Well, so good morning, everyone. Thanks for joining us today. My name is Alexandra Steiger, and I'm part of the U.S. Internet Research Team here at Goldman Sachs. We're very pleased to have James Reinhart, founder and CEO of ThredUp, and Sean Sobers, CFO of ThredUp, with us today. Good to see you again, and welcome to our conference.
Thanks.
Thank you.
Thanks for having us.
So let me kick it off with you, James. You founded ThredUp almost 15 years ago, and the company has grown significantly since then. You processed over 170 million items from thousands of brands over your history, and you've reached 1.7 million buyers last year. Starting high level, for those that are less familiar with the story, can you introduce the audience to ThredUp and the scale that the company has achieved over the past few years?
Sure. Yeah, so I mean, the founding story for ThredUp is, you know, I was in business school at the time, and I had a closet full of clothes that I wasn't gonna wear, and I went to take them to a local consignment store, and this was 2009, and they said, "We don't take these, we just take luxury." And at the moment, like, this was a J.Crew sweater. I remember it so vividly, the J.Crew sweater. It was a Brooks Brothers coat, and I said, "But this stuff can't be worth zero." And so the founding insight was that there really was this market failure in secondhand, because at the time, really all you had was eBay and Craigslist.
And so at the time, there weren't great consumer options, and then this was a moment when the iPhone had just been invented. People were, you know, taking Ubers, they were staying in Airbnbs, you were streaming on Spotify—like, there were all these consumer experiences that were being unlocked, all these new ways that consumers were engaging, and I thought that the secondhand market that was sort of trapped in this old dusty, you know, Goodwill experience, like, there had to be a better way. And so the business got started with the idea to sort of reinvent secondhand for the modern consumer, and we've been on that journey ever since. And I think we've done really three things that have been critical to the story.
One is we really understand ourselves as a logistics and infrastructure company, and so we run distribution centers around the country. The core principle being that in order to unlock the modern resale economy, you need to make it really easy for consumers to get rid of the things that they no longer wear. And so we invented this Clean Out Kit, which you know holds like a laundry basket worth of stuff, and you fill it with all the things you're no longer wearing and send it to us, and we take care of it. So we had to build infrastructure to do that. The second piece is we had to build an entire data science and algorithmic approach to how do you value secondhand clothing?
Because what's unique about apparel relative to other used categories is there are no serial numbers on anything. So it's like you don't just scan something and then pull up, like, the... You actually have to create a data set. So the second thing we did was we built this, like, really important data set that has now processed 170 million items. And then the third piece is we had to build a marketplace-
Mm-hmm.
That connects buyers and sellers. And Sean and I often talk about the fact that each one of those is hard. You know, building an entirely new supply chain and infrastructure, distribution centers, that's hard. The data science, and algorithms, and pricing, and market arbitrage is really hard, and then a marketplace on top of that is really hard. And I think the value that ThredUp has created is because we do all three. So that's kind of the beginning.
Leaving aside macro for a moment, because I do want to focus on that later in our conversation, the resale category remains obviously an area of growth within the overall e-commerce landscape.
Yeah.
Can you talk about the opportunity ahead for resale as a category? What is driving, you know, growth for the category, and how is ThredUp positioned to against that opportunity?
Yeah, I mean, resale is the fastest growing sector in apparel. You know, it is growing, you know, high teens, you know, low twenties per year. And, you know, traditional retail is maybe growing like a couple points. And so I think what's driving that primarily is, you know, young people, you know, consumers, Millennials, Gen Z, that I think have a newfound appreciation for secondhand. I think, you know, our generation, I think secondhand was still a little bit stigmatized, and I think, for people in their twenties now, it's just actually the thing you do. And when you double-click on the data around, okay, well, what's going to drive that growth into the future? What you see is two things.
One is people who currently buy or sell secondhand, when you ask them, "Are you gonna do more or less of that in the future?" Overwhelmingly, they say more, right? Literally, nobody says, "The secondhand thing isn't working out for me, I'm gonna do less." Like, everybody says more. And then there's a whole cohort of people for whom you say, "Have you bought or sold secondhand?" And they say, "Not yet." And you ask them, "Will you in the future?" And overwhelmingly they say, "Yes." And so when you have survey data out like that, two things happen. One is your sort of eyes sort of get big because you're like, Man, the number of people who are coming into this category is profound. And then the second piece is just then it's, it's really hard to then estimate that.
