Good afternoon, everyone. My name's Trevor Young. I'm one of the internet analysts here at Barclays. I'm pleased to be hosting the ThredUp team, James Reinhart, Co-founder, CEO, Sean Sobers, CFO. Great to see you again.
Good to see you.
Helping wrap up the second day here at the conference.
Yeah.
Thanks so much. You guys are probably having to be macro prognosticators just like we have been the last couple of quarters. We're in an environment where a lot of our companies are a lot more focused than ever on what their competitors are doing because, frankly, a lot of the signals we're getting across retail and e-com are mixed. I realize you may not provide comments on how you've been doing quarter to date, but what are you seeing across your peers or some of the competitors just in terms of promo from big retailers?
Yeah.
How is that impacting your business? I know on the 3Q print a few weeks ago, you flagged some impact earlier in October. What do you find particularly encouraging or concerning as you start to look into 2023?
Sure. I mean, if you, if you go back, like, a year, right? Like, you go back to sort of '21 '21 was a year where you finished with inventories, like, quite constrained, right? I remember the conversation we had internally was make sure we put in stock ready to ship on all of our products because it was a time in the markets when nothing was in stock and inventories were constrained. That was a great time for the business. You know, our business in Q4 last year grew 60%+, right? You fast-forward to a year, I think there was just this massive overcorrection.
Right.
With the expectation that 2022 would be as good as 2021. I think when we look across the peer set, what we see is inventories, like, significantly elevated not just in apparel, but in a lot of across the board. At least what we've heard from the peers, and I think what we sort of have digested and seen is inventories were really up. Therefore, the promotional environment has been brutal.
Yep.
I think what's happening is that we're gonna digest all of that.
Yep
... quicker.
Okay.
I think that our peers are of the mindset of, like, let's just digest it and move on.
Yeah.
I think the setup for us in 2023 when the inventory environment is better, is probably pretty good.
Okay.
That's what we're seeing now.
Okay. It sounds like almost like a bit of a faster flush of that inventory to kind of get it out before year end.
Yeah. Yeah. I think so.
Everybody can start 2023 cleaner.
I think so because I don't think if you're a traditional apparel retailer or you're or not even apparel, but you're a traditional retailer, I think everybody has expected this to be bad.
Yeah
... spending season.
Yeah.
I don't think you want the carryover into 2023.
Yeah. You just own it now and move on.
Own it now.
Move along. Yeah. Got it. Makes a lot of sense. On the customer side one of the areas of concern we've heard over the last couple quarters is some of your commentary around the budget or value-oriented-
Yeah
... consumers stepping to the sidelines in apparel altogether. I mean, the reason should be pretty well understood, just inflationary pressures.
Yeah.
They don't have as much discretionary income to allocate to more discretionary-
Yeah
... like apparel. That's pretty straightforward. The big question is, when does that alleviate? What do you think it takes for those consumers to kind of step back in here?
Yeah. I mean, I think you can't discount the discountings effect, right?
Yeah.
I think some of those shoppers are going to Walmart and buying jeans for $1.
Yeah.
Like, I think to be realistic, the competitive environment is real. I think those budget shoppers, I think you know, if you look at the consumer sentiment, like, really, it's really pretty bad.
Yeah.
Like, even though it feels okay, like, the general sentiment is like, "shift's gonna get worse." Right? I think what you really need to see, Trevor, is, like, sentiment to improve.
Okay.
I think that comes on the back of $3 gasoline.
Yeah.
I think it comes on the back of interest rates stabilizing. I think there's a bunch of things that could be catalysts in 2023.
Yeah
that will make the consumer feel a little better.
Okay.
I think that's what you would have to see to see, like, a real, like, rebound.
Yeah.
I think the inventory headwind's probably the bigger one for us.
Yeah. In light of what you're saying about that inventory headwind maybe abating more quickly than you had even previously contemplated, you've said in the past about how you feel like you're positioned to ramp up marketing to take share.
Yep.
