Good day, everyone, and welcome to today's ThredUp Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Lauren Frasch, Head of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Thredup's First Quarter 2024 financial results. With me 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 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 be making forward-looking statements during the course of this call, including, but not limited to, statements regarding our earnings guidance for the second fiscal quarter and full year of 2024, future financial performance, market demand, growth prospects, business strategies and plans, investments in AI technologies, reorganization activities and our ability to cost-effectively attract new buyers. Words such as anticipate, believe, estimate and expect, as well as similar expressions, are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties, including our ability to effectively deploy new and evolving technologies such as artificial intelligence and machine learning in our offerings, and the effects of inflation, increased interest rates, changing consumer habits, climate change and general global economic uncertainty. Our actual results could differ materially from any projections [indiscernible] performance or results expressed or implied by such 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, comparable GAAP measures, in our earnings press release and supplemental information posted on our IR website. 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 ThredUp's First Quarter 2024 Earnings Call. We are pleased to share ThredUp's financial results for Q1 and have important news to share about how we expect our business financials to improve in the back half of the year. We will provide an update on adjusted EBITDA margin expansion, expectations for free cash flow in 2024 and key company-specific initiatives around AI that we are excited to announce today for the first time. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our first quarter 2024 financials in more detail and provide our outlook for the second quarter of 2024 and the remainder of the year. We'll close out today's call with a question-and-answer session. Let me start with our Q1 results, which were in line with our expectations despite an ongoing difficult consumer backdrop. Our revenue was $79.6 million, representing a year-over-year increase of 5%. Consolidated gross margin came in at 69.5%, representing 8% gross profit growth year-over-year. Recall we believe gross profit growth is the best way to measure the underlying growth in our business due to our continued transition to consignment, especially in Europe. U.S. gross margins reached a record high of 80.1%. Active buyers reached $1.7 million, increasing 4% year-over-year, while orders reached $1.7 million, growing 9% compared to the same time period last year. Of note, adjusted EBITDA totaled negative $736,000, or minus 0.9% of revenue, due to ongoing leverage in our business as well as some reorganizing that we did in March. Our U.S. business was adjusted EBITDA positive for the third quarter in a row and was free cash flow positive for the quarter. Now let me turn to the future, as…

Thanks, James. I'll begin with an overview of our results and follow up with guidance for the second quarter and full year of 2024. I will discuss non-GAAP results throughout my remarks. Our GAAP financials and a reconciliation between our GAAP and non-GAAP measures are found in our earnings release, supplemental financials and our 10-Q filing. We're very proud of our Q1 results and our ability to navigate a challenging consumer environment. For the first quarter of 2024, revenue totaled $79.6 million, an increase of 5% year-over-year. Additionally, active buyers continue to grow, reaching $1.7 million, up 4% year-over-year. Orders also increased, up 9% year-over-year to $1.7 million. Consignment revenue grew 32% year-over-year, while product revenue shrank by 38%. We are pleased with the growth in consignment revenue driven by the final stages of our U.S. transition and our accelerated transition in Europe. We would expect to continue to see outsized growth in consignment and declines in product revenue throughout 2024. While the transition to consignment should be a tailwind to gross margins over time, we expect it to slightly mute revenue growth simply due to the accounting treatment. As a reminder, consignment payouts reduce net revenue while owned payouts are in COGS and reduced gross margin. As a result, we look to gross profit as the most relevant measure to evaluate the underlying growth rate of our business, and we are pleased to report that our Q1 gross profit grew 8%. For the first quarter of 2024, gross margin was 69.5%, a 220 basis point increase over the same quarter last year. We are proud to report that our consolidated results were driven by a record U.S. gross margin of 80.1%, a 560 basis point improvement over last year. The global outperformance was the result of the transition to…

Yes, sir. [Operator Instructions] Our first question comes from Matthew Boruchow of Wells Fargo.

Good to hear from you guys. Just 2 questions. First one for me, it is good to see the guide on the profitability in Q2, the increase in profit, but it looks like you're getting some scale there. Maybe just help us understand a little bit more just the building blocks to kind of take the revenue, the EBITDA, to be free cash flow positive for this year?