We feel very strongly, like, the secondhand market is big and only gonna get bigger, and that it's not a fad, right? It is a true structural shift in how people shop, and I think that's pretty exciting.
Maybe one for you, Sean. So the company has gone through significant financial progress in the recent quarters with narrowing losses, reaccelerating growth rates. Can you talk about the evolution of the company's financial profile since the IPO in 2021, and help frame investors how we should think about, you know, growth and profitability from here?
Okay. Yeah, no, I think it's interesting because when we went public, we were only in the U.S.
Mm-hmm.
We were transitioning to a consignment-based business, but probably, I don't know, 60% of our way there then. And so from then till now, we acquired a company in Europe.
... we transitioned most of our business in the U.S. to consignment, although we're still kind of closing out a few of those things that'll wrap up this year. And that in itself has driven, you know, better financial statements across the board, including the automation and the efficiency that we've done, but we've improved gross margin in the U.S. to something like 76.4% last quarter, record all-time high. And we still have a ways, you know, a little bit of ways to go on the consignment side, which will be a little bit of a tailwind. And then you bring in Europe, and Europe's a 100% owned business, which is a structurally different gross margin profile, but they've started their journey to consignment transition as well.
So that really essentially started last quarter, and it'll take some time, but that business will migrate over to consignment, which will improve gross margins, contribution margin, but that will take something around three years over that time. I think the benefits of margin expansion, more than just consignment, is gonna be, you know, automation, efficiency, continuing what we've done in the U.S. for a long period of time, but just getting better at it, and then taking that same level of effort, that we do in the U.S. and bringing it to Europe. There's not all the same opportunities in Europe, just 'cause the labor structure is so much, so much lower cost, but there's a lot of room for data and automation and things like that we can do there, so.
Macro obviously remains pretty challenging, especially for the lower income budget shopper, and you highlighted that-
Mm-hmm
In the last few earnings calls. Can you maybe expand on the trends you are seeing on your platform, and how this influenced your decision to target more affluent shoppers?
Yeah, I mean, I think what we've seen over the past six quarters is, yes, that budget shopper, you know, who maybe makes, you know, less than $60,000 a year. I mean, apparel is a discretionary category, like, definitionally. And so I think those customers are often particularly strained, you know, across their personal balance sheet. And so you just see less of them, you know, in market, you know, purchasing. And, you know, that was a big part of our business, and I think sometimes it's lost on people that, you know, when you have a, you know, a third of your customers that identify like that, and then they sort of, you know, step back, that's a tough thing for a business.
And I think we've done, like, a pretty remarkable job of evolving away from being so concentrated on that customer, you know, really quickly, to being able to target a slightly more affluent customer. And I say slightly more affluent because we're talking about customers for whom their household average household income is, say, $90,000, right? So it's... This is by no means, you know, a wealthy consumer. I often characterize it as the distinction between somebody who, you know, might shop at Old Navy, right? Versus somebody who might shop at J.Crew, right? Like, that's what we're talking about.
And so the implications for us on the platform is, you know, a different targeting strategy for supply because that shopper wants a different suite of products relative to the budget shopper. Different pricing strategy, different discounting strategy, you know, different customer acquisition approach around the types of ads and the types of messaging. And the team, I give them just an enormous amount of credit for being able to shift that so effectively.
I think what we're watching for now as we move, you know, over the next year is we do still have incredible product for the budget shopper, and so I think as that environment for the budget shopper improves, you know, over the next, you know, pick your time horizon, maybe it's a year, maybe it's two years, I think you'll see that shopper come back to our platform, you know, again.
Mm-hmm.
But we will have built this new base of customers, that I think are driving kind of the margin expansion and the revenue that we've seen.
Maybe let me follow up here and ask you a question that we're asking all of our companies here at this conference. You know, how do you expect the health of the consumer, you know, into the second half of this year and into 2024? Do you expect the consumer to improve, to kind of like stay the same or even deteriorate from here?
