Good day. And welcome to the thredUP Q3, 2021 Earnings Call. Today's call is being recorded. At this time, I’d like to turn the call over to Lauren Frasch, Senior Director of Investor Relations. Please go ahead, ma’am.

Good afternoon. And thank you for joining us on today's conference call to discuss thredUP's third quarter 2021 financial results. With us are James Reinhart, thredUP's Chief Executive Officer and Co-Founder; and Sean Sobers, Chief Financial Officer. 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 website 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 guidance and future financial performance, market demand, growth prospects, business strategies and plans. These forward-looking statements involve known and unknown risks and uncertainties and our actual results could differ materially. 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. 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 with comparable GAAP measures, in our earnings release. Now I'd like to turn the call over to James Reinhart.

Good afternoon, everyone. I'm James Reinhart, CEO and Co-Founder of thredUP. Thank you for joining us for thredUP's third quarter 2021 earnings call. As we head into the final quarter of the year, we're excited to share our financial results and key business highlights from our third quarter. I'll start with some perspective on what we're seeing in the broader retail environment and how our strategy is evolving. I'll then discuss our marketplace dynamics and progress with our Resale-as-a-Service offering. And finally, I'll touch on changes in our product experience, how we're scaling our operations and what we're doing internationally. Sean Sobers, our Chief Financial Officer, will follow with a review of our financials in more detail and provide our outlook for the fourth quarter and fiscal year 2021. We'll then close out today's call with a question-and-answer session. Let's start with the results. For the third consecutive quarter, we achieved record revenue, record gross profit, record active buyers and record orders. Our revenue of $63 million is an increase of 35% year-over-year while gross profits grew 41% to $46 million. This is our third quarter of accelerating revenue and gross profit growth. Active buyers and orders increased 14% and 28%, respectively. These growth metrics underscore thredUP's resilience to the headwinds we faced throughout the pandemic and indicate that our long-term investment strategy will lead to sustainable growth over time. Let me first address what we've been seeing in the broader retail sector. We concur with consensus that there was a dip in consumer spending at the beginning of the third quarter amidst Delta variant concerns. But that overall consumer sentiment was robust into September with a significant rise in retail sales. Now having said that, supply shortages, labor costs and logistics surcharges has continued to take a toll, and…

Thanks, James. And again, thanks, everyone, for joining us on our third quarter earnings call. I'll begin with an overview of our results and follow with guidance for the fourth quarter and 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 on our 10-Q. We are extremely proud of our Q3 results especially delivering our third consecutive quarter of accelerating revenue and gross profit dollar growth. For the third quarter of 2021, revenue exceeded our expectations totaling $63.3 million, an increase of 34.8% year-over-year. Consignment revenue increased 42.8% year-over-year, while product revenue grew 14.5%. Active buyers and orders are amongst the most important KPIs that we use to track our business. For the trailing 12 months, active buyers rose 14% to 1.4 million. Third quarter orders reached $1.3 million, increasing 28% as compared to the same period last year. Gross margin expanded to 72.8%. This is a 300 basis point improvement over a 69.8% gross margin for the same quarter last year. Gross profit totaled $46.1 million representing growth of 41% year-over-year. Gross margin expansion has come as a result of expanded automation, larger distribution centers and more items per order, offset by continuing headwind from wage inflation and increasing logistics and shipping costs. We believe gross profit dollar growth is the best way to measure our business growth as we continue to transition to a mostly consignment-based business. For the third quarter of 2021, GAAP net loss was $14.7 million compared to a GAAP net loss of $11 million for the third quarter of 2020. Adjusted EBITDA loss was $7.8 million or 12.4% of revenue a 350 basis point improvement compared to the adjusted EBITDA loss of $7.5 million…

Thank you. [Operator Instructions] We'll take our first question from Erinn Murphy of Piper Sandler.

