ThredUp Inc. (NASDAQ:TDUP) Q1 2024 Earnings Call Transcript May 6, 2024
ThredUp Inc. misses on earnings expectations. Reported EPS is $-0.15147 EPS, expectations were $-0.14. TDUP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day everyone and welcome to today’s ThredUp Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note this call is being recorded. [Operator Instructions]. It is now my pleasure to turn the conference over to Lauren Frasch, Head of Investor Relations. Please go ahead.
Lauren Frasch: Good afternoon and thank you for joining us on today’s conference call to discuss ThredUp’s first quarter 2024 financial results. With me are James Reinhart, ThredUp 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 be making forward-looking statements during the course of this call, including, but not limited to, statements regarding our earnings guidance for the second fiscal quarter and full-year of 2024, future financial performance, market demand, growth prospects, business strategies and plans, investments in AI technologies, reorganization activities and our ability to cost effectively attract new buyers.
Words such as anticipate, believe, estimate, and expect as well as similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties including our ability to effectively deploy new and evolving technologies such as artificial intelligence, and machine learning in our offerings and the effects of inflation, increased interest rates, changing consumer habits, climate change and general global economic uncertainties. Our actual results could differ materially from any projections of future performance or results expressed or implied by such 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 with comparable GAAP measures in our earnings press release and supplemental information posted on our IR website. Now I’d like to turn the call over to James Reinhart.
James Reinhart: Good afternoon, everyone. I’m James Reinhart, CEO and Co-Founder of ThredUp. Thank you for joining ThredUp’s first quarter 2024 earnings call. We are pleased to share ThredUp’s financial results for Q1 and have important news to share about how we expect our business financials to improve in the back half of the year. We will provide an update on adjusted EBITDA margin expansion, expectations for free cash flow in 2024, and key company specific initiatives around AI that we are excited to announce today for the first time. I will then hand it over to Sean Sobers, our Chief Financial Officer, talk through our Q1 2024 financials in more detail and provide our outlook for the second quarter of 2024 and the remainder of the year.
We’ll close out today’s call with a question-and-answer session. Let me start with our Q1 results, which were in line with our expectations despite an ongoing difficult consumer backdrop. Our revenue was $79.6 million, representing a year-over-year increase of 5%. Consolidated gross margin came in at 69.5%, representing 8% gross profit growth year-over-year. Recall, we believe gross profit growth is the best way to measure the underlying growth in our business due to our continued transition to consignment, especially in Europe. U.S. gross margins reached a record high of 80.1%. Active buyers reached 1.7 million increasing 4% year-over-year, while orders reached 1.7 million, growing 9% compared to the same time period last year. Of note, adjusted EBITDA totaled negative $736,000 or minus 0.9% of revenue due to ongoing leverage in our business as well as some reorganizing that we did in March.
Our U.S. business was adjusted EBITDA positive for the third quarter in a row and was free cash flow positive for the quarter. Now let me turn to the future as we have important context to share about how our business is transforming into an AI powered resell company and what the year ahead will look like. In March, we reduced headcount and reorganized several parts of the business, enabling us to invest more in AI product development, boost processing in our distribution centers, and increase marketing spend. We cut approximately $13 million in operating expenses and reinvested roughly half of those savings into high potential growth areas. The result of these changes is that we expect to achieve positive adjusted EBITDA in Q2 nearly triple our full-year adjusted EBITDA results compared to our last outlook, and to generate free cash flow on a full-year basis in 2024.
We have now pulled forward our free cash flow expectations by a full-year. We view this to be an important milestone for the company as we turn the page from answering questions about profitability to focusing on how we expect to invest earnings over time in growing our business to capture the long-term opportunity in resell. With that in mind, let me turn to the progress we’ve made across our product investments that are improving the customer experience and planting new seeds for sustainable long-term growth. In just the last 60 days, we have launched a new AI search experience and created two new AI powered tools that allow consumers to thrift any style that inspires them. These tools make ThredUp the easiest place to thrift no matter when the inspiration strikes, whether that’s from the high street, when they see their favorite outfits, when shopping online at any of their favorite stores, or even if they want to tell us about an event they’re shopping for and have us do the work to inspire them.
All three of these features are now live in beta form. You can try the new visual search in our search bar, and you can visit our ThredUp concept store on your smartphone at ThredUp.com/concept to see the other new tools in action. The competitive advantages that we have been talking about for many years, our supply chain infrastructure, proprietary data, and marketplace dynamics are now being amplified by AI technology breakthroughs that have only recently started to take shape. I want to emphasize my belief that AI strengthens the advantages we already have in place and deepens the long-term defensibility in our business. With our business expected to generate free cash flow this year, we remain ever committed to investing in new vectors of opportunity to grow our business faster with an eye towards creating stronger long-term earnings, and this goes beyond just AI.