Yeah, I don't know if I see, like, a fundamental, like, deterioration from here, but like... But I think, like, people are, they're just getting tighter with their dollar, and I think-
Mm-hmm
... they're looking, you know, in especially in discretionary categories, it's just that people are just buying on a deal, and I think you see it whether it's travel, whether you see it in their leisure activities. And so, you know, I think in the apparel category, you know, if it's not on sale, like, it's probably not moving, and I think that's a lot of what you're gonna see over the next six to 12 months. And I think the implication is, can you get customers to pay, pay more later, right?
Mm-hmm.
And I think, the difference for us is, we're not a brand.
Mm-hmm.
So, like, there is no erosion of brand value by the fact that we are selling other people's products on sale. We're just responding to the macro environment. And so I think we can then pass along, like, you know, deals and discounting, I think at a lower risk than say, you know, pick your brand, right, who... Where everything is 40% off. And so I think it'll be interesting to watch over the next, you know, 12-18 months as brands try and recapture some of that margin and try and be less promotional, and I think you're gonna see a wedge opportunity for us where we can still be an incredible deal-
Mm-hmm
... but in a different way.
So you already talked about promotion. That was actually my next question.
Yeah.
So, how do you actually expect kind of like the competitive intensity in apparel in general to evolve from here? And maybe, Sean, for you, like, can you maybe frame the impact of the higher promotional environment on the business from, like, a financial perspective?
I mean, I don't see, you know, I don't see a path for.... I think there are very few brands that can maintain their pricing strategy today, right, and of selling stuff more at full price. I just think it's really hard. So I just think you're gonna continue to see the world be more promotional. And then the question is, you know, how does a business like ours, or any business, sort of, rebuild the P&L with sort of the promotion in mind? And I think the difference for us relative to a company that, say, makes things, is that we can really rapidly change the price we pay for the goods that are coming onto the platform, because we have a large portion of sellers. And so we can flex some of those, those payouts, right?
Which is sort of how we think about our cost of goods, to better reflect the pricing, dynamics. So I think as a marketplace, we're just a little bit more immune to that. I don't think we're totally immune, right?
Mm-hmm.
There is a threshold, but I think we're better positioned, you know, relative to others, which is... If you look at our guidance, we're talking about, like, the back half of the year, like, you know, strong double-digit growth, strong double-digit margin expansion, which we feel good about.
Yeah, no, I think the natural hedge on how we do payouts, 'cause it happens after the item sells, so if it's more promotionally discounted, there's a little bit of hedge there 'cause we pay out less.
Yeah.
The part that probably offsets that to some degree is processing is processing, right?
Mm-hmm.
Whether it's a $20 item or $10 item. So that's-
Yeah.
There's definitely a headwind to overall gross margin or contribution margin, depending on what it is.
Great. Let's pivot to some business initiatives you introduced over the past couple of months. James, you talked about the decision to introduce fees for cleanout kits for sellers. So can you maybe talk about, you know, the seller response and maybe, Sean, again, can you maybe walk us through, like, the financial implications here?
Yeah. I mean, as a founder, it's so funny, you have these things that you've convinced yourself you could never do, which is, we could never charge people, you know, to pick up the bags at their house or to order a bag because they won't send it to us. And that was, like, a bit of a sacred cow. And then, over the past year, what we've learned is that if you charge people a little bit-
Mm-hmm.
And so the way this works is, if you request a bag from ThredUp, or you send us a box of stuff, you know, we'll charge you anywhere from, you know, $10-$20. You know, there's some, like, testing that's going on there. Once we process your goods, we'll charge you essentially the logistics cost to receive the box in. And I never thought we could do that, but we can, and, like, what we've learned is that the customer would much rather pay us $10 for this and be always able to send stuff to ThredUp-
Mm-hmm
... than be caught in a queue of people waiting for their bags to be processed, which is, like, what has happened over the last couple of years, where there was so much demand for our cleanout service that we couldn't keep up. So by introducing just a small fee, you enable, actually, everybody to participate, but then you also weed out people who send you not great stuff. Because there's the psychology of just paying $10 is enough for people to be like, "Meh, maybe I won't send them, like, you know, my stuff that's not any good." And so you have the benefit of, like, you're getting better sellers, and you're getting the right, like, mix by discouraging bad sellers.
