Everyone, I am excited to be joined this morning by James Reinhart, ThredUP CEO and co-founder, and Sean Sobers, ThredUP's CFO. Thank you both for being here today.
Yeah, sorry I'm late.
It's okay. Quick disclosure, please know that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com/research disclosures or at the registration desk. With that out of the way. Maybe James, for investors who are newer to the story, talk about your founding vision for the business and sort of how it's evolved over the past 10 years.
Yeah, sure. Yeah, so I mean, the true founding story of the business is I was in business school at the time, and I didn't have any money because I was a teacher before that. I went to sell my clothes at the local consignment store, and they wouldn't take them. They said, "We just do luxury." I thought, "But this is a J.Crew cashmere sweater and a, you know, Brooks Brothers skirt." I remember it so vividly. They're like, "Yeah, not our problem." I, at the time, like, my insight was like, well, but this is like a market failure because this stuff is not worth zero. It should be worth $10 or $20, but there was not a mechanism in place, this was back in 2010, to do that.
That's how the business got started. You know, how do you, like, rethink secondhand goods online? That's how we got started. The other key insight was, consumers are really lazy. The idea of selling something online, like how many of you like, sell on eBay on a regular basis? Like, the idea was that that's really hard. Man, people are really good at putting in a bag and putting stuff in a box. The idea was how do you make it really easy for the consumer to get rid of the things they're no longer wearing? That was the core consumer insight on the selling side.
Fast-forward today, you know, now it's hundreds of thousands of bags of clothes that come into our facilities, you know, every quarter, and we process those bags, put those items online, and have built this incredible marketplace.
Okay, great. I mean, the resale space has definitely received, you know, increasing investor interest over the past couple of years, not only because it's one of the fastest growing subsectors of apparel, but retail broadly.
Yep.
You know, there are competitors out there.
Sure.
Can you talk about the competitive moats of the business, and sort of your relative positioning?
Yeah. We do three things that I think are really hard. The first is we invented a new supply chain for second hand. We invented the Clean Out Kit that has become the industry standard for how people clean out their closets, and that whole supply chain to get processed goods back. To put that in context, you know, people fill a bag, a thredUP branded bag, and typically that bag has 25 or 30 items in it. We don't ask them to do anything, but we take all that clothing back through our supply chain, and we bring it to one of our distribution centers. That whole mechanism was important. We built all the technology and software to process all those goods, so single SKU logistics.
If you guys all look at your clothing, I challenge you to find a barcode on it, which means there's no structured data set on any of this stuff. It's not like you're scanning an ISBN number. You are literally making a data set. We're now 125 million pieces of clothing through our network. Incredible data set, 35,000 brands, 100 categories, essentially building arbitrage business. That's the software and technology. All of that stuff was built by the guys who built the Netflix DVD business. I mean, literally the guys. Not like the 25th guy on the engineering team, right? Like, the guys who orchestrated Netflix's 52 distribution centers. Those are the guys who built thredUP's business. Not just new supply chain, now, like, new processing, automation, software, data.
Then the third thing is we've built a marketplace, and so, you know, marketplaces are hard to build. You need suppliers, you need sellers, you need buyers. So bringing those two pieces together, you know, millions of consumers now, you know, come together on thredUP to buy and sell. So what I like to tell people is, it's not that we've done, like, one hard thing. Like, you put those three hard things together, and it's a pretty defensible opportunity. That's the way we think about the business.
Okay. Maybe for you, Sean, you reported earnings earlier this week, talked about sort of EBITDA margin year-over-year being relatively flat with 2021. Maybe talk about some of the investments that you're making in the business this year.
Yeah. I think the biggest things we're doing is we're adding to the processing power of the entire company, and by that, we're opening a large DC in Dallas. It's going to hold 10 million items. You know, we signed the lease in December, and you start paying for it before you're ready to go. There's a bit of a drag as you go through that investment, and it's going to take, you know, a few years, maybe a couple of years before we get that up to speed and at kind of an efficient capacity. As we exit the year, it'll still be lower than our normal contribution margins for a distribution center. At the same time, we're adding a distribution center in Bulgaria as well for our Remix acquisition, and that is going to replace their existing facility and about double the capacity.
I'll step back to the U.S. for a second. Well, we've opened already 2 processing centers in Dallas to help us process as well and get through all of that supply that we have and get more items on the marketplace. In addition, there's some small minor investments in people related to the SG&A side.
Okay. Maybe just pivoting off of that for a minute, the Bulgaria distribution center. Can you talk about Remix's exposure to Russia, Ukraine, Eastern Europe broadly, if you're seeing anything there? You know, ultimately from a Remix investment perspective, how that could impact profitability maybe over the next couple of years.
