Q2 2022 ThredUp Inc Earnings Call SAN FRANCISCO Aug 16, 2022 (Thomson StreetEvents) — Edited Transcript of ThredUp Inc earnings conference call or presentation Monday, August 15, 2022 at 8:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Graden Sean Sobers ThredUp Inc. – CFO * James G. Reinhart ThredUp Inc. – Co-Founder, CEO & Director * Lauren Marie Frasch ThredUp Inc. – Senior Director of IR & Strategic Finance ================================================================================ Conference Call Participants ================================================================================ * Alexandra Christine Kasper Steiger Goldman Sachs Group, Inc., Research Division – Research Analyst * Anna A. Andreeva Needham & Company, LLC, Research Division – Senior Analyst * Ashley Elizabeth Helgans Jefferies LLC, Research Division – Equity Analyst * Dana Lauren Telsey Telsey Advisory Group LLC – CEO & Chief Research Officer * Dylan Douglas Carden William Blair & Company L.L.C., Research Division – Analyst * Edward James Yruma Piper Sandler & Co., Research Division – MD & Senior Research Analyst * Lauren Elizabeth Cassel Schenk Morgan Stanley, Research Division – Equity Analyst * Noah Seth Zatzkin KeyBanc Capital Markets Inc., Research Division – Research Analyst * Rakesh Babarbhai Patel Raymond James & Associates, Inc., Research Division – MD & Research Analyst * Tom Nikic Wedbush Securities Inc., Research Division – Research Analyst * Trevor Vincent Young Barclays Bank PLC, Research Division – VP ================================================================================ Presentation ——————————————————————————– Lauren Marie Frasch, ThredUp Inc. – Senior Director of IR & Strategic Finance  ——————————————————————————– Good afternoon, and thank you for joining us on today’s conference call to discuss ThredUp’s Second Quarter 2022 Financial Results. With us 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 also 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 third fiscal quarter and full year of 2022, future financial performance, market demand, growth prospects, business strategies and plans, impacts of inflation, 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 the 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 of 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. ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Good afternoon, everyone. I’m James Reinhart, CEO and Co-Founder of ThredUp. Thank you for joining us for ThredUp’s second quarter 2022 earnings call. We’re pleased to share ThredUp’s financial results and key business highlights from our second quarter. In addition to our financial results, I’ll give a closer look at how the ThredUp customer is faring in this difficult economic environment, discuss the unique advantages of our marketplace business model and provide some details on our progress towards profitability. I’ll wrap up with a discussion of investments in our customer experience, our progress in Europe following last year’s acquisition of Remix and updates on our Resale-as-a-Service offering. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our second quarter 2022 financials in more detail and provide our outlook for the third quarter of 2022. We’ll close out today’s call with a question-and-answer session. I’d like to start by acknowledging that we are facing a consumer environment that is much different than it was just 2 months ago. All the data that we’re seeing indicates that consumer health is deteriorating, especially among the budget consumer who makes up a meaningful portion of our customer base. As such, we saw our business slow in the final weeks of Q2, a trend that has continued into Q3. Given the volatility we’re seeing with the consumer, it’s incredibly hard to predict exactly how the customer is going to behave in the back half of the year, a period during which we also have challenging year-over-year comparisons. With that said, our priority in the coming quarters and into 2023 is reaching breakeven on an adjusted EBITDA level and we are planning to get there by managing the variables within our control. We are actively making adjustments to reduce our cost structure and modify our CapEx plans to not only weather this challenging economic period, but importantly, to come out profitable on the other side, positioning us for share gains and consumer health returns. I’ll provide additional details on our path to profitability later in the call. But first, let’s turn to our Q2 results. We achieved another quarter of strong financial performance, seeing record revenue, resilient gross margins and continued growth in active buyers and orders compared to the same time last year. Our revenue of $76.4 million is an increase of 27% year-over-year, even with the deceleration beginning in mid-June. We are particularly proud of our gross profit totaling $52.6 million, representing growth of 19% year-over-year. We finished the quarter with gross margins at 68.9% on a consolidated basis and record gross margins in our U.S. business of 74.2%, as our progress in our logistics strategy more than offset a highly promotional environment. Active buyers and active orders this quarter increased 29% and 40% year-over-year respectively. Our adjusted EBITDA loss of $13.5 million is primarily due to planned investments across our operating infrastructure and technology stack. Let’s turn to the macro environment and the consumer. Our second quarter results were solid, building off a strong first quarter. But as I noted, our consumer began to really struggle in the back half of June, and that persists today. As has been well-documented, the American consumer and particularly the budget consumer has pulled back on discretionary spending amidst today’s economic climate. Inflation continues to squeeze the purchasing power of all but the wealthiest Americans. Recall that approximately 60% of our customer base has a household income below $100,000, and our customer data is telling us that this budget consumer is feeling particularly pinched. As a rigorous data-driven company, we’re sharing some incremental earnings this quarter to demonstrate how consumer behavior in the U.S. has evolved in our marketplace. We’re (inaudible) a clear bifurcation of ThredUp customers with premium shoppers trading up and value shoppers trading down. Year-over-year, the average order value of the deep discount segment of our customers declined 