And then the third thing, which I really, you know, in hindsight, like, you know, why, why didn't we see this, is you're getting a lot more stuff coming in the bag or in the box, 'cause once we're gonna charge you $10, you might as well stuff all the stuff in there. And so the net effect is, like, immensely profitable and great, right? And I just joke as a founder because we should have done it, like, five years ago. Right? So anyway, that's how it's working, and then me and Sean can talk about how it-
It probably also helps you to kind of, like, target the more affluent.
Yeah, I mean, it's just, like, it's just incremental.
Yeah.
It's like, it's not even necessarily the targeting. It's just, there's a self-selection-
Mm-hmm. Yeah
... right, for the type of seller who kind of comes onto the platform. And I think, and I think then, the other, like, the last piece, and then, and Sean can talk about it, is. And then if we say to you, "Hey, we're gonna charge you $10," and then you send us an incredible bag of stuff, we can then go and waive the $10 fee and make you feel really good, like, "Thank you, oh, thank you for sending us such amazing stuff. We've waived your $10 fee." And then you feel even better about it, right?
Mm-hmm.
So those, like, four pieces have worked really well.
I mean, from the financial side, it's kind of a win-win scenario, 'cause for the people who are paying, that's just straight revenue. And then, the people are sending in better goods, so we're getting just better, higher quality. We're selling items faster, better margin, more items per bag-
Yeah
... so more cost spread out. So, like, it all works, but it is really important, and usually I'm, I want to talk to your team when I say this part, it's like, but not everybody ends up paying for the bag. So don't just take, like, total number of suppliers-
Yeah
... 13 x, $20, whatever it is, because we do go in and waive it for the best suppliers. Because the most important thing for us is not the fee we charge, it's what we get from-
Yeah
... the supplier. If it's amazing and it sells in five days, it's great. Because guess what? Sells in five days, we sold it, you know, with low discount, good margin, great turns and usage of the capital assets that we have, and so it all becomes kind of a better thing across the board because of this.
You also launched features to improve the flow of product returns, including the Keep for Credit feature-
Mm-hmm
... that contributed to return rates declining by 500 basis points in the U.S. Can you maybe expand on those initiatives and on the benefits you're seeing on the Keep for Credit feature?
Yeah, I mean, what we found with Keep for Credit is, we, we know returns are, like, a problem, you know, in, in the apparel industry.
Mm-hmm.
Some of it's because things, like, generally are like don't fit and the customers don't like them, and sometimes they're bad actors, right? In secondhand, you have the unique challenge of, you know, you have fit over, like, you know, five to seven years, and how brands are sort of changing their size profiles, and so it's a little trickier. And we've always had pretty low return rates, but we had this initiative where we realized, you know, if a customer's returning one item to us, and that item is $20, $10 is gonna get eaten up in the logistics fee.
Mm-hmm.
We're in the business of trying to, you know, have less product moving around, less carbon emissions... more circularity. So this initiative says to the customer, and we use a bunch of data science that's in the background. You go to click return, and we say, "Hey, Xandra, how about you- how about we let you keep the item, and we'll give you x% back in credit for you to shop on ThredUp?" The psychology of that for, for you as the consumer, you're like, "That's actually a pretty good deal. Like, maybe this item didn't fit, but if I'm gonna get $20 back for it, I could take it and get it altered," right?
And, or I could get it dry cleaned to get, you know, this, like, persnickety little stain right out of it." And so we actually think it's been a great thing for the customer, and then we're getting less items back that we have to ship, process, re-ingest, re-reput online. And so, so it's been, it's been really effective, and the P&L represents that.
Yeah, it's great across the board on the P&L.
More broadly, you've also introduced other, you know, interesting product changes and improvements to, like, the customer experience in the recent months. Anything you wanna highlight, you know, that stood out to you in terms of really, you know, changing the customer experience?
