ThredUp Inc. (TDUP) FY 2023 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full calendar year or any other period.

Overview

ThredUp operates one of the world’s largest online resale platforms for apparel, shoes and accessories. Our mission is to inspire the world to think secondhand first. We believe in a sustainable fashion future and we are proud that our business model creates a positive impact to the benefit of our buyers, sellers, clients, employees, investors and the environment. Our custom-built operating platform consists of distributed processing infrastructure, proprietary software and systems and data science expertise. This platform is powering the rapidly emerging resale economy, one of the fastest growing sectors in retail, according to a GlobalData market survey conducted in January 2023.

ThredUp’s proprietary operating platform is the foundation for our managed marketplace, where we have bridged online and offline technology to make the buying and selling of tens of millions of unique items easy and fun. The marketplaces we have built enable buyers in the U.S. and in Europe to browse and purchase resale items for primarily apparel, shoes and accessories across a wide range of price points. Buyers love shopping value, premium and luxury brands all in one place, at up to 90% off estimated retail price. Sellers love ThredUp because we make it easy to clean out their closets and unlock value for themselves or for the charity of their choice while doing good for the planet. ThredUp’s sellers order a Clean Out Kit, fill it and return it to us using our prepaid label. We take it from there and do the work to make those items available for resale. Aside from Clean Out Kits, ThredUp also sources inventory from a variety of supply channels, such as wholesale supply in Europe.

In addition to our core marketplace, some of the world’s leading brands and retailers are taking advantage of our RaaS offering, which allows them to conveniently offer a scalable closet clean out service and/or resale shop to their customers. We believe RaaS will accelerate the growth of this emerging category and form the backbone of the modern resale experience domestically and internationally.

Overview of 2023 Results

Revenue: Total revenue was $322.0 million, an increase of 11.7% year-over-year.

Gross Profit and Margin: Gross profit totaled $213.8 million, representing an increase of 11.2% year-over-year. Gross margin decreased by 30 basis points to 66.4% from 66.7% year-over-year.

Net Loss: Net loss was $71.2 million, or a negative 22.1% of revenue, for the year ended December 31, 2023 as compared to a net loss of $92.3 million, or a negative 32.0% of revenue, for the same period in 2022.

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Non-GAAP Adjusted EBITDA(1): Non-GAAP Adjusted EBITDA loss was $17.4 million, or a negative 5.4% of revenue, for the year ended December 31, 2023 as compared to a non-GAAP Adjusted EBITDA loss of $43.4 million, or a negative 15.0% of revenue, for the same period in 2022.

Active Buyers and Orders: Active Buyers totaled 1.8 million and Orders totaled 6.9 million in 2023, representing growth of 8.8% and 6.2%, respectively, compared to the prior year.

Key Financial and Operating Metrics

We review a number of operating and financial metrics, including the following key business and non-GAAP metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. These key financial and operating metrics are set forth below for the periods presented.

(1)Non-GAAP Adjusted EBITDA loss and Non-GAAP Adjusted EBITDA loss margin are non-GAAP measures which may not be comparable to similarly-titled measures used by other companies. See below for a reconciliation of Non-GAAP Adjusted EBITDA loss to net loss.

Active Buyers

An Active Buyer is a ThredUp buyer who has made at least one purchase in the last twelve months. A ThredUp buyer is a customer who has created an account or purchased in our marketplaces, including through our RaaS clients, and is identified by a unique email address. A single person could have multiple ThredUp accounts and count as multiple Active Buyers. The number of Active Buyers is a key driver of revenue for our marketplaces.

Orders

Orders means the total number of orders placed by buyers across our marketplaces, including through our RaaS clients, in a given period, net of cancellations.

Non-GAAP Financial Measures

Non-GAAP Adjusted EBITDA Loss and Non-GAAP Adjusted EBITDA Loss Margin

Non-GAAP Adjusted EBITDA loss means net loss adjusted to exclude, where applicable in a given period, stock-based compensation expense, depreciation and amortization, interest expense, severance and other charges, provision for income taxes, impairment of non-marketable equity investment, and acquisition-related expenses. Non-GAAP Adjusted EBITDA loss margin represents Non-GAAP Adjusted EBITDA loss divided by Total revenue. We use Non-GAAP Adjusted EBITDA loss and Non-GAAP Adjusted EBITDA loss margin, which are non-GAAP measures, to evaluate and assess our operating performance and the operating leverage in our business, and for internal planning and forecasting purposes. We believe that Non-GAAP Adjusted EBITDA loss and Non-GAAP Adjusted EBITDA loss margin, when taken collectively with our GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results.