7%, while our upscale shoppers average order value increased 15%. When we look at the items being purchased, the bifurcation is even more pronounced. The deep discount shoppers are trading down to items that are 24% less expensive and the typical budget shoppers trading down to items that are 8% less expensive. Meanwhile, the upscale shopper is doing the opposite, trading up to items that are 8% more expensive. While we’ve only seen a slight dip in the number of upscale shoppers buying with us, we’ve seen a 23% decline across discount and budget shoppers in July compared to the same period in May. Discount and budget shoppers make up about 1/3 of our customer base, so essentially nearly 1 in 4 of them are [siloing] themselves from apparel purchases right now. Across all our shoppers, we’ve seen return rates climb over the past several months, which we believe is an indicator that customers are being more selective when it comes to their discretionary purchases. What this tells us is that while there are many customers on the sidelines right now, even the customers in market are behaving differently. We expect these trends to continue for some time. Given this backdrop, I want to call your attention to 2 areas: first, the advantages of our marketplace model and how we can flex our platform to adjust the demand. And second, how we’re approaching variable expenses in our march towards both sustainable growth and sustainable profits. Let me start with the structural advantages and built and resiliency of being a marketplace. I want to remind everyone that we’re not a retailer or direct-to-consumer e-commerce company. Unlike traditional retailers whose brand equity around pricing, inventory commitments and fashion manufacturing lead times can become a liability in a hyper-promotional and slowing macro environment, our consignment structure and flexible responsive supply chain enable us to take minimal inventory risk. We don’t set trends or have to bet on trends in many quarters into the future. We can let the data drive our decision-making. We think of every listed item in our marketplace as a snowflake, which means we have the flexibility to adjust our prices, seller payouts, processing cadence, recommendation algorithms and merchandising mix to adapt to the consumer environment. For example, we see resilience in spending from higher-income customers. We can adjust our assortment and pricing strategy for items that are trading with that demographic. If customers are trading down into lower-priced goods, we can adjust our selection and payouts for those items to drive sell-through while protecting margins. One of the lessons learned coming out of pandemic was how to flex our mix of goods to meet the moment. Right now it’s a prime example of how we can flex. While traditional retailers have overbought and must work through a glut of inventory, we can more easily dial back inbound supply and shape our assortment from our customers to best match the forecasted demand environment. As macro conditions begin to improve, we can dial back up our processing to meet the demand curve. Next, I’d like to address in more detail the steps we’ve taken to reduce expenses across the organization as a proactive step towards our profitability goals. It’s very important to note that, again, as a marketplace, many of our expenses are variable, not just in supply processing, but more broadly across the P&L. This past quarter, we reduced expenses across head count, R&D, CapEx and discretionary spending not pertinent to the current growth trajectory of the business. This includes making the difficult decision to lay off about 15% of our corporate workforce as well as shutter one of our processing centers. We believe these actions will position us well for the uncertain demand environment ahead and accelerate our path to profitability. While we’ve prioritized the new approach to expenses, it’s proving hard to predict exactly how the customer is going to behave in the back half of the year and into the first part of 2023. With that in mind, we thought it best to be conservative and to guide investors to 3 operating principles on which we’re running the business. First, we are focused on maintaining our active customer numbers and engaging our core buyers and sellers through continuous improvements in the product experience. We will seek to acquire new customers as acquisition costs continue to come down and we will plan to be spring-loaded to search item processing and growth spend as we’ve seen green shoots of a recovery. Second, we are focused on maintaining our strong gross margins, pricing power with buyers, our payout power of our sellers and reducing inventory risk to provide maximum flexibility as the customer recovers. We plan to drive our processing backlog down to allow us to be nimbler in sourcing and shaping the best possible assortment. Three, we will rigorously manage variable expenses and CapEx as needed to achieve our profitability targets and regulate our cash levels. While we expect a challenging consumer environment for the foreseeable future and can reduce variable expenses further if needed, we will also be positioning our product and growth strategy to take advantage of a recovering consumer. Importantly, we expect to be adjusted EBITDA breakeven in the back half of 2023. This is assuming a quarterly revenue run rate between $80 million and $85 million and on a clear path to sustainable profits thereafter. Now that we’ve covered the consumer, the advantages in our marketplace and our path to profitability, I’d like to update you on what we’re doing to improve the customer experience and provide some commentary on our progress with our European and Resale-as-a-Service businesses. Let’s turn to the customer experience. Across our marketplace, our team has honed in on high-impact, high-conviction improvement to ThredUp prompt experience that will pay dividends in the short and long term. First, it’s all about delivering a world-class shopping experience that keeps customers coming back. We offer a one-of-a-kind catalog where fresh new items across thousands of brands, categories, styles and price points are listed every day. With our expansive assortment, one area we’re particularly focused on is curation. We’re building tools like visual filters, style-matching algorithms, occasion-based recommendations and mobile swiping favoring features to empower the customer to get exactly