Yeah. I think the simple answer on do we sell or do we get supply from Ukraine and Russia? No. It is in Europe and is in Eastern Europe, so there's a bit of a, you know, a general overhang with what's going on, and we don't know what's going to happen. Hopefully it gets better in the near term and in the long term too. Again, there's a little bit of just general concern across the board. It is a brand-new acquisition, brand-new business for us, so I think we're very logical about how we forecast that business, and we're appropriately conservative, so I think we're okay there from that perspective.
Okay. Then maybe on the Texas distribution center, you sort of talked about the step function increase in capacity that it allows, you know, short-term headwind from a profitability perspective. But what's that allow you to do over the next couple of years, and how would we expect those margins to scale there?
Well, I'll start, and I know James wants to finish, I'm sure. I think the great thing about what we're saying now is we're doing all this investment in 2022, and we're not going to do another DC until the earliest of 2025 for the U.S. We'll have all that investment made in 2022, and we won't need to open another box. We'll have great processing with the processing centers, and you'll start to reap those benefits as you go through 2023, 2024, and then 2025. I do think the other side of it is even when you get a facility with all the slots in it, so let's say that the 10 million storage capacity is there, you're not at peak efficiency yet. You're not filled in.
The team that isn't operating a business or isn't operating a box of 10 million items that they've done over and over again. Efficiency continues to grow. I just point back to Atlanta, where we have 3.5 million item capacity there. We're not full there, and we haven't been running it at what I'd say functional capacity. There's a lot of opportunity just to get that business or that side of the business, contribution margin better than it even is now.
Okay. I guess. Do you want anything on-
No, no. I think that's great.
Okay. I guess taking all of these things together, how should we think about timeline to profitability?
I would say, I'm not going to say a date, obviously, but we're going to focus on a quarterly sequential improvement to EBITDA rate and then eventually dollars as we go through this process over time. We're very focused, you know, I sit in James' staff meeting obviously every week. It's a bullet point we talk about as a group, so it's a very, very key focus for us.
Okay.
The thing I would add, though, that from a strategic point of view is, like, the point isn't to break even. Like, I think we've lost the plot. Like, the point isn't to break even. We don't care about that. The question is, what are the investments you're making so that every quarter you are in a position to expand margins and expand those profit dollars? To do that, you need to make very thoughtful investments over a medium to long-term horizon. What I spend most of my time thinking about is not what the quarter we're going to break even, although I know that's what Sean has to, like, answer lots of questions about. Like, how do we make sure that the next quarter we say, "Hey, remember that massive facility we built? Yep, we expanded gross profits.
That went down to the bottom line, and we're making more progress." The next quarter, we say the same thing, and the next quarter we say the same thing. Like, what I'm after as a founder is, like, a sustainable growth engine that can grow and expand margins over three, five, seven, 10 years. I think sometimes we get lost in the, like, when are you going to be profitable? I'm like, "That is not the question." The question is, how are you going to sustain profits over time in an evolving market? Like, the thing I think people forget about thredUP's business is, look, we're building a massive moat.
You know, a year from now or two years from now, we're going to look up and be like, "Man, it's really hard to compete with these guys." I think sometimes investors forget that. That, like, at the end of the day, building a huge competitive advantage that can expand profitability over time is the most important thing.
Okay.
Very much like the Amazon playbook, right? It isn't sufficient to just break even. It's how do you use that moat for your competitive advantage.
I guess maybe on that, can you talk about, like, the core unit economics of the business on a per order basis, and maybe that will help people sort of think about the contribution?
Yeah, I mean, I think we've reported the thredUP standalone margins, you know, gross margins are in the 70s, 71% for the year. You know, we'll continue to expand in the U.S., you know, above that. When I started the business, the gross margins were negative, right? Like, we would, like, staple the $20 bill to every outbound order, right? I think, like, what I was really passionate about was, like, I had conviction on, like, this evolving market opportunity and the evolving point of view around, like, how you can build advantage over time. From negative margins to 71% last year and expanding to our long-term targets of 75%-78%, like, that's pretty good, I think.
I think that's how it translates through to the bottom line is really important because as a marketplace, you know, thredUP's going to sell close to 30 million-ish, 30 million pieces of clothing this year. That's a lot of clothing. Do you know how many merchants we have at the company? One. Do you know how many people we have producing clothing at the company? Zero, right? So, like, we're not forecasting trends. We're not doing any of that stuff that, like, a traditional retailer does. It's a marketplace. When you have those types of gross margins in a marketplace context, it leverages really nicely.
Okay. Maybe talk about how you acquire customers, acquire supply. You know, IDFA has been a headwind that a lot of people have talked about.