Great. Good afternoon. A couple of questions for me. First, James, I was curious if you could share a little bit more about your strategy of lowering prices here as a competitive advantage. How are you marketing this change to the consumer? Have you seen kind of a new consumer come into the top of the funnel? And then maybe for Sean, what is this doing potentially to the margin structure in the near term? And then I've got one follow-up.

Sure. Erinn. I think customers come to us for predictable, particularly low prices and great deals. And so I think what we've tried to do with our messaging and the storytelling we've done on site and in e-mail and our app is just let people know the great deals that they're getting. And I think the sort of broader sense that people aren't getting promotions and aren't getting discounts at other places they're shopping at, we just keep hitting hard that like thredUP is the place where you can find the best prices on the brands that you love in a sustainable way. And so I think it's more of us just doubling down on the idea of how great our prices are and reminding people that while they're feeling the pinch in other parts of their life, we're going to kind of be there to support them. And I'll let Sean kind of talk about the margins.

Yeah, Erinn. Yeah, on the lower prices, I think some of the dynamics there that work with it is the fact that with lower prices, we're going to discount less. So we have less discounts, we'll be less promotional. So you have less sales happening at the same time so you don't end up with kind of a lower overall pricing charge. You also get returns coming down as well because we know there's a direct correlation between the ASP and then returns happening. I think generically, if you think longer term, what I think this drives is more new customers, which drives better growth and more revenue over time. So we think that all works together really well.

And you're definitely seeing it, Erinn, in the conversion rates and sort of how new customers are coming on to the platform. And I think we feel like the whole strategy really holds together with that in mind.

Great. Super encouraging. And then my second question is one thing we noted during the quarter is the seller could no longer request a cleanout bay. And I'm sure it's just given the backlog you have at 12 weeks now. But should we expect that 12-week processing time to continue until the new Dallas DC ramps? Or just help us think about the interplay there between what you're attempting to do to reprioritize labor into processing bags with that new DC opening up. Just curious on expectations there. Thank you so much.

Yeah. We're also -- keep in mind that we're also scaling out our RaaS partnerships, Erinn. So there's a lot of demand coming from what we've launched with adidas and Crocs and Michael Stars. So there are a lot of sort of bags out in the ether that are coming back to us. But as you know, not everyone can request on online. And yes, the idea is that we're opening our new processing center in Dallas. Those will both come online Q1, Q2. And then we should start to make progress on driving that backlog down. But I would sort of be consistent with sort of what we said last quarter is the demand for our cleanout service continues to rise and as thredUP's presence becomes even better known in the market. So we're trying to get it down, but we don't have a time line to commit to as far as when that will happen.

Got it. Well, you’re going to get a new bag from me this week. So I’m going to track your time. All right, thank you so much. I’ll let someone else jump in.

We'll take our next question from Ike Boruchow of Wells Fargo.

Hey. Congrats, James, Sean. And welcome, Lauren. 2 for me. I guess, James. I think you know we spent a lot of time thinking about the potential sales opportunity that RaaS could be for thredUp over the long term. But could you maybe help us all understand the most impactful ways that the RaaS can drive profitability for the business?

Yes. Sure, Mike. Yeah and I appreciate the note. I think you captured a lot of the sentiment correctly. I think the 2 ways to think about that are. One, all the ways that it amplifies our supply advantage allows us to leverage other people's supply chains to get supply in the door. And so that means on the backs of the distribution, whether it's in store or it's online and the way we work with our RaaS partners on the payouts to the supplier and what the RaaS partner contributes. So I think that really helps sort of lower our supply costs. And then of course, with our pro shops and our premium and our enterprise versions, the brands that we're working with are going to pay overtime SaaS-like fees, right? And so whether that's for the types of customizations that they want or the omnichannel experience they want. And so as I've joked, RaaS rhymes with SaaS for a reason. And so we think there's high-margin revenue to monetize on a client-by-client basis as well as just lower operating costs as RaaS partners work in our supply chain. So that's really the 2 ways that we think about it. And we're going to continue to try and give folks more information as we bring new clients onto the platform.

