Well, welcome. I'm Bernie McTernan. I am one of the internet analysts here at Needham & Company. Thanks, everyone, for joining. Pleasure to be joined up on stage here with the ThredUp team. We have CEO and co-founder James Reinhart and CFO Sean Sobers. Thank you so much for being with us.
Thanks for having us.
Thanks for having us.
Well, and it's especially time, I mean, given the results that you guys just put out there.
We did it for you, Bernie.
Yeah.
We did it for you.
First real quarter, second quarter covering you guys, so I appreciate that. More to come. So I want to hit on that, but first, maybe just as an introduction to people, to folks that might not be as familiar, I'd love just to maybe, as you reflect on 2024, what were some of the key achievements for ThredUp?
Sure. I mean, I think probably the biggest impact to the financial profile of the business was we decided to exit the European business, right? So that was a business that we were trying to make work for the last couple of years and decided sort of middle of the year that our resources, our time and attention would be best focused on the US business, which was really the engine of our growth and engine of when we went public. So I think that probably had the biggest impact. I think we'll have some of the biggest impact as we move into 2025, not having to focus on that. I think the second is we had a real tremendous focus on product investments in AI.
So we've only been working on AI products at ThredUp at this point for 14 months, and they're sort of foundational to everything that we do today. All the product innovation is coming on top of the work we've done around AI. And then the third is just continue to focus on the infrastructure and processing advantages we have in our DCs. And so we continue to invest in our distribution centers around the quality regime, and that's, I think, starting to pay dividends, as you saw it in Q4.
Yeah. Appreciate that gross margin is at around 80% for Q4 as pre-announced, so all culmination of that.
Yeah. Great. Let's touch on those preliminaries out. Yesterday, for anyone who was under a rock, 9% revenue growth in the U.S., over 6% EBITDA margins. The press release talked about momentum throughout the quarter, looking forward to sustaining that momentum. Can you just talk about maybe what went right versus the original plan and how sustainable those kinds of results are?
Yeah. I think that, remember, we guided right before the day before the election, so I think there was a little bit of fear, uncertainty, doubt around how things were going to materialize. And so I think there probably was a touch of conservatism in there with the election. But I think the reality was that what we saw beginning in October, but really came to roost in November and December, was the combination of we had great supply, so we had great product in the door. I think we had a strong merchandising approach in the quarter. We continued to follow up a very strong acquisition quarter in Q3 with another strong investment in acquisition in Q4. And so if you remember, Bernie, we said Q3 was the best acquisition quarter we had had in a few years.
We just sort of maintained that momentum because what we saw was the paybacks were good, the LTVs were good. So you're adding more customers, you've got the right product. And then, oh, by the way, all the compounding returns to our AI investments meant customers could find the products they wanted. We were able to build basket size through recommendations. So I think all of that came together to really drive conversion rate. And then on top of that, the ability for us to think about the business purely in the U.S., I cannot underestimate, because over the past six-to-eight quarters, even if the U.S. business was doing well, we said, oh, we're generating an extra dollar in the U.S. Oh, that can help fund sort of a miss in Europe.
Now it was, oh, the U.S. is doing, put that back into the business, put that back into the business. And so it was like we had two different engines, and one engine was sort of sputtering, and we were trying to figure out how to fix it on the fly. And so now the fact that we're just focused on the U.S. made Q4, I think, better. As we think about 2025, I don't want anybody to get ahead of themselves, but I think there's nothing that we're planning to do in 2025 that's materially different than the strategy over the last six months in the U.S. And I think the ability for us to stay focused on the U.S. means that we feel pretty good about 2025.
Got it.
We'll give everybody an update when we announce earnings in March, so that helps as well.
Perfect. And maybe can you maybe give us a little bit of a history lesson here in terms of what happened in February? What were the fixes that went on in June and July? And then ultimately, again, 9% revenue growth in the fourth quarter. Revenue grew sequentially, I believe, too. That normally doesn't happen in the fourth quarter in terms of how customer acquisition has really trended.
