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ThredUp Feels Heat of Elevated Returns, ‘Sober Demand’

ThredUp’s third-quarter revenue totaled $67.9 million, an increase of 7.4 percent from $63.3 million in the year-ago period. But the secondhand apparel platform that touts its “resale-as-a-service” (RaaS) program saw net losses widen to $23.7 million as the company feels pressure from decreasing demand.

The resale company also issued revised guidance for the fourth quarter and the full year, both of which are below initial outlook projections.

In a Nutshell: Returns appear to be a growing problem for ThredUp, with rates inching higher and impacting revenue by $3 million in the third quarter. The resale company expects returns to have a similar revenue impact in the fourth quarter.

“We’ve seen the return rate continue to increase as times have gotten worse and things are a bit more challenging,” said ThredUp chief financial officer Sean Sobers in an earnings call. “The consumer is maybe a little more focused on cash back or buyer’s remorse, but we’ve seen the return rate kind of spike up and we’re working on quite a few different things internally to help resolve that.”

ThredUp CEO James Reinhart said some of the ideas floated include waiving some items that get returned so that customers keep them, or presenting the product in better ways.

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Beyond returns, the secondhand fashion platform is looking to rein in its spending in an effort to drive the business to adjusted EBITDA breakeven. The company closed its processing center in Lebanon, Tenn. and consolidated its operations into its Dallas, Texas distribution center, which is currently under construction. The Dallas facility will be ThredUp’s flagship distribution center upon its completion, and is expecting to bring the company’s network-wide storage capacity to 16.5 million items.

ThredUp said in an SEC filing that it does not anticipate expanding its distribution network to include additional locations in the near term.

The company, which has recently signed up Hot Topic and Tommy Hilfiger as resale partners, also is restricting the number of cleanout bags it accepts and sends to suppliers in accordance with demand, as well as evolving the mix of goods offered online “to meet a more sober demand environment,” Reinhart said.

Net inventory at ThredUp skyrocketed 265.4 percent to $15 million as of Sept. 30, up from $4.1 million in product at the end of the 2021 third quarter.

Gross margin was 65.5 percent, a decrease of 736 basis points (7.3 percentage points) compared to 72.8 percent in the third quarter last year.

The increase in inventory and the decrease in gross margin was primarily due to the inclusion of results of ThredUp’s European operations from October 2021 onward, stemming from the company’s $28.5 million acquisition of Bulgaria-based Remix. Revenue from the European operations is primarily derived from product sales with a lower gross margin.

Worldwide, active buyers totaled 1.7 million, up 18 percent from 1.4 million in the comparable year-ago period. Orders totaled 1.6 million, up 24 percent from 1.3 million in last year’s quarter.

But while ThredUp is bringing in more customers, the compnay is envisioning a worse holiday than anticipated, with the firm lowering its fourth quarter and full-year guidance from prior estimates.

For the holiday quarter, ThredUp expects revenue in the range of $62 million to $64 million, a 12.2 percent to 15 percent drop from last year’s $72.9 million. Prior estimates called for a 1.2 percent to a 4 percent decline. Gross margin is now projected to be in the range of 62 to 64 percent, down from the initially anticipated 64 to 66 percent range. Adjusted EBITDA loss margin was expected to fall in the range of 14.5 percent to 16.5 percent, an improvement from the projected 16 percent to 18 percent loss.

Full-year revenue is now forecast to be between $279 million and $281 million, a 10.8 percent to 11.6 percent increase over the year-prior. Initial estimates called for a 12.4 percent to 14 percent jump. Gross margin estimates slipped to a range of 66.5 to 67 percent, down from the anticipated 67 to 69 percent gross margin. Adjusted EBITDA loss margin is expected to range between 16 percent and 17 percent, widening slightly from the 15 to 16 percent range.

As of Sept. 30, 2022, ThredUp had cash, cash equivalents and short-term marketable securities of $123.2 million. Additionally, the company has $38 million available in its term loan facility.

Net Revenue: Revenue at ThredUp was $67.9 million, an increase of 7.4 percent from $63.3 million in the year-ago third quarter.

Consignment revenue, the money taken from commission of sales made on the platform, dipped 13.6 percent to $41.6 million from $48.1 million in last year’s third quarter.

Product revenue, which comes from sales of products owned by ThredUp, soared 73.6 percent to $26.4 million. The massive growth was largely driven by the Remix acquisition and the relative growth of its RaaS supply. ThredUp plans to transition both the European and RaaS business toward consignment over time, Sobers said.

Net Earnings: The third-quarter net loss was $23.7 million, amounting to a per share loss of 24 cents in the period. This widened from the year-ago quarter’s net loss of $14.7 million, which tallied a 15 cents per share loss.

Adjusted EBITDA loss was $11 million for the third quarter of 2022, delivering an adjusted EBITDA margin of -16.2 percent of revenue. In the prior-year period, adjusted EBITDA losses were $7.8 million, or -12.4 percent of revenue.

CEO’s Take: “The ThredUp brand stands for value and that message is being washed out in this hyper-promotional landscape,” Reinhart said. “We’re confident that this competitive dynamic is temporary. We believe it will subside as retail inventory positions improve, but we expect revenue to be challenged in the near term.”

In the longer term, Reinhart shared some optimism regarding resale in a recessionary environment.

“What’s getting overlooked in this environment is that consumers are becoming accustomed to buying apparel at extremely low prices,” Reinhart said. “When retailers sell through their excess inventory, prices normalize, and we believe there is a significant opportunity for resale to take share. For a customer that’s been conditioned to expect 60 percent to 80 percent off retail for their clothes, and is still feeling the effects of inflation, resale is going to be a go-to for value.”