Got it. And then just one follow-up to follow Erinn's anecdote. I placed an order last week, and I got 3 bags in the mail today. I guess what I want to understand is how atypical is that to see that level of split shipment. Is that just because of what happened with COVID and opening up a new processing center? Like at this time next year, if someone places a bundle order like that, should it all come in one bag? Or can you just kind of help explain how that all should work?

Yeah. Ike, it depends a little bit on what you're buying and where you're buying it from. And we continue to kind of experiment with how we move goods around through our network. But certainly, there's an experience where you get things from multiple distribution centers. But ideally, over time, as we bring on a facility like Dallas that will hold 10 million items, our expectation is that the customer you for example, would be able to find a selection of items for your basket all out of that facility. And so instead of getting 3 packages, you would get 1. And sort of part of the strategy over time is to really reduce logistics costs by having people shop out of one facility and not 3. So that's sort of the plan, and we're excited to bring Dallas online middle part of next year.

Got it. Good luck.

Our next question comes from Ross Sandler of Barclays.

Hey, guys. Sean, so it sounded like the labor cost and the freight were most of the headwind from 3Q going into 4Q. Just can we confirm if that's the case? And then Remix, what's baked in, in terms of revenue gross margin impact and EBITDA margin impact for the 4Q guide? How should we think about Remix for next year as well? And then maybe one for James. On all these new RaaS partnerships, you've got a bunch of different strategies or different versions that you're offering. So for someone like adidas could you just give us a little color on like which one are they getting? And do you guys have the capability of having these partners send product into all your facilities? Or do you have to set up dedicated facilities like Dallas that can handle more as RaaS volume? Just any color on like how the bag processing works on that versus the regular business. Thanks a lot.

Sure. Ross, let me start with the RaaS one, and then I'll kick it over to Sean to talk labor freight and Remix. I mean on the resale side, there's really the 3 ways that we work with folks: it's our Clean Out Kit -- kit partnership, the cash-out marketplace and then the resale shops. And ideally, we bring people on, on either side of the Clean Out Kit or the resale shops, but we really become a full-service offering on both sides. Because I think to really drive circularity in the resale market, you want supply and demand kind of working together. And so I think, for example, with adidas, we've started with the Clean Out Kit partnership. And we're going to move to a resale shop strategy, similarly with what we did with Madewell, same idea. I think as we bring partners online in some ways it's easier to get them started on the Clean Out Kit side. And then we help use that to build supply to launch real high-quality resale shops. And so that's how we think about Resale 360. That's the way we talk about it internally, and I think that's the way brands are -- why it's resonating so well with brands because we can really provide a full-service experience. And as for where the bags and the fulfillment flows. We can do it out of all of our distribution centers. But I think over time, we will probably consolidate some of those operations in our larger facilities just to provide simplicity in the processing approach. But we have flexibility to do it across our network. And I think what's exciting is as we've launched in Europe, we see a lot of opportunity for RaaS for partners we work with in the U.S. to work with them as well in Europe. And so I think not only can we provide a full-service offering on supply and demand, we can do it in the U.S. and we can also do it abroad. And so a lot of good momentum on the RaaS side. I'll let Sean talk about.

Yeah. Ross, on the labor and freight, yes, you're right. There's about $4 million impact to Q4 from Q3. So that's a big chunk there. And then I think the other piece is to not miss is that we are going to continue to process more focused. So you'll see that in the OPT line. So as we crank through Q4 to get more things online and process, you'll see some pick up there in that expense line. And again, think about that as investment for tomorrow's revenue. So it's a really good thing is what we'll continue to do as we go through our process. And then I think you asked about Remix. On the Remix side, I think you can give them some directional stuff on how big they were. They're about $33.5 million on last full year. So you can kind of figure out they weren't really investing a lot of growth dollars in. So the business probably hasn't changed that much. The gross margin itself has a pretty good headwind when you consolidate in. What I talked about in the prepared remarks is they’re all ons. There’s no consignment. They also have some wholesale, which is also a lower gross margin. But overall, they were operating the business at a more -- a relatively better EBITDA than us. So there’s a little bit of kind of a tailwind from EBITDA. But we’re going to turn around and invest pretty heavily on the marketing side and the infrastructure side as it relates to Remix to really capture that growth opportunity in Europe.