Yeah. So I think the big thing in Q1 was we had made some changes. And frankly, I made some pretty bold bets around how we wanted to refactor some of our customer acquisition strategy around the offer mix, how we're spending dollars in the channel. And that started kind of mid-February, and it lasted a few months. And frankly, we just didn't get it right. We were trying to do something that we get a lot of things right, we don't get everything right. And so I think that we made some mistakes there that I think we rectified kind of into summer. At the same time, we were making a lot of substantial technology investments on the AI side. And like any classic J curve, it's like you can kind of see like, oh, this stuff is working, but it's only rolled out to 5% of customers.
I talked on earnings calls of like, this stuff is starting to roll out. By the time you got to the end of the year, you were in a much better place. You had sort of readied the ship on customer acquisition. You were in the right place around processing. The product stuff was starting to work. I think that's the shape of the year for us. It felt great because I think we all believed the product work the team was doing, the technology. You could kind of see it. You just couldn't quite see it in the numbers yet. All your leading indicators was like, God, this has got to hit the numbers. Eventually, it's starting to.
Great. Then maybe a question for Sean. Well, James, you mentioned kind of there used to be a beat of a dollar in the U.S. would then go to fund Europe. If we just look at what we think, at least, the U.S. OpEx expectations were for 2024 relative to our expectations, even though margins beat by a considerable amount, OpEx did come a little bit higher. So just how to think about where those kind of incremental dollars of investment are going and how we should be thinking about incremental margins. I guess that's all relative to the guidance you provided originally that margin should be more or less flat in 2025 relative to 2024.
Yeah. I mean, I think the two areas you're going to see us spend in and happen in Q4, and you're going to see it happen in 2025, is in marketing and operations. There's a strong connection to what we list, and so that's processing inbound, to what we're able to sell and acquiring new customers, which ends up coming from marketing. As we did in Q4, that's where the spending happened. Then as we go through 2025, without giving any guidance, you'll continue to see that additional focus from us.
Yep. Makes sense. All right. Maybe just a bigger picture question. What's it going to take for ThredUp to get back to a double-digit grower? I know we were sniffing at it in fourth quarter, but to get back to those levels sustainably.
Yeah. I mean, I hate to oversimplify it, but it's actually pretty simple, which is we need sustainable growth in new customers. That comes from predictability on LTV to CACs, which I think we observed in Q3 and talked about. And I think some of that continued into Q4. So we need to continue to add and retain those new customers. And we need great supply, as Sean mentioned. And you need those things moving in tandem. And I think what's exciting for us, Sean and I have been together now, this is our fifth five years. And I remember when Sean first came to the business, he's like, boy, this is easy. We just list more stuff, acquire more customers, and keep doing that. He's like, this thing's going to be great.
Second time I've heard that today.
And so it's just like funny how the European experience for us really took our eye off of that core engine. And so I don't know, Bernie, whether it gets back to double digits as fast as we would like, but I can tell you that the playbook is much simpler. And so it's NFL season. You got to be able to run the ball. You got to be able to run the ball in the postseason. We're going to run the ball, process goods, acquire customers. And I think now with the margin profile that Sean talked about, that should produce good financial returns.
There we go. You've mentioned great product supply twice. How much ability do you have to control that?
I don't think we can't obviously control what people send us, but we can create the right sets of incentives to have the right seller send us the right stuff. So for example, if people are not, if sellers are sending us stuff that we can't process and list and make money on, we will ban those sellers. We will tell them, hey, thanks so much, Bernie, for sending us that bag of stuff from Shein. We don't want that stuff. Please, you can donate. So we can shape the actual seller mix. And then through the types of incentives around what we want, we can shape what they send us. So right now, we're running for certain brands and certain categories. From a seasonal perspective, we're helping people send us the right things. And so that on the margin can sort of influence what people send us.
And then we're experimenting with other ways. We have experiments out in the field right now that are making it easier for people to send us a few items at a time. And so again, we can't control it, but we've been doing this long enough to know how we sort of shape that curve. And I think that's what we're going to kind of continue to do.
Great. Can we talk about TAM? Just how do you think about the size of the market in the U.S.? And yeah, I mean, what's the right way of thinking about penetrating it, and then especially maybe the competition that you're facing within it?
