Good afternoon, ladies and gentlemen. And welcome to the thredUp Q4 2022 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, March 6, 2023. I would now like to turn the call over to Lauren Frasch, Head of Investor Relations. Please go ahead.

Good afternoon. And thank you for joining us on today’s conference call to discuss thredup’s fourth quarter and full year 2022 financial results. With me are James Reinhart, thredUp’s CEO and Co-Founder; and Sean Sobers, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.thredup.com. This call is being webcast on our IR website and a replay of this call will be available on the site shortly. Before we begin, I’d like to remind you that we will make forward-looking statements during the course of this call, including, but not limited to, statements regarding our earnings guidance for the first fiscal quarter and full year of 2023, future financial performance, market demand, growth, prospects, business strategies and plans, our ability to attract new buyers and the effects of inflation, increased interest rates, changing consumer habits and general global economic uncertainty. These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties, and our actual results could differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Words such as anticipate, believe, estimate and expect, as well as similar expressions are intended to identify forward-looking statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in our SEC filings, earnings press release and supplemental information posted on our IR website. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. In addition, during the call, we will present certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from GAAP measures. You can find additional disclosures regarding these non-GAAP measures, including reconciliations and comparable GAAP measures in our earnings release and supplemental information posted on our IR website. Now I’d like to turn the call over to James Reinhart.

Good afternoon, everyone. I’m James Reinhart, CEO and Co-Founder of thredUP. Thank you for joining thredUP’s fourth quarter 2022 and fiscal year 2022 earnings call. As we head into a new fiscal year, we’re pleased to share thredUP’s financial results and key business highlights from our fourth quarter. In addition to the financial results, we’ll also share our commentary on the consumer environment, strategic focus areas of the company and our continued progress towards profitability. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our fourth quarter 2022 and fiscal year 2022 financials in more detail and to provide our outlook for the first quarter and fiscal year 2023. We’ll close out today’s call with a question-and-answer session. Let me start with our Q4 results. We closed out 2022 with a strong quarter, generating revenue of $71 million, excluding a $2 million catch-up benefit related to annualized gift card breakage, which Sean will address in further detail later in the call, we achieved $69 million in quarterly revenue, far exceeding our own internal expectations. Our gross margins were 63%, 300 points lower than a year ago due to the strong growth of our lower margin European business Remix and the fact that Remix is becoming a larger proportion of our overall business. Year-over-year, our gross margins in the U.S. were actually up slightly at 71%. Active buyers and orders in Q4 reached $1.7 million and $1.5 million, respectively, both declining slightly year-over-year, as we reduced marketing spend and what we expected would be a highly promotional fourth quarter. We also continue to make progress towards our profitability goals. Q4 adjusted EBITDA improved by 800 basis points or $5 million quarter-over-quarter. Even without the $2 million annualized gift card benefit, adjusted EBITDA improved 470…

Thanks, James. And again, thanks everyone for joining us on our fourth quarter and full year 2022 earnings call. I’ll begin with an overview of our results and follow-up with guidance for the first quarter and full year. I will discuss non-GAAP results throughout my remarks. Our GAAP financials and a reconciliation between GAAP and non-GAAP are found in our earnings release, supplemental financials and our upcoming 10-K filing. As a reminder, our results now include our Europe business for one full year after the 2021 acquisition. We are very proud of our Q4 results. For the fourth quarter of 2022, revenue totaled $71.3 million, a decrease of 2% year-over-year. This includes a catch-up benefit of $2.1 million related to gift card breakage and we expect an immaterial benefit from this going forward. Excluding this, we delivered fourth quarter revenue of $69.2 million, a 5% decline, still exceeding the high end of our guidance. Consignment revenue was down 16% year-over-year, while product revenue grew 20%. The decline in consignment revenue and outsized growth in product revenue is primarily attributable to a mix shift. This is driven by an outstanding performance from our European business during their seasonally strongest quarter and the relative growth of our RaaS supply. Currently, the majority of revenue from both RaaS and our European business falls under product revenue, though we are continuing to transition each of these businesses towards consignment over time. On top of a difficult macro environment in which our budget customers remain on the sidelines, we also pulled back on marketing spend in Q4 as the highly competitive environment led to a decline in marketing efficiency. These factors resulted in a 2% decrease in active buyers to $1.7 million for the trailing 12 months. We ended the fourth quarter with 1.5 million…

Thank you. [Operator Instructions] Your first question comes from Trevor Young with Barclays. Please go ahead.

