ThredUp Inc. — Q2 2021 Form 10-Q Summary
Business Context and Reporting Period
ThredUp operates an online resale marketplace for women’s and children’s apparel, shoes and accessories, including direct marketplace activities and Resale-as-a-Service offerings. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods. The company completed its IPO in March 2021 and began trading on Nasdaq on March 26, 2021.
Financial and Operating Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $60.0 million | $47.3 million | $115.6 million | $95.7 million |
| Gross profit | $44.1 million | $33.0 million | $83.9 million | $65.6 million |
| Gross margin | 74% | 70% | 73% | 69% |
| Operating loss | $13.9 million | $6.5 million | $28.6 million | $19.8 million |
| GAAP net loss | $14.4 million | $6.7 million | $30.6 million | $19.9 million |
| Adjusted EBITDA loss | $9.0 million | $3.3 million | $18.2 million | $13.7 million |
| Net loss per share | $0.15 | $0.61 | $0.54 | $1.84 |
| Active buyers | 1.34 million | 1.24 million | 1.34 million | 1.24 million |
| Orders | 1.22 million | 0.998 million | 2.35 million | 1.95 million |
- Q2 revenue increased 27% year over year; six-month revenue increased 21%.
- Consignment revenue rose 39% in Q2 and 33% for the six-month period, while product revenue declined 9% and 12%, respectively. Consignment represented 81% of revenue in both 2021 periods versus 74% and 73% in the comparable periods.
- Q2 gross profit increased 34%, and gross margin expanded by approximately 400 basis points. Management attributed the improvement primarily to the shift toward higher-margin consignment revenue and operating efficiencies.
- Operating expenses increased 47% in Q2 and 32% for the six-month period, exceeding gross profit growth. Operations, product and technology, marketing, and sales, general and administrative expenses all increased as the company expanded processing capacity, marketing, infrastructure and public-company functions.
- Stock-based compensation was $2.9 million in Q2 and $6.4 million for the six-month period, compared with $2.0 million and $3.4 million, respectively, in 2020.
Cash Flow, Liquidity and Debt
- At June 30, 2021, cash and cash equivalents were $173.1 million, marketable securities were $57.4 million, and total cash, cash equivalents and restricted cash were $176.1 million.
- Six-month operating cash flow was negative $9.1 million, compared with negative $1.5 million in 2020.
- Investing cash outflow was $66.4 million, including $57.4 million of marketable-security purchases and $9.0 million of capital expenditures, primarily for distribution centers.
- Financing cash inflow was $184.1 million, primarily from $180.3 million of net IPO proceeds and $4.6 million of net debt issuance proceeds.
- Total debt principal outstanding was $40.0 million at June 30, 2021. The term loan carried a nominal interest rate of 5.50% and an effective rate of 6.65%; the company was in compliance with its debt covenants.
- Management stated that existing cash and cash equivalents were expected to fund operations for at least the next twelve months, while also expecting operating losses and negative operating cash flow to continue for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by a 22% increase in Q2 orders, an 8% increase in active buyers and a 4% increase in revenue per order.
- Gross margin improved from 70% to 74% in Q2 and from 69% to 73% for the six-month period, primarily because of the consignment mix shift.
- Despite higher revenue and gross profit, net losses widened because operating expenses grew faster than gross profit.
- The company’s balance sheet strengthened substantially following the IPO: total stockholders’ equity was $180.8 million at June 30, 2021 versus a deficit of $222.2 million at December 31, 2020. Convertible preferred stock was converted into Class B common stock in connection with the IPO.
- Unprocessed Clean Out Kits increased during Q2 after restrictions on seller kit orders were lifted, while employee retention measures increased compensation costs.
Guidance, Outlook, Commentary and Risks
- Management expected revenue to increase moderately in the third quarter of 2021 and gross margin to be slightly lower.
- Operating expenses were expected to increase in absolute dollars in Q3 as the company invested in distribution-center capacity, customer acquisition, technology and public-company infrastructure. The filing does not provide a clear quantitative revenue, margin or earnings forecast.
- On July 24, 2021, ThredUp agreed to acquire Remix Global AD, a Bulgarian fashion-resale company. Expected consideration was approximately $28.5 million, including repayment of approximately $11.8 million of Remix debt. The transaction was expected to close in Q4 2021, subject to conditions, and was expected to be funded with cash on hand. The filing cautions that closing was not assured.
- On August 2, 2021, after quarter-end, ThredUp completed a follow-on offering of 2.0 million Class A shares at $24.25 per share, generating approximately $45.3 million of net proceeds.
- COVID-19 continued to affect demand, distribution-center capacity, hiring, labor costs, processing backlogs and supply-chain operations. Management expected adverse effects to continue for at least the remainder of 2021.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2021 because of a previously reported material weakness in internal control over financial reporting. The weakness involved information-technology controls and controls over account reconciliations and journal entries. Remediation was ongoing.
- Key risks include continued operating losses, dependence on buyer and seller growth, labor availability and wage pressure, distribution-center capacity, marketing efficiency, competition, cybersecurity and privacy compliance, COVID-19 uncertainty, potential acquisition-integration challenges, debt covenant compliance and possible future capital needs.
Important Facts for Investors to Verify
- Whether revenue growth and order growth can continue after the COVID-19 recovery period and following changes in government stimulus and consumer spending.
- Whether the favorable consignment mix and gross-margin improvement are sustainable as product and RaaS activities evolve.
- Whether operating-expense growth can moderate sufficiently to reduce Adjusted EBITDA and GAAP losses.
- The status, funding, closing conditions and integration costs of the proposed Remix acquisition.
- Progress toward remediation of the material weakness and effectiveness of the company’s financial reporting controls.
- Distribution-center processing capacity, Clean Out Kit backlog, labor retention and related fulfillment or seller-payout delays.
- Cash burn, capital expenditures, debt covenants and the effect of the post-quarter-end follow-on offering on liquidity and share dilution.
- The effect of the dual-class structure, under which Class B shareholders held approximately 97.6% of voting power as of June 30, 2021.