I mean, I think the work that we've done on Sculpting is probably the third piece. So we talked about the shipping fees, and we talked about KFC, keep for credit. The sculpting piece is just on the margin. I think we're paying closer attention to the seasonality and demand signals of, like, what we want. And so we used to be willing to accept, you know, anything that would sell at some point in, you know, in a sort of a time horizon we thought made sense based on the price of the item. And so for an example, like, right now, you know, if you... You know, three years, three years ago, if you would send ThredUp a high-end tank top, right? We'd take it right now, even though we're moving into fall and winter.
I think now we're being a little bit more picky around-
Mm-hmm.
We don't really want that right now because we have to: one, it's not good for you.
Mm-hmm.
'Cause if we accept it, we're gonna have to sell it at a lower price because there's not a big enough demand curve, you know, in the fall for that. And two, like, maybe it won't sell at the rate that we want.
Mm-hmm.
And so we're really trying to educate the customer around send us stuff that are, that's seasonally appropriate. And we're using sculpting, where we're just sort of rejecting the incremental item that maybe we would have accepted a few years ago.
A topic that is obviously, you know, front and center for many investors these days is AI and GenAI. So I do, you know, wanna ask you, like, how you're leveraging AI and, you know, where do you see an opportunity to deploy AI within your business?
In our distribution centers, there's enormous opportunity for AI. We've been using you know AI technology to you know process imagery and you know look at items for years. I think where we're evolving even more now is we've got technology that allows us to take any item. So, you know, take that sweater, right? And when that item is on a carousel, and it's moving, like, through the distribution center, we have cameras that will take a picture of that in a 6-camera array, and then in real-time, shoot it to a database that says: Have we ever seen this item before? And if we have, it will report back all of the data, photograph, everything about the item, and then we can essentially skip all the downstream processing of the item.
And that is an AI model that kind of sits in the background. And so we've been doing stuff like that that's getting better and better. So that's on the distribution side, and then the other piece, I think, is on the front end product side, because we don't have product descriptions and things like that, the way a more traditional retailer might, we're using AI to provide more lifestyle photography, provide, you know, incremental product copy that, like, helps the customer sort of visualize the item, and that's been effective.
Just to add on the photo capture, the first part that James was talking about, is what can be so amazing about that is if you're able to take an item out of the bag or the box, take the photo, then have the AI work and match it, it would mean you know all the attributes, you know... You actually have professional pictures that we already took on the item, and you skip the inbound process dollars in a significant form.
Yeah.
So this is being tested in the Atlanta facility now, but even as we do it, we're thinking like, "Oh, we've got to keep pulling it forward, like, right out of the box or the bag is, like, would be the most important, 'cause then there's nobody doing any data entry or anything to pull that information." So it'd be a huge opportunity for cost savings.
Great. Let's pivot to Remix for a moment. So you acquired Remix in 2021, which has led the way for your European expansion. You've also seen a lot of positive momentum in recent quarters. Can you maybe talk about the business, how it evolved since the acquisition, and some of the factors that might driving the momentum going forward?
Yeah. I mean, we bought the business in the fall of 2021. It was a business that was similar to ThredUp in many ways. It was, it was secondhand. It was, you know, value messaging. It had operations that were similar in sort of theory to, to ours. And we've been, like, really impressed. It's a great team. I mean, their distribution, you sort of walk into the facility there, and, like, all you do is light up with things that you can do better. And so when I saw a business that was- that had raised just a limited amount of capital, that had built a real business, and that was operating the way ThredUp was operating, like, a decade ago, we saw just huge, huge potential.
So we bought the business in the fall of 2021, and we've spent the past two years just giving them the ThredUp playbook, right? So we moved them out of their, you know, sort of janky, you know, facilities into, like, a new modern facility. We brought in all the technology around photo processing and pricing and discounting and all that stuff. So, yeah, the business has been doing really, really well, and I think as Sean mentioned, the consignment mix shift is the next big one. But they have, like, some huge advantages. I mean, they operate in Sofia, Bulgaria, which is an incredible labor market.
They can serve most of Central and Eastern Europe effectively from that market, and we think it's a great, like, you know, beachhead for the rest of Europe.
Sean, I don't know if you want to follow up just on, like, the financial implications as you're kind of, like, going through that transition from, or to consignment.