Good results. When you guys gave guide around mid-November, obviously, halfway through the quarter, it seemed like you’ve been a bit more cautious on the outlook at that point and the guide, now coming in well ahead of that even excluding the gift card impact. Was that a result of December picking up more than you expected or maybe not seeing a deterioration in further trend? That’s my first question.

Yeah. Hey, Trevor. It’s James. Yeah. I mean I think October was reasonably strong and then I think November and December we expect it to be a little softer than they were. So I would say that the business performed better than we expected. I don’t think it was that December was amazing by any stretch. I also think a number of the things that we started to work on across kind of the portfolio of products on the front end, just started to work a little better and I think you can see in our guidance for Q1, like, it’s reflective of we think things are working better and so that’s sort of the approach.

Got it. That makes sense. And then on the inventory coming out of 4Q, I think, it was up kind of mid-high-teens Q-on-Q. Is that where you expect it to be and do you feel good about the kind of the quality of inventory as you head into 2023?

Yeah. No. I think that’s about where we expect it to be. I think keep in mind that the business that -- the inventory shows up on the balance sheet is the owned inventory only. So that’s going to be a small portion of what’s related to the U.S. and probably over 50% of it relates to the European business.

Got it. Thank you, both.

Your next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

This is Kate on for it. I’m wondering if you could just elaborate a bit more on the stabilization that you called out with your budget shopper? Just anything that you’re seeing from like a behavioral or a category perspective that you’re finding encouraging? And then, James, you mentioned it in your remarks, you guys are just getting sharper at appealing to that customer. Just any key learnings kind of coming out of the holiday that you were particularly pleased with that you’re even more encouraged by looking towards 2023?

Yeah. Sure. Yeah. Kate, I mean, I would characterize it more as the transition of budget shoppers who were maybe not in market is often right or who are on the sidelines, as that starts to stabilize, you just have better data both quantitative and qualitative around what that shopper is looking for. So then we can start to bend the mix, the promotions, the marketing messages, everything can sort of work a little bit better once you really understand the context that you’re living in. And so I think as we move through 2022, we just got sharper around that type of messaging and the storytelling we were doing to those budget shoppers. And I think a lot of that work in Q4 is really informing how we’re moving into 2023. And so I think in a world where the environment is very competitive and consumers are feeling pinched, you can just get sharper around what you’re discounting, how you’re discounting, the types of messages you’re putting in market that I think really allow that shopper to relate to the product offering. And so like any management team, I think, now that we understand where we are and what we’re dealing with, we can make the right moves to make the business work better and I think that’s where -- I think we’re feeling some confidence as we move into 2023.

That’s helpful. Thanks very much.

Your next question comes from Anna Andreeva from Needham & Company. Please go ahead.

Great. Thanks so much, and good afternoon, guys. I wanted to follow-up. We noticed that $299 cleanout that see now in addition to $1,499 processing fee. And James, you mentioned you guys are testing some of that stuff. Just curious how did you think about that and tested those amounts specifically? And also recognizing it’s early, but just curious what the response has been from the sellers thus far. I guess, are you getting better supply coming in as now the seller is actually paying for it? And thank you so much.