I think the data out from GlobalData, which is a big independent research firm that does a lot of this market sizing, suggests that resale market is going to grow faster than traditional retail for a long time. Look, I think the market is big. I think that when we do the market sizing data every time, what really drives that number is how many people are interested in selling. And so if you think about it, it isn't like, oh, am I interested in buying used clothes? But at the end of the day, the market grows because you have sellers putting high-quality apparel in market to drive the growth. For example, Airbnb's growth is often driven by, do they have new listings? And so in a two-sided market like ours, we're OpenTable. OpenTable's market was all about the number of restaurants, Resy number of restaurants.
And so to me, I think the question of the market size is how many people are going to be selling in the future. And the data from young people suggest that this is like taking a bath or taking a shower. They don't take baths anymore. It's like taking a shower is just kind of what you do. And so I think it's going to continue to grow. And then I think the competition will be who best meets the needs of that emerging seller. And I'm a deep believer that when you're young, you've got lots of time and no money. And so you're likely to sell your own stuff on Poshmark or Depop or wherever. And then eventually, you end up having more money than time.
And then you're like, I don't want to spend all my day listing stuff to sell, and I'm not a fulfillment and distribution center. And so I think when you look at kind of the transition from peer-to-peer platforms to managed marketplace like ThredUp, it happens in your 20s. And so I think the purchasing power is only going to grow as these generations age into that.
Is there any point too where if you get more, and I think this is the Airbnb example where it's like if you become a seller, then you're more likely to become a buyer and that kind of like self-fulfilling prophecy?
Yeah. I mean, right now, I mean, it's about a third of the population is sort of an overlap of people who are buyers and sellers on the platform. But yes, it's easy to get some sellers. It's easy to get sellers to be buyers. You don't always want your buyers to be sellers. Same with Airbnb. Just because you want to rent an Airbnb doesn't mean you should be renting out your home. And so you do want the right sellers, the right renters to become, or the right people who have Airbnb homes to become renters on the platform. But you don't necessarily want everyone.
Yep. Makes sense. And what about just differentiation versus the other resale markets out there? So whether it's a Poshmark, Depop, Depop's results have been pretty stellar for Etsy as of late. eBay, just in terms of user experience, inventory, sourcing, pricing, just where you think ThredUp differentiates?
Yeah. I mean, it's really just about the amount of work that the seller wants to do. So I think if you're highly motivated and you have time to sell on your own, those platforms make a lot of sense because you're able to make more money, and you do all your fulfillment and answer customers. If you're a buyer and you want to engage on Depop and ask questions and favorites and likes and all that kind of stuff, and you have time, that also makes a lot of sense. I think the big differentiation on ThredUp is that on the buy side, it feels like a more classic commerce experience. It's dedicated customer service. It feels like you're shopping at Nordstrom or Amazon or wherever, and on the seller side, you're just getting rid of the stuff you're no longer wearing.
We think that the TAM in that market is bigger over time. I would say that it's harder to build because you're building infrastructure on the internet. That takes time. Once you get there, if you think about it, there's been very little investment or competition in the managed resale space. You basically can't come up with anybody who's really doing the logistics and infrastructure the way we are. I think it pays to own the piping over time.
Right. Okay. Maybe we wanted to touch on just health of the consumer post-election. How's it feeling? Any change in how you're thinking about how the consumer is going to be acting during 2025?
My sense is that the consumer has no more money than they had before, but they feel a little better.
Okay.
So whether that means that they choose to spend into credit or open up their wallets from their savings accounts, I don't know, but there's nothing that I see where I'm convinced that people have a lot more money and more discretionary dollars to go around. I just think post-election, whether you're a Republican or a Democrat, I think it removed some anxiety about what was going to happen, and now people are like, all right, I know what I'm going to get for the next few years.
Right.
If we go back to tightening in Q4, I think when we gave guidance for Q4, our assumption then was things are going to get a little worse. Hearing James just say it, they didn't get a little worse.
They didn't get worse. Yeah, exactly.
Okay. Wanted to touch on promotions a little bit. So I think one of the interesting data points in the 3Q call is how you said GMV was up 7%. So revenue is declining. So obviously, promotions were impacting that. How did that play out? Just any additional color to provide in terms of however you want to address either promotions or GMV trends in the fourth quarter?
Yeah. I don't think we can really talk about it. We'll talk about it in March. But I don't think anything has really changed from Q3. We're continuing to be sharper on price and being more promotional. But I would just characterize it as just being some items just pricing better to meet the customer where they are. And I think rather than saying, hey, we need to hit this price point at this turn rate, I think we've decided, hey, how do we maximize flow through? How do we maximize contribution? You don't pay the bills with contribution margin percent.