Yeah, yeah. No, I think that that business, since it's in kind of an own purchased upfront business, the accounting's different, and you're, you're guessing at what you're going to sell items for, so you do your best at that. So the margins on that business are, like, in the thirties. I think we've talked about that. But with, with the transition to consignment, there's going to be a tailwind, not only that you get the accounting treatment, which is helpful, of course, but you actually are going to get to know what you sell it for, so you're-- what you're selling is going to be improved. I think the other side of it is, is what James touched on, is just the level of expertise that ThredUp U.S. can bring to Europe is huge, right? So whether it's pricing or some of the automation...
I mean, he talked about moving out of their dingy facilities, is what he said. It was... They had a distribution center, but it wasn't one center. It was, like, four different buildings. There was a car involved, and we literally talk about, like, steps to the item, seconds process. There was, like, a vehicle involved in this process. So getting that done made things significantly different. And they were a business that was capital constrained, too, so they really couldn't even try to lean in when things were good. They were just like, they had to generate a dollar, you know, every time they spent a dollar. So it was a very unique profile. And so I think that's how we've been able to really accelerate that growth curve, giving them a little bit of opportunity to spend and invest. Yeah.
Great. So you also operate a business called Resale-as-a-Service, or RaaS, where you partner with brands to power their resale efforts. Can you just quickly walk the audience through what RaaS is and how it benefits the overall ThredUp ecosystem?
Yeah. So, I mean, we've built these three assets around infrastructure, operations, pricing and data, marketplace. Over the last few years, we started to realize that the brands would really be able to benefit from all of the technology that we've built. And then I have this thesis that over time, brands will want to be part of the resale ecosystem, because ultimately, they all have pressure to be more sustainable and more circular, and that pressure will come from investors, right? It'll come from regulators, and it'll come from customers who want to see the brands that they love, you know, be more sustainable.
So over the past couple of years, we've started to build this platform where we power both the take-back program, so you can go into, you know, dozens of brands now, Athleta, Reformation, Kate Spade, J.Crew, Madewell, Tommy Hilfiger, the list goes on, right?
25 more.
Yeah, and 25 more. I know. And you can pick up a co-branded Clean Out Kit, like, in their store.
Mm-hmm.
Sometimes you'll get it in an online order, and then you can send that back to ThredUp, the same way you would send a Clean Out Kit back to us. And the key difference is that instead of getting credit at ThredUp, you get credit at the brand, and the brand would actually give you more credit to shop for the brand. And so brands love this because it's essentially like found money, right, from their consumer. So that's the first part, which is an integrated take back model, which is doing very well. And we were public about just how big that has gotten. It's, you know, close to half a million Clean Out Kits, you know, coming through brands last year. So a significant, like, penetration there.
And then the other piece is that we are now taking our technology and powering branded resale sites. And so if you go to jcrew.com, you can click on a little Pre-Loved tab and move to a site that looks very much on brand for J.Crew, and it's all their secondhand product. And what's important about that is that that product that sits on J.Crew or sits on Kate Spade or Madewell or Athleta or the other 25 is cross-listed on ThredUp, and so there's no difference for us in the back end. We process the products, we put them online on ThredUp.com, and then we cross-list them in real time on these brand sites. And so it just provides incremental demand, incremental awareness. And so when you zoom out, the value of RaaS is...
Oh, and then we charge brands, like, a fee for the privilege of us doing all this. And so when you zoom out, like, the RaaS business improves our supply advantage. You know, it's another way to get great, great bags and great cleanout kits, drives incremental demand on the same fixed asset base, and drives, you know, service, like, SaaS-like fees. And so we think it's a good, like, long-term fit for the business. And, you know, we really think about ourselves as the backbone of resale on the internet, and I think that's how brands are approaching it.
Great. I don't know if you want to add something, because we're going through a shift to consignment here as well.
Yeah, yeah. No, this is actually the last piece of the U.S. business that purchases upfront, and we're literally down to one partner that does purchase upfront. That's going to change to consignment. So that'll be the last piece in the U.S., and it'll be just a very small piece that will relate to returns of stuff that we own, but I think you'll get that tailwind. But I do think that the... People often ask us, like, "So what's the revenue stream from this?" The most important thing is essentially not the fee that they pay us, which we do like that, of course, but it's the fact that you have one item that's listed in four different locations being able to be sold, supported by an infrastructure behind the scenes that's exactly the same.