Yeah. Hey, Anna. Yeah. I mean we continue to test it. I think part of the insight was, as you know, you’ve been following us for some time, just incredible demand for our cleanout service has never really waned and so we’re looking for ways where we could prioritize our best sellers and also ways to monetize the brand equity that we built at thredUP being the most convenient place to clean out your closet. And so, yeah, we’ve been testing fees at different price points and also similarly with paying for the cleanout bag. And I have to say, we feel very good about the test results. We’re seeing consumers really understand why we’re making some of these changes and I think the limited number of bags that we’re processing already from these cohorts suggest like that is better stuff. And as you might imagine, when people are paying for a service, they’re putting more items in the cleanout kits, so the amount of items we’re getting are higher and the quality of those items are better. So I think -- we think this is a good positive sign for the business.

Awesome. Thank you so much.

Your next question comes from Dylan Carden with William Blair. Please go ahead

Yeah. Thanks. Can we just stay on that for a second. How -- maybe you won’t disclose this, but how many, or I guess, what percent of sales are you charging? Any way to sort of think of the reach of that piling program, is that pretty broad-based or is it in a small segment of the market?

Dylan, it’s a pretty meaty experiment. So we have enough data now to feel pretty good about the results that we’re seeing. But I think we’re going to continue to evolve the mix to make sure that we get the seller experience, right, and we get the best product for our buyers. And I think we’ve talked a lot about the ability to flex both sides of our marketplace. And I think over the last couple of years, we’ve done more on the demand side and I think now we’re really balancing out how to get the marketplace to spend as fast as possible. So I think we all feel pretty good about where we are.

And then that’s not -- you kind of ran their sort of some of this optimization unit economic optimization efforts you’re doing. I guess what else, if we could sort of spend some time on other initiatives you’re doing and is that embedded including sort of the charging for the cleanout kits? Is that embedded in breakeven EBITDA or is it that would be incremental?

Yeah. I think we talked about sort of the three areas, the cleanout bag charges, as well as work that we’re doing around returns, a number of things around what the customer’s experience of returns is, how many products can be returned sort of the unit economics in there is we’re continuing to kind of figure out the best way to make those work. And then the work we’re doing around merchandising and the sculpting of the mix of product that’s coming in. I think those three things are experiments that are in market. And I think to the best that we can, that’s reflected in the guidance for the year, but it is still early. And but we continue to work on a number of other things on the front-end experience for buyers that we think also have some upside. So I think our guidance reflects the best case of where we think the business will be in 2023, but we come to work every day and work really hard to make it better. So we’re working on some new stuff as well.

Okay. And then the consignment versus product outlook, I know you’re not going to kind of break out revenue guidance by those two items. But do you think that sort of where the consumer is in the first quarter, they’re kind of rounding out the bottom of the declines in the consignment business. Is that fair?

Yeah. No. I think the mix in Q4 was pushed towards products, because we had turned off supply from the non-RaaS business. So we have a lot more supply coming in from RaaS, which a good portion of that is owned. And then you also had an outsized quarter from Europe and Europe is -- the majority of that is owned. So I think that’s what you saw happen in Q4. That being said, when you get into 2023, we do have to kind of burn through a lot of that RaaS supply. So I wouldn’t expect a dramatic shift to consignment in 2023, but I would just say, it improve -- slight improvement as we go through 2023.

Excellent. Okay. And then lastly, any -- I guess you had mentioned that you sort of turned supply off for second, any update on processing throughput kind of where you stand there?

Yeah. I think, Dylan, in our remarks, we expect the backlog to be in a really good place by mid-summer. We turned on DC07.

Excellent.

So processing is in a good place. We think the mix of bags coming in RaaS-related versus CMP-related is in a good place. We think the unit economics of all those bags coming in is as good as it’s ever been. So I think everything is really coming together nicely for us across processing and the unit economics.

Excellent. Okay. Thanks a lot guys. Nice quarter.

Thanks.

Your next question comes from Alexandra Steiger from Goldman Sachs. Please go ahead.

Thank you for taking my questions. I do want to follow up on your full year EBITDA guide. Could you please discuss how you think about margins progressing through the year and given your goal to achieve profitability in the back half? And then second, could you help us understand the different building blocks of your EBITDA guide in terms of the factors that are inside versus outside of your control? Thank you.