You wanna make sure your own business is well positioned on inventory levels and be in a position of strength for when that demand does come back. What sort of signal are you actually waiting for to trigger when you ramp up that marketing spend? Is it an increased organic buyer traffic, or some other signal that you're looking for there?
Yeah. I mean, generally, we're looking for, signals of organic traffic-
Yep
... like, generally improving, and then conversion rates.
Okay.
Right? You see a lot of people that are coming to the site, not just us, but broadly internet, coming and doing a lot of browsing.
Okay.
A lot of window shopping.
Yeah.
Then like, "Nah, maybe I don't need this right now given the environment.
Not the conversion. Got it.
I think we're watching for sort of conversion of those budget shoppers' sessions to kind of continue to reset. I think those will be indicators that we could be a little more aggressive.
Okay.
Our expectation is that things aren't gonna get really too much better in 2023.
Right.
Like, maybe they get a little better towards the end of the year.
Right
... but our bet is really more that, the competitive environment-
That pressure eases.
that pressure eases.
Yeah.
The value proposition for resale is better.
Yeah.
I think we really try to set up that model for 2023 internally to be the promotional/too much inventory isn't cleaned up until about halfway through the year.
Right.
We feel like that's fairly conservative.
Yeah.
We don't assume anything like there's this massive consumer recovery.
Right
in the back half of the year. It's just like you get to some, nothing's getting worse.
Yeah.
How about that?
Yeah. Pretty reasonable base case. When you see that improved conversion signal, what forms of spend do you think you're gonna be looking at? Is it gonna be, like, direct response advertising? Is it gonna be more search related, or is it gonna be even, like, promo type spend to get people kind of reactivated on the platform?
I mean, we continue. I think we'll probably ramp up direct response, like, in relation to kind of the growth kind of the new buyer segmentation as we we tend to spend more money in the first half of the year.
Mm-hmm.
We tend to not spend a lot of money in Q4 just 'cause.
Yeah
... just the more traditional environment.
Yeah.
I think we'll probably move upper funnel.
Okay.
I think one of the things that you need to make sure that we do is customers who may be on the sidelines.
Yeah
... who may not be opening our email or getting our push notifications, right? We need to be sort of out of home.
Yeah.
You'll see us probably do more top-of-funnel brand campaigns as you get into Q2, Q3.
Okay.
More influencer work, more stuff that feels like traditional-
Okay
media, because I think you have to sort of break through the logjam a little bit. That's what we'll be working on.
It sounds like that's more to target potentially new to ThredUp customers rather than like reactivations. You know, what do you?
It is reactivations too.
Okay.
It's sort of because it's just people... What you're trying to target is people who are not actively in your ecosystem.
Yeah.
Maybe they were shoppers in 2021, and they turned, right?
Yeah.
When we survey people and ask them, "Hey, why didn't you come back?" When we The reply we often get is, "Man, I just forgot.
Right.
That tends to be a proxy for, like, out-of-home advertising.
What can you do to reactivate those buyers? Also on the inventory side potential sellers that maybe did a bag once.
Yeah
haven't come back.
Yeah
... probably have refreshed their wardrobe in whatever, 12, 18 months.
Yeah. Yeah.
could
We don't have any problem with sellers.
Yeah.
We spend very little time talking about sellers.
Yeah.
We're just trying to get them to not knock down the gates. Sellers is like an, a true competitive advantage for us. I think on the buyer side, it is a much more of a traditional storytelling campaign when buyers are gonna be back in market. 'Cause I think what's gonna play out in my murky ball is everybody-- we're all gotten used to now buying stuff 65%, 70% off, like everything's-
Right
... on sale all the time. You're gonna have quite a bit of sticker shock nine months from now when J.Crew is not on sale for 45 straight days at 70% off.
Right. Makes sense.
I think that's gonna be this moment of inflection where consumers are still gonna feel a little bit pinched-.
Right
... looking for value, and resell, I think, will look pretty good then.