Yeah.
You guys have navigated it pretty well. Talk about what kind of allows you to be that insulated.
Yeah. Really importantly for people to understand is we've never spent a single dollar, right, directly acquiring sellers. All great marketplaces are built on a competitive advantage around supply, right? What constrains Airbnb's growth, right, is new listings. What constrains OpenTable's growth was, like, new restaurants. Like, all two-sided marketplaces tend to be supply constrained, and thredUP has built an engine that where we do not have that constraint. The opposite is true. We have more supply than we can process today. Really important part of our, like, strategy. You know, as far as, like, how we acquire customers, what's so surprising about the IDFA piece is that people were surprised about the IDFA piece. It's not as though, like, this happened overnight. Like, this has been coming. It has been telegraphed.
When we knew it was coming, we then put the pieces in place to kind of build and be defensive around it. We did not see real meaningful changes to our business. We've always had a diverse mix of supplier channels and buyer channels, and I think the team has done a fabulous job of navigating around it. What I would say is that the team is built to navigate these things, not just today, but in the future, right? I think that's what having a diverse set of channels means.
Okay. One thing we haven't talked about is resale as a service, the RaaS piece of the business. I think, you know, one of the most differentiated aspects of your business.
Mm-hmm.
You've onboarded a lot of different partners like Farfetch, LG, Adidas this year. Talk about the strategy, how it's evolving, and how big of an opportunity you think it could be.
Yeah. I think over the last 10 years, what you have seen is marketplaces really drive resale's penetration and growth in the industry. My thesis is that the next 10 years will be much more driven by brands. Because I think every brand in every C-suite is saying, "Man," as you said, Lauren, right? "Oh man, the resale industry is going 11 times faster than our business. Like, how do we get into that business?" The work that we've been doing over the last couple of years, the reason why we're making these massive investments in infrastructure, is very much to serve the next generation of resale, right? Which is brands. What that means, Resale-as-a-Service, is we help brands launch take-back programs that amplify, like, our supply.
We work now with 28 clients. You can go to Athleta, you can go to Madewell, you can go to Adidas, and you can request a co-branded ThredUp Clean Out Kit, put all your items in there, and then the differentiator is instead of getting cash at ThredUp, you actually get credit at the brand. Every brand loves this. Those brands want to give out as many Clean Out Kits as possible, 'cause it's credit back to their brand. The brands love that piece. That amplifies our supply advantage. We're building white label resale shops for brands, where a brand can turn on a resale shop that's fully powered by ThredUp in the back end, to sell their secondhand products. We've launched with a number of folks. We'll have a bunch of big ones coming this year.
My vision is, like, a year from now, if you are so gracious to have us come back, right? A year from now, you're going to say, "Hey, how are all those clients doing?" I'm going to say, "Look, we've got 40, 50 clients, and all those resale shops are driving huge circularity." The magic of that is that we don't spend any time worrying about how those businesses do, 'cause that brand is ultimately driving that, and I think people misunderstand that.
Okay. Anything you can share on the economics of those partnerships?
We're not disclosing too much on the economics, but the basic way to think about it is there's variable costs in the supply chain, so the fees that we charge a brand to kind of do the take-back program, there are platform fees we charge based on the services that they use, and then there's some fees on, like, usage on the demand side. So think about it as variable across the board, and then platform, like subscription, like SaaS revenue for brands that are utilizing our platform.
Okay.
Think about, I think, to add in on that is everything that we do for our RaaS client is what we do for our normal suppliers and sellers. It's just, the process isn't any different inside the DC for Adidas. I think that's the key thing too, is we're going to make money on stuff that we already do.
Okay.
More money.
Right. Okay. One more from me, and then if anyone has a question in the audience, we can certainly take those. Maybe just talk a little about the ESG story of the business.
Mm-hmm.
You know, some of the key KPIs that you've shared of you know, what you're doing from an environmental perspective.
Yeah. I mean, it's an exciting part of, like, our story because, you know, as thredUP gets bigger, we just do more good in the world. I think I remember having a conversation on the roadshow. It was like, "But do you give profits for the things you sell?" I was like, "No, our mere existence is good for the world. Like, the bigger we get, the more clothes we recycle, like, the better it is for" "Oh, right. Yeah." So I think, you know, when I think the point is, like, our ESG strategy on the E side is just we want to recycle and circulate as many clothes as possible. Everything we do, and that's why RaaS is such a passionate part for me, is we can teach the world to fish, right?