Yeah. From an EBITDA perspective, as you kind of roll from, let’s take it from Q4 of 2022, if you take out the impact of the breakage, we kind of had four consecutive quarters of improving EBITDA rates and we kind of expect that evolution to continue through 2023. How do we get there? I think it’s as simple as growth and improving unit economics. In growth, you will see in kind of our overall guidance, we’re going to be able to spend more, spend more on marketing, spend more on operations, both of those are going to fuel growth. And then on unit economics, we talked about the new DCs and the strategic initiatives that James has mentioned. But I was I think those are your drivers towards what happened in 2022, where we’re headed in 2023 and how are we going to get there from an overall breakeven perspective on an EBITDA rate perspective.

And Alexandra, the only thing I would add is that, none of the guidance for 2023 implies some big consumer recovery, right? I think our implicit in that is, these are investments we’re making in the conditions in which we find ourselves and so I think we’re navigating the business in this environment to a really good place. And I think if the market recovers and gets better, that would be good for everyone and we can take advantage of that.

That’s very helpful. Thank you.

Your next question comes from Tom Nikic with Wedbush Securities.

Hey, everybody. Thanks for taking my question. James, I want to ask about the customer count. So I think quarter-over-quarter, it’s been down each of the last two quarters. When do we think about that kind of bottoming and starting to get back to growth again?

Yeah. Hey, Tom. Yeah. I mean, I think, you should start to see that inflect this year, as we reinvest in growth and some of the sort of key initiatives that we’re working on. I think what you had, while you saw the last couple of quarters where they were is, we had very successful in high spend quarters throughout 2021. The business was really growing at a nice clip. And so you’re sort of lapping some of that as you got into the back half of 2022 on top of which you were spending a lot less in marketing. And so now I think as we turn the page into 2023, feel like the macro environment is more stable, we feel very comfortable spending into that with the economics that we’re seeing and so you should start to see that improve as we move through this year.

Got it. And the quasi follow-up there, obviously, the budget shopper has been pressured lately. But how do you think about potential trade down and maybe a higher end consumer who’s never shopped resale before, never shopped your business before potentially becoming more discount hungry and gravitating to thredUp?

I’ll give you a quasi answer to your quasi follow-up. I mean, I think, we’ve been clear, right, like, I think the conditions for resale in 2023 are promising. If you start to see retailer promotions come down and you still feel like the shopper is looking for value. I think that intersection of those two things suggests that resell could really do quite well in this environment. And some of that is from trade down as you suggest and some of that is just prices getting more normalized in traditional retail context means that it’s just going to be more expensive and so then the value proposition for retail should be stronger. And so that’s how we think the setup in 2023 looks and we’ll see whether it plays out that way. But I think we’re feeling cautiously optimistic.

Sounds good. Thanks everybody and best luck this year.

Thanks.

Your next question comes from Rick Patel with Raymond James. Please go ahead.

Hey, guys. Well done on the progress. I have a follow-up to Tom’s last question on the consumer. So as you look at how the first quarter is shaping up versus how you performed in the fourth quarter, any key differences to highlight in terms of behavior -- behavioral changes and what your -- maybe elaborate on what your expectations are for the consumer for the rest of the year?

Yeah. Rick, I mean, I think, we had this conversation a few months ago, I thought retailer inventories would have been a little cleaner into Q1, but I still think based on the commentary across the apparel sector, right, inventories are still elevated in lots of places. So you’re still seeing that promotional environment creates sort of downward pressure on price. So I think that’s really in Q1 of a continuation of the themes of last year. But I would say that, like, it’s clear that there is an end in sight right around this. And so I think the shopper and the value proposition at thredUp is going to be more attractive as we sequentially move through the year. But I don’t think the conditions have changed meaningfully on the inventory environment. I do think though that like consumer sentiment is still quite negative. I still think people think interest rates can go higher. And so I do think you’re going to have a consumer that’s a little bit more cautious, at least for the time being and that’s why in our guidance and sort of how we’re operating the business, we don’t expect any sort of big inflection in consumer behavior. But we think we can continue to invest and grow the business under the conditions in which we find ourselves and have a lot of success kind of quarter-over-quarter.