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The following table provides a reconciliation of net loss to non-GAAP Adjusted EBITDA loss:

Presentation

Revenue

Our revenue is comprised of consignment revenue and product revenue.

Consignment revenue

We generate consignment revenue from the sale of secondhand apparel, shoes and accessories on behalf of sellers. We recognize consignment revenue, net of seller payouts, discounts, incentives and returns. We expect consignment revenue to continue to increase as we increase our Active Buyers and Orders, and as we recently transitioned our RaaS partners to the consignment model and introduced the consignment model to our European operations.

Product revenue

We also generate product revenue from the sale of items that we own, which we refer to as our inventory. The sales from our European operations are primarily from sale of owned items. We recognize product revenue, net of discounts, incentives and returns. We expect the percentage share of product revenue to decrease in the long term as we recently transitioned our RaaS partners to the consignment model and introduced the consignment model to our European operations.

Cost of Revenue

Cost of consignment revenue

Cost of consignment revenue consists of outbound shipping, outbound labor and packaging costs. We expect cost of consignment revenue to decrease and gross profit to increase as a percentage of consignment revenue as we continue to scale our business due to our ability to drive leverage in shipping, labor and packaging.

Cost of product revenue

Cost of product revenue mainly consists of inventory cost, inbound shipping related to the sold merchandise, outbound shipping, outbound labor, packaging costs and inventory write-downs. We expect cost of product revenue to decrease and gross profit to increase as a percentage of product revenue as we continue to scale our business due to our ability to drive leverage in shipping, labor and packaging.

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Operating Expenses

Operations, Product and Technology

Operations, product and technology expenses consist primarily of distribution center operating costs and product and technology expenses. Distribution center operating costs mainly include inbound shipping costs, other than those capitalized in inventory, as well as personnel costs, distribution center rent, maintenance and depreciation of equipment and leasehold improvements. Product and technology costs include personnel costs for the design and development of product and the related technology that is used to operate our distribution centers, merchandise science, website development and related expenses for these departments. Operations, product and technology expenses also include an allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect operations, product and technology expenses to increase in absolute dollars in future periods to support our growth, especially as costs to increase our supply (inbound costs) are generally incurred prior to the expected revenue growth. Additionally, we expect to continue investing in automation and other technology improvements to support and drive efficiency in our operations. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments, including business acquisitions. We expect these expenses to increase in absolute dollars and decrease as a percentage of revenue over the longer term due to better leverage in our operations.

Marketing

Marketing expense consists primarily of advertising, public relations expenditures and personnel costs for employees engaged in marketing. Marketing costs also include an allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect our marketing expenses to fluctuate as a percentage of revenue as we intend to increase marketing spend to drive the growth of our business.

Sales, General and Administrative

Sales, general and administrative expense consists of personnel costs for employees involved in general corporate functions, including accounting, finance, tax, legal and people services, and customer service. Sales, general and administrative also includes payment processing fees, professional fees and allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect to increase sales, general and administrative expense as we grow our infrastructure to support operating as a public company and the overall growth in our business. While these expenses may vary from period to period as a percentage of revenue, we expect them to increase in absolute dollars and decrease as a percentage of revenue over the longer term.

Interest Expense

Interest expense consists of interest and debt issuance costs relating to our term loan facility. Certain interest costs in conjunction with the build-out of our distribution centers in 2022 were reclassified from interest expense and capitalized.

Other Income (Expense), Net

Other income (expense), net consists of non-operating income and expenses such as interest income earned on our investments in marketable securities, impairments of non-marketable equity investments and claim proceeds for lost shipments.

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Financial Results for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Revenue

Total revenue increased $33.6 million, or 11.7%, for the year ended December 31, 2023 as compared to the same period in 2022. The increase in revenue for the year ended December 31, 2023 as compared to the same period in 2022 was driven by a 22.1% growth in consignment revenue, partially offset by a 4.4% decrease in product revenue. The increase in total revenue was due primarily to an 8.8% increase in Active Buyers and 6.2% increase in Orders combined with a 5.1% increase in net revenue per Order.

Cost of Revenue

Gross margin was 66.4% and 66.7% for the years ended December 31, 2023 and 2022, respectively, representing a decrease of 30 basis points.

Consignment revenue is recognized net of seller payouts. Seller payouts related to product revenue are included as a component of cost of product revenue. As such, product revenue has a lower gross margin than consignment revenue.

The decrease in gross margin for the year ended December 31, 2023 as compared to the same period in 2022 was due to a decrease in product gross margin by 1110 basis points, primarily driven by our European operations, which have a lower gross margin. This lower product gross margin was offset by a 250 basis point increase in consignment gross margin, primarily driven by lower shipping, labor and packaging costs. The changes in consignment and product gross margins, coupled with the 22.1% increase in consignment revenue and the 4.4% decrease in product revenue, resulted in overall gross margin declining 30 basis points for the year ended December 31, 2023.