We can teach brands how to be more sustainable over time. On the S and the G side, I mean, I think all the work we're doing in our communities, I mean, you know, we have employees in Ukraine, right? That we're trying to relocate. We spend a lot of time on workforce development in our distribution centers, on our corporate office. You know, equity across our workforce. On the governance side, you know, we just added our fourth female board member. The board is now 44% female. You know, we just announced 2 board members stepping down, so it'll actually go up close to 60%. Trying to be, like, a really good corporate citizen across all those categories.
Great. Anyone have any questions?
Oh, come on.
Maybe what do you think is the most underappreciated aspect of the story?
I think it's sometimes hard to appreciate like a generational like structural change in like how people shop like those habits. Like some people are like "Well my you know I don't shop secondhand" right? Or "My wife doesn't shop secondhand." I think like what you have to keep in mind is if you talk to people who are basically under the age of 25 two things are true. One they buy a lot of secondhand. Two they don't have nearly as much money today as they're going to have in 10 years.
When you think about, like, how a market is constructed over time, all those people with slim wallets, but, like, big hearts to shop sustainably, like, those people are going to age up, and they're going to be a disproportionate share of, like, how this market is going to evolve. I think it's really hard to see that sometimes in the near term. It tracks. Like, same thing with, like, you know, electric cars, right? Like, we're still in the Prius stage. Like, you know the Prius stage? Like, I'm willing to buy an electric car, but it's ugly. You know? Like, we're still a decade away from the Tesla stage, where it is really cool, and I think investors don't appreciate, like, when that happens, how profound the impacts are going to be for traditional retail and, like, how consumer demand shifts.
Sean, anything on the financial side?
No, I don't want to take away from that.
Maybe on international expansion. Obviously, Remix is sort of kickstarting-
Yeah
The European expansion. You talked about sort of launching thredUP brand. I guess part of that is, what's the plan with Remix, you know, from an integration, keeping the brand or not? How do you think about international expansion from here?
Yeah, I mean, you know, Remix operates primarily in, you know, Central and Eastern Europe, right? They operate in nine countries there. They don't operate in any, you know, traditionally, like, large Western European markets. I mean, they do have a small presence in Germany, but it's like you have to like really look. You know, I think the plan for the next year is to really focus on the core markets that they operate in and then, you know, build the strategy to deploy into Western Europe. The European market is large, right? It essentially doubles our TAM, and it's like we have an incredible team there. That's kind of the plan in Europe, and then we're just continuing to sort of keep an eye on the rest of the world, right?
I don't think secondhand is a U.S. phenomenon, right? It's a first world phenomenon. You know, I think we'll keep our eyes open for interesting, you know, opportunities. We're very focused on the U.S. and Europe today, and we think those markets are massive.
What about new categories? I think, you know, if the business is women's apparel.
Yep.
Shoes, handbags, kids, men's.
Yep.
I guess how are we prioritizing international versus new categories?
Yeah, I mean, we do all of women's apparel today. We do shoes, we do handbags, we do kids. I think men's is probably on the horizon, primarily from a Resale-as-a-Service business. We have a lot of clients. I would say two things. We have a lot of clients that are, you know, they sell men's and women's clothing, and they really want to build a take back program that reflects like the diversity of their community. We want to make sure we can serve those clients with their men's business. The second is, my team always reflects this back to me, the men in the company. They're like, "Hey, the mission is to inspire a new generation of consumers to think secondhand first.
What we're doing is inspiring a new generation of women to think secondhand first. Where can you, like, build an opportunity with men over time? I think we're going to tread lightly into that because I think women disproportionately drive this market. You could see men's down the line. We do men's in Europe. Yeah.
You do?
Yeah.
Okay.
Yeah. Yeah.
You know, from a market share perspective, who do you think you're taking share from or are you creating the market that you're in?
Yeah. I definitely think like we're creating a lot of new consumers in this market. When we surveyed, we didn't do this last year, but you know in 2020 we surveyed consumers and said, "Hey, if thredUP didn't exist, where would you have purchased this item before?" We've done that survey for a number of years. 70% said TJ Maxx or off-price. So we're definitely like I think eating into like dollars that might have gone. That's the way I would phrase it is like those are dollars that might have gone to TJ and maybe now like we're getting you know some of those dollars.
I think disproportionately over the next 10 years, it's going to be taken from department stores and specialty retail where the value proposition for secondhand is really powerful.
Okay. From a customer demographic perspective, your customers lower middle income, kind of what does the average person look like?
Our customer overall looks like the people who shop at Target, which is everyone, right? Like, you have rich people who shop at Target. You have less rich people who shop at Target. I have been shocked by how the penetration is evenly distributed among people of different socioeconomic classes. Yeah, that's my answer. Yeah. Sticking to it.
All right. Maybe we'll wrap it there. Thank you so much for coming. Really appreciate it. Thanks very much.
Thanks for having us. Thank you.