what she wants in an increasingly effortless way. If you’ve used the ThredUp app, you may have seen some of this already in beta form. Of course, we also remain disciplined on acquiring new customers and delighting them the first time they engage with ThredUp. To that end, I’m excited to share that Noelle Sadler has joined ThredUp as our Chief Marketing Officer. Noelle comes from online fashion retailer, Lulu, where she served as Chief Marketing Officer. Her deep expertise in e-commerce marketing and merchandising will be immensely beneficial as we look to capture an even larger mind share of Gen Z consumers. Shifting to the international front, we remain focused on Remix, the European fashion resale company we acquired in Q4 of last year. As mentioned on last quarter’s call, we are focused on driving supply growth and margin expansion within the Remix business. We’re also learning to manage and optimize the more seasonal nature of its operations in Central and Eastern Europe, where Q3 tends to be sales of low-priced Ts, tanks and shorts and Q4 tends to be sales of higher-priced pants, jackets and outerwear. As we learn more about these customer preferences, we’re leveraging the ThredUp playbook to improve pricing, merchandising, payouts and sell-through. We are pleased at how well Remix continues to exhibit resiliency in its top line and margins despite economic turbulence in Europe. Turning to ThredUp’s Resale-as-a-Service business, also known as RaaS. We recently launched Resale 360 for Tommy Hilfiger, a classic American brand dedicated to embracing circularity. At the same time, we launched OakenFort, a minimal and sustainable fashion brand, showing that our RaaS platform can effectively serve brands across the apparel ecosystem. In addition, [Made Well], one of our early RaaS clients expanded into 15 categories outside of denim, growing listings on its resell shop by over 400%. Despite a tough environment for retailers, we remain on track to have more than 40 brands on our RaaS platform by year-end, and many of our existing clients are expanding their businesses with us as we prove out the value of our model. By leveraging our marketplace infrastructure, RaaS amplifies our supply advantage, places our brand in front of new customers, increases our sell-through and return on assets and expands our long-term profitability metrics by adding sources of recurring high-margin revenue. In conclusion, let me reemphasize that our priority in the coming quarters and in 2023 is reaching breakeven on an adjusted EBITDA level, and we are planning to get there by managing the variables within our control, while positioning us for share gains on consumer health returns. I also want to acknowledge that the mission of ThredUp, which is to inspire a new generation of consumers to think secondhand first. And our mission of our company ultimately comes to life through the incredible work of our team, and I’m really proud of their collective resilience. The year-to-date corporate employee retention rate remains a remarkable 96% with the average tenure of our most senior executives approaching 8 years. This quarter, we also released our 10th annual 2022 reset report conducted by third-party retail analytics firm, GlobalData. According to GlobalData, the resale market is expected to exceed $80 billion by 2026. And while we remain confident in its long-term growth prospects, we are keenly aware of the near-term economic challenges in front of us. One final comment before I turn it over to Sean. I’d like to note that while this is a challenging moment for the budget shopper in a discretionary category, the American consumer has proven to be incredibly resilient over time. And when discretionary spend comes roaring back as it has in every other previous recovery, we will be poised to serve that surging demand with an incredible selection of great clothing in an ever-improving marketplace with strong unit economics and with a meaningfully improved cost structure. With that, I’ll now turn it over to Sean to walk through our financial results and our guidance. ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– Thanks, James, and again, thanks, everyone, for joining us on our second quarter of 2022 earnings call. I’ll begin with an overview of our results and follow with guidance for the third quarter and the 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-Q filing. We are extremely proud of our Q2 results. For the second quarter of 2022, revenue totaled $76.4 million, an increase of 27% year-over-year. Consignment revenue was flat year-over-year, while product revenue grew 145%. Q2 consignment revenue saw an outsized impact from slowing demand in the U.S. in the final weeks of the quarter, a deceleration that so far has continued into Q3. Product revenues growth is due to our Q4 2021 European acquisition and growth in our RaaS channel. Currently, the majority of revenue from both RaaS and our European business holds under product revenue, though we plan to transition these businesses towards consignment revenue over time. For the trailing 12 months, active buyers rose 29% to 1.7 million. Second quarter orders totaled $1.7 million, increasing 40% as compared to the same period last year. For the second quarter of 2022, U.S. gross margins expanded to 74.2%, a 60 basis point increase over 73.6% for the same quarter last year, representing our highest U.S. gross margin ever, our progress in outbound shipping logistics, along with our ongoing work in improved automation, larger distribution centers and expanded utilization despite elevated returns and a more promotional strategy towards the end of the quarter. Over the course of Q2 2022, we did see return rates move higher as consumers became more selective, negatively impacting our revenue by an incremental $2.5 million over Q2 of 2021. We have seen this trend continue in Q3. Consolidated gross margin was 68.9%, a 470 basis point decline over the same quarter last year due to the consolidation of the lower-margin European business. Over the next few years, we plan to migrate the European business towards higher-margin consignment. In the near term, Europe’s product revenue margins are materially lower than ThredUp U.S.’ product margin, and we see ample opportunities to improve its product revenue margins through investments in automation and data science in order to be closer to the 50% range that U.S. product margins command. For