All right. I guess technically it's still good morning, everyone. I'm Lauren Schenk, Morgan Stanley small and mid-cap internet analyst. Excited to be joined this morning by James Reinhart, thredUP's founder and CEO, and Sean Sobers, CFO. One disclosure on my end. Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com\researchdisclosures or at the registration desk. With that out of the way, James, for those that might be newer to the, to the thredUP story, maybe talk about your founding vision for the business and how it's evolved over the past decade.
Yeah, sure. Yeah, the business was founded 2009. The core thesis was the second-hand apparel market was sort of broken. People didn't have really convenient ways to get rid of the things they were wearing. People had to go to sort of smelly, stinky Goodwill thrift stores, which nobody really liked. We thought there was this, like, big opportunity to sort of reinvent how second hand might work on the Internet. That was a time when, you know, Spotify and Uber, Airbnb, all these sort of new consumer experiences were coming of age, and so we thought we could really build a big business in secondhand.
Okay. Obviously resale apparel has been a very dynamic space over the past few years. How do you see the resale market evolving over the next couple of years and sort of the competitive positioning of thredUP within that?
Yeah, I mean, you know, for a number of years I've been saying this sort of line of, like, you know, there were sort of three lanes in resale. You sort of had a luxury lane, which I think, you know, The RealReal has been in. You had a peer-to-peer lane, which Poshmark has been in, and you had thredUP as sort of a mass managed marketplace. Honestly, I think things are playing out exactly as we thought, which is that the biggest opportunity, the biggest TAM is in the managed, you know, sort of mass market in which we operate. That peer-to-peer would, like, have a real, like, take rate, race to the bottom competitive dynamic that would be real, that'd be really hard.
That in the luxury space, it'd be a really hard time acquiring inventory. I think from where we sit, we feel very good about the competitive positioning because I think as a two-sided marketplace, it's all about supply. I've been saying this for a long time, if you win the supply game in a two-sided market, you win the game.
Right.
I think we're winning in sort of every way you could imagine.
Great. Maybe following up on that, I think, you know, there are a lot of players that go after the higher-end resale space in particular, 'cause I think it's easier to think about how the unit economics could work.
Sure.
Maybe the middle and lower end gets a bit more skepticism from investors because it's harder to make the math work.
Mm-hmm.
Explain kind of how you're making the math work.
Yeah, I mean, I think people chase luxury because they can make the gross margins work. But what it fails to capture is, like, the cost to acquire supply. Our thesis has been that you could build a really big business and have superior unit economics if you had an unfair advantage in supply. From where we sit, as a consignment business, you know, we don't spend any money acquiring sellers, and we literally have to turn them away all the time, right? I mean, we have such demand for our cleanout service. We've built these highly sophisticated distribution centers, sort of first of their kind, high throughput, low operating cost to do them.
What that does is it, you know, in the U.S., 'cause we now have a European business which we can talk about, but in the U.S. it's sort of a mid-70s gross margin business. I think we've done a very good job of building unit economics that have strong flow through while at the same time kind of scaling the business. I think the linchpin in there is that we don't pay to acquire supply and that you can do it at, like, real sufficient scale to get the unit economics.
Great. Maybe let's pivot to macro. you know, you've seen some volatility in the business over the past several months. Maybe talk about what you've seen there, kind of what you're expecting over the coming year. Then, you know, in 2008, 2009, resale really wasn't a business.
Yeah.
We don't have really any frame of reference of how it performs in a, you know, a potential recession. What is your sort of view in how it does perform in a recession?
Yeah. I mean, 2022 for, you know, I think it's been well documented, it was sort of almost a tale of two halves, right? I think the first half of the year was fine, some people would describe it. The back half of the year was not. Like, what's interesting is, like, you know, we just reported Q4. You know, the business was down, you know, 2% overall. What doesn't get captured in that is the business was up 70% last Q4, right? Like, we saw tremendous growth into 2020, at the end of 2021, and the first part of 2022 was fine, and then we had this back half that's not been great. I don't think it sort of calls into question the structural, like, you know, long-term tailwinds of resale.