In Europe, the transition to consignment continues and we are making progress across our key strategic areas. Of note, we set new records in Q1 for the number of bag requests in a week, the number of bags returned in a week, and the number of consignment bags processed in a week. We processed more consignment bags in Q1 than we did in all of 2023 combined. After concluding our write-off at the end of 2023, we believe our assortment strategy is paying off. Our sell through rates are among the strongest they have been since we acquired Remix in late 2021. We also announced last week that we have hired Florin Filote as our GM of Europe. He is relocating to our European headquarters in Sofia, Bulgaria. Florin brings two decades of experience building and scaling marketplaces, and we believe he is absolutely the right person to continue scaling top line revenue and driving margin expansion in Europe.
He will run our EU business while sitting on our U.S. based executive team. I’m also just as excited that Dan DeMeyere, who previously was running our EU business while being based in the U.S. will return to the U.S. business as Chief Product and Technology Officer as we scale all of our tech and AI products. Next, we’ve continued to scale our Resale-as-a-Service or RaaS business. In Q1, we added eight new brands to our client roster, and you can now get a ThredUp co-branded cleanout kit in 800 retail stores across the country. And with some clients, we’ve begun natively integrating the ability to order a cleanout kit right from their ecommerce checkout page. We are also looking to expand our RaaS footprint in Europe and believe commercial agreements with brands and retailers there can further accelerate our transition to consignment.
Now let me turn to our impact. As we remain committed to balancing purpose and profits, it’s also worth noting how we’re driving impact beyond our core business. We recently started to see our advocacy effort take shape at the federal level. As a Founding Member of the American Circular Textiles Coalition, we helped advocate for the inclusion of $14 billion of incentive for textile circularity in the Americas Act, a bipartisan trade bill that was introduced by U.S. Senators Bill Cassidy and Michael Bennet in March. This is a historic moment as it’s the first time federal legislation has contemplated circular fashion. We believe recognizing circularity’s potential to strengthen the U.S. economy from both an environmental and international trade perspective is a huge step forward for the industry.
Until fashion is no longer one of the most damaging sectors of the global economy, we will continue to advocate for the government to provide resources that make fashion and textile industries more sustainable and planet friendly. In conclusion, before I turn it over to Sean, I want to emphasize a few milestones in guiding principles. We think of our earnings this quarter being a reestablishment of who we are and where we’re headed along these four dimensions. First, over the past two years, including the midpoint of our 2024 guidance, we have expanded adjusted EBITDA 1,800 basis points and now expect free cash flow on a full-year basis in 2024. Second, while driving adjusted EBITDA margin expansion, we have not compromised driving growth. At the midpoint of our 2024 guidance, the underlying growth rate of our business over the past two years, which is gross profit growth due to the consignment shift is 24%.
This represents annual double-digit growth despite an ongoing volatile consumer environment. Third, we now have the ability to more rapidly improve the customer experience, especially with emerging AI technology and invest in growth while simultaneously achieving our free cash flow goals. We believe we’re in a position to manage the magnitude of growth and profits effectively regardless of where the consumer environment goes. Finally, we want to reestablish the trust of the investment community that we are great stewards of capital, that our most innovative days are ahead of us, and that we do not want to just meet our expectations. We want to exceed them. That is the journey we begin anew today. With that, I will now turn it over to Sean to go through our financial results and guide in some more detail.
Sean Sobers: Thanks, James. I’ll begin with an overview of our results and follow-up with guidance for the second quarter and full-year of 2024. I will discuss non-GAAP results throughout my remarks, Our GAAP financials and a reconciliation between our GAAP and non-GAAP measures are found in our earnings release, supplemental financials and our 10-Q filing. We’re very proud of our Q1 results and our ability to navigate a challenging consumer environment. For the first quarter of 2024, revenue totaled $79.6 million, an increase of 5% year-over-year. Additionally, active buyers continue to grow reaching 1.7 million, up 4% year-over-year. Orders also increased up 9% year-over-year to 1.7 million. Consignment revenue grew 32% year-over-year, while product revenue shrank by 38%.
We are pleased with the growth in consignment revenue driven by the final stages of our U.S. transition and our accelerated transition in Europe. We would expect to continue to see outsized growth in consignment and declines in product revenue throughout 2024. While the transition to consignment should be a tailwind to gross margins over time, we expect it to slightly mute revenue growth simply due to the accounting treatment. As a reminder, consignment payouts reduce net revenue while owned payouts are in COGS and reduce gross margin. As a result, we look to gross profit as the most relevant measure to evaluate the underlying growth rate of our business, and we are pleased to report that our Q1 gross profit grew 8%. For the first quarter of 2024, gross margin was 69.5%, a 220 basis point increase over the same quarter last year.