the second quarter of 2022, GAAP net loss was $28.4 million compared to GAAP net loss of $14.4 million for the second quarter of ’21. Adjusted EBITDA loss was $13.5 million or 17.7% of revenue for the second quarter of ’22, an approximate 265 basis point decline compared to the adjusted EBITDA loss of $9 million or 15.1% of revenue for the second quarter of ’21. The deleverage was largely the result of operations, product and technology investments as we continue to build out our Texas DC, which will ultimately increase our current unit capacity by over 150% in the U.S. alone. Q2 GAAP operating expenses increased by $23 million or 40% year-over-year. Just over half of this increase was related to higher operations, product and technology costs related to our infrastructure expansion in both the U.S. and Europe, while stock-based compensation accounted for $7 million of the increase as we awarded employees our annual ROT refresh. Turning to the balance sheet. We began the second quarter with $191.1 million in cash and investments and ended the quarter with $155.7 million. Our cash usage from operations was $18.2 million, while we spent $14.9 million on CapEx, largely attributable to our infrastructure build-out. As we look forward, our priority in the balance of the year and into 2023 is to direct the business towards adjusted EBITDA breakeven on our way to profitability. With the acknowledgment that the challenges in the macro economy are something we cannot control and that we will likely be facing a slower demand environment in the near term, we believe we have mapped a path to adjusted EBITDA breakeven that’s dependent upon what we can control, expenses. ThredUp is clearly aligned on our adjusted EBITDA breakeven goal with the entire organization prioritizing expense rationalization and cost efficiency. At the same time, we remain dedicated to investing in our customer experience and operations so that we are well-positioned to take share when consumer health returns to steadier footing. We acknowledge that the time frame to reach adjusted EBITDA breakeven on a quarterly basis could shift depending on the macro environment. But based on our current assumptions, we believe that we’ll be able to reach breakeven by the back half of 2023, assuming we reach a quarterly revenue base of $80 million to $85 million. An example of the work we have done in re-examining our expense structure is that we have made the difficult decision to lay off 15% of our corporate workforce towards the end of Q2, close one of our processing centers and eliminated a significant portion of discretionary spend. We are continuing to find opportunities to reduce costs and we expect many of the expense rationalization initiatives we put in place will materialize over future quarters. We’re also pulling back on variable spend in response to slowing demand in areas such as marketing and inbound processing. In Q3 and Q4, we expect to realize approximately $12 million and $18 million of savings from these initiatives respectively. Based on the current revenue trends in 2023, we expect $70 million in savings, over half of which are operations and marketing-related, which we expect to redeploy when revenue trends improve. Even in the slowing demand environment that we are facing, we are confident in our ability to reach adjusted EBITDA breakeven due to the fact that our expense structure is highly variable. This expense flexibility is a key of our business model that can serve us well in a weaker economic environment. For example, inbound costs that sit in operations, product and technology are responsive to revenue trends. If we’re selling fewer items, then we need to process fewer items in, naturally reducing our expenses. Furthermore, we have the ability to react to revenue trends and defer or reprioritize our CapEx commitments as well. For example, we have taken a modular approach to building our Texas DC. This means we can push out the second phase and the associated CapEx and cost until demand requires additional capacity. Based on the current environment, we expect to spend $12 million to $13 million in Q3, $5 million to $6 million in Q4 and are planning for less than $20 million in total for 2023. Though we spent $33 million in cash in Q2, we expect the spend level to significantly decrease by Q4 as our CapEx expanding eases as we near the end of completion of Phase 1 of our Texas DC combined with the significant improvements in EBITDA we are expecting due to the ongoing cost-saving initiatives were implemented. Even in a slower growth environment, the variable nature of our expenses, combined with the ongoing work we’re doing to drive out excess costs provides us with the confidence that we expect to be able to fund the business through our existing cash balance and/or debt facility until we reach free cash flow positive. In fact, we believe our recently refinanced $70 million debt facility could entirely finance our near-term CapEx requirements if needed. As a result, we do not anticipate our balance of cash, cash equivalents, restricted cash and marketable securities falling below $50 million before reaching free cash flow positive nor do we expect the need to turn to the capital markets before them. We are electing to take a highly conservative approach to the second half as visibility consumer behavior is low, particularly among the low-end consumer. In addition, we are facing a difficult second half comparison due to the step-up in processing power in 2021. Our outlook assumes that the trends we are seeing today extend through the balance of the year. With these factors in mind, I would now like to share our financial outlook. For the third quarter of 2022, we expect revenue in the range of $64 million to $66 million, gross margin in the range of 65% to 67%. Keep in mind that our Europe business is highly seasonal with its lowest gross margin quarter in Q3 during the summer selling period. In addition to our weaker-than-expected U.S. performance, our lower-margin European business will be a larger portion of our business in Q3. And adjusted EBITDA loss of 18% to 16% of revenue, which is a 70 BP sequential improvement at the midpoint of our outlook and basic weighted average shares of approximately $100.4 million. For the fourth quarter of 2022, we expect revenue in the range of $70 million to $72 million. Gross margin in the range of 64% to 66%. Our lower-margin European business has their