Yes, sure. Let me start with -- on the profits and the full year guide. We made a number of changes structurally to the business in Q1. I mean, it doesn't always line up with the earnings calendar, but we have focused over the last 6 months on this real transformation in the business. And so as that came to fruition towards the end of Q1, it became clear that the magnitude of the savings and how we were going to reinvest those dollars was going to really flip the script on EBITDA for Q2, for the full year and for free cash flow. And so that's even despite lowering the revenue. And so Sean can get you through some of the building blocks, but we feel very good about that switch and excited about where it's going to take us.

Yes. I think it's pretty simple -- is on the guidance, we're guiding about $10 million of EBITDA at the midpoint. And if you think about it, we're going to spend around $8 million in CapEx. The simple math there is EBITDA is pretty close to free -- our cash flow from operations, subtract out the CapEx and you're free cash flow positive at that point. And we kind of expect to be, on the EBITDA side, obviously, as we guided, positive in Q2 and then for the quarters there going forward.

Got it. Super helpful. And then just a follow-up. I'm trying to understand the lower revenue range combined with the increased investments you're making. Just maybe just talk about the puts and takes, always seeing profits going up when revenues are coming down. So I'm just trying to understand that a little bit better.

Yes, sure. I think part of it is that we are really focused on some of these new AI product developments, but they're only rolled out to a portion of customers. And then we're restraining some of the marketing dollars behind those products. And so the timing of how the marketing is going to play out for the year is something we want to be a bit more cautious about. We're also adding processing in our DCs in ways that we haven't done since early 2022. And so what I would say is that there's a number of things that are in transition that we feel very, very good about, but we prefer to see a little bit more data around those before we sort of declare victory on the AI products, the marketing growth, the processing growth. So I think there's some caution there. I think second to that is that I think Q1 was -- I've described as, like, a little softer than we anticipated. I think April has been fine, but it did not sort of alleviate our sort of uncertainty around how the year is going to shake out. I think you're seeing inflation seems like a little stickier. We think rates are going to be higher for longer. And so I just think we wanted to be a little bit more cautious around how the year was going to play out, given we feel very good about the profitability and free cash flow numbers. And that's kind of how we came to being more conservative on the top line.

Our next question comes from Dylan Carden with William Blair.

Just curious, kind of, I guess, working our way down the P&L, on the gross margin line, taking that up for the year, what the drivers are there? And Sean, just latching on to a comment you had about potentially being a structurally higher gross margin business, just maybe elaborate on that or expand that a little bit.

Dylan, this is Sean. I think, from a gross margin perspective, the biggest driver was overall improvements across the operations team, so things like more items per order, improved logistics costs, more automation in general. And then, overall, you have all the investments of the past starting to come to fruition, continuing to build up on that. So I think those are the big drivers towards gross margin expansion. And then I think it comes to just, in general, the future is where these next-gen AI investments can lead us and improve margins from there. I don't want to lean too far on that because we're still at the early days of that, but I think there's lots of opportunities there for us to really change the gross margin to even better. And then you also have the...

[indiscernible]

...sort of consignment shift still doing, which is sort of a tailwind to all of this. And I think kind of the combination of the operations improvement and the accelerated consignment I think makes us feel like structurally higher for some time.

The AI investments are mostly frontward-looking customer-based at this point, right? You're not really doing much on the back end? Basically, it's incremental. I know that's sort of always been a piece of it.

Yes, I think the ones that we announced today for the first time are really on the customer-facing side, but there is a number of things that we will -- that we're prototyping today that we think can be really -- create some foundational improvements on the back end. But it's still pretty early. And I think the same thing on the consumer side. Those products are rolled out to just 10% of customers. As we continue to iterate, they really are beta products. And so I think we'll get a lot of feedback over time. And I think part of why we're being a little bit more cautious is we want to see those products and consumer response take shape before we lean in more on the growth side.

Got it. And sorry, if I could sneak one more in. The marketing line came in kind of much lighter than I had thought. Was that sort of as a reflect of the environment or, I guess, sort of cutting some of these costs and waiting to see what [ investment ] marketing dollars it sounds like in the latter part of the year? And is that at all related to maybe -- you sort of mentioned a little bit of a softer quarter. So it seems there to be some relationship there as well.

Yes, it's a little bit of timing, Dylan, around the sort of back half of the year versus Q1. I think, overall, our expectation is to grow marketing dollars this year for the first time since 2021. So we are planning to invest. But what we saw in Q1 relative to Q2 is a little bit of timing, especially as we started to make these transitions in the business in the first part of March. So those are the 2 reasons why.

