Good day everyone and welcome to today's ThredUp Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note, today's call will be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Lauren Frasch, Head of Investor Relations.

Good afternoon, and thank you for joining us on today's conference call to discuss ThredUp's second 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 make forward-looking statements during the course of this call, including, but not limited to, statements regarding our earnings guidance for the third and fourth fiscal quarters and full year of 2024, future financial performance, market demand, growth prospects, business strategies and plans, investments in AI technologies, the company's intention to exit the European market and to seek strategic alternatives for its European business 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, our ability to identify and execute a strategic alternative for the company's European business 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 of future 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 with 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.

Thanks, Lauren. Good afternoon, everyone. I'm James Reinhart, CEO and Co-Founder of ThredUp. Thank you for joining our second quarter 2024 earnings call. We're pleased to share ThredUp's financial results for Q2, and I have significant news to share about how we expect our business to evolve in the back half of the year and into 2025. We will provide an update on growth, adjusted EBITDA margin expansion, expectations for free cash flow over the next year and further developments in our new AI products as we launch them widely this month. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk to our second quarter 2024 financials in more detail and provide our outlook for the third and fourth quarter of 2024. We'll close out today's call with a question-and-answer session. To get right to it, I want to start by acknowledging that the quarter on a consolidated basis was challenging for us. This was the case for three specific reasons, which I will explain in order of impact. First and by far most significantly, our European business really struggled. Second, we experimented in the U.S. with initiatives around new forms of customer acquisition and promotions, and they simply didn't perform the way we expected. Third, we are operating in an incrementally more challenging consumer environment, where the compounding effects of inflation continue to hurt our core customers. While Sean will walk you through all the detailed financials in a moment, I want to highlight that for the fourth quarter in a row, our U.S. business is growing gross profit, expanding margins and is adjusted EBITDA positive. In Europe, however, the business has continued to struggle, even as we invested over $20 million in cash in that business over the past 6 quarters. In…

Thanks, James. I'll begin with an overview of our results and follow up with guidance for the third and fourth quarters 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. Before we get into the numbers, I want to start with an overview of how I view our business in the remainder of the year. Q2 was a challenge, in part due to the factors outside of our control in Europe, and in part due to factors within our control in the U.S. We have our arms around both of these challenges. In the U.S., we expect the impact from the Q1 and Q2 missteps in our buyer acquisition strategy and promotional cadence that James described earlier to linger throughout the balance of the year. But we are pleased to report that we have diagnosed the problem and are course correcting. While our revenue growth in the second half will be weaker than we'd like, as we absorb the negative impact of the strategy shift as well as being up against 15% growth in the second half of 2023, we expect to be EBITDA positive. Europe has been a drag on our profitability and focus for several quarters, but we intend to exit the European market and expect to present U.S.-only operating results when we report our Q3 earnings. We will be able to direct our focus and resources to prioritize our U.S. operations without the burden of optimizing for consolidated results. We anticipate that this action will immediately increase our gross margins, improve our gross profit growth, get us to positive adjusted EBITDA and accelerate our path to free cash flow.…

[Operator Instructions] And we'll take our first question from Ike Boruchow with Wells Fargo.

I guess I wanted to focus on the split of EU and U.S. I guess first question is on Europe. Obviously, we know it's been a drag for a while. You guys have talked about it. Just maybe what specifically changed in the second quarter? And then maybe, James, could you just talk about the evolution of your thinking as you kind of came to the decision you guys did?

Sure. Yes. And then I think if you go back a year, we had been focused on investing in the product, technology, operations piece of the business. And then over the past several quarters, I've talked about the change in consignment, really focusing on that as a driver of gross profit expansion and growth. And Ike, it's just -- it's taken longer to see that materialize the way that we had liked. And then we brought in Florin, who started in May, who I think we feel really great about. And he made it clear as he dug into the business, that it was going to take even longer than I think we originally thought and not just time, but capital. And I think we aligned with the idea that it was going to require more degrees of flexibility for them to turn around that business. And so I think we then decided that in order for them to really successfully get the business to a place that they wanted, that the U.S. is going to be tough for the U.S. to support them. And so that became really the catalyzing event, and we think that business and the TAM opportunity in Europe is real. We just think it's going to take longer. And so at this point, given the challenges globally, we think our capital and resources deployed fully on the U.S. is the best-case scenario. And part of it also reflected back, we put $20 million over the last 6 quarters in the EU. What would that have looked like if we had put that $20 million into the U.S.? And I think we'd be in a better place. And so we didn't want to repeat that same mistake.