You'll be in a good spot there. Shifting gears a little bit, I wanna hit on Resale-as-a-Service, RaaS. It's one of the key differentiators of your platform. Frankly, I think it's gonna be a bigger part of the business over time.
Yep.
It's a great way to partner with brands and retailers to help solve a problem for them. Can you just talk about where we stand with RaaS adoption among those bigger brands or large retailers? How should we think about sizing the opportunity moving forward, and how big can it be within ThredUp over some period of time?
Yeah. I mean, I think just for those who don't know, I mean, RaaS, Resale-as-a-Service, does 2 things. 1 is we power sort of take-back recycling programs for brands that then help them, help us monetize those goods in the form of gift cards that are captive to the brand. We do that now for dozens of brands. I think we're still on track to have more than 40 by the end of the year. Despite a very tough environment for apparel, we managed to, like, achieve our client goals for 2022, which has been great. We power resale shops, so from everybody from Target to Athleta to PacSun to Tommy Hilfiger to Madewell, Vera Bradley, Walmart, like a pretty broad set of folks.
We enable those brands to do circular strategy.
Mm-hmm.
I think over time, what you'll see is almost every brand will have a resale strategy.
Yeah.
I think we are well positioned to meet those brands', like, needs because I think we're the only real scaled player doing Resale-as-a-Service. I think there are some startups, but there's a big difference between being a startup that can process 10,000 goods and a company like ThredUp that can process millions.
Right.
I think we'll have a pretty good advantage as this plays out. I think it'll be a big part of what we do in the future.
To that point on having the scale consideration, I mean, is that part of the arrangements exclusive for some period of time?
Yes, they are exclusive.
... I could imagine a lot of them don't wanna work with multiple providers.
For sure.
They just rather have you do it.
Yeah. I mean, they are exclusive. You know, many of them are year agreements, but some of them are multi-year agreements. Yeah, I mean, I think our job is to provide sort of best-in-class experience.
Yeah.
Like, look, I think you roll the thing forward 3, 5, 7, 10 years, I think you have hundreds and hundreds and hundreds of brands that have resale strategies that are all built on top of ThredUp's technology.
Right. It solves a real pain point for them.
It does.
I would imagine. Can you talk a little bit about the advantages to these brands from partnering with you rather than trying to figure it out in-house, like a Walmart, for example?
Mm-hmm.
They're great at logistics.
Yeah.
Over time, they could probably figure it out, but why would they choose to partner?
Yeah, I mean, I think everybody could, in theory, figure it out with enough time and enough capital. The analogy I often give is brands that have stores, if you want to open a new store in San Francisco...
Mm-hmm
... you don't go buy the building.
Right.
You wanna you know, you wanna add a supplier in Asia to make more clothing, you don't go and, like, buy the supplier, right? You contract. Most brands and retailers have a lot of these contract and licensing arrangements across their supply chain. To then think, like, resale is the one thing that they will own soup to nuts, sort of doesn't, like, hold up.
Right.
What these guys tend to be is quite smart around: Where can I get the best service at the lowest cost?
Mm-hmm.
I think where ThredUp is positioned is, we've done this for 10 years. We're very, very good at it. We have a great supply chain to do this, we're better off utilizing their infrastructure than building redundancy, because all the infrastructure of the traditional retail environment, whether they manage their own logistics like a Walmart or they're using 3PLs, none of that is designed for single SKUs.
Right.
Everything is designed for 1,000 black dresses, 10,000 pairs of shoes. You know, our systems are designed for ones and twos, and I think that's unique to resale.
Once you get in with some of these brands or retailers, maybe 1-year agreement, multi-year agreement, execute well, kind of land and expand type strategy.
Yep
Hopefully you get longer term, more more exclusivity.
Yeah. Yeah. I think resale will ultimately become a bigger part. It's not just the, as our client base grows-
Yeah
... it's that this will become an increasingly bigger part of their businesses over time.
Yeah.
I think what you'll see from us over the next couple of years is, and I think what people should watch, is, how many clients, right, and how much is resale becoming a bigger part of their business as more of them try and get younger and be more circular?