We do nothing different for when we sell, you know, through Madewell or we sell through ThredUp. It's the same item. Actually, the processor doesn't even know.
Mm-hmm.
We have dual listed or trial listed or whatever it is. So I think that's, like, the real advantage of getting, RaaS up and running. It's just a huge demand channel for us additionally.
And I think you just have to, like, you have to take the long view on this, because every brand, like, is going to, like, go at some methodical pace, right? Of, like, how they're going to, like, approach resale. Like, it's not like one brand is going to decide overnight... we wanna, we want 10, we want 20% of our business to be, like, that's not how it works. But, you know, if each one of those businesses grows 3% or 4% a year, you know, you wake up 10 years, and all of a sudden you have, you know, 100 or 150 or 200 brands on the platform that are all growing at that rate. Like, the numbers get pretty big. And so I think people tend to, like, underestimate that, just compounding growth over, say, a decade.
And then, you know, startup is the only place where that can exist, right? Because the switching costs, right, become really, really hard when where your provider at that scale.
Looking more near term, and that's probably, you know, for you, Sean, you laid out a target to reach Adjusted EBITDA breakeven in Q4 of this year. Can you maybe talk about the building blocks of margin progression into the second half, and then also into, into next year?
Yeah. So I think it's... I mean, it's essentially, you know, improving unit economics. So just we're going into bigger facilities, we're more automated, there's less cost associated with it. ASPs have come up, so all of that, and then it's volume. And it sounds kind of funny because it's the simple economics on that piece, but it's just the more we're able to process at those better unit economics and continue to improve that business, from a unit economics perspective, drives us toward that break even. And then you have the transition of consignment, you have the transition of consignment in, in Europe, and all that just kind of gets this point where, for us, you know, break even EBITDA is just a way point, right? It's on the way to free cash flow generation, cash flow generation, and expanding the EBITDA margins and profitability too.
So it doesn't just stop there, just the one thing we've talked about a lot recently.
And as the founder, I'm always balancing the, like, pursuit of profits with the pursuit of growth, right? And like, you know, you ultimately wanna have both, and I think where we're trying to find that right balance is, you know, what's the right sustainable growth rate, you know, that's, you know, high double digits, right? And then, you know, how does that flow through to free cash flow generation, and have some nice... We have that debate all the time.
As you're moving towards adjusted EBITDA breakeven, how should we think about, you know, capital allocation?
Yeah.
You briefly touched on that. And kind of like, to your question, kind of like how you balance, you know, growth versus those reinvestment into the business, either on, like, the product side or, you know, international expansion, and kind of like all the product initiatives you've laid out.
Yeah, I mean, I think we definitely wanna, like, show investors, hey, the business can generate free cash flow. And then I think we wanna find the balance of, you know, we obviously want to expand, you know, margins over time, but we also think the category is emergent, and we don't wanna miss opportunities to continue to be, you know, a dominant force in that. And so I think we're gonna have the right balance, which is, you know, you should continue to see margin expansion, but, you know, we think a lot about the Rule of Forty, which has become kind of shorthand for some of this stuff.
You know, that's sort of a guiding light for us of being a company that, you know, on that metric, really stands out, and I think that's how we're thinking about it.
Great. Last minute, I do wanna ask you about your outside-the-box prediction for-
Uh-oh
... the resale category and then also ThredUp.
Um-
For, let's say, next year, and then let's take a also more longer term approach.
Yeah, I mean, I think there's a lot of like competition on the RaaS side right now. I think there's a number of startups that have come in to try and build resale platforms for brands, and I think most of those companies are going to die.
Mm-hmm.
And so I think one thing you'll probably see is real consolidation around resale enablement-
Mm-hmm
... over the next couple years, and I think ThredUp will be a big beneficiary of that. And then I think you're gonna continue to see you know, with a challenged consumer, you know, resale being like a category winner relative to the rest of retail. And so we feel very good about our ability to sort of outperform, like, the broader category. But you know, we'll make that happen.
Great. Well, thank you so much for joining us today.
Thanks for having us.
Thank you.
Thanks.