ThredUp Inc.

Good day, everyone, and welcome to today's ThredUP Q2 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Lauren Frasch, Head of Investor Relations.

Good afternoon, and thank you for joining us on today's conference call to discuss ThredUP's second quarter 2024 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 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 third and fourth fiscal quarters and full year of 2024, future financial performance, market demand, growth prospects, business strategies and plans, investments in AI technologies, The company's intention to exit the European market and to seek strategic alternatives for its European business and our ability to cost effectively track 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. our ability to identify and execute a strategic alternative for the company's European business, 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 result expressed or implied by such forwarding statements. You can find more information about these risks, uncertainties, and other factors that could affect our operating results in our SSC 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.

Thanks, Lauren. Good afternoon, everyone. I'm James Reinhart, CEO and co-founder of ThredUP. Thank you for joining our second quarter 2024 earnings call. We're pleased to share ThredUP's financial results for Q2. And that's significant news to share about how we expect our business to evolve in the back half of the year and into 2025. We will provide an update on growth, adjusted EBITDA margin expansion, expectations for free cash flow over the next year, and further developments in our new AI products as we launch them widely this month. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our second quarter of 2024 financials in more detail and provide our outlook for the third and fourth quarter of 2024. We'll close out today's call with a question and answer session. To get right to it, I want to start by acknowledging that the quarter, on a consolidated basis, was challenging for us. This was the case for three specific reasons, which I will explain in order of impact. First, and by far most significantly, our European business really struggled. Second, we experimented in the U.S. with initiatives around new forms of customer acquisition and promotion, and they simply didn't perform the way we expected. Third, we are operating in an incrementally more challenging consumer environment, where the compounding effects of inflation continue to hurt our core customers. While Sean will walk you through all the detailed financials in a moment, I want to highlight that for the fourth quarter in a row, our U.S. business is growing gross profit, expanding margins, and is adjusted without positives. In Europe, however, the business has continued to struggle, even as we invested over $20 million in cash in that business over the past six quarters. In Q2, our EU business contracted 18% while posting a negative 23% adjusted EBITDA, despite significant attention from our US team. The accelerated transition to consignment in the EU business has been challenging, particularly in the midst of a difficult consumer demand environment and persistent inflation. Despite bringing in new leadership, upon strategic review, we've determined that the Remix business needs a longer-term turnaround. As such, we've made the difficult decision to divest our European business and I commend seeking strategic alternatives. I'd now like to turn your attention to U.S. performance. There are two areas I would like to make sure are very clearly understood. First, midway through Q1, we embarked on a plan for driving increased lifetime value from new customers by spending a bit less on marketing and changing our new customer offer structure and subsequent retention incentives. With the U.S. business cash flow positive and growing revenue per buyer, we attempted to test into a new customer growth strategy and to further increase the LTV to CAC ratio by exploring some bold changes. Unfortunately, after reducing spend to iterate in nearly 90 days of testing and observing retention metrics, we found ourselves to be worse off. The estimated impact of this was that we acquired 90,000 fewer customers, who then also will not materialize into repeat customers this year. We reverted back to our prior spend and offer strategy on June 1st and have seen immediate recovery in June and July. Second, let me turn to pricing and promotion. Since the middle of 2022, back when the consumer environment began to soften, we've been flexing prices and promotions to optimize for unit and contribution margin. Over that time period, we have made significant margin gains, with gross margins up nearly 800 basis points to roughly 80%, and contribution margins improving more than 1,000 basis points. Our unit economics have been as strong as ever, And then we have made substantial progress towards our long-term margin profile. What we've been experimenting with in Q2 and into the early part of Q3 was to trade some of those unit economics for increased active buyer engagement, orders per customer, and sell-through. And the results have been mixed. Orders and revenue per buyer reached all-time highs in Q2, running at more than $208 per active buyer in the U.S. Total item sales for the quarter reached an all-time high of more than 5 million pieces of clothing. The downside is that we did not see sufficient buyer incrementality, given what we believe is just