I think you just have to sort of manage through this consumer mushiness. My take has always been that in a mild recession or when consumers are feeling pinched, like, resale should do quite well. I think we were very precise in our earnings call around we think the setup for resale in 2023 is actually quite favorable.
Mm-hmm.
Cause we expect softness in the consumer with what will end up being lean inventories across the retail environment, the intersection of those two things I actually think is really good. The deep recession, I think all bets are off. I don't think we're there yet.
Okay. How do you think about trade down in your business? Have you seen any of that? Do you think that accelerates in a recession?
I do think trade down accelerates in a recession. The challenging part for us, I think we've talked about this over the last couple quarters, is there's this whole segment of budget shoppers who I think are who sort of sat out the market, so they're trading out and they're not trading down. I think that's consistent with how other retailers have talked about it. I think as you get more stabilization in the economy of those customers kind of move back in, and I actually think that's a bigger tailwind to our business than just the trade-down. Remember, we were just living through 6, 9 months of, like, the greatest liquidation environment in the history of retail, and I don't think people truly appreciate, like, the cost.
I mean, I don't know if you don't cover Kohl's, like, Kohl's in their earnings were talking about quarter-over-quarter, like, reduction in inventory. You know this probably better than I do, it was like Q2, inventory was up 50%, Q3 was 25%, Q4 year was 4. It's like, where do you think all that product went, right? Like, they were giving it away for $1. Right? It's hard to compete, Oops, it's hard to compete when people are giving stuff away.
Right. Okay, let's pivot to the core business. Currently, you only accept women's and kids'. Any thought in terms of entering men's at some point? Does not having men's inventory or men's angle impact the ability to win RaaS clients, which we'll talk about in a minute?
No, I don't think we'll go into men's anytime soon. I think there are plenty of women out there, to build a business on. I still lack conviction that there's an interesting business to be built in men's. For, for, like, the reasons that many of you know. Men, we wear the same, like, four colors: blue, black, brown, gray. Raise your hand if you're wearing something other than blue, black, brown, gray.
I tried to cover them all.
Okay, great. That one always wins in a public audience of investors. Second is men wear their stuff out, like, at much higher rates. Like, by the end of all of this, like, nobody wants, like, you know, pit-stained polos and dress shirts and jeans that are worn out. The third is men just don't shop at the same rates, right? Like, we don't have the same interest in, like, a new dress, a new pair of shoes. For those three reasons, I'm not long on men's in resell.
Okay. All right, maybe I'll take a step back on my previous question in terms of RaaS. Maybe explain to the audience what RaaS means.
Sure.
How you're using technology to scale resale.
Yeah, RaaS stands for resale as a service. It's a business venture that we launched sort of inside the company a few years ago, I think 2019. The idea was that we could ultimately power brand resale for brands on their own websites. If you were to go, our two most recent clients are J.Crew and Kate Spade. If you went to their websites, if you go to J.Crew and you kind of go into the navigation, you'll see it says Pre-Loved. You click on the Pre-Loved tab, and it brings up a totally, like, curated, modern resale experience of used J.Crew products, and all those products are thredUP products. They live on our site, and they are co-listed on J.Crew's site.
The power of RaaS is that we can leverage everything we do at thredUP, like, exceptionally well, like sourcing, sellers, operations, processing data, all that, and bring that to bear for retailers in a way where they can turn on our resale experience without really doing anything. I think that's, like, what's really exciting about RaaS. To your point about men's, I think the only time we would enter into men's is if a RaaS partner, it was like, "Hey, we'll pay you to do men's for us.
Mm.
In which case, the economics are, like, a little bit different. Like, for Tommy Hilfiger, for example, Tommy Hilfiger has a large men's business, and we do some men's for them on a pay-to-play kind of basis.
Okay.
I think the thing on RaaS too not to forget is that that website on madewell.com or Athleta or whatever is listing a bunch of stuff that is also listed on our core marketplace.
Mm-hmm.
