TDUP - NASDAQ

Good day, everyone, and welcome to today's ThredUp Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure 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 2024 financial results. With me are James Reinhart, ThredUp's 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 be making 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 2024, future financial performance, market demand, growth prospects, business strategies and plans, investments in AI technologies, reorganization activities 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 [indiscernible] 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, 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 2024 Earnings Call. We are pleased to share ThredUp's financial results for Q1 and have important news to share about how we expect our business financials to improve in the back half of the year. We will provide an update on adjusted EBITDA margin expansion, expectations for free cash flow in 2024 and key company-specific initiatives around AI that we are excited to announce today for the first time. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our first quarter 2024 financials in more detail and provide our outlook for the second quarter of 2024 and the remainder of the year. We'll close out today's call with a question-and-answer session. Let me start with our Q1 results, which were in line with our expectations despite an ongoing difficult consumer backdrop. Our revenue was $79.6 million, representing a year-over-year increase of 5%. Consolidated gross margin came in at 69.5%, representing 8% gross profit growth year-over-year. Recall we believe gross profit growth is the best way to measure the underlying growth in our business due to our continued transition to consignment, especially in Europe. U.S. gross margins reached a record high of 80.1%. Active buyers reached $1.7 million, increasing 4% year-over-year, while orders reached $1.7 million, growing 9% compared to the same time period last year. Of note, adjusted EBITDA totaled negative $736,000, or minus 0.9% of revenue, due to ongoing leverage in our business as well as some reorganizing that we did in March. Our U.S. business was adjusted EBITDA positive for the third quarter in a row and was free cash flow positive for the quarter. Now let me turn to the future, as we have important context to share about how our business is transforming into an AI-powered resell company and what the year ahead will look like. In March, we reduced headcount and reorganized several parts of the business, enabling us to invest more in AI product development, boost processing in our distribution centers and increase marketing spend. We cut approximately $13 million in operating expenses and reinvested roughly half of those savings into high potential growth areas. The result of these changes is that we expect to achieve positive adjusted EBITDA in Q2, nearly triple our full year adjusted EBITDA results compared to our last outlook, and to generate free cash flow on a full year basis in 2024. We have now pulled forward our free cash flow expectations by a full year. We view this to be an important milestone for the company as we turn the page from answering questions about profitability to focusing on how we expect to invest earnings over time and growing our business to capture the long-term opportunity in resale. With that in mind, let me turn to the progress we've made across our product investments that are improving the customer experience and planting new seeds for sustainable long-term growth. In just the last 60 days, we have launched a new AI search experience and created 2 new AI-powered tools that allow consumers to thrift any style that inspires them. These tools make ThredUp the easiest place to thrift, no matter when the inspiration strikes, whether that's from the high street, when they see their favorite outfits, when shopping online at any of their favorite stores, or even if they want to tell us about an event that they're shopping for and have us do the work to inspire them. All 3 of these features are now live in beta form. You can try the new visual search in our search bar, and you can visit our ThredUp concept store on your smartphone at thredup.com/concept to see the other new tools in action. The competitive advantages that we have been talking about for many years, our supply chain infrastructure, proprietary data and marketplace dynamics, are now being amplified by AI technology breakthroughs that have only recently started to take shape. I want to emphasize my belief that AI strengthens the advantages