The next question comes from Rick Patel with Raymond James.

Can you talk about the outlook for active buyers? It looks like it was down quarter-over-quarter in the first quarter, so just curious if that's attributed to the business model changes or if there's something else going on there. And how we should think about what's embedded for buyer growth as we think about the guidance for the rest of the year?

Yes. Sure, Rick. Yes, I mean, I think buyer growth generally lines up and tracks with revenue growth. I think you have some sort of seasonality effects Q4 to Q1. And as we just mentioned earlier, we did pull back in spend in Q1 on a timing basis. But you should see those numbers sort of reaccelerate, I think, as we move through the year. But I think active buyers are really key to our long-term growth strategy. And so they should track pretty closely with the underlying growth rate of the business. And so we expect double-digit growth in the business, again, based on gross profit growth. And we expect active buyers to be in that range, which has been true for the last few years.

And can you provide more color around customer behavior? I'm just curious if you're seeing transactions tilted more towards higher-income versus lower-income consumers. And any changes in behavior in general versus what you saw 3 months ago?

I think that the consumer, I think, is continuing to be -- it's challenging out there. I think we have strategically moved our assortment to be incrementally more premium over the last couple of years. And so I think that customer is doing okay. And I think the more budget shopper, I think, still remains on the sidelines. I mean, we are seeing more items per order. You do see some of that growth in revenue per customer. And so potentially, Rick, you're seeing some of the effects of a trade-down environment, given how well resale, I think, is positioned from a value perspective. But look, I think our perspective is that the consumer confidence is actually now down, right? I think, if you look at the numbers, it's down 3 months in a row. I think the consumer is a little bit more cautious, and I think that's rolling into how we're thinking about the rest of the year.

[Operator Instructions] Our next question comes from Anna Andreeva with Needham.

Two quick ones from us. I wanted to follow up on the softer sales guide. And it sounds like you're being just more conservative there. But are you seeing softer trends for more value consumers specifically as of late? Or is the premium customer more discerning as well to kind of explain the softer sales guide for 2Q and also for the year? And then secondly, what are you seeing in Europe? Should we still expect consignment at 20% of the mix there for the year?

Sure. Let me start with Europe, which is I think we feel better and better about the progress that we're making there. I think, as we noted, record consignment bags, receipts processing in Q1. And so I think that journey is onward. And I think the expectation is consistent with that 20%. But I think the demand environment there remains challenged. Inflation is higher there. So we think that that's going to continue to be the case. But we're thrilled with Florin as the new GM there, I think he's going to be great, lots of experience in marketplaces and scaling supply and demand. And so I think we feel incrementally better about where Europe is headed. I think in the U.S., on the softer sales, value versus premium piece, again, I think, given the number of things changing in our business over the last 90 days, the reorganization, the launch of 3 new pretty significant products and then how we're thinking about timing around marketing dollars and processing just leaves us in a position where we want to just see a little bit more data of how these 3 things come together. And so I think, given the demand environment, we just think we should be a little smarter as we think about the rest of the year. So I don't think that is necessarily about value customers or premium customers. We think that the macro environment is more challenged. And we think, inside the 4 walls of the business, there are a number of things we've got in the hopper, and we kind of want to see those things come together.

Okay. That's very helpful. And James, I think you said marketing dollars should be growing for the year.

Yes.

Should we expect an increase in marketing for 2Q?

Yes. Yes. Marketing dollars are growing for the first time since 2021 year-over-year. They're definitely growing in Q2. And I think the timing of those on a -- I think for Q2, Q3 and Q4, is it going to be related to the new product investments that we're launching across sort of the AI products? And so I think, again, that's where we're not quite sure how all of those are going to land from a timing perspective and I think driving us to be a little cautious.

Makes sense.

We have no further questions at this time. I'd now like to turn the call back over to today's presenters for any additional or closing remarks.

Well, thanks. That concludes our first quarter 2024 earnings call. Just in conclusion, I want to thank all of our current and former employees for the contributions they've made over the years in building ThredUp into the highly defensible marketplace leader and resell pioneer that it is today. I could not be prouder of the work that we've done to date. And I've never actually been more bullish on our future than I am today. And so I want to thank our shareholders for sticking with us through this last couple of years and reassure you that we truly believe our best days are ahead of us. So thanks, everyone. We'll see you next time.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.