It's another channel. Just the ability to turn through that inventory or those items for sale that much quicker, which actually takes us to, you know, eventually we'll talk about, I'm sure, CapEx spend and what we need on the DC network.
Yeah.
Okay.
Just to give you a sense, like, in our distribution centers, our employees who run, they literally have no idea where this stuff's going. For them, they're just doing what they're doing. It just happens to be going to a customer that bought it on jcrew.com.
Okay. 2022 was a big year for RaaS. I think brand adoption was up more than 3x, a lot of that was coming from new partnerships and white label shops. Maybe talk about the roadmap for RaaS in 2023 and any high-level ways to think about how RaaS impacts the P&L.
Yeah, I don't think, like, we have any news to make around the number of clients, like, we're targeting, but I think the business continues to gain momentum. I think retail, in this particular context, are, they're followers. Like, I think it's one of those things that the more brands we launch, the more brands are like, "Hmm," right? We got a lot of inbound after the J.Crew and Kate Spade launches, and we've got another set of big launches coming in the next couple months. I think good continued momentum in RaaS. The way it impacts the P&L is we monetize it in three ways. First, we charge brands, monthly recurring fees. RaaS does rhyme with SaaS for a reason, right? We charge them monthly fees.
It can vary from a few hundred dollars to many thousands. The second is that we power their clean-out programs, many of them. If you get a clean-out kit through one of our RaaS partners, Athleta, for example, is very successful at this. You send this in, you get Athleta credit. We charge Athleta a fee to process that and turn that into a gift card. The third way is what Sean mentioned, is we monetize through selling goods on other people's platform, which the way that impacts our P&L is we don't pay for any of that traffic, right? Not only does it generate return on assets for us, but it's sort of like free ad dollars.
Okay. Maybe let's switch gears to the, to the expense side. Maybe talk about, the path to profitability.
Mm-hmm.
... the drivers to get there, and is there a minimum top-line growth that you need to see to be able to achieve that?
Yeah. I think, you know, we previously talked about getting to breakeven EBITDA on the back half of this year, 2023, at $80 million-$85 million in revenue. That's still very consistent, our message there. I think the piece that really simplify how do we go from where we are today to where we are breakeven, it's really simple: growth-
Improve unit economics. You look from our annual guidance, we're growing revenue, we're actually investing in marketing, we're investing in operations, all of which are gonna drive more growth. Then from a unit economics perspective, moving into Dallas, bigger, larger DC, moving into a more efficient DC in Bulgaria, and then actually implementing the automation that we've been working on throughout the years, in addition to the strategic initiatives that James already mentioned on the earnings call, things around return rates, seller fees, all these sculpting, things that are gonna just drive us to better overall unit economics, which means more money per item. That drives us all to Step one, which is break even EBITDA. Step two, cash flow positive on operations. Step three, free cash flow. I'll stop now because it'll keep going.
Okay. You brought up Texas, the new distribution center, DC07, just opened. How do you think about the ramp of capacity there and the related cost through 2023?
We opened the first phase, it's two and a half million items, which brings our total U.S. network to 9 million slots or available space, just think of it that way. We're probably around 50% full. We got a good runway as far as before we need to build more, and we publicly stated over and over again that we don't believe we'll need any new DC CapEx spend until 2025 at the earliest. We're lowering CapEx spend from last year was $43 million, this year will be less than $15 million. It'll be front-end loaded. I think we're really hyper-focused on that cash spend, but part of it is because we've made all this investment in the DC network. Tying it back to RaaS is, as turns increase, we can just generate more revenue with the exact same footprint.
Mm-hmm.
Someday we'll do a phase two in Dallas. At the earliest it's 2025.
Okay. You talked on the earnings call also about the changes that you made on the cost of the cleanout kit. We've added a $14.99 processing fee and $2.99, I think, for a mailed bag. What drove those changes and has it impacted supply at all?