Yeah.
You pay them with the dollars, and so I just think being a little bit more thoughtful around how we do that. But look, it helps to have processing scale and some of the other things that we're doing to just improve those margins on a variable basis.
Right. And then, so when you guys run promotions, is it typically to the existing customer or more aimed at gross adds and kind of like? And then, how do you think about that kind of LTV to CAC or that investment in the customer?
Yeah. We do both. I think for new customers, we're pretty generous on the front end to get people to try. I mean, I think people to shop online thrift, you know, need proper incentives. So I think we're probably a little bit more generous. But we're pretty rigorous on the LTV to CAC ratios. But again, I think as Sean was talking about with the gross margins, as your variable contribution margins go up, it has real impact on your LTV to CAC ratio. So we can spend more money to acquire those new customers, even if we're being incrementally promotional. And then I think for existing customers, we're really focused on making sure that they are finding items that are at the right price, whether that's discounted or not discounted.
And so we combine what the customer needs to see, existing customers need to see, with how product trends and items are sort of in demand. So to give you an example, right now, even if a customer is in market, we may not be discounting that winter coat as much as we probably could to make the sale, knowing that there is another buyer that is likely to come in and buy that coat. So it's an item-based and a customer-based approach.
Right. Okay. And so.
Question?
Yeah. Yeah. Shoot.
You said so nicely that on the sellers, I was curious. The sellers that you want are the ones that have money but no time. How much of those sellers, how much do you think is about educating them so that they don't throw out the clothes that they have?
Some of it is education. Some of it is just awareness. I mean, there's just a broad, a lot of people just, as surprising as it is, people are just like, just give stuff away. And so that's the default bias. And so it's really helping educate people that it's easy to not just give stuff away. You actually can do good and make some money back. And so that is the part that we're trying to do. But I will tell you the nuance is that a lot of the stuff that we give to charity, for example, even with the best intentions, a lot of that stuff just ends up in a landfill. And it's not because any of the charities we give to are bad people, but they're nonprofits, and they don't have the infrastructure to process the scale of the goods.
And so we're really trying to educate people that ThredUp is a great supply chain for you to make sure your stuff ends up in new homes and doesn't end up in a landfill. And so I don't know if that answers your question, but it's a lot of education for those folks.
Just see if there's any questions from the audience. Or while you guys are thinking, just ask one more. Contribution margin, you mentioned how it can kind of fuel that LTV to CAC equation. What's been driving any way to gauge kind of how LTV, or sorry, how contribution margin has been increasing? What are the major drivers?
I mean, the biggest drivers are around operations, operations efficiency, automation, the AI tools that we've been using there. And I think we stated around the IPO, contribution margin is around 27%. And then in the Q3 call, we updated it slightly to say it's grown over 1,000 basis points. So it's 37% or more at that point. So quite a big change with desires and plans in place to make that number grow even further by way of optimizing the operation side.
Right, and do those kind of investment decisions, I'm assuming those get a whole lot easier if revenue is growing, where there's all of a sudden the ROI on every deal or everything you could do to drive more technology and automation in the system makes a whole lot more sense.
That's exactly right. Yeah.
Got it. And then so James, you mentioned in the beginning, so product investments in AI, you've really only been working on this stuff for 14 months. So how does that? What does the product pipeline look like? What's most exciting right now at this point in time that maybe you can do now that you couldn't have done two or three years ago?
How much time do we have? I mean, it's like a fundamental. I'm like one of the few guys who says publicly AI is underhyped, although I think people are coming around now. I think if you look at the core product experience right now, I mean, everything is built on top of some new foundational model. So right now, if you were to go to ThredUp, you'll see all this incredible merchandising that we're doing now, pictures of women in dresses, and it's all generative AI, all of it, and you would not know it. It is such high quality, so now you're able to visually merchandise in a way that you weren't able to six months ago. We now are using AI visual search technology to help customers shop similar.