we already have in place and deepens the long-term defensibility in our business. With our business expected to generate free cash flow this year, we remain ever committed to investing in new vectors of opportunity to grow our business faster with an eye towards creating stronger long-term earnings, and this goes beyond just AI. In Europe, the transition to consignment continues, and we are making progress across our key strategic areas. Of note, we set new records in Q1 for the number of bag requests in a week, the number of bags returned in a week and the number of consignment bags processed in a week. We processed more consignment bags in Q1 than we did in all of 2023 combined. After concluding our write-off at the end of 2023, we believe our assortment strategy is paying off. Our sell-through rates are among the strongest they have been since we acquired Remix in late 2021. We also announced last week that we have hired Florin Filote as our GM of Europe. He is relocating to our European headquarters in Sofia, Bulgaria. Florin brings 2 decades of experience building and scaling marketplaces, and we believe he is absolutely the right person to continue scaling top line revenue and driving margin expansion in Europe. He will run our EU business while sitting on our U.S.-based executive team. I'm also just as excited that Dan DeMeyere, who previously was running our EU business while being based in the U.S., will return to the U.S. business as Chief Product and Technology Officer as we scale all of our tech and AI products. Next, we've continued to scale our Resale-as-a-Service, or RaaS, business. In Q1, we added 8 new brands to our client roster, and you can now get a ThredUp co-branded cleanout kit in 800 retail stores across the country. And with some clients, we've begun natively integrating the ability to order a cleanout kit right from their e-commerce checkout page. We are also looking to expand our RaaS footprint in Europe and believe commercial agreements with brands and retailers there can further accelerate our transition to consignment. Now let me turn to our impact. As we remain committed to balancing purpose and profits, it's also worth noting how we're driving impacts beyond our core business. We recently started to see our advocacy efforts take shape at the federal level. As a founding member of the American Circular Textiles Coalition, we helped advocate for the inclusion of $14 [ billion ] of incentive for textile circularity in the Americas Act, a bipartisan trade bill that was introduced by U.S. Senators, Bill Cassidy and Michael Bennet in March. This is a historic moment as it's the first time federal legislation has contemplated circular fashion. We believe recognizing circularity potential to strengthen the U.S. economy from both an environmental and international trade perspective is a huge step forward for the industry. Until fashion is no longer one of the most damaging sectors of the global economy, we will continue to advocate for the government to provide resources that make fashion and textile industries more sustainable and planet-friendly. In conclusion, before I turn it over to Sean, I want to emphasize a few milestones and guiding principles. We think about our earnings this quarter being a reestablishment of who we are and where we're headed along these 4 dimensions. First, over the past 2 years, including the midpoint of our 2024 guidance, we have expanded adjusted EBITDA 1,800 basis points and now expect free cash flow on a full year basis in 2024. Second, while driving adjusted EBITDA margin expansion, we have not compromised driving growth. At the midpoint of our 2024 guidance, the underlying growth rate of our business over the past 2 years, which is gross profit growth due to the consignment shift, is 24%. This year represents annual double-digit growth despite an ongoing volatile consumer environment. Third, we now have the ability to more rapidly improve the customer experience, especially with emerging AI technology and invest in growth while simultaneously achieving our free cash flow goals. We believe we are in a position to manage the magnitude of growth and profits effectively regardless of where the consumer environment goes. Finally, we want to reestablish the trust of the investment community, that we are great stewards of capital, that our most innovative days are ahead of us and that we do not want to just meet our expectations, we want to exceed them. That is the journey we begin anew today. With that, I will now turn it over to Sean to go through our financial results and guidance in more detail.