Yeah, I mean, you know, it's still experimental, right? It's not... Not everybody's in that sort of experiment. We're continuing to kind of test sort of elasticity around that. What's really fascinating about it is... I was, like, skeptical of, like, the how much we could charge for this. What I have found in the sort of the qualitative research is that what people really love is the fact that thredUP is open for business.
When you talk to consumers, they're like, "You know, I don't really care about the $10 bucks, but I love that I can just send you something whenever I want." That's, like, a really important insight of just, like, how much we've become part of people's lives and kind of what they do and how much dissatisfaction there was last year when people were like, "I don't care what it costs. Can I just send my stuff to you? Because I feel good about it." Right? The results have been really encouraging. People are sending us stuff. They love it.
The second piece is that, this is sort of obvious when you say it out loud, you charge people more money, they try and put as many things as possible in the bag. Obviously, right? You're getting more items per bag, which, you know, when you spread across your logistics costs, means your cost per item of inbound goes down. Not only you get fees going up, but your cost per item goes down because you're loading it over more items. The third piece is that there's some weird psychology of when you're paying, right, you kind of inspect your stuff a little bit more, like. We've seen yield and quality improve. To be honest, Lauren, it's like a home run, across those three things.
What that's done is now it allowed us to figure out, like, you know, Kate, when Kate sends us a bag, and it's a great bag, we can say, "Thanks so much, Kate. We're waiving your fee.
Mm.
She feels even better about it. Like, there's real power in this that I, frankly, like, I did not anticipate, how great it could be. You can tell I'm, like, I'm pretty bullish on the opportunity.
Great. You also mentioned some iterations or changes to the returns. Maybe elaborate a little bit on that too.
Yeah. You know, we made it so easy for you to load up your cart on thredUP that it created some, like, negative behavior. I don't know if you ever did this. People do. They buy a lot of stuff, and then they return half of it because it's so easy to return. We started to put some guardrails around restocking fees. We made incrementally more items final sale. We did some of the sort of basics. We're testing something that, you know, for just to a few set of customers, which is sort of a credit return system where we let you keep the item. That's in its earliest days, but all of that has sort of brought return rates back to, like, where they were historically.
Cause you had this sort of weird where for 10 years return rates were where they were. The pandemic, they went way down 'cause people were worried about touching stuff and going to the. Right? Then back half of last year, they kind of surged as consumers got pickier, and I think we're now back to the more normal environment.
Gross margin has seen some pressure, but largely as you've seen a shift from consignment to product.
Yeah.
Maybe talk about, how that trends through 2023 and when that should kind of reach equilibrium.
I think we ended the year with basically not open for business for the average customer, which is all of our consignment supply. It was mostly RaaS, which is mostly owned, or a portion of it's owned. You also had kind of an uptick in European performance, which is all owned. That kind of skewed Q4's results. We move into January 1, things are back to normal from a supply perspective. We still have to go through that RaaS supply. I think you'll see a slight uptick in gross margin as you go through 2023, as well as the mix shift towards consignment. I think you start to see a bigger mix shift to consignment once we start 2024 and moving the European business more to consignment.
Okay. Maybe let's spend a minute on the, on the European business Remix. After acquiring the business, you made a lot of progress and improvements there in 2022. Maybe talk about what you've improved since the acquisition, and kind of what's the strategy go forward.
Yeah, I mean, it was a business I tracked for probably five years before we made the acquisition, so I was close to the founders. I understood kind of like how they were operating the business. They were managing to achieve what they were doing, like, despite having, like, such a rudimentary understanding of, like, how you could apply, like, software and analytics, right? I mean, this was a company doing $35 million a year without really an email function. Just, like, let that, like, sink in, right? You're like, "What?" Right? They didn't have a single person doing retention. They didn't have a single data scientist.
I looked at that, and I was like, "Well, we know a lot about that." We spent the last year bringing data around pricing and promotions, email marketing, retention, when do you hit a customer with a coupon or not? All kinds of, I mean, basic stuff, but that stuff that we had spent a bunch of years sort of cracking. We did a lot of that last year. We started to begin this consignment transition. You know, most of their product is direct, as Sean mentioned. We're sort of beginning that consignment transition. We expect it'll take a few years. The business has done well. I mean, in a constant currency basis, you know, really exceeded our expectations.
obviously, the dollar moved against them, but I'm quite bullish on that business and Europe in general.