Our next question comes from Anna Andreeva of Needham.

Hi. Good afternoon. Congrats, guys. Great results. I have 2 quick ones for James, another one on Ross for you. Can you talk about the economics of each structure versus your initial expectations? Maybe what have been some of the surprises? And how should we think about the cadence of these partnerships as we look into '22? And congrats also on the Texas DC. Just for the modeling purposes, I guess this is for Sean. As we look into next year, can you remind us how we should think about the incremental rent expense as part of ops and technology line, I guess, for 1Q and 2Q? Thanks so much.

Sure. Thanks for the question. I think on the -- thanks for the questions. I think on the RaaS side, we're not breaking out the discrete economics by partner. But what I would say is that we -- again, I think it provides us leverage on the supply side. And obviously, as we sell things in branded resale shops, it increases our sell-through and improve some of our return on assets. I think the other piece is, if you think about what retailers or brands are paying for SaaS vendors that are enabling new distribution channels, I would think about it like that. And so we think that these are large revenue opportunities that scale over time and that they are high margin. And so as for cadence, I mean, ultimately we think there are hundreds, if not thousands, of brands that could participate in our Resale-as-a-Service offerings. And so I think you should see us continue quarter after quarter to announce new ones and then deepen the relationships with those brands over time. Again, not just in the U.S., but as we think global with the scale of those opportunities.

And then on the Dallas DC, and I would say throw in the Dallas PC, the processing center, as well. Those will build start impacting rent expense for the full facility starting in Q1. So we're going to -- if you think about it, it takes a while to ramp up, and we don't really even start processing in Dallas, the DC, until Q2. And that's going to be 500,000 items once we're in Q2, and then it'll ramp up quarter after quarter after quarter. So there's a decent level of headwind and inefficiency certainly through '22 and most -- probably more heavy weighted to the front end. So if you're thinking about modelling so 600,000 square foot building, eventually 2,000 employees 10 million items. But it starts off at 0.5 million and not getting processed until Q2. So there's a level of inefficiency there in the OpEx side as we kind of roll into and scale out that facility.

Okay, super helpful. I’ll take the rest offline. Good luck guys.

Thank you.

Next question comes from Ed Yruma of KeyBanc.

Hey, guys. Thanks for taking my question. I guess 2 questions. First, on the changes in pricing. Is it your intention that over time, the consignor is the one that's really bearing it, so it's margin-neutral, I guess, is a to Erinn's question? And second, I know you guys have been doing a lot of investment the unit economics and some of your more recent vintage DCs. I guess, relative to your expectations how are they trending? Thanks so much.

Yeah. Ed, on the pricing side, I mean, yes. I mean the supplier, I think, on the margin makes a few a few less pennies on the supply side. But ultimately, what it does is I think it creates predictable pricing for the buyer. And so unlike sort of the environment where it's promotional and customers are waiting for sale days, and that's what's really driving the magic. I think now we're in an experience where consumers are really seeing like, hey, these prices are just structurally lower. And so what we want to do is create that experience where buyers think, hey, I should just go to thredUP first because they have the best prices. I don't need to wait for stuff on sale. Every one -- every item we have is a snowflake. And so we do think that, ultimately the economics are -- that it's margin-neutral. But the key to that is we drive a lot more buyers into the funnel. So new buyers, retaining existing buyers at higher rates, more orders per buyer. So I think that's really part of the pricing strategy, at least in the near term. And I'll let Sean talk a little bit about the investment side.

Yeah. On the unit economics piece, that's where your focus is, I think from what we put out early on when we were looking at ETO2 [ph] or Phoenix and mechanics for we're well past that with Atlanta coming on. So I think the overall order economics have gotten better than what you guys saw last. I do think there is that headwind that we've been talking about. Shipping as well as the labor costs. They are a bit of a headwind, but we're continuing to innovate our way around that. James talked about innovations where we can have more items coming from one DC that helps in shipping and then just general automation where we're less reliant on manpower and helping reduce the risk of the rising labor wages.