seasonally strongest quarter in Q4, making it the greatest percent of total revenue for the year, pressuring gross margins and adjusted EBITDA loss of 10% to 8% of revenue, which is an 800 bps sequential improvement at the midpoint as we expect to benefit from a full quarter of our cost-saving initiatives and basically the average shares outstanding of approximately 101.3 million. For the full year of 2022, we now expect revenue in the range of approximately $283 million to $287 million. Gross margins to be in the range of approximately 67% to 69% an adjusted EBITDA loss of approximately 16% to 15%. We continue to expect sequential progress in our adjusted EBITDA rate and dollars until we reach breakeven. Despite the top line pressures to our business, we are expecting an improved EBITDA loss versus the midpoint of our previous guidance due to the meaningful actions we have taken to reduce expenses across the organization. And basic weighted average shares of approximately $100 million. In closing, while we are pleased with our second quarter performance, we know there is much more work to be done. While we are lowering our top line expectations for the remainder of the year due to the consumer environment, we want to reiterate that our adjusted EBITDA margins continue to improve sequentially and are in line with our previous guidance for the full year. We are confident that we will make progress on our path to profitability as we flex the variable costs within our control, and we believe that our marketplace model is uniquely positioned to weather this uncertain economic period. As James mentioned, we are not sure when the consumer environment will recover, but we know that when it does, we will be in a position to emerge as a stronger, more profitable business on the other side. James and I are now ready for your questions. Operator, please open the line. ================================================================================ Questions and Answers ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) And we’ll take our first question from Trevor Young with Barclays. ——————————————————————————– Trevor Vincent Young, Barclays Bank PLC, Research Division – VP  ——————————————————————————– Great. On that path to breakeven into H ’23, and I think you said $80 million to $85 million run rate revenue required to get there, can you just help us understand what needs to go right for that to come to fruition? And does that outlook imply that current trends that you saw in July and August from underlying consumers persist? Does it get better a little bit? Does it get worse? Just trying to understand or get a sense as to what’s baked into that? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Sure. It’s James. Yes, I mean, I think we saw the step down in the back half of Q2. And I think the way we’re thinking about the back half of the year and into 2023 is that things sort of remain where they are at these depressed levels, but that we continue to work on the business and continue to optimize what we can do around pricings, promotions, payouts. But we’re not assuming any big recovery in that. But we’re also not assuming that things get materially worse, right? So I think we’ve sort of hit kind of the level that we’re seeing right now and we expect that to persist for several quarters. ——————————————————————————– Operator  ——————————————————————————– We’ll take our next question from Edward Yruma with Piper Sandler. ——————————————————————————– Edward James Yruma, Piper Sandler & Co., Research Division – MD & Senior Research Analyst  ——————————————————————————– I guess 2 for me. First, just to kind of underscore the last question. Are you seeing trends stabilize at this lower level? Or are they continuing to deteriorate? And I guess what does guidance contemplate? And then as a bigger picture question, as the traditional first-party environment gets more promotional, is it your belief that you need to kind of come down in price further so that you maintain kind of a differential secondhand versus new? Or kind of how do you think about adjusting pricing across your offering? And kind of when should we start to see those changes? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes, I mean, I think we’re starting to see the trends stabilize. I think you saw that step down in the end of June and into July. But now we’ve been seeing it be pretty consistent. And so we’re projecting that we’re going to kind of live in these levels for some time, Ed. But then the way we’re managing the business is being super flexible where things start to recover, we can accelerate into that recovery. And if things somehow were to get materially worse, pull the levers to manage that variability. So I think our posture running the business is to be flexible, but we do think the world is stabilizing. I think on the competition piece, your second question, we’ve sort of built that into our assumptions that it’s going to be more competitive. And so we’re going to have to flex price, promotion, discounts, payouts to our sellers. So we’re willing to flex all of those things to be competitive in the environment. But we’re — our guidance reflects what we expect to be a competitive environment in the back half of the year and into ’23. ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– And Ed, I would just add to that to being mostly consignment-based business, right? As our prices come down, our payouts come down. So the gross margins themselves are a little more protected than most. ——————————————————————————– Operator  ——————————————————————————– We’ll take our next question from Tom Nikic with Wedbush Securities. ——————————————————————————– Tom Nikic, Wedbush Securities Inc., Research Division – Research Analyst  ——————————————————————————– James, you mentioned in your prepared remarks when you gave kind of like the 3 principles or 3 pillars that you were focusing on, you talked about maintaining your customer count. And you made a comment about acquiring new customers as acquisition costs come down. Is that something that you’re already seeing? Are you seeing the come down? Or are you kind of saying that you’re assuming that in the environment of more moderate demand that tax would come down and you’d be able to continue acquiring new customers in that environment? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes, Tom, I think just to double click on both parts of that. I mean, I think on the one hand, you’re seeing our existing customers — many of them are in market and purchasing, and there’s a segment of customers who I think are sitting out and buying. And I think it’s a really important thing to understand around what’s happening with our active customer base, which is customers who are in market, they’re buying lots of stuff, but there are people who are on the sidelines. And I think that influences our thinking and then, frankly, what we’re seeing around the marketing piece, which is we are seeing ad rates come down. I think all the big marketplace — all the big ad marketplaces have talked about cost per click and CPMs coming down, and we are seeing that trickle through. But we’re not expecting like that to materially change over the next few quarters. It’s just that it is lower than it has been over the prior few quarters. And so I think we’re kind of watching both parts of the business, existing active customers and new customers coming in and feeling like there may be a chance to take advantage of some discontinuities over the next couple of quarters. ——————————————————————————– Operator  ——————————————————————————– We’ll take our next question from Lauren Schenk with Morgan Stanley. ——————————————————————————– Lauren Elizabeth Cassel Schenk, Morgan Stanley, Research Division – Equity Analyst  ——————————————————————————– Great. Just to, I guess, put a finer point on one of the earlier questions. I guess what level of promotional activity is assumed in the second half gross margin outlook? And then what are you seeing on the supply side? Are you seeing customers or sellers perhaps wanting to monetize your class a little bit more? Curious, any changes there? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes, Lauren, I mean, I think we’re anticipating it’s going to be very competitive in Q3 and Q4. I think our guidance reflects what we expect to be a very competitive environment. We’ve seen some of that already quarter-to-date. I think as you know, on the supplier side, I mean, we just have never had trouble firing sellers, and we continue to see strong demand from our sellers and think there’s going to be resilience in that selling community. But I’m not sure that necessarily there’s going to be more and more sellers in market than there was historically given what we’re seeing. So hopefully, that answers your question. ——————————————————————————– Operator  ——————————————————————————– We’ll move on to our next question from Anna Andreeva with Needham & Company. ——————————————————————————– Anna A. Andreeva, Needham & Company, LLC, Research Division – Senior Analyst  ——————————————————————————– Great. Two quick ones. I wasn’t sure if you covered this, Sean or James, how did Remix perform during the quarter versus your plan? And what are you guys implying for Remix in the back half? And secondly, we saw you started charging for cleanout bags. Can you talk about what’s behind that decision? And just curious how has customer reaction been? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Sure. I’ll let Sean talk about Remix first. ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– On the Remix side, they’re performing really well, performed pretty much up to our expectations. I think the piece to keep in mind, as you start to look at Q3 and Q4, there’s a much more seasonal business than we’ve seen in the U.S. So in Europe, when a summer, it’s pretty much summer everywhere when it’s winter and fall, it’s cold everywhere. So I think you see overall ASPs declined in Q3, T-shirts, shorts, things like that. So their GM goes down. And then you get to Q4, it’s their biggest quarter. ASPs are higher, gross margins higher and actually their revenue contribution to the whole company is at its highest. So that’s where you’re looking forward, Q4 will be the biggest quarter. ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– And on your question around charging for cleanup kits, this is an experiment we’ve run over time over many, many years. So in this current variation, we’ve just seen continued real demand for our cleanout service. And so exploring willingness to pay on the cleanout side and how that affects the customer experience. And there’s some interesting data that hopefully we’ll share next quarter around how that influences the types of customers that choose to clean out with ThredUp because as I said in the prepared remarks, we’re really looking to influence the assortment — and this is one experiment that we’ve been running to see how that materially changes what people send us. So stay tuned for more information on that. ——————————————————————————– Operator  ——————————————————————————– We’ll take our next question from Dana Telsey with Telsey Advisory Group. ——————————————————————————– Dana Lauren Telsey, Telsey Advisory Group LLC – CEO & Chief Research Officer  ——————————————————————————– As you think about the categories of merchandise that are selling and the difference between the income cohorts, what are you seeing there? And what — how is your pricing adjusted? And lastly, you mentioned about one of the processing facilities. Are you delaying it, closing it? Or what exactly is happening there? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– I’ll let Sean talk about the processing centers, and then I’ll hit your question, Dana, on the merchandise mix. ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– Yes. As part of our restructuring, we closed one of the processing centers, I think we mentioned that in our prepared remarks. And then as it relates to DC07, which is the large facility in Dallas, we’ve been able to flex that down and slow down the build out. We’ll build out Phase 1 at first, which will hold about 5 million items. And then we’ll build out the second half as needed as we go through it. What that really does is allow us to conserve CapEx spend all through ’23. It kind of fits in nicely what I talked about is spending CapEx less than $20 million in 2023. ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– On the shopping trends, I think what we’re seeing is you’re definitely seeing this trade down where your discount shoppers your budget shoppers, they’re buying cheaper items, but they’re buying a fair amount of them, right? So I think we’re capturing incremental share in the closet, whereas your upscale shopper is buying more expensive items, and I think still remains like pretty resilient on the luxury side. And I think that’s what we’re projecting will be true over the next few quarters. And our job is really to shape that assortment to best serve where the customer is, and that’s where our focus is right now. ——————————————————————————– Dana Lauren Telsey, Telsey Advisory Group LLC – CEO & Chief Research Officer  ——————————————————————————– And are you seeing the same customer trends in — with Remix in Europe is what you’re seeing here in the U.S.? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes, I think what we’re seeing is — again, I want to really emphasize that there are plenty of customers that are in market and buying and some of them are trading down and some of them are trading sort of neutral and some are trading up. The bigger challenge is that there’s just a segment of customers that are just not in market. And so I think what we’re seeing in the U.S. is that customer on the sideline waiting to digest the cost of groceries and gas and rent and we expect that customer at some point to come back in the market. And I think the same thing is true in Remix, but just at a much smaller scale. So yes. ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– And Dana, I would say like across the company, the revenue per active buyer is at its highest ever that we’ve ever had before in Q2. ——————————————————————————– Dana Lauren Telsey, Telsey Advisory Group LLC – CEO & Chief Research Officer  ——————————————————————————– And then just one last thing. On the customer base, do you notice any regional trends in terms of what you’re seeing? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– We don’t have any regional trends that we’re talking about right now. So no, nothing to share there, Dana. ——————————————————————————– Operator  ——————————————————————————– We’ll hear next from Ashley Helgans with Jefferies. ——————————————————————————– Ashley Elizabeth Helgans, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– You mentioned a pullback in marketing in the back half. Just any more color you can provide there? And then any category trends you can call it from the second quarter. I think last quarter, you called out categories like workwear, cocktail attire, that would be helpful? ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– Sure. Ashley, yes, I mean, typically, what happens is that we spend more marketing in the beginning of the year, and then it tends to actually come down quarter-over-quarter. That’s — it’s been a historical trend. Same thing is true. This year, we tend to spend a fewest amount of marketing dollars in Q4 because typically, Thrift is not a big holiday category. And so we don’t try to compete in the holiday season like other retailers. So the same trends that we’ve served previously, those are in play this year. As for the trend piece, we didn’t comment on it in the prepared remarks, but very similar sort of themes that we were seeing around — as others are seeing around back-to-school categories. I think the one thing that we are seeing is you’re seeing fall and winter spending be pulled forward. So more will coats, more jackets, more outerwear earlier in the season than I think we saw previously. So that’s probably the one thing to know for you. ——————————————————————————– Operator  ——————————————————————————– We’ll take our next question from Alexandra Steiger with Goldman Sachs. ——————————————————————————– Alexandra Christine Kasper Steiger, Goldman Sachs Group, Inc., Research Division – Research Analyst  ——————————————————————————– I just wanted to follow up on your higher-income shoppers. Could you maybe talk about how you can attract more of these buyers to your platform? And how quickly can you actually adjust your assortment? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes. I mean the — I think it’s been reported widely. I think the upscale shopper is actually faring pretty well in this economy. And so we’re confirming that in our data. I think we said that they’re trading up to items that are 8% more expensive. And so I think what we’ve been doing is continuing to focus our sourcing strategy on products that are going to delight that customer. And I think what we found is that it’s in many marketplaces and ThredUp is not unlike others, it’s really the product that you have really drives the customers who come on to the platform. And so I think — we will continue to try and find great product to serve that more premium shopper. But I don’t think we’re going to materially go chasing in that direction. I think we have a great selection, a broad assortment, and we see we can do incrementally better job of making sure that product is available. ——————————————————————————– Operator  ——————————————————————————– We’ll take our next question from Dylan Carden with William Blair & Company. ——————————————————————————– Dylan Douglas Carden, William Blair & Company L.L.C., Research Division – Analyst  ——————————————————————————– Just curious on the sort of scale down DC07 plan, does that affect sort of the maturity curve and the profit contribution as you had sort of previously envisioned it? And sort of a related question, thinking of breakeven by the back half of next year, if you could kind of quantify or bucket or rank kind of are you getting there evenly between cost-cutting and sort of a maturing fleet? Or is it more cost-cutting? ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– I appreciate it. Yes. I think from the DC07 perspective, I think it will be about half the size as we close out this 2022. We are actually starting a quarter later due to some — basically some challenges in the supply chain. So that instead of starting in Q3 when we started in Q4, so that’s an impact on EBITDA in that quarter of about — about the same as what it was before, about $2.2 million, $2.3 million and that will open up for revenue in Q4 and it will start to move that headwind. So I don’t think the overall scale of the business other than starting later is going to change what we had already assumed. It’s going to take time to ramp into the $5 million and then further time to build out the final $5 million and then go up to the total of $10 million in the DC. ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes. And Dylan, on the profitability piece, I think it’s more on the — managing through the variable costs in the business that I think gives us the confidence in profitability in the back half of the year. We’re not — as we gave you explicit guidance around the revenue run rate, like we’re not expecting a massive consumer recovery to get us there, but we are expecting to see the benefits of a lot of the things we’ve done on the variable expense side, and also the work we continue to do around pricing and promotions and discounts and returns and all those sorts of things that we’ve been working on. And I think it kind of speaks to the power of the marketplace that we can bend those cost curves and those decisions to get to where we want to be. ——————————————————————————– Dylan Douglas Carden, William Blair & Company L.L.C., Research Division – Analyst  ——————————————————————————– Great. And then I guess on the marketplace and the supply side, you would think that in this environment, people might be selling more into the marketplace to earn cash to offset some purchasing. I mean, is there some lag time there potentially it’s when you might see a benefit? Are you seeing that benefit? And I guess, yes, just maybe to ask the question again just around can you sort of shift the model to maybe more fully leverage the people that are spending, right? Or is it just that it’s just so the contribution from the lower income customer so great that it’s hard to kind of more fully offset that impact? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes, Dylan, I mean, I think we are shifting some of the attention and efforts, but I think it’s tough to overcome 1 and 4 of their discount and budget shoppers just sort of being out of market. And so I think we’re — what’s nice about it is that we can manage kind of the variability piece on the expense line and really be poised to accelerate on the growth side, right, as the recovery takes place because those customers are going to be surging in the market, which I think will be an exciting time for us. But I don’t want to — we don’t want to shift the business too much in one direction, knowing that we don’t expect this to be many, many years challenge, right? We think about it as several quarters. ——————————————————————————– Operator  ——————————————————————————– We’ll hear next from Noah Zatzkin with KeyBanc Capital Markets. ——————————————————————————– Noah Seth Zatzkin, KeyBanc Capital Markets Inc., Research Division – Research Analyst  ——————————————————————————– Just one for me. On RaaS, can you provide some color around number of clients line of sight to additional clients in the back half, how you’re thinking about 2023 and the P&L impact from your plan? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes. No. I mean, I think as we said, we still feel like we’re on track to be around 40 clients by the end of the year. And so I continue to think that the RaaS business is showing resilience in an environment where I think apparel retailers are broadly struggling. So I feel very good about RaaS’ penetration. And we haven’t put any numbers out there around 2023 for RaaS. But keep in mind that every RaaS client we signed provides real leverage on both sides of our business. And we’re seeing that today on the supply side. And as we launch new clients, we just launched Tommy Hilfiger last week, it drives incremental demand for us. So I think a really nice vector for growth. And it will be one of those things that we’re going to stack every quarter and really see those results compound over time. ——————————————————————————– Operator  ——————————————————————————– We’ll take our final question from Rick Patel with Raymond James. ——————————————————————————– Rakesh Babarbhai Patel, Raymond James & Associates, Inc., Research Division – MD & Research Analyst  ——————————————————————————– Appreciate you squeezing me in here. You touched on this earlier, but can you provide additional color on the puts and takes for gross margins as we think about the U.S. and Remix businesses separately? And I know you’re not guiding to ’23 specifically, but I’m hoping you can help us have a better understanding of what you see at the low-hanging fruit to improve gross margins once we presumably get through this rough economic patch? ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Yes. So the gross margin piece, we kind of touched on it on the seasonality as it relates to Remix. So as you add the business, it’s a little lower than us, and they take — they become a bigger portion of our business, it drags down gross margin overall. I think the piece to keep in mind is Remix itself is mostly direct and their margins are well below our 50% for our direct business. So we have a great opportunity there to move that business up to what the standard rate is for ThredUp. In addition, we’ll be moving that business over time, over 2 years to 3 years on a consignment model that will be a tailwind overall in addition to that moving into more automated facilities, using more data, more algorithms, a larger unified facility, just is kind of other things too that we could add here. ——————————————————————————– Graden Sean Sobers, ThredUp Inc. – CFO  ——————————————————————————– Yes, Rick, the only thing I would add is you go into 2023 is as you can see the economy potentially improving over time is, is there some improvements you get from promotions, from returns normalizing back to where they were pre-distress, I would say, in the apparel market. So I think there’s a bunch of things in there. And I think what we’re really trying to do is focus on how do we surge out of this recovery as we start to see the green shoots of that. And I think you’ll see that top line. I think you’ll see that in gross margin, and I think you’ll see that in EBITDA. So really trying to be able to manage the business through a time when you really don’t have a lot of clarity, right, around what the next few quarters are going to look like. ——————————————————————————– Operator  ——————————————————————————– And that does conclude today’s question-and-answer session. I’d like to turn the conference back over to management for any additional or closing remarks. ——————————————————————————– James G. Reinhart, ThredUp Inc. – Co-Founder, CEO & Director  ——————————————————————————– Great. Well, thank everybody — thanks, everybody, for joining us for this earnings call. And I look forward to seeing you next time around. Thanks. ——————————————————————————– Operator  ——————————————————————————– Thank you. And that does conclude today’s conference. We thank you all for your participation. You may now disconnect.