So you see a dress you really like, you can click a little button and see all dresses that look exactly like it using an AI background. You see an item out on the street, you can snap a photo and find it on ThredUp. You can get us to make outfits for you. Just like in real time, you can say, hey, I'm going to an investor conference in New York in January. Come up with some outfits for me. And it'll make those outfits for you and then make those shoppable. In our distribution centers now, on many of the product pages, you can see we've rolled out automated measurements. And so now there's full edge detection on all the items. It's more accurate measurements, more accurate for the, it saves us money, and it's more accurate for the buyer.
And so I mean, I literally could keep going. But now it's less of a question of can we use this technology than how are we using it in fun and creative ways? We just had a hackathon last week, Demo Day on Monday, of all kinds of new crazy stuff teams are working on that's going to be incredible.
Okay. Great. And so for products like Style Chat and image search, are you going out and training your own LLM? Or are you using third parties? Just what kind of technology do you have to go out and build yourself, or can you license?
Yeah. It's a bit of a smorgasbord, really. Some of the stuff we're building, some of the stuff we're licensing, some of the stuff we're using open source. It's a bit of the Wild West out there around how to put these things together, and the technology is moving pretty fast, so we're doing a bit of all of it.
Okay. Understood, and so.
We are paying for stuff. You know what I mean? So embedded in those margins, we're paying to generate images. We're paying to do a lot of the tech that we're doing today.
Right.
But not so much that I could tell you the names of the vendors.
Yeah. So that question.
I want to circle back on the better supply in the second half of the year. I mean, James, you guys have been continually trying to incentivize. And I don't think there was one major program that you just all of a sudden launched. It's been a continuous effort. And so I'm just kind of wondering what led to really kind of a clear improvement to Q3 versus earlier or later?
On the supply side?
Yeah.
Yeah. I mean, I think it's not just that the quality of the supply was better. It was incrementally better, but think about the ability for us to merchandise that, for the consumer to find it, and as you got into Q4, the measurements to be better, and so yes, it's probably some cocktail of, yes, the product was better, but also then just the buyer experience was improving so that they were willing to pay for that item. I will, though, say that we did roll out a new service, so we tested at the beginning of the year something called Consignment Pro back in early 2024, which was a more concierge level of selling, and then we iterated that into a premium service that we launched middle of the year, and that service is generating better supply. Customers pay more.
So instead of the $14.99 fee, you actually pay $35 for it. But you get longer consignment windows. You get dedicated support. You get your items back by default. You get secondary. You get a bunch more stuff. And so it's actually building a lot of trust with the best sellers. And that is starting to flow through into the mix of goods. So a bunch of stuff, and there actually was a meaningful product launch in the middle of the year.
Is that business likely to end up being more profitable as well?
Yeah. Yeah, it is. It is. It's better stuff. It's better for the seller. But it's taken a lot of investments on the technology side to enable it to process those goods the way that a more premium seller would expect. But go to the selling page. You'll see kind of the premium experience. You'll see it is different. It is more expensive. But I think it's bringing in a seller who has better stuff, who wants more trust and more ownership.
Higher quality goods, higher ASPs, thus to your advantage, better margins.
Yeah. Yeah.
Got it. Oh, sorry. Yeah. Keep going.
That kind of also benefits kind of the inefficiency of acquisition and the cost of transportation and so forth. Are you doing anything else on that side to decrease the kind of physical cost of getting from seller to your warehouse?
I don't think we've done anything rapidly different on changing that cost structure, but what I will say is that, and I think I said this in previous calls, the introduction of the fees a year plus ago and then the introduction of the premium fees, what that means is your customers are sending more stuff in the bag, so once you're paying a fee, all of a sudden you're incentivized. I want to get all I can get out of this fee. It's like paying for a buffet. You got to gorge yourself, and so customers are sending more stuff in, and that really does help the economics, so if you're getting better stuff, you're getting a fee, and you're getting more of it, it's a triple whammy.
As we.
Sharpen our pencils and move over our models to including Remix and now 25 without it. Anything we should be thinking about in terms of just seasonality or, for easy comms, just that you think would be pertinent for investors to be mindful of?
I don't think there's anything different than you've seen in the past. In Q2 and.
