ThredUp Inc. Q3 2023 Form 10-Q Summary
Business context and reporting period
ThredUp operates an online resale marketplace for apparel, shoes and accessories in the United States and Europe, including its Remix platform and Resale-as-a-Service offerings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $82.0 million | $67.9 million | $240.6 million | $217.1 million |
| Gross profit | $56.6 million | $44.5 million | $163.5 million | $147.4 million |
| Gross margin | 69.0% | 65.5% | 67.9% | 67.9% |
| Operating loss | $18.2 million | $24.2 million | $57.1 million | $73.1 million |
| Net loss | $18.1 million | $23.7 million | $56.6 million | $72.8 million |
| Adjusted EBITDA loss | $3.6 million | $11.0 million | $15.2 million | $37.5 million |
| Operating cash flow | Not separately provided | Not separately provided | $(14.6) million | $(36.9) million |
Q3 revenue grew 20.8%, gross profit increased 27.3%, and adjusted EBITDA loss improved 67.5% year over year. Q3 net loss margin improved to negative 22.0% from negative 34.8%. Basic and diluted loss per share was $0.17, compared with $0.24 in Q3 2022.
- Consignment revenue increased 39.2% in Q3 and represented 70.5% of revenue, compared with 61.2% in the prior-year quarter.
- Product revenue declined 8.3% in Q3. Product gross margin fell to 36.8% from 45.6%, primarily due to the greater contribution of lower-margin European operations.
- Active buyers increased 4.1% to 1.763 million, and orders increased 11.4% to 1.803 million in Q3.
- Marketing expense increased 31.5% in Q3 to $19.4 million, while operations, product and technology expense increased 4.3% to $40.4 million.
- Stock-based compensation expense was $7.9 million in Q3 and $24.9 million for the first nine months, compared with $7.2 million and $20.8 million, respectively, in the prior-year periods.
Liquidity, cash flow and debt
- At September 30, 2023, cash and cash equivalents were $68.6 million and marketable securities were $5.6 million. Management reported cash, cash equivalents and short-term marketable securities of approximately $74.1 million.
- Cash, cash equivalents and restricted cash totaled $74.6 million, compared with $44.1 million at December 31, 2022.
- Nine-month investing cash flow was $48.4 million, primarily reflecting $72.0 million of marketable-security maturities, partly offset by $13.8 million of capital expenditures.
- Total debt outstanding under the term loan was $27.3 million, including $3.8 million classified as current. The loan matures in July 2027 and bears variable interest at the prime rate plus 1.25%, subject to a 6.00% floor; the effective rate was 10.73% at September 30, 2023.
- The company repaid $3.0 million of term-loan principal during the first nine months and reported compliance with all debt covenants. It stated that $38.0 million remained available under the facility.
- Management believes existing cash, cash equivalents and short-term marketable securities will be sufficient for at least the next 12 months, but noted that additional equity or debt financing may be sought.
Material changes versus the prior comparable period
- Revenue growth accelerated in Q3, driven by higher order volume, more active buyers and a shift toward consignment revenue.
- Gross margin expanded 350 basis points in Q3 because of the mix shift toward consignment and lower shipping, labor and packaging costs. Nine-month gross margin was unchanged at 67.9%.
- Operating and net losses narrowed materially, although the company remains unprofitable and cash-flow negative.
- Interest expense increased to $0.7 million in Q3 and $1.5 million for the first nine months, reflecting higher borrowing costs and less capitalized interest.
- Cash increased primarily because of marketable-security maturities and lower capital expenditures, rather than positive operating cash generation.
- Total stockholders’ equity declined to $109.5 million from $140.0 million at December 31, 2022, primarily due to accumulated net losses.
Outlook, commentary, risks and unusual items
Management expects operating losses and negative operating cash flow to continue in 2023 while it invests in growth, infrastructure and marketing. It expects capital expenditures to remain limited for the remainder of 2023 after completing the first phase of its Texas distribution center and does not anticipate adding distribution-center locations in the near term.
- Macroeconomic pressures include inflation, elevated interest rates, transportation and wage costs, recession concerns and uncertain consumer spending.
- Risks include dependence on discretionary spending, seasonality and weather, including potential effects of climate change, competition, foreign-currency exposure and the need for additional capital.
- The company identified a continuing material weakness in internal control over financial reporting involving account reconciliations, journal-entry controls and sufficient accounting personnel. Disclosure controls and procedures were therefore deemed ineffective as of September 30, 2023.
- Management is adding finance personnel and implementing new accounting processes, controls and systems, but stated that remediation is not complete and will require the controls to operate effectively for a sufficient period.
- The filing reports no material pending legal proceedings and no material adverse impact expected from ordinary-course litigation or indemnification matters.
- Unusual items included $0.5 million of Q3 severance and other charges, a $2.4 million stock-based compensation charge from accelerated RSU vesting in Q1, and $1.9 million of gift-card breakage revenue recognized during the first nine months.
Investor verification checklist
- Verify whether revenue growth and order growth can continue without disproportionate increases in marketing and infrastructure spending.
- Monitor the transition toward consignment revenue and the lower product gross margins in European operations.
- Assess the sustainability of liquidity given continuing operating losses, negative operating cash flow and variable-rate debt.
- Track remediation of the material weakness and any subsequent auditor or management conclusions regarding internal controls.
- Review the company’s ability to meet term-loan covenants as interest rates and operating losses evolve.
- Evaluate exposure to inflation, consumer discretionary demand, seasonality, weather and foreign-currency movements.