Got it. And could you -- sorry if I didn't follow up. But on U.S. EBITDA, the self-inflicted issues, you kind of talked about that [ph]. Like roughly how much was that in dollars to the U.S. EBITDA for this year?

Hold on, Ike, I'm looking for it.

I guess as you look for it, Sean, I guess what I'm trying to look at is, so your U.S. business is basically $250 million with a 1% to 2% margin, but there's some headwind in that margin from this issue. I'm just trying to think about as we try to shake this off and look into next year, like what is the run rate of the business from a profitability perspective as you're hopefully back to growth as well next year?

And Ike, your question is what's like the normal EBITDA run rate for the U.S. business or the impact of what happened this year in the U.S. business? I'm trying to get an understanding.

Well, I'm trying to add back that self-inflicted issue to the positive 1% to 2% margin and think about how you guys think the U.S. because now it's a U.S.-only business from here into next year. So like how should we think about U.S. profitability scaling as we think about the business moving into next year and beyond?

Okay.

Yes. I mean I'll jump in, Sean. And then I mean, the way, Ike, I think about it is if you go back to exiting 2023, the U.S. business was Q3, Q4, we were expanding. Q4 exited at 4%. In the full year in the U.S., I think, will be in that 1% to 2% range. And so our expectation is whatever -- where we guided on a consolidated basis previously, U.S. stand-alone will be above that as we get into 2025. And so I think you can triangulate around above where the consolidated guide was previously, knowing that there might be some tumult in Q3 and Q4.

Yes. What I would say, Ike, I'm just doing a little back-of-the-envelope math, right, because I didn't have it here in front of me. But you could say it's around -- of the $6 million that we kind of lost as it relates to the buyer strategy related to the 90,000 buyers, it's probably around $2 million-ish in EBITDA for the full year.

Got it. So you exited last year on a 4% margin. You've got a couple of points from the headwind here that would kind of get you back. It kind of seems like a mid-single-digit U.S. margin is kind of what you strive for as you kind of go into the next year. Is that fair?

That sounds right.

Yes, I think that's fair. I think that's fair, yes.

We'll move next to Rick Patel with Raymond James.

I'm just trying to better understand the change that you made in mid-1Q that had the negative impact in the second quarter. So can you maybe just walk us through an example of what change that resulted in the negative impact? And I guess what changed again in the beginning of June that created the positive change in the direction? And then secondly, I was hoping you can tie in that commentary with what you're seeing with gross margins because it sounded like you're maybe pulling -- it sounded like you pulled back on promotions, and that's why you lost those 90,000 customers. But at the same time, your gross margins came in a little bit lighter than you wanted to because of the discounting. So I feel like I'm not fully understanding what happened.

Sure. Well, why don't I talk about the acquisition piece, and then I can kick it over to Sean. So yes, I mean, Rick, the way to think about it is we were flexing the percent off your first order. And then we have a traditional onboarding path where you may get incremental credits or loyalty points for second order, third or fourth order. And so we had moved to more of a flat dollar-based credit system. And so for example, instead of 30% or 40% off your first order, to induce trial, we were flexing, is it $10? Is it $20? Is it $30 off an order of $100 or more? And so we were really iterating around that type of strategy. And what we found is that there was nothing that we could do from a dollars off your first order or incentives across multiple orders that was better than just the straight percent off order with free shipping. And so -- but we didn't -- we needed 90 days to really see how those LTVs played out. And once we felt confident that we were worse off, we reverted back to where we had been previously and where we had been for the prior year on June 1. So that was -- it was the offer structure and then the incentive structure.

And Rick, on the gross margin piece, I think in the beginning, I think you have it right. During that new customer acquisition period, gross margins were probably a little more favorable on our side. But as we started to end the quarter, we got much more promotional and started to really give opportunities at discounts back to the new customers as well as our existing purchasers. And that more than offset the benefit of having the gross margin favorability that we had in the first part of Q2. And that's why you see the kind of the mix in the 78.8% gross margin in the U.S. versus the 80% is just what we've seen in Q1 [ph].

Okay, that's really helpful. And secondly, can you just zoom out and maybe just talk about consumer behavior on the platform? Any incremental data that trade down may be getting worse than expected or maybe the kinds of consumers that you might be acquiring like higher end versus lower end? Any kind of changes in the trend line from the prior quarters?

Sure. I mean I think the biggest thing, Rick, is that you're just seeing that the consumer, especially as we move through the quarter, they were just more discerning, right? And so you were -- you had -- discounts needed to be incrementally higher to that budget shopper. I think the standard premium shopper, our highly engaged buyer, I think they performed as well as ever. But that real budget shopper, call it, making $50,000, $60,000 a year, you really needed to have compelling offers to convert them. And so just I'd give you an example, discounts had to be about 20% higher, Rick, for that budget shopper relative to where they were a year ago to sort of move them off the couch and to make a purchase. And so we've been navigating that now for a few months, and we feel good about sort of the plan into the back half of the year, but it's really that segment of buyers that struggled.

