ThredUp Inc. 2021 Q3 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 sales and Resale-as-a-Service offerings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the same periods in 2020.
The company completed its initial public offering in March 2021 and a follow-on offering in August 2021. It agreed to acquire Remix Global AD, a Bulgarian resale company; the acquisition closed on October 7, 2021, after the reporting date.
Financial and operating metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total revenue | $63.3 million | $46.9 million | +35% |
| Gross profit | $46.1 million | $32.8 million | +41% |
| Gross margin | 73% | 70% | +300 bps |
| Operating loss | $(15.5) million | $(10.6) million | Loss increased |
| GAAP net loss | $(14.7) million | $(11.0) million | Loss increased |
| Adjusted EBITDA loss | $(7.8) million | $(7.5) million | Negative margin improved to 12% from 16% |
| Active buyers | 1.44 million | 1.26 million | +14% |
| Orders | 1.30 million | 1.01 million | +28% |
| Metric | Nine months 2021 | Nine months 2020 | Change |
|---|---|---|---|
| Total revenue | $178.9 million | $142.6 million | +25% |
| Gross profit | $129.9 million | $98.4 million | +32% |
| Gross margin | 73% | 69% | +400 bps |
| Operating loss | $(44.1) million | $(30.3) million | Loss increased |
| GAAP net loss | $(45.3) million | $(30.9) million | Loss increased |
| Adjusted EBITDA loss | $(26.0) million | $(21.2) million | Loss increased |
| Orders | 3.65 million | 2.97 million | +23% |
Q3 revenue growth reflected a 28% increase in orders and a 5% increase in revenue per order. Consignment revenue rose 43% to $48.1 million and represented 76% of revenue, compared with 72% in the prior-year quarter. Product revenue rose 15% to $15.2 million in Q3 but declined 3% for the nine-month period. The higher consignment mix contributed to margin expansion because consignment revenue is recognized net of seller payouts.
Operating expenses increased 42% in Q3 and 35% for the nine-month period. Q3 operations, product and technology expense increased 24%, marketing expense increased 60%, and sales, general and administrative expense increased 82%. Management attributed the increases to distribution-center capacity, labor costs, customer acquisition, technology, public-company costs and Remix-related expenses.
Cash flow, liquidity and debt
- September 30, 2021 cash and cash equivalents were $160.9 million, with $100.8 million of marketable securities and $166.1 million of cash, cash equivalents and restricted cash.
- Nine-month operating cash flow was $(14.1) million, compared with $(4.9) million in 2020.
- Nine-month investing cash flow was $(116.3) million, including $102.7 million of marketable-security purchases and $15.2 million of capital expenditures.
- Nine-month financing cash flow was $229.0 million, primarily reflecting $222.7 million of net proceeds from the IPO and follow-on offering.
- Net debt principal outstanding was $38.0 million at September 30, 2021. The debt bears interest at 4.00% plus the prime rate, with a reported nominal rate of 5.50% and effective rate of 6.65%.
- The company was in compliance with debt covenants at quarter-end and stated that existing cash and cash equivalents should fund operations for at least the next twelve months. Management nevertheless expects continued operating losses and negative operating cash flow and may seek additional financing.
Material changes, outlook and unusual items
- The IPO generated $175.5 million of net proceeds, and the August follow-on offering generated approximately $45.5 million of net proceeds.
- The Remix acquisition closed after quarter-end. ThredUp paid approximately $19.2 million in cash, including repayment of approximately $12.1 million of Remix debt, and subsequently paid approximately $6.2 million of other Remix liabilities. An additional approximately $3.5 million is payable in stock, subject to adjustments, 18 months after closing.
- Management expects fourth-quarter revenue and gross profit to increase sequentially due primarily to the inclusion of Remix, but expects gross margin to decline sequentially because of Remix's lower margin profile. Operating expenses are also expected to increase in absolute dollars.
- The company reported an elevated number of unprocessed Clean Out Kits and ongoing difficulty hiring and retaining distribution-center personnel. Increased compensation and benefits contributed to higher cost of revenue and operating expenses.
- COVID-19 recovery and reopening supported demand during the nine-month period, but management expects the pandemic and related uncertainty to adversely affect the business, results and cash flows through at least the remainder of 2021 and early 2022.
- Management disclosed a material weakness in internal control over financial reporting involving information-technology controls, account reconciliations, journal entries and staffing. Disclosure controls and procedures were therefore deemed ineffective as of September 30, 2021, although management concluded the interim financial statements fairly present the reported results.
- The September 2021 DC07 lease for a Texas distribution center has an aggregate base rent of approximately $28.1 million over an original 123-month term and requires a $4.3 million letter of credit. The company also had total operating lease liabilities of $22.0 million at quarter-end.
Key risks and contingencies
- Continued losses, negative operating cash flow and the need to fund distribution-center expansion, automation, marketing and technology investments could require additional debt or equity financing.
- Labor shortages, wage pressure, processing backlogs, shipping disruptions and insufficient distribution-center capacity could constrain growth and damage customer satisfaction.
- COVID-19, changing consumer discretionary spending, reduced stimulus and economic uncertainty could affect buyer demand, seller supply and operations.
- Remix integration, international expansion, European data-privacy requirements and undiscovered liabilities could produce higher costs or reduce anticipated acquisition benefits.
- Competition from resale platforms, retailers, brands and other marketplaces could pressure revenue, customer acquisition costs and margins.
- The material weakness creates a risk of delayed or inaccurate financial reporting until remediation has operated effectively for a sufficient period.
- The company disclosed no material pending legal proceedings and stated that ordinary-course litigation is not expected to have a material adverse effect.
Facts investors should verify
- Whether Remix integration delivers the expected European growth and how it affects consolidated revenue, gross margin and operating expenses.
- Progress in remediating the material weakness and whether disclosure controls and internal controls are later assessed as effective.
- Quarterly operating cash burn, capital expenditures, marketable-security balances and the sufficiency of liquidity as losses continue.
- Unprocessed Clean Out Kit levels, labor availability, distribution-center productivity and the economics of the Texas facility.
- Whether order and active-buyer growth remains sufficient to offset elevated marketing, labor, infrastructure and public-company costs.
- Compliance with debt covenants and the potential dilution or restrictions associated with future financing.