a muted overall demand environment. In addition, revenue flowed through at reduced unit economics, and we believe we pulled forward summer demand from Q3 into Q2. To give you a sense of this, item sales in June were up 16% year over year, and June tends to be a weaker demand month than apparel. We learned important lessons in Q2 and early in Q3 around item targeting, promotions, and pricing elasticity that will guide our decision-making into the back half of the year and beyond. Unfortunately, these two initiatives, which we take full accountability for, will have a lingering impact the remainder of the year. But it's worth emphasizing that these were not things that, quote unquote, happened to us. Rather, we made choices with well-considered strategic considerations, and they just did not perform the way we expected. Many of our initiatives over the past couple of years have led to the steady growth and adjusted EBITDA expansion you've seen in the US. But we're not perfect. We won't get it right every time. But we believe our body of work over the past couple of years demonstrates that we're getting it right a lot more than we're getting it wrong as we navigate a challenging macro environment. And that's a nice segue as I turn to our product launches this week. After months of testing, we are going live with our, quote, endless expression marketing campaign. that launches our new AI shopping products to all customers. Our visual search functionality is now deployed across each of our platforms, bringing a much more robust shopping experience to every journey. Our style chat launch helps customers shop by inspiration and occasion in ways that are much more intuitive. For example, you could now shop for a Cape Cod fall wedding or a Disney Bahama cruise or outfits for New York City back to school like Ariana Grande. Customers are now only limited by their imagination and creativity. Our image search tool now lets you import any item into ThredUP's mobile experience and find quality, high-fidelity looks that match your style. Whether it's finding a look you love on Instagram or TikTok or Pinterest or reading People or Vogue magazine or seeing a cute mannequin dressed up in a store window, we now bring you all of this into a customizable, on-demand thrift experience. I want to emphasize This is the most significant product launch we've had at ThredUP in a long time, arguably since we launched the company more than a decade ago. Much of the customer innovation from here will build on top of this foundational technology for merchandising, discovery, and inspiration. This technology can enable us to leap forward because we already have built a massive data advantage, world-class infrastructure, and a beloved brand. As I've said before, this isn't ThredUP plus some new AI experiences. This is a fundamental upgrade in how we're innovating on behalf of the customer. We believe that AI disproportionately benefits our business relative to other marketplaces and retailers. And as consumers become more accustomed to these types of products in their lives, we believe we will see significant upside in our business. Before I turn it over to Sean, I want to close with a few thoughts on how we see the back half of the year shaping up broadly and for ThredUP specifically. First, consistent with commentary from many of our peers, We expect the consumer environment to remain challenging until consumers begin to feel the benefits of ebbing inflation, lower interest rates, and ongoing job stability and wage gains. We agree with soft landing commentary for the broader economy. But remember, landings are not the same as takeoffs. We think it will take several quarters for consumers, especially our core customers, to feel the benefits of interest rates coming down and for overall sentiment to improve. We also remain cautious given the upcoming U.S. election cycle and recent financial indicators of a slowing economy and degradation in the jobs market. Second, after the volatility of the first half of the year with our March restructure, intention to divest our European business and to seek strategic alternatives from EMICS, and the full-scale launch of a whole new set of product experiences built around generative AI, our approach is to remain cautious on investments in marketing, processing, and general operating expenditures. We will focus our efforts on improving our product experience, normalizing our unit economics, and driving process improvements in our DCs to lower our overall variable cost. We remain poised to accelerate all of our growth engines as conditions for discretionary apparel spending in the U.S. improve. Despite the ambition and optimism of every teammate in the halls that brought up, we just do not see a playing field in the second half that suggests we should or could be more aggressive. Third, as we refocus all of our efforts on the U.S., we expect our business to grow faster with structurally higher margins, adjusted EBITDA, and free cash flow, despite having a lower top line. This might not come all at once, as I mentioned earlier, and we may remain temporarily at the mercy of economic forces outside of our control, but we believe the fundamentals of Thrive's business will be more resilient, more predictable, more defensible as we move back to exclusively focusing on U.S. opportunity. This laser-like focus should be a significant catalyst for us in the year ahead. I'll now turn it over to Sean to walk through the financials in more detail.