We are proud to report that our consolidated results were driven by a record U.S. gross margin of 80.1%, a 560 basis point improvement over last year. The global outperformance was the result of the transition to consignment in both the U.S. and Europe and continued operations improvements in our DCs. We’re pleased to see higher items per order in the U.S. as well as ongoing improvements in our logistics network. For the first quarter of 2024, GAAP net loss was $16.6 million compared to GAAP net loss of $19.8 million in the same quarter last year. Adjusted EBITDA loss was just $736,000 or negative 0.9% of revenue for the first quarter of 2024. Though the quarter proved to be more challenging than expected, we significantly reduced our adjusted EBITDA loss in Q1 by more than half versus last quarter and by nearly $6 million versus last year, representing an approximate 780 basis point improvement reflecting significant progress towards profitability.
Turning to the balance sheet, we began the first quarter with $69.6 million in cash and securities and ended the quarter with $67.9 million using just $1.7 million in cash in Q1. As a reminder, we used $11 million in cash in Q1 of last year, illustrating the enormous progress we’ve made over the last four quarters. Our significantly reduced cash burn is due to generating a record $1.4 million of cash flow from operations. Now I’d like to turn to our outlook. As James discussed earlier, we are making significant structural changes to support our AI driven strategic priorities. We expect these new priorities to enable a superior online resale experience and unlock efficiencies in our operations that were not possible before, including structurally higher gross margins.
We’re shaping our organizations so that our resources are fully aligned with this objective in a way that we expect to accelerate decision making, eliminate redundancies, drive stronger operating leverage and free cash flow. Importantly, we do not expect to require any additional CapEx to do this. This reorganization included an approximate 20% reduction in our global corporate workforce, incurring approximately $3 million of nonrecurring charges in Q1. We expect this action plus other cost saving measures to deliver $13 million in savings in 2024 or $17 million annualized, mostly realized in SG&A expenses. We have made meaningful progress over the past year on our path to profitability and our recent actions have significantly accelerated our progress.
We now expect to achieve quarterly adjusted EBITDA profitability in Q2 and going forward. Plus, we expect to be free cash flow positive on an annual basis this year. As a reminder, our favorable negative net working capital dynamic should prove to be a further tailwind to cash flow as we scale our model. In addition, we continue to expect maintenance CapEx levels of approximately $2 million per quarter until 2026. Given the meaningful improvement in our adjusted EBITDA and free cash flow, the accelerated consignment transition in the U.S. and Europe and the timing of how we expect to roll out new AI products, we are updating our guidance to better match how we’re running the business on a day-to-day basis. While we significantly reduced operating expenses, we are committed to investing in the parts of our business that are key to our long-term success.
With clear line of sight to profitability and free cash flow, we have turned our attention to investing in new product experiences, amplifying those products with marketing spend and ensuring we have the widest and deepest assortment of secondhand clothing online anywhere. As I noted earlier, our reorganization is expected to save $13 million in 2024. However, we are also reinvesting $6.5 million into a better customer experience. We are ramping processing in our operations, the most since early 2022, deploying new AI features across our product experience and increasing marketing dollars to drive new customers. Historically, each of these areas have driven revenue growth, but we’re choosing to be prudent as it relates to guidance as we execute in this unique consumer environment and ramp our strategic investments.
Furthermore, though the discretionary apparel environment remains challenged for our consumer, this updated range provides us with a high level of confidence that we can achieve our outlook regardless of macro trends in the balance of the year. With all this in mind, in the second quarter we expect revenue in the range of $81 million to $83 million, gross margin in the range of 71% to 73%, representing gross profit growth of 6% year-over-year, positive adjusted EBITDA of 1% to 3% of revenue and basic weighted average shares outstanding of approximately $112 million. For the full-year of 2024, we now expect revenue in the range of approximately $328 million to $338 million, gross margin in the range of approximately 71% to 72%, representing gross profit growth of 11% year-over-year, 100 basis points higher than our previous outlook due to the accelerated consignment shift and improved operations.
Positive adjusted EBITDA of 2% to 4% of revenue, nearly 3x our previous outlook and basic weighted average shares outstanding of approximately $114 million. In closing, we’re excited for our accelerated path to profitability, free cash flow and being a self-funded company. While we spent the past two years in a profit first mindset, we are now turned our attention to growth, while continuing to expand adjusted EBITDA and free cash flow. James and I are now ready for your questions. Operator, please open the line.
Operator: Yes, sir. [Operator Instructions]. Our first question comes from Matthew Boruchow, Wells Fargo.
See also 25 Richest Billionaires in Manufacturing Industry and 25 Biggest Real Estate Companies in the US in 2024.
To continue reading the Q&A session, please click here.