Thanks, James. I'll begin with an overview of our results and follow up with guidance for the second quarter and full year of 2024. I will discuss non-GAAP results throughout my remarks. Our GAAP financials and a reconciliation between our GAAP and non-GAAP measures are found in our earnings release, supplemental financials and our 10-Q filing. We're very proud of our Q1 results and our ability to navigate a challenging consumer environment. For the first quarter of 2024, revenue totaled $79.6 million, an increase of 5% year-over-year. Additionally, active buyers continue to grow, reaching $1.7 million, up 4% year-over-year. Orders also increased, up 9% year-over-year to $1.7 million. Consignment revenue grew 32% year-over-year, while product revenue shrank by 38%. We are pleased with the growth in consignment revenue driven by the final stages of our U.S. transition and our accelerated transition in Europe. We would expect to continue to see outsized growth in consignment and declines in product revenue throughout 2024. While the transition to consignment should be a tailwind to gross margins over time, we expect it to slightly mute revenue growth simply due to the accounting treatment. As a reminder, consignment payouts reduce net revenue while owned payouts are in COGS and reduced gross margin. As a result, we look to gross profit as the most relevant measure to evaluate the underlying growth rate of our business, and we are pleased to report that our Q1 gross profit grew 8%. For the first quarter of 2024, gross margin was 69.5%, a 220 basis point increase over the same quarter last year. We are proud to report that our consolidated results were driven by a record U.S. gross margin of 80.1%, a 560 basis point improvement over last year. The global outperformance was the result of the transition to consignment in both the U.S. and Europe and continued operations improvements in our DCs. We are pleased to see higher items per order in the U.S. as well as ongoing improvements in our logistics network. For the first quarter of 2024, GAAP net loss was $16.6 million compared to GAAP net loss of $19.8 million in the same quarter last year. Adjusted EBITDA loss was just $736,000, or negative 0.9% of revenue, for the first quarter of 2024. Though the quarter proved to be more challenging than expected, we significantly reduced our adjusted EBITDA loss in Q1 by more than half versus last quarter and by nearly $6 million versus last year, representing an approximate 780 basis point improvement, reflecting significant progress towards profitability. Turning to the balance sheet, we began the first quarter with $69.6 million in cash and securities and ended the quarter with $67.9 million, using just $1.7 million in cash in Q1. As a reminder, we used $11 million in cash in Q1 of last year, illustrating the enormous progress we've made over the last 4 quarters. Our significantly reduced cash burn is due to generating a record $1.4 million of cash flow from operations. Now I'd like to turn to our outlook. As James discussed earlier, we are making significant structural changes to support our AI-driven strategic priorities. We expect these new priorities to enable a superior online resale experience and unlock efficiencies in our operations that were not possible before, including structurally higher gross margins. We are shaping our organization so that our resources are fully aligned with this objective in a way that we expect to accelerate decision-making, eliminate redundancies, drive stronger operating leverage and free cash flow. Importantly, we do not expect to require any additional CapEx to do this. This reorganization included an approximate 20% reduction in our global corporate workforce, incurring approximately $3 million of nonrecurring charges in Q1. We expect this action plus other cost-saving measures to deliver $13 million in savings in 2024, or $17 million annualized, mostly realized in SG&A expenses. We have made meaningful progress over the past year on our path to profitability and our recent actions have significantly accelerated our progress. We now expect to achieve quarterly adjusted EBITDA profitability in Q2 and going forward. Plus, we expect to be free cash flow positive on an annual basis this year. As a reminder, our favorable negative net working capital dynamics should prove to be a further tailwind to cash flow as we scale our model. In addition, we continue to expect maintenance CapEx levels of approximately $2 million per quarter until 2026. Given the meaningful improvements in our adjusted EBITDA and free cash flow, the accelerated consignment transition in the U.S. and Europe and the timing of how we expect to roll out new AI products, we are updating our guidance to better match how we're running the business on a day-to-day basis. While we significantly reduced operating expenses, we are committed to investing in the parts of our business that are key to our long-term success. With clear line of sight to profitability and free cash flow, we have turned our attention to investing in new product experiences, amplifying those products with marketing spend and ensuring we have the widest and deepest assortment of secondhand clothing online anywhere. As I noted earlier, our reorganization is expected to save $13 million in 2024. However, we are also reinvesting $6.5 million into a better customer experience, we are ramping processing in our operations the most since early 2022, deploying new AI features across our product experience and increasing marketing dollars to drive new customers. Historically, each of these areas have driven revenue growth, but we're choosing to be prudent as it relates to guidance as we execute in this unique consumer environment and ramp our strategic investments. Furthermore, though the discretionary apparel environment remains challenged for our consumer, this updated range provides us with a high level of confidence that we can achieve our outlook regardless of macro trends in the balance of the year. With all of this in mind, in the second quarter, we expect revenue in the range of $81 million to $83 million, gross margin in the range of 71% to 73%, representing gross profit growth of 6% year-over-year, positive adjusted EBITDA of 1% to 3% of revenue and basic weighted average shares outstanding of approximately 112 million. For the full year of 2024, we now expect revenue in the range of approximately $328 million to $338 million; gross margin in the range of approximately 71% to 72%, representing gross profit growth of 11% year-over-year, 100 basis points higher than our previous outlook due to the accelerated consignment shift and improved operations; positive adjusted EBITDA of 2% to 4% of revenue, nearly 3x our previous outlook; and basic weighted average shares outstanding of approximately $114 million. In closing, we're excited for our accelerated path to profitability, free cash flow and being a self-funded company. While we spent the past 2 years in a profit-first mindset, we have now turned our attention to growth while continuing to expand adjusted EBITDA and free cash flow. James and I are now ready for your questions. Operator, please open the line.