And can you also talk about the outlook for the Remix business? You touched on opportunities to implement thredUP U.S. best practices there. So which inning are you in, in terms of those improvements and when should we expect to see a more meaningful improvement in terms of the contribution of the margins?

Yeah. I think it’s still relatively early on that transition. I mean I think 2022 was a difficult year in Europe and so we felt like it didn’t make sense to try to introduce some big large scale changes into the way Remix sort of processed and operated its P&L. I think we’re starting to make some of those changes slowly and I think you’ll see as we transition more of the business to consignment, that you’ll see some of those gross margins go up. But the business is executing very well to topline. It’s doing very well across its customer acquisition and retention metrics. And so we’re pleased with its progress and we will be patient to see some of these consignment mix transitions. But we’ll get there and -- but we feel very optimistic about where that business is headed.

Thank you. All the best this year.

Thanks.

Your next question comes from Ashley Helgans from Jefferies.

It’s Blake on for Ashley. Thanks for taking our question. I wanted to talk about the pipeline for RaaS deals. It looks like you, I think, close to doubled your client count this past year. Just wondering if we could get an update on how those conversations are going, especially in a challenged macro? How is the competitive environment? And if you could comment on how much incremental should the RaaS business contribute to sales and EBITDA in 2023 versus 2022?

Yeah. Sure, Blake. I mean, I think, yeah, we exited the year feeling very good about the total RaaS clients. I think there’s good momentum in the business, as you saw with the launches of J. Crew and Kate Spade, who are two of our best-selling brands on thredUP. And I think 2022 was a challenging year for retail. I expect 2023 will be also a challenging year. It certainly is right now, although, it may very well get better. But the pipeline feels solid. I think we’re taking the long view on how branded resale evolves in the ecosystem. But I think you continue to see us launch more brands, launch some big brands, small brands that I think are all sort of accretive to the bottomline. But we don’t break out 2023 over 2022 on an incrementality basis. But I think every brand partner that we bring on drives incremental demand and for the right partner drives incremental supply and I think both of those things are really positive for our business.

Got it. And then our follow-up is on just your marketing budget. I am wondering if you could comment on that for 2023. And then kind of post Apple IDFA change, if we could reassess and you could give us an update on just on your marketing strategy and the ways you’re now marketing to try to acquire customers? Thank you.

I’ll start with the strategy and then I’ll turn it over to Sean to just walk through some of the numbers. But, I mean, nothing has really changed since the IDFA piece for us or no news since the last time that we talked about it. We continue to focus on building sort of a wide range of channels, both direct response and then I think upper funnel as we continue to build the brand. So no real change, I would say, on the strategy, but I’ll let Sean talk about the math.

Yeah. On the marketing dollars is expected to go up from 2022, but down as a total percentage and think about that, this as us investing in the growth of the business. So think about that when you start to model out 203.

Great. Thank you, guys.

Thanks.

Your next question comes from Ed Yruma from Piper Sandler. Please go ahead.

Hey, guys. Thanks for taking the question. I guess first is a follow-up on the marketing. Do you anticipate having to build marketing back kind of basically ahead of what you expect consumer turmoil be more coincidence? And as a follow-up, I think, you guys have experimented with different types of promotions, you kind of moved to like pricing transparency later comes back, where do you think you all on that [Technical Difficulty] now in terms of striking the price downs between kind of lowest price versus offering that promotional handle? Thank you.

Hey, Ed. We couldn’t really hear you. It’s very garbled on our end. So I don’t know -- I can’t -- I couldn’t make out the question. Maybe try again?

Yeah. Let me give one more shot. Can you hear better now?

No. It’s still bad.

Got it.

Sounds like you are under...

I will step up.

Okay. Sorry about that.

Thanks, Ed.

Okay.

Your next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Good afternoon, everyone. As you think about the trends with the European consumer from Remix and the U.S. consumer, what are the biggest differences that you’re seeing so far? And then as you plan for 2023, what are the -- under the hood or the breakouts of how you’re thinking about the gross margin on both consignment and product and what the puts and takes may be? Thank you.