Cost of Consignment Revenue

Consignment gross margin was 81.4% and 78.8% for the years ended December 31, 2023 and 2022, respectively, representing an increase of 260 basis points.

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The increase in consignment gross margin for the year ended December 31, 2023 as compared to the same period in 2022 was primarily due to a 250 basis point decrease in outbound shipping, labor and packaging costs.

Cost of Product Revenue

Product gross margin was 36.8% and 47.9% for the years ended December 31, 2023 and 2022, respectively, representing a decrease of 1110 basis points.

The decrease in product gross margin for the year ended December 31, 2023 as compared to the same period in 2022 was primarily due to our European operations, which have a lower product gross margin. Product gross margin decreased primarily due to higher seller payouts and an impairment of aged inventory in our European operations, which unfavorably impacted product gross margin by 1150 and 280 basis points, respectively. This decrease was partially offset by a 170 basis point decrease in inventory costs in the U.S. and a 140 basis point decrease in shipping and labor costs.

Operations, Product and Technology

Operations, product, and technology expenses increased $1.1 million or 0.7% for the year ended December 31, 2023 as compared to the same period in 2022. The increase was primarily due to a $4.4 million increase in facilities, technology, and other costs, of which $2.9 million relates to recognizing incremental rent and depreciation expense on assets related to our Texas distribution center and a $0.3 million increase in inbound shipping. This increase was partially offset by a $2.6 million decrease in personnel-related costs and a $1.0 million decrease in professional services.

Marketing

Marketing expenses increased $1.9 million or 3.0% for the year ended December 31, 2023 as compared to the same period in 2022. The increase was primarily due to a $0.8 million increase in advertising costs and a $1.1 million increase in personnel-related costs, of which $0.6 million was related to stock-based compensation expense.

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Sales, General and Administrative

Sales, general, and administrative expenses increased $0.8 million or 1.4% for the year ended December 31, 2023 as compared to the same period in 2022. The increase was primarily due to a $2.6 million increase in personnel-related costs, of which $2.2 million was related to stock-based compensation expense, and a $1.2 million increase in facilities, technology, and other costs, offset by a $3.0 million decrease in professional services.

Interest Expense

Interest expense increased $1.4 million for the year ended December 31, 2023 as compared to the same period in 2022. This increase was primarily due to a $0.6 million increase in interest costs due to higher interest rates and a $1.0 million decrease in capitalized interest expense in conjunction with the build-out of our distribution centers in 2022, partially offset by a $0.1 million decrease in amortization of debt issuance costs.

Other Income (Expense), Net

Other income (expense), net increased $4.8 million for the year ended December 31, 2023 as compared to the same period in 2022. The net increase was primarily due to a $3.8 million decrease related to an impairment charge related to our non-marketable equity investment in 2022, a $1.7 million increase in interest income on our marketable securities due to a higher interest rate environment, and a $0.1 million foreign currency transaction gain. This increase was partially offset by a $0.8 million decrease in claim proceeds for lost shipments.

Liquidity and Capital Resources

We have historically generated negative cash flows from operations and have primarily financed our operations through private and public sales of equity securities and debt. As of December 31, 2023, we had cash, cash equivalents and short-term marketable securities of $64.2 million. Additionally, we have a term loan facility (“Term Loan”) under which $22.5 million remained available to be drawn as of December 31, 2023 for the purchase of certain equipment, and we were in full compliance with our debt covenants under the Term Loan as of that date. See Note 8, Long-Term Debt, to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a further discussion on our Term Loan.

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We expect operating losses to continue in 2024 as we continue to invest in growing our business and our infrastructure. Our primary sources of liquidity are cash flows generated from operations, cash on hand and borrowings available under the Term Loan. Our primary use of cash includes operating costs such as distribution network spend, product and technology expenses, marketing expenses, personnel expenses and other expenditures necessary to support our operations and our growth. Additionally, our primary capital expenditures are related to the set-up, expansion and/or automation of our distribution network. Based upon our current operating plans, we believe that our existing cash, cash equivalents and short-term marketable securities will be sufficient for at least the next 12 months to meet our short- and long-term capital requirements, and we do not anticipate expanding our distribution network to include additional locations in the near term. Our cash flow forecast is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements will depend on many factors, including but not limited to, the timing of our increased distribution center automation and expansion plans to support planned revenue growth, the expansion of sales and marketing activities, the potential introduction of new offerings and new RaaS clients, the continuing growth of our marketplaces and overall economic conditions. However, we expect that our capital expenditures will be limited in 2024 as we have completed the first phase of our new distribution center in Texas. See the section titled “Risk Factors—Risks Relating to Our Indebtedness and Liquidity—We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders.”