Right. takes it from a cost center currently.
Yes
... to a potential revenue stream in a low.
Definite
... way. Yeah.
Definite revenue stream. it's we tell them often, like, it's an ESG approach.
Yeah
... to circularity that's cash flow generative.
Right
... and not a cost center.
Yeah. Makes a lot of sense. Shifting gears a little bit on the international strategy and the Remix deal. We've heard a little bit of pushback from investors on whether that made sense given where your scale in the U.S. so far and given the huge opportunity still here, whether it's RaaS or just.
Mm-hmm
... your core business. Just help us understand why the deal made sense and why the timing was right to go international when you did the Remix deal.
Yeah, I mean, it's always, it's always easy to Monday morning quarterback these things.
You talk it to a sell-sider.
Yeah. As a New York Giants fan, I do a lot of Monday morning quarterbacking. You know, if you go back to the summer of 2021, right, as we were starting to put the deal together, things looked very good across consumer internet. The Remix team, I had known for about five years at that point. We always believed that Europe was a good opportunity.
Yeah.
It just came together that we thought, great team, right opportunity, right price.
Yeah.
That we could essentially double the TAM in a way that would be accretive to the business over the long term. I still believe all of that.
Yeah.
Despite the war in Ukraine, which was not in the investment memo. Right? Despite like, double-digit inflation and a recession, like, the business has still executed very, very well. We've been really pleased.
Yeah.
I think they'll prove it on the field, so to speak.
Yeah
how good it was over time.
What do you think you got right about that deal, and what do you think you still need to improve upon? Maybe as you've gotten in the weeds on it.
Yeah
... you've realized like, "Hey, this is more than we realized.
it's better than we thought.
Right.
It's a testament to the entrepreneurs are the single most important thing.
Yep.
Great entrepreneurs and operating in a low cost center.
Mm-hmm.
Bulgaria is a very cheap place to do business.
Yep.
Their operations are cost effective. Their talent is great, and I think, yeah, I mean, we continue to be happy, you know.
Yeah
... with what they've been able to do.
A good core to build off of for the rest of international.
Definitely.
Yeah.
I think we'll be less... We're not gonna go buy something else any-
Right
... anytime soon.
Right.
I think... I think having a footprint in Europe and a footprint in the US are strong options for us.
Makes a lot of sense. Just shifting back to the rest of the core business and the path forward in 2023. A few quarters ago, you flagged getting back to EBITDA breakeven at some point later in 2023, kind of predicated on quarterly revenues of $80 million-$85 million.
Obviously, you've taken steps to improve the cost base. You're going much more modular on the CapEx front, which obviously helps preserve cash in this environment. Meanwhile, revenue and gross margin remain under pressure, just given some of the macro that we've talked about.
That's pretty well understood at this point. Can you just talk through what needs to go right from here to get to that break-even point, that $80 million-$85 million, and what's within your control versus, as you said, your base case is kind of just stable but no improvement in macro?
You want me to start?
Sure.
Yeah. Yeah. No, I think the assumption I talked earlier about the 2023 plan is that the promotional environment and the excess inventory resolves itself essentially in the first half. That doesn't seem outlandish or outrageous.
Yeah.
That's our, that's essentially our biggest assumption in the plan. We'll be able to go back in and process more and market more, and overall growth will start to come back and start to get you there. I think if you look at Q2, we did, like, seventy-six and a half million dollars in a point where the quarter was kinda getting weaker on the tail end.
Yeah.
Getting to that $80 million-$85 million from what is like a semi-okay quarter is not that far off. That's how we think about as we migrate to the back half of the year. We took about $70 million out of the business in an OpEx perspective or an expenses perspective. Half of that is really variable, tied to revenue. The other half of that is costs that don't need to come back.
Right.
That can stay out of the business for a good long time, right? Maybe incrementally pieces come back. That's how you march your way to that, not only the revenue number, but that EBITDA breakeven as well.
