consumer habits, climate change, and general global economic uncertainty. Our actual results could differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. You can find more information about these risks, uncertainties, 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 with 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 fourth quarter 2023 and fiscal year 2023 earnings call. As we head into a new fiscal year, we're pleased to share ThredUP's financial results and key business highlights from our fourth quarter. In addition to the financial results, we will also reflect on the progress we made in 2023, as well as provide an update on key strategic initiatives that we expect will drive growth and margin expansion in 2024. I'm particularly excited to share how we're leveraging AI across our business and how we believe we are uniquely positioned to benefit from advancements in this technology. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our fourth quarter 2023 and fiscal year 2023 financials in more detail. He will also provide our outlet for the first quarter 2024 and fiscal year 2024. We'll close out today's call with a question and answer session. Let me start with our Q4 results. We closed out 2023 with another quarter of strong financial performance. demonstrating healthy top-line growth and bottom-line leverage. Our revenue exceeded the high end of our guidance at $81.4 million, representing a year-over-year increase of 14%. We reached 1.8 million active buyers in Q4, up 9% compared to the same quarter last year. Orders reached a record high of 1.8 million, a 17% year-over-year increase. In Q4, gross margins came in at 62%, the midpoint of our range. But note, this includes our decision to do a one-time write-off, of 1.9 million of aged and unproductive inventory in Europe that we had acquired in early 2023. This action had a 230 basis point impact to our consolidated gross margins. Excluding this one-time impact, our consolidated gross margins exceeded our guidance at 64%, representing gross profit growth of 16%. The one-time write-off in Europe also impacted our adjusted EBITDA in Q4, which totaled negative 2.1 million, or minus 2.6%. Excluding the one-time inventory write-off, we're proud to deliver an adjusted EBITDA allow of just 200,000. This 790 basis point improvement over last year represents the significant progress we made toward breakeven in 2023 and indicates our clear line of sight towards full-year adjusted EBITDA breakeven in 2024, which Sean will talk about more in a bit. I'm particularly proud to report that despite a highly competitive Q4, the U.S. business posted expanded gross margins of 78% while generating positive adjusted EBITDA for the second consecutive quarter. Stepping back, 2023 was a very strong year for our business. Despite a challenging discretionary environment caused by compounded inflation and elevated interest rates, we delivered consolidated net revenue growth of 12%, active buyer growth of 9%, while expanding adjusted EBITDA margin 960 basis points. We're extremely pleased with how well our U.S. business continues to scale and believe that this year has demonstrated the growth and earnings opportunities of a managed resale business model. Our European business demonstrated strong growth and accelerated transformation to becoming a leading resale marketplace in Europe. Finally, we finished the last phases of our distribution network build-out and expect minimal maintenance capex until at least 2026. With limited capex needs over the next few years, we expect our cash flows from operations to move in line with our adjusted EBITDA. Now let's turn to the year ahead. Let me start with profitability on a consolidated basis. The good news is that we are already there in the US, which makes up 80% of our overall business. We believe we've demonstrated the strength of our unit economics and our bottom line discipline, having delivered positive adjusted EBITDA in the US in both Q3 and Q4 of 2023. We expect that the U.S. business will continue to expand gross margins and generate positive adjusted EBITDA this year as we grow, continue to automate, and leverage our expenses. Our next task is to do this in Europe. We've nearly doubled revenue in Europe since our acquisition in 2021 and continue to progress towards positive adjusted EBITDA in that market. To give you a sense of how we evaluate our European business, we apply the Rule of 40 to the EU's gross profit growth and adjusted EBITDA rate. We believe gross profit is the best indicator of its growth when normalized for the consignment transition. And we expect that business to be well above 40 in the year ahead. I'm confident that we are on the right track tackling the large opportunity in Europe with a proven playbook from the US. We expect to see continued improvement in Europe each quarter driven by three core initiatives. Some of these may sound familiar if you followed us into our IPO. First, we were accelerating the transition to consignment. This process began in mid-23, and we expect Europe to be approximately 20% consignment revenue in 2024. As I've shared on previous calls, this change presents a short-term headwind to revenue due to the accounting treatment, but we believe that it will yield a business with a superior margin profile and provide us with more levers to flex margins and growth investments. Second, we are migrating our dynamic data-driven pricing system from the U.S. to Europe to improve sell-through rates. The faster items sell, the more we maximize average selling prices and minimize our aged inventory, which yields better margins. This work is already starting to pay off as we are seeing some of the fastest sell-throughs in history year-to-date in 2024. And third, we're introducing inventory sculpting. Using the U.S. item acceptance model as a guide, we recently implemented a similar system in the EU to determine which items are listed in our marketplace at any given time. By leveraging data science, we are segmenting inventory to better identify what types of items sell quickly and which items maximize gross profit. The goal is a marketplace with an overall assortment that's more desirable to buyers and expands Europe's gross margin profile. To summarize, the U.S. has already posted two consecutive quarters of positive adjusted EBITDA, and as we continue to apply U.S. strategies and tactics to Europe to improve our gross margins in that market, We expect to achieve positive consolidated adjusted EBITDA on an annual basis in 2024. Next, I'd like to share an overview of strategic initiatives that are designed to drive