Thanks so much, guys.

We'll take our next question from Dana Telsey of Telsey Advisory Group.

Good afternoon, everyone. Just to go back to the pricing one more time. The 15% lower average price, is that going to remain that way? Or how do you see the pricing architecture of how you maneuver with the lower prices? And then I see you made another acquisition in Latin America. What do you see is that opportunity? Is it as significant as Remix? Thank you.

Thanks, Dana. Yes. I mean, Dana, on the pricing side, like I think we've always believed that thredUP, because the product is high-quality used product that we can always provide the best prices on a relative basis when the consumer is looking to shop new versus used. And we've always tried to target prices up to 90% off. I think generally speaking what we want to try and do is that we're able to drive lower operating costs through automation through technology, through uses of our data. What can we -- what kind of price power can we pass on to the consumer so that we can provide an incredibly wide selection at always great prices? And so I think what's exciting for us now is when you open the newspaper every day, and it feels like prices are going up everywhere all around you. And we can say with confidence that that's not going to happen on thredUP and that you can count on us and you can trust us to do everything we can to create the best price as possible. I think you build a lot of trust with the consumer, and I think you leverage that trust over time. And so I want to be able to do that consistently. Switching to Latin America and Vopero. That was -- we did not acquire Vopero. It's a relatively new company that started in Uruguay, now operates in Mexico, a wonderful founding team. And we are a minority investor alongside Grupo Axo which is a great partner of ours in Latin America. And so together, we're minority shareholders. But I think what's exciting is that we see a lot of opportunities with the Latin American market and with Vopero and are interested in watching that business grow and flourish.

Thank you. Operator

We'll take our next question from Tom Nikic of Wedbush Securities.

Hey everybody. Thanks for taking my questions. And congratulations, Lauren, on the new gig. So Sean, I want to ask, so the -- Sean or James. So the new distribution center, historically you've kind of opened a distribution center every like 2 years or so. But obviously, the scale of this one is far larger than anything other. I'm assuming it's safe to assume that you're not going to need another distribution center 2 years from now? Like how -- I guess, kind of like how many years of growth do you think the Dallas center can support?

It's a good question. I think it's really interesting to think about it because we have a lot of data that talks about how much clothes are just ending up in landfills that could be reused. And I think the estimate that we've seen is something like the equivalent of billion thredUP Clean Out Kits on an annual basis. So if you think about that equivalent to 10 million items in the Dallas DC, we're going to have to open more DCs. But your question, I think, is very specific in what is the timing. And I think that's TBD here. So how fast can we process, how fast can we sell, how can we ramp -- how fast can we ramp up? So you're right, we've been doing one every 18 months. We'll just have to wait and see and see how fast Dallas actually comes up to speed.

But Tom, I think you're going to see us continue to invest a lot. I mean I just think we see the opportunity is so large. And I think you can see a little bit with the processing center, it feeds into Dallas. And you'll just see us continue to try and scale to attack the supply opportunity.

Got it. And if I could also follow up. It sounds like 2022 will be a fairly heavy investment year between investing in the international business, the new DC and there's probably some cost inflation that rolls through the P&L next year as well. I mean, how do we think about like the EBITDA line next year? I mean, is it possible that the EBITDA kind of takes a step backwards before it starts going forward again? Or just is there any directional help you can give us?

Yeah. I wouldn't think of it as a step-back period. I do think we're investing for what I called earlier tomorrow's growth, but it's not 4 quarters out. It's literally sometimes 1 quarter out or less. And I think we're going to really focus on continuing to drive the actual growth revenue and the rate at which revenue grows. But I don't think you should take away anything that we're not driving towards expansion of the EBITDA margins or closing of the EBITDA loss.

Understood. All right. Thanks very much and good best of luck the rest of the year.