Q3 are generally our best quarters. I don't think that's going to change, although I think we continue to figure out how we make Q4 and the holiday season a better quarter because we're kind of atypical from retailers on that side. But I don't think there's anything out of the ordinary that you haven't seen from us as a U.S. standalone business. And you can look at history. And I think we provided now a ton of information on historical U.S.-only data. And we'll also file a 10-K with all of the U.S. data in it as well when we do earnings in March.
Okay. Great. And just thinking about U.S. margin. Where do you think they can go over time? I think the longer-term target was 20%-25% margins. But what's kind of like a realistic, is that still the right way to think about where the U.S. can get. Over the long term?
Yeah. So we built those long-term targets as a standalone U.S. business. And we still think those are where the business can head. I think point of note, if you look at gross margins. When we did the long-term targets, it was 75%-78%. And we just did 80%. So we're past that. But I do think some of the questions are where can that go? And I think around 80%, where it is today, is what we probably want to live. We'll come up with great automation and efficiencies and improve it. But we'll also be able to give that back to the customer.
Okay, and as we're thinking about the conversion of EBITDA to free cash flow, obviously free cash flow, the goal would be free cash flow break-even this year. I believe that was the target. Anything we should be thinking about from a CapEx or working capital perspective that's happening below EBITDA?
No. Essentially same as what we talked about on the Q3 call. We'll do $7 million-$8 million in spend on CapEx in 2025. So no real change and no real big expansion in the DCs until we get to 2027.
Right. And so what informs that view on 2027, where you couldn't need incremental capacity? And does that mean building a new distribution center, or is that kind of adding on to the existing?
It's mostly adding into the DC in Dallas. So the Dallas DC holds about 2.5 million items. It has the ability to hold 10 million. So we'd build out the infrastructure for the next, whether it's 2.5 million more or the ultimate capacity is 10 million there. So we'd have 7.5 million that we could add into Dallas.
Right. Okay. And as you're putting up these strong financial performance, free cash flow positive, how do you start to think about capital allocation and how to use that excess free cash flow?
Yeah. I mean, I think we want to reinvest in the business. But even let's say as we reinvest in the business, we generate more cash, just the nature of the beast and the unit economics. But I think for right now, there is no intention of using that money in other ways other than A, building another balance sheet, and B, reinvesting it in the business.
Right. Okay. Resale-as-a-Service. What's the latest there? Just would love to get the updated thoughts.
Yeah. I mean, I would say we've continued to add a few brands in the fourth quarter, which we'll talk about in March. But I would say that 2025 is sort of this year of figuring out which of the brands that we're working with, we're not working with, really are going to scale. And so I think a lot of brands have dipped their toe into this. And some brands are going faster than others. I think what we really want to do is help brands say, "Hey, how is this contributing to a 10-year vision?" I think we sort of did the beta pilot phase. And now it's like, "Okay. Let's get serious here." And I don't want to support brands for whom it's just a PR stunt.
So, I think what you'll see is that'll probably be more concentrated in a handful of brands that can get really big and support those brands however they would like.
Have you guys said what % of your supply this?
Yeah. I think the last time we talked about it was like 20%-25%.
Right. Okay.
Yeah. It's meaningful.
Yeah. Definitely. Just want to see if there's anything else from the audience. But if not, maybe just a last summary question here. Talked about what were the successes in 2024. We'd love to think what are some of the few items that would make 2025 a success for ThredUp?
I mean, I think if the consumer can get a little bit better, I think that will help because I still think we have a large segment of customers that used to be our customers that were sort of on the sidelines have been squeezed out by interest rates. So I think anything that improves on the macro would be helpful. But as far as the things that we can control, I think Sean's talked about the contribution margins. That is a bit of a linchpin in sort of the engine. And so I think we're doing a lot of work to drive those contribution margins up. And I think as contribution margins go up, we can spend more money on marketing. It flows through.
It's a flywheel.
It's a really important flywheel. And I think kind of what you saw in Q4 was you might have expected a beat where like, "Oh, you guys crushed the revenue number, but EBITDA was sort of in line." But it's like, "No. You crushed revenue number and you crushed EBITDA number." And I think that speaks actually to the engine. We shouldn't have to trade those things off. And I think that's an exciting thing for us to think about as we get into 2025.
Awesome. Well, if nothing else from the audience, let's leave it there. Thank you both so much. This was great.
Yeah. Thanks, Bernie. Appreciate it.
Appreciate it.
Nice show.