We'll move next to Dylan Carden with William Blair.

Okay. I'm curious sort of why the change was made in customer acquisition. Yes, let's just start there.

Yes. I mean Dylan, as I said, I think the business, we were feeling pretty good. At the beginning of the year, the U.S. business free cash flow positive, growing. I think we felt some sense of optimism that the year would materialize better. And I think we had been in a very -- we had not really messed with the new customer offer in some time. And so what we were looking for was, was there something that we could do that would yield more new customers, wider [indiscernible], better LTVs over time. And so we were really looking for a new mountaintop. And I think it's very easy as an organization to keep doing what you're doing across your marketing mix and across your offer mix. And we were looking for something that potentially could have put us in a much better place; and so that was the intent. And I think in retrospect, we probably could have done it in certain areas differently. But that was the path we chose, and we got it wrong. And we owned that and we fixed it and moved forward.

And so it wasn't in response to some sort of competitive change, dynamic change in the market?

No. I think we were just looking for -- at this point, we were looking for new sources of growth and lifetime value and could we shift the type of buyer that we're looking for, can we shift the channel from where those buyers came from and it didn't materialize the way we would like. And we think a lot of it had to do -- we think one was the offer, but also just into a demand environment that we thought -- that we think was weakening, you just -- you were worse off.

And so now with sort of what we're left with on the guide, there's a lot of moving pieces here. If you kind of strip away the lost 90,000 buyers, what's the incrementality on kind of the macro overhang? I mean I was of the impression I think you can go back to the last call that sort of you were derisked on the macro front in the prior guide. Is there sort of incremental behavior that you're seeing that kind of takes you another leg down here? Is it really just the kind of own goal or own, yes, that you're sort of speaking to here?

I think Sean can give you kind of the bridge. But Dylan, yes, I mean I think consistent with, I think, the commentary from a lot of our peers in consumer, I think the buyer -- the consumer is more challenged now than they were 90 days ago, right? I think that you're -- there's -- whether it's Starbucks or McDonald's, right, across the board, there are some consumer companies that are struggling. And so I think maybe you think the world has gotten a little bit worse, right, from where we were 90 days ago and certainly at the beginning of the year. And Sean, do you want to bridge the revenue piece for Dylan?

Yes. Yes. Dylan, so if you think about like our last guide to this guide, it's about -- it's down at the midpoint, it's about $33 million on an annual basis. That's -- it's pretty simple. It's $19 million of it straight up Europe. And so I think we've talked about that and you guys know what we're doing there. And then the remaining $14 million is the U.S., about $6 million is really that active buyer strategy change that we made and then made back and then the remaining is about $8 million, which is really macro impact.

We'll move next to Dana Telsey with the Telsey Group.

James, you talked about the increase of 20% of a discount or promo in order to get people to spend. What was it for besides the value of customers? What does it look like for just your other regular core customers? What are you seeing in terms of clean-up bags in terms of what you're getting? And how do the distribution centers with this lower volume, how do you think of the capacity and the expense structure going forward?

Yes. I mean, Dana, it's interesting. I mean I would not say that there's lower volume by any means. In Q2, we sold more clothing than we've ever had than ever in our history, right? So there is a lot of volume. I think what we've just found is that for those products that, if you think about the average selling price on ThredUp being between $20 and $25, we were just having to mark down our lower-priced product even further, Dana, for customers to convert. And so the sort of pernicious part of it all is that you're having to discount more, right? And even that then, that budget shopper is not converting at the same rate. And so we just think that there is a segment of customers who, it's not that they potentially are trading down, that they are trading out, and we think that they're really struggling. And so I don't think our cost structure, the variable cost in our DCs and the fixed cost is any kind of overhang. I think the biggest challenge was sort of the weakness in Europe in Q2 and then some of the strategic changes that we made the acquisition in Q1 and then the promotions in Q2.

And it does appear that there are no further questions at this time. I would now like to turn it back to the company for any additional or closing remarks.

Well, thank you, everyone, for joining. Thank you to the teammates throughout the ThredUp organization and our folks overseas in Europe. We appreciate all the things that you have done and are working on, and are very excited for the product work ahead of us. And we do make mistakes, but we also have a firm understanding of where we're headed. And so we look forward to seeing you on our next call.

This does conclude today's program. Thank you for your participation. You may disconnect at this time and have a wonderful afternoon.