James, to your earlier remark, it sounds like the inventory kind of flushing through is maybe starting to happen faster than you had originally contemplated when you first put that out.
I mean, I think it's in everybody's interest to kind of put 2022 behind them on the inventory side.
Yeah.
I think there's general, like, public cohesion around, "Let's not let this leak into 2023.
Yeah.
I think the other thing that, like, is important is, like, all the capex we spent about $50 million in CapEx in 2022.
Mm-hmm.
We'll spend another sub-15 really in 2023. Almost all of that's gonna be in Q1. As you get into Q2, your CapEx, at least for the next few years, is behind you.
Right.
You're not just the... 'Cause I don't think adjusted EBITDA is, like, the point.
Right.
Right? It's free cash flow generation. Free cash flow generation comes quickly thereafter.
Yeah
... the adjusted EBITDA. I think that's where we're focused, and I think that's why you can't just play defense.
Right.
Yeah.
To that point, just remind us how much cash flow should lag EBITDA kind of on a go-forward basis in light of that improving CapEx.
Yeah. I would say think of it as like EBITDA, adjusted EBITDA is gonna be pretty close, to cash flow from operations. Maybe it's a quarter or something like that.
Yeah.
'Cause we just don't have that big of a net working capital drag.
Right.
Its free cash flow is essentially you just gotta cover CapEx.
Yeah
at that point. We do probably $3 million of maintenance CapEx throughout the year, so sub-$1 million a quarter.
Yeah.
You don't have to do a lot to go from cash from operations to free cash flow. That's exactly how our model works. We kind of migrate to the point where we're self-sufficient.
Yeah. Back to the earlier comment, a lot of the CapEx is much more modular going forward.
Correct.
As demand comes back, as you need more processing capacity, you could probably flex that up with a bit less lead time than you might not have had. You know, 12, 18 months ago.
Yeah, a lot of the CapEx that would come in 25, for example, would be carousels.
Yeah.
Right. What we're seeing in the RaaS business and some of the work we're doing is generating faster turns of all that product.
Yep.
You could get to a point where your turns are growing at a rate where, like, you can push that CapEx out even further.
Okay.
we feel like that's a really good cash flow-
Got it.
generation opportunity.
Okay, great. Fast-forward to 1Q or 2Q 2023, maybe macro's improved, maybe it's just steady, consistent with kinda your base case. We're in the same place, consumers are still on the sidelines. You know, not looking for the macro call here, but what sort of levers do you have within your control to further limit EBITDA losses if things aren't panning out how you expect? Is there more to potentially flex up or down?
Yeah, for sure. I mean, we still spend about, what? About $100 million in SG&A and marketing. There's $100 million of discretion in there, right? It's not all variable.
Yeah.
I think in a business that that's gonna, you know where we've already removed so much of that cost to take another $10 million out of that, take 10% out of that $100 is not difficult.
Why is that spend still in there? Is that because you're focused on being positioned more offensively next year rather than like, "Hey, we really need to pare this back to get to breakeven as quickly as possible"?
If you told me we were heading into a deep, dark recession,
Yeah
we would already have removed that.
Right.
If you told me we're heading into like a a six-month, like, pullback, we probably wouldn't have pulled back, right?
Right.
We're trying to find that Goldilocks plan, where we can play offense and defense. What we wanna avoid is cutting so that if things do get better...
Right
We're on the back heel again.
Right.
you know, that's the hardest part about running a business right now, is trying to do offense and defense at the right time. I think if we get it right, we're gonna be well-positioned.
The per share gains.
Yeah. If things are worse than we thought, then we can cut it.
Pare back, yeah.
I felt like the opportunity costs in there, we thought it made sense to not be too draconian right now.
Makes a lot of sense. That exhausts my questions. I do want to open it up to the audience to see if we have any questions before we wrap up here. If not, we'll wrap it there.
Awesome.
Thank you so much, guys.
All right.
Really appreciate the time.
Thank you.
Have a good holiday.
Thanks, Harry. Yeah, you too.