Yes, sir. [Operator Instructions] Our first question comes from Matthew Boruchow of Wells Fargo.

Good to hear from you guys. Just 2 questions. First one for me, it is good to see the guide on the profitability in Q2, the increase in profit, but it looks like you're getting some scale there. Maybe just help us understand a little bit more just the building blocks to kind of take the revenue, the EBITDA, to be free cash flow positive for this year?

Yes, sure. Let me start with -- on the profits and the full year guide. We made a number of changes structurally to the business in Q1. I mean, it doesn't always line up with the earnings calendar, but we have focused over the last 6 months on this real transformation in the business. And so as that came to fruition towards the end of Q1, it became clear that the magnitude of the savings and how we were going to reinvest those dollars was going to really flip the script on EBITDA for Q2, for the full year and for free cash flow. And so that's even despite lowering the revenue. And so Sean can get you through some of the building blocks, but we feel very good about that switch and excited about where it's going to take us.

Yes. I think it's pretty simple -- is on the guidance, we're guiding about $10 million of EBITDA at the midpoint. And if you think about it, we're going to spend around $8 million in CapEx. The simple math there is EBITDA is pretty close to free -- our cash flow from operations, subtract out the CapEx and you're free cash flow positive at that point. And we kind of expect to be, on the EBITDA side, obviously, as we guided, positive in Q2 and then for the quarters there going forward.

Got it. Super helpful. And then just a follow-up. I'm trying to understand the lower revenue range combined with the increased investments you're making. Just maybe just talk about the puts and takes, always seeing profits going up when revenues are coming down. So I'm just trying to understand that a little bit better.

Yes, sure. I think part of it is that we are really focused on some of these new AI product developments, but they're only rolled out to a portion of customers. And then we're restraining some of the marketing dollars behind those products. And so the timing of how the marketing is going to play out for the year is something we want to be a bit more cautious about. We're also adding processing in our DCs in ways that we haven't done since early 2022. And so what I would say is that there's a number of things that are in transition that we feel very, very good about, but we prefer to see a little bit more data around those before we sort of declare victory on the AI products, the marketing growth, the processing growth. So I think there's some caution there. I think second to that is that I think Q1 was -- I've described as, like, a little softer than we anticipated. I think April has been fine, but it did not sort of alleviate our sort of uncertainty around how the year is going to shake out. I think you're seeing inflation seems like a little stickier. We think rates are going to be higher for longer. And so I just think we wanted to be a little bit more cautious around how the year was going to play out, given we feel very good about the profitability and free cash flow numbers. And that's kind of how we came to being more conservative on the top line.

Our next question comes from Dylan Carden with William Blair.

Just curious, kind of, I guess, working our way down the P&L, on the gross margin line, taking that up for the year, what the drivers are there? And Sean, just latching on to a comment you had about potentially being a structurally higher gross margin business, just maybe elaborate on that or expand that a little bit.

Dylan, this is Sean. I think, from a gross margin perspective, the biggest driver was overall improvements across the operations team, so things like more items per order, improved logistics costs, more automation in general. And then, overall, you have all the investments of the past starting to come to fruition, continuing to build up on that. So I think those are the big drivers towards gross margin expansion. And then I think it comes to just, in general, the future is where these next-gen AI investments can lead us and improve margins from there. I don't want to lean too far on that because we're still at the early days of that, but I think there's lots of opportunities there for us to really change the gross margin to even better. And then you also have the...

[indiscernible]

...sort of consignment shift still doing, which is sort of a tailwind to all of this. And I think kind of the combination of the operations improvement and the accelerated consignment I think makes us feel like structurally higher for some time.

The AI investments are mostly frontward-looking customer-based at this point, right? You're not really doing much on the back end? Basically, it's incremental. I know that's sort of always been a piece of it.

Yes, I think the ones that we announced today for the first time are really on the customer-facing side, but there is a number of things that we will -- that we're prototyping today that we think can be really -- create some foundational improvements on the back end. But it's still pretty early. And I think the same thing on the consumer side. Those products are rolled out to just 10% of customers. As we continue to iterate, they really are beta products. And so I think we'll get a lot of feedback over time. And I think part of why we're being a little bit more cautious is we want to see those products and consumer response take shape before we lean in more on the growth side.

Got it. And sorry, if I could sneak one more in. The marketing line came in kind of much lighter than I had thought. Was that sort of as a reflect of the environment or, I guess, sort of cutting some of these costs and waiting to see what [ investment ] marketing dollars it sounds like in the latter part of the year? And is that at all related to maybe -- you sort of mentioned a little bit of a softer quarter. So it seems there to be some relationship there as well.

Yes, it's a little bit of timing, Dylan, around the sort of back half of the year versus Q1. I think, overall, our expectation is to grow marketing dollars this year for the first time since 2021. So we are planning to invest. But what we saw in Q1 relative to Q2 is a little bit of timing, especially as we started to make these transitions in the business in the first part of March. So those are the 2 reasons why.