Thanks, Tom.

Our next question comes from Brian McNamara of Berenberg Capital Markets.

Hey, thanks for taking my questions. Congrats on the strong results. So my Remix question was already answered. But I was also wondering if you're currently seeing any benefit or if you contemplate in your Q4 guidance. Any benefit as the primary apparel market deals with shortages driven by supply chain headwinds?

Yeah, Brian. I mean I think there's a lot of bluster out there around the supply chain markets -- or the supply chain in the traditional apparel markets. I think in a normal quarter we might see some tailwind from that. But again, I think in our prepared remarks, Q4 typically is not our strongest quarter because of the way gift giving trends around the holidays kind of play out. So I don't think that we're counting on benefiting from some macro trend at the moment. But I think if that -- if the supply chain challenges persist into Q1 and Q2 next year then yes I could imagine us benefiting from some of those macro tailwinds. Unidentified Analyst

Got it. And then secondly, on RaaS, can you provide some color on your white-label offering and what common characteristics a white-label partner has relative to your more traditional RaaS partners?

Yeah. I mean I think it's a classic white-label distinction. So I think when the offerings are white label, I think thredUP sits in the background and you don't really see us in the partnership. So I think FARFETCH would be a good example of a white-label strategy where thredUP towers FARFETCH Clean Out Kit program, but you really wouldn't know it. You'd have to dig for it. Whereas I think in Crocs, for example, which we just announced, I think thredUp is really a key partner, and it's a thredUP up plus Crocs delivering you kind of the resale relationship. So that would probably be the distinction. And I think as brands want to be more white labeled, right, there's -- obviously, the fees go up. And so that's the way we think about sort of our role in fees and white label as it relates to sort of a more generic partnership.

Great. Thank you. Best of luck.

Thanks.

(Operator Instructions) We'll take our next question from Lauren Schenk of Morgan Stanley.

This is Nathan Feather on for Lauren. As you've seen a pretty tight labor market, is that impacting your ability also to ramp up processing power? And then on the Europe side of the business, you noted you're really investing into Remix as a brand. What are the key areas of investments you're making in that business in '22? And then more from a logistics and infrastructure side, are you able to expand the RaaS partners Europe with just Remix' current infrastructure? Or do you need to take additional steps in order to really bring the RaaS platform there? Thank you.

Yeah. Nathan, I think with respect to the labor, I think as Sean noted, I think that the headwind in Q4 relative to Q3 of that $4 million. I think part of that is just overall increased cost to hire folks, hourly rates and so forth. So I think it's a combination of trying to get great people in the door, what it costs to do that on the recruiting and the retention side. So that is the tailwind -- I mean that is the headwind that we noted. I think on the Remix side, I think the infrastructure investments we're going to move them in -- likely into a new facility that can do more processing, faster outbound. So I think there'll be some costs there. We also think that the business can grow much faster than it's growing. And so on the marketing side, I think we'll invest dollars there. And I think similar to the way it works at thredUP in the U.S., as you process and have more supply coming online, you can spend more marketing dollars. And so those 2 things, we think, will ultimately drive nice growth from Remix in '22 and beyond. And then your last question is can you scale RaaS in Europe with Remix' existing infrastructure? The answer is no. I mean we have to continue to invest in their infrastructure to support the growth in the RaaS clients that we have in Europe. But I think we have some time to really focus then, at least in '22, on kind of core marketplace growth. And then we can layer and wrap clients over time in the back half of '22 or even into '23. But we see just an incredible amount of potential in the European business. But having said that we've owned Remix for like 30 days. So I think it's going to take some time, but I think we're excited.

Appreciate it. Thank you.

That concludes today's question-and-answer session. James Reinhart, at this time, I will turn the conference back to you for any closing remarks.

Yeah. Thanks, everyone, for tuning in to our call and for the great questions. Very excited about the quarter ahead and the year ahead. And I look forward to talking to all of you again in the New Year. Thanks.

This concludes today's call. Thank you for your participation. You may now disconnect.