Okay. Maybe let's stay on data. I have to ask the obligatory AI question that comes up in every fireside over the last four days. To what extent do you use AI in the business today, and where do you think you see the greatest opportunity as large language models and others gain traction over the next couple of years?
I mean, we're using, like, intelligent features in lots of stuff we do. You know, Scott Belsky, who was, like, the founder of Behance and now runs, like, a big part of Adobe, he's like, asked a bunch of people, like, "Hey, have you ever used AI on Adobe products?" Like, only half of the audience, like, "Have you ever used the autocorrect function?" Everybody's like, "Yes." He's like, "Well, you're using artificial intelligence." Like, it's part of so much that we do. I, you know, I don't think we brand it internally as AI, although maybe we should start. I think we're getting smarter and smarter about how to use our very large data models to, like, improve how we price and how we promote and what we mark down and how we segment our customers.
A lot of that is feeding into personalization.
Okay. I don't know if there's any questions in the audience. If not, I have a couple more.
They want you to use the mic, yeah.
No concerns around differentiated supply. Maybe some thoughts on buyer demand. Like, what % of accepted inventory is unsold after 90 days? Like, how has that ratio trended over the last few quarters?
What percent of accepted inventory? I you know, yeah, I don't know if we don't disclose it publicly, but, like, the turns have been fine, and I think. The way to think about that is that we, it's more that we manage the inbound. Like, unlike a traditional retailer who's got like, tons of stuff kind of coming, and they're sort of forced to kind of, like, push it through the system, if we see in our business that, like, hey, demand for swimwear, demand for athleisure is declining, right? What we do is we then stop accepting as much athleisure or as much swimwear. We can hit our turns target more by stopping, like, the inbound piece, and I think that's, again, power of the marketplace and not, like, a traditional.
Is our ability to control kind of both sides. Remember that we're using data constantly, where... Let's imagine there's a lululemon item that comes in, and we expect that item to sell in 12 days, and it turns out that item sits around for 24 days. Like, the data system says, "Oh, there's something about, like, this category at this moment in time that's not turning as fast." The next lululemon item we get in, it changes the price. It can change the payout. It's a constant, might be an AI learning system, right? That's helping us, like, hit those turns, so...
Any others? I guess maybe I'll wrap with each of you with a two-parter maybe. One, what are you most excited about heading into 2023? Two, what you think is most underappreciated or misunderstood about the business by investors?
Oh, I thought you were gonna ask me about stock-based comp. I wanted to talk about stock-based comp, Lauren. What am I most excited about? I mean, as I said on the earnings call, like, it just feels great to be in a position where, like, there's a new normal, and, like, we kinda understand the field of play, and that was really hard in the back half of last year because you just... Like all of us, you're just like, "Is it gonna keep getting where is, like, stasis?" Right?
I think it's really nice to be back to being like, "Okay, I know the rules of the game that we're playing right now, and I can now make changes." I'm really excited about all the work the team is doing now that we know the new normal. I'm very bullish about a bunch of these initiatives. There's a bunch of stuff we haven't, like, talked about publicly yet, that we'll talk about, you know, next quarter. I think 2023 is a good setup for resale, and I think we're gonna be able to play some offense this year.
Great. Anything to add?
I have two in my head. He takes them both, of course. I do think the impact of all the things that we've done over the last two years, above and beyond just the strategic initiatives, they all have been a little muted because of the environment's been tough.
Mm-hmm.
I think as you start to get to the new normal and then get into 2024 and say that's a newer normal, a better normal, I think the impact of all those things we've done are really gonna start to, you know, inflect and make the financials that much better. I'm gonna focus on the financials.
Yeah.
Excellent. All right. Thank you guys so much for joining us.
Yeah.
thanks everyone for being here.
Thank you.
Thank you.