The next question comes from Rick Patel with Raymond James.

Can you talk about the outlook for active buyers? It looks like it was down quarter-over-quarter in the first quarter, so just curious if that's attributed to the business model changes or if there's something else going on there. And how we should think about what's embedded for buyer growth as we think about the guidance for the rest of the year?

Yes. Sure, Rick. Yes, I mean, I think buyer growth generally lines up and tracks with revenue growth. I think you have some sort of seasonality effects Q4 to Q1. And as we just mentioned earlier, we did pull back in spend in Q1 on a timing basis. But you should see those numbers sort of reaccelerate, I think, as we move through the year. But I think active buyers are really key to our long-term growth strategy. And so they should track pretty closely with the underlying growth rate of the business. And so we expect double-digit growth in the business, again, based on gross profit growth. And we expect active buyers to be in that range, which has been true for the last few years.

And can you provide more color around customer behavior? I'm just curious if you're seeing transactions tilted more towards higher-income versus lower-income consumers. And any changes in behavior in general versus what you saw 3 months ago?

I think that the consumer, I think, is continuing to be -- it's challenging out there. I think we have strategically moved our assortment to be incrementally more premium over the last couple of years. And so I think that customer is doing okay. And I think the more budget shopper, I think, still remains on the sidelines. I mean, we are seeing more items per order. You do see some of that growth in revenue per customer. And so potentially, Rick, you're seeing some of the effects of a trade-down environment, given how well resale, I think, is positioned from a value perspective. But look, I think our perspective is that the consumer confidence is actually now down, right? I think, if you look at the numbers, it's down 3 months in a row. I think the consumer is a little bit more cautious, and I think that's rolling into how we're thinking about the rest of the year.

[Operator Instructions] Our next question comes from Anna Andreeva with Needham.

Two quick ones from us. I wanted to follow up on the softer sales guide. And it sounds like you're being just more conservative there. But are you seeing softer trends for more value consumers specifically as of late? Or is the premium customer more discerning as well to kind of explain the softer sales guide for 2Q and also for the year? And then secondly, what are you seeing in Europe? Should we still expect consignment at 20% of the mix there for the year?

Sure. Let me start with Europe, which is I think we feel better and better about the progress that we're making there. I think, as we noted, record consignment bags, receipts processing in Q1. And so I think that journey is onward. And I think the expectation is consistent with that 20%. But I think the demand environment there remains challenged. Inflation is higher there. So we think that that's going to continue to be the case. But we're thrilled with Florin as the new GM there, I think he's going to be great, lots of experience in marketplaces and scaling supply and demand. And so I think we feel incrementally better about where Europe is headed. I think in the U.S., on the softer sales, value versus premium piece, again, I think, given the number of things changing in our business over the last 90 days, the reorganization, the launch of 3 new pretty significant products and then how we're thinking about timing around marketing dollars and processing just leaves us in a position where we want to just see a little bit more data of how these 3 things come together. And so I think, given the demand environment, we just think we should be a little smarter as we think about the rest of the year. So I don't think that is necessarily about value customers or premium customers. We think that the macro environment is more challenged. And we think, inside the 4 walls of the business, there are a number of things we've got in the hopper, and we kind of want to see those things come together.

Okay. That's very helpful. And James, I think you said marketing dollars should be growing for the year.

Yes.

Should we expect an increase in marketing for 2Q?

Yes. Yes. Marketing dollars are growing for the first time since 2021 year-over-year. They're definitely growing in Q2. And I think the timing of those on a -- I think for Q2, Q3 and Q4, is it going to be related to the new product investments that we're launching across sort of the AI products? And so I think, again, that's where we're not quite sure how all of those are going to land from a timing perspective and I think driving us to be a little cautious.

Makes sense.

We have no further questions at this time. I'd now like to turn the call back over to today's presenters for any additional or closing remarks.

Well, thanks. That concludes our first quarter 2024 earnings call. Just in conclusion, I want to thank all of our current and former employees for the contributions they've made over the years in building ThredUp into the highly defensible marketplace leader and resell pioneer that it is today. I could not be prouder of the work that we've done to date. And I've never actually been more bullish on our future than I am today. And so I want to thank our shareholders for sticking with us through this last couple of years and reassure you that we truly believe our best days are ahead of us. So thanks, everyone. We'll see you next time.