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Changes in Cash Flows from Operating Activities

Net cash used in operating activities was $22.6 million for the year ended December 31, 2023 compared to the net cash used of $52.1 million same period in 2022. The decrease in cash outflows was primarily due to a $25.7 million decrease in our net loss excluding non-cash expenses. Additionally, changes in operating assets and liabilities were favorable year over year by $3.8 million. This change in operating assets and liabilities was due to a $13.9 million favorable change in accounts and seller payables, consistent with the growth in our consignment business and a $10.1 million reduction in inventory mainly driven by decreased upfront inventory purchases as we transitioned our RaaS partners to the consignment model. This change was partially offset by a $9.9 million unfavorable change in accrued and other liabilities due to timing of vendor payments, an $8.0 million increase in operating lease costs and a $2.6 million unfavorable change in accounts receivable due to timing of cash receipts from payment processors.

Changes in Cash Flows from Investing Activities

Net cash provided by investing activities for the year ended December 31, 2023 increased $34.8 million as compared to the same period in 2022. The favorable change was primarily due to a $21.9 million increase in maturities in marketable securities and a $27.3 million decrease in purchases of property and equipment as we completed the first phase of our Texas distribution center, offset by a $14.4 million increase in purchases of marketable securities.

Changes in Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2023 decreased $0.3 million as compared to the same period in 2022, which was primarily due to decreased net debt repayments of $1.9 million, increased proceeds from issuance of stock-based awards of $1.0 million, partially offset by a $2.6 million of increased taxes paid related to stock-based award activity.

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Contractual Obligations

Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2023, the value of our non-cancellable unconditional purchase obligations was $13.2 million. See Note 11, Commitments and Contingencies, to the Consolidated Financial Statements included in Part I, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information regarding our purchase obligations.

For a further discussion on our operating lease commitments and long-term debt as of December 31, 2023, see the sections above as well as Note 7, Leases, and Note 8, Long-Term Debt, to the Consolidated Financial Statements included in Part I, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss or consolidated statements of cash flows.

Critical Accounting Policies and Estimates

Use of Estimates

U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses. Actual results could differ materially from those estimates.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We generate revenue primarily from the sale of secondhand apparel, shoes and accessories on behalf of sellers and partners. We retain a percentage of the proceeds received as payment for our consignment service. We report consignment revenue on a net basis as an agent and not the gross amount collected from the buyer. We recognize consignment revenue upon purchase of the seller’s secondhand item by the buyer.

We also generate revenue from the sale of our purchased inventory which we refer to as product revenue. We sell our purchased inventory mainly through our online marketplaces. We recognize product revenue on a gross basis. Online sales and sales to our retail partners are recognized upon shipment of the purchased secondhand items to the buyer.

Both consignment and product revenue are recognized net of discounts, incentives and returns. Sales tax assessed by governmental authorities is excluded from revenue.

Loyalty points and rewards are accounted for as separate performance obligations and accrued as deferred revenue in the amount of the transaction price allocated to the points and rewards. The allocated transaction price is based on the estimated fair value per point, net of breakage. Breakage is estimated based on our historical redemption rates. Revenue is recognized when the loyalty rewards are redeemed or expire.

We recognize revenue from gift cards when the gift cards are redeemed by the customer, and we recognize breakage revenue when we determine that the redemption of gift cards is remote, which is two years after issuance.

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Stock-Based Compensation

We estimate the fair value of stock options and the ESPP at the grant date using the Black-Scholes option-pricing model (the “Black-Scholes Model”). The fair values of RSUs are determined based on our stock price on the date of grant. The fair values of equity awards are recognized as compensation expense over the requisite service period or over the period in which the related services are received (generally the vesting period), using the straight-line method. The estimated fair value of equity awards that contain performance conditions is expensed over the term of the award once we have determined that it is probable that performance conditions will be satisfied. We account for forfeitures as they occur.

The Black-Scholes Model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include per share fair value of the underlying common stock, expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term. For all stock options granted to date, we calculated the expected term using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). We determine volatility using the historical volatility of the stock price of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on United States Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

Goodwill and Acquired Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not subject to amortization but will be reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

Acquired intangible assets with determinable lives are generally amortized over their estimated useful lives using the straight-line method. We review intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. Accordingly, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

New Accounting Pronouncements

See discussion under Note 2, Significant Accounting Policies, to the Consolidated Financial Statements included in Part I, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for information on new accounting pronouncements.