Sure, Dana. I mean I think on the European versus U.S. consumer, I think, both consumer businesses, I mean, Remix operates in Central and Eastern Europe. They have some revenue concentration in a few key markets, where I think, it’s like -- it’s incrementally less competitive than it is in the U.S. And so I think the resale business in Europe, I think, as we invest more dollars in that business can have greater sort of share gains across kind of value retail. So I think that European consumer has slightly less choice than they do in the U.S., where I think the U.S. consumer right now is certainly, I mean, frankly, the consumer is benefiting from how attractively priced apparel is for new stuff and I think that, that will be true at least for another quarter or two. But I think you probably know as well as others that will certainly start to dissipate. So I think that’s how we think about the European consumer versus the U.S. consumer, and I’ll let Sean talk a little bit about the margin piece.

Yeah. On the gross margin, you’re looking at 2022 versus 2023. I think, overall, I just think it’s going to be slightly better than 2022. Obviously, our assumption is that the inventory kind of over is going to start to settle down, promotional environment will start to improve. But I think you can also break that down whether you’re talking about consignment or product. So it’s slightly going to improve there as well and the same thing would go if you’re going to split it between the U.S. and Europe, slight improvements across the Board.

Got it. And then just lastly, as you look at the environment now for apparel where value is certainly the mainstream of the day. In terms of whether it’s orders, whether it’s active customers, how are you navigating this environment? Is it at all different in your history from what you’ve seen before in terms of the value offering?

I don’t think it’s too different, Dana, than sort of where we live prior to the pandemic. I think prior to the pandemic, the business was really growing very, very nicely and I think the value in resale was very clear to the U.S. consumer. And then I think the pandemic created a bunch of volatility in that sort of value proposition. So I think as we move through the year, I think, you’ll get back to a more standard assessment of the value of secondhand, which I think is more a taint the value you would have in the off-price context, which I know we’ve talked about in the past. So I think the value opportunity this year, certainly as we get further into the year, it’s going to be attractive given resales price point.

Your next question comes from Ed Yruma with Piper Sandler. Please go ahead.

Hey, guys. Hopefully, this is a little bit clear. Let me try this again. I guess, first on the promotional strategy. I know you guys have experimented quite a bit in 2022 being less promotional or being experiencing more promotional. I think kind of what [Technical Difficulty] consumer is today and how close are you in kind of nailing that formula. And then just as a follow-up to the previous question on marketing expense, do you just think having a retail marketing kind of in front of when consumer demand improves or more coincident? Thank you.

It was a little better, Ed. So I think we’ll get it. So I think the first question was around promotional strategy and how that’s evolved. And so I think where we are today and where we finished the back half of 2022 was just understanding both the mix of goods that we’re really going to delight the buyer and the context that they were in. And so how do we acquire more of those goods, how do we shape the assortment of what’s coming in and then what are the types of categories that are in demand, right? And so I think we got sharper around how that budget shopper and broadly, the resell shopper was thinking about value. And again, it’s -- we’re a very data-driven organization. So we were really relying on the quantitative data around pricing promotion discounting. But we’ll continue to sort of evolve our thinking on that. On the marketing spend, I think, what you’re asking is do we spend ahead of the customer recovery. And I think the answer is that, I think, we feel very good about the dollars that we’re spending now based on the customer acquisition costs and the LTDs that we’re seeing. But I don’t think we’re leaning in ahead of any potential consumer recovery. I think we’re playing the game on the field sort of as we see it, but feeling very good about those investments.

Thanks so much.

[Operator Instructions] There are no further questions at this time. Please proceed.

Thank you everyone for joining us on the call. I appreciate all the good questions. Appreciate all the hard work the thredUP team does every day to inspire a new generation to think secondhand first. So, thanks, everyone. We’ll see you next time.

Ladies and gentlemen, this concludes the conference call today. We thank you for participating and ask that you please disconnect your lines.