business growth in 2024. Let me start with the ways we're deploying artificial intelligence to improve the customer experience and reduce costs in our distribution network. First, we recently debuted an AI-powered search experience that makes it easy and intuitive to find any second-hand item on ThredUp. Our vast selection of inventory is one of our biggest assets, but it also creates challenges for buyers as they shop up to 4 million unique secondhand items at any given time. This new search functionality significantly enhances the secondhand shopping experience in our marketplace by combining visual language with personal style. By enabling buyers to curate style inspirations effortlessly, whether it's by searching for a popular item like a satin cocktail dress or a descriptive trend or look like Sunday brunch dress, or a phrase that evokes emotion like Academy Award chic. ThredUP can help shoppers find exactly what they want. It's not only fun to use, but it also has that sense of magic to it. Sometimes you just can't believe how good the technology is at delivering relevant results. Early indicators show an increase in searches per session, a higher add to cart conversion of items from search, and higher click through for individual product pages. Second, we have begun to leverage janitor of AI technology that will soon give customers the ability to create outfits they love using just a text description. For example, a friend is looking for an outfit to wear at a fancy luau on an upcoming trip to Hawaii. Using natural language prompts or generative ad tool, create an outfit composed of a beautiful floral crop top, a flowy white maxi skirt with a side slit, paired with highly embellished sandals. Want to create an outfit from popular magazines or style influencers or runway trends? We can now easily do that while delivering shoppable secondhand product up to 70% off what a consumer might pay new. The list of outfits that can be generated through this tool is endless, restricted only by the imagination of our buyers. We'll be weaving these style inspiration touch points throughout the product experience over the year ahead and look forward to sharing more soon. I want to emphasize that AI is an enormous leap forward for us in bringing emotion and storytelling to the millions of unique shopping journeys that regularly happen on ThredUp. Given the breadth of our offering and the limitation of not having on-model photography in our core product experience, we believe generative AI technology disproportionately benefits a managed marketplace like RedUp compared to other apparel or peer-to-peer marketplaces. Now let me turn to AI in operations. We're also implementing AI across more operations in our distribution center network to enhance the customer experience and improve throughput and productivity. Once a garment has been photographed, we employ advanced AI technologies to extract a wide range of detailed characteristics of the item from its image. This capability not only enriches our inventory database, but also streamlines the categorization and processing of items. This has improved operational efficiency and the accuracy of our product listings, resulting in better search and personalization in our marketplace. We see near-term opportunities for generative AI to improve visual merchandising and add more engaging content to the shopping journey without us having to use expensive on-model photography. Eventually, you can imagine a world where AI not only supplements manual photography, but replaces it. These AI-driven initiatives have enabled us to set new standards for efficiency and accuracy and are paving the way for continuous innovation and potential margin expansion. So much of what we believed we could achieve over the next few years through our own software and industrial engineering development has now become readily available, and it's cheaper and faster than we imagined. Beyond AI, we're seeing continued improvements across a number of areas. For example, our delivery promise and thrift promise initiatives, which aim to deliver purchase to doorstep shipping in four days or less and do right by the customer with every order, continue to make progress. Orders delivered within this timeframe have increased more than 150% year over year in the quarter to date. Our return rate decreased by 700 basis points in Q4 compared to the same quarter last year. We've also put a renewed focus on our loyalty program as a way to reduce broad-based promotions, and we expect to see continued benefits as we invest in customer retention efforts with more attractive rewards. Early signals show a double-digit increase in orders with loyalty rewards, and we believe creating a fun and easy rewards loop will encourage all customers to shop like our best customers do today. Our Resell as a Service business, or RAS, continues to provide brands and retailers with the fastest and easiest way to deliver customizable and scalable resale experiences to their customers. Across our 50 plus brand customers, we now estimate that we power six of the 10 largest brand resale shops online, power more than 50% of total branded resale listings that are sold online, and you can pick up a co-branded ThredUP clean-out kit in more than 800 stores nationwide. As a reminder, by leveraging ThredUP's marketplace infrastructure, RAS amplifies our supply advantage increases our sell-through and return on assets, drives brand awareness, and expands our long-term profitability metrics. As I often do on these calls, I'd like to take a moment to remind you of ThredUP's steadfast commitment to balancing purpose and profit. Our mission of inspiring the world to think secondhand first remains the cornerstone of our strategy. Since our founding, we've now processed more than 172 million unique pieces of clothing. Keeping clothes in circulation and out of landfills while delivering incredible value to our millions of customers. At the center of every decision we make is our business and brand aligned environmental, social, and governance strategy, which guides us and helps fuel our success and thread up purpose and profits are inextricably linked. We were recently named a winner in Good Housekeeping's 2024 Sustainable Innovation Awards, which recognized products and services that have embraced a people, purpose, and planet approach to sustainability. As we head into another year, I'm excited about our path forward and the impact we'll make globally on our people, our communities, and the planet. With that, I will now turn it over to Sean to go through our financial results and guidance in more detail.