ThredUp Inc. (NASDAQ:TDUP) is an online resale platform for apparel, shoes, and accessories. Beyond item consignment and a digital marketplace for buyers and sellers, the innovation is a broader technology-driven concept of resale-as-a-service "RaaS". ThredUp facilitates a new revenue source for brands and retailers to accept returns and capture value from secondhand items through an end-to-end supply chain solution. The model supports an effort at sustainability in the industry while consumers are attracted to the deep discounts. Indeed, the company has generated strong growth supporting a positive long-term outlook. An important development is ThredUp's recent acquisition of "Remix Global AD", Europe's largest fashion resale company, representing a start of an international expansion and adding to the bullish case. TDUP is an exciting stock benefiting from several tailwinds.
ThredUp with an operating history going back to 2009 launched its IPO in March of this year raising approximately $176 million against a current valuation at $2.1 billion. In May, ThredUp reported its first quarterly result as a public company with revenues reaching $56 million, up 15.2% year-over-year. The growth here was supported by solid operating metrics. Active buyers on ThredUp at 1.29 million climbed 14% y/y while the number of total orders at 1.13 million was 18% higher.
While the company is not yet profitable with a net loss of $16.2 million in Q1, the trend has been towards firming financials and higher margins. The gross profit climbed 22% y/y with a margin expanding to 71%, up from 68% in the period last year. Favorably, a negative adjusted EBITDA margin at -16.4% of revenue, narrowed from -21.6% in Q1 2020 with an expectation for an improving trend going forward.
(source: company IR)
An important point here is that within the sales figure, the business is split between the consignment business which includes the fees net of seller payouts, discounts, incentives, and returns on the marketplace. The "core" Consignment segment, representing 80% of the total sales, has been a strong point with the growth of 26.5% y/y in Q1 while the top-line result was dragged lower by a 15.5% decline in product revenue. In Products, the company offers its own brand of new clothing based on a theme of reclaimed and recycled materials which hasn't gained the same traction with consumers as the secondhand items. In other words, a case can be made that the underlying business is stronger than the headline results suggest considering the strategic focus is on consignment.
(source: company IR)
The company ended the quarter with $246 million in cash and equivalents including the IPO proceeds against $33 million in long-term debt. Notably, the company announced a secondary offering in July raising an additional $49 million to support its growth strategy. We believe that while the company remains unprofitable with negative operating cash flows, the liquidity profile is solid in the near term.
ThredUp is offering full-year 2021 guidance targeting revenue between $223 million and $229 million. At the midpoint, the estimate represents 21.5% growth over the result last year. The outlook for the gross margin between 70% and 72% along with a negative adjusted EBITDA margin in the range of 20% to 16% are in line with the trends in Q1. The expectation is that financial metrics will improve through scale. The company is targeting a long-term adjusted EBITDA margin to turn positive between 20-25% as expenses decline as a percentage of revenue benefiting continued top-line momentum.
(source: company IR)
To get a sense of how the consignment model at ThredUp works, sellers are offered a prepaid return bag which is a package mailed to their homes or business allowing it to be filled with the used clothing and returned. From there, ThredUp with extensive logistical and warehousing operation sorts the items with an automated process including cleaning and preparation with pictures for resale on the platform for buyers. The end-to-end consignment service represents the company's managed marketplace.
(source: company IR)
The bigger attraction of ThredUp, in our view, is the significant opportunity is the more economically significant resale-as-a-service option targeted at brands and retailers. Currently, the company has 21 RaaS partners including specialty-apparel names like The Gap Inc (GPS) and Abercrombie & Fitch Co. (ANF), along with an arrangement with Walmart Inc (WMT) that cross-lists ThredUp's inventory on the Walmart online store as pre-owned inventory. There are a couple of different offerings each with its own value proposition. With a "Clean Out Kit", partners can offer customers an option to return used brand items in exchange for store credit as a measure to drive new sales. Partners are also using ThredUp as a resale shop to realize value from store returns that can't be resold as new.
(source: company IR)
In June, ThredUp announced a deal with premium fashion online retailer Farfetch (FTCH) where customers can donate used clothing in exchange for credits on the Farfetch platform. In this deal, even as Farfetch already offers a marketplace for buyers and sellers of high-end clothing, ThredUp fills the void to resell items that are may not be a good fit on Farfetch.
The important point here is that from just the small group of RaaS partners live right now, the opportunity is significant to expand with many more brands and retailers. Oftentimes, companies are simply discarding returned items, lacking the infrastructure to offer a secondhand option. ThredUp shares industry surveys suggesting upwards of 72% of all retail executives are interested in testing resale considering the potential that it has in driving earnings with incremental revenue. From a high level, a theme for the company is sustainability with a message from ThredUp that the resale model of used clothing has environmental benefits by helping to reduce waste in the apparel industry along with limiting the carbon footprint from new manufacturing.
Investors need to be looking at ThredUp as a long-term opportunity with the bullish case being that the company is still in the early stages of growth. There is a case to be made that as the number of active customers and orders climb, the momentum builds on itself with more RaaS partners joining the platform. A more diverse selection of used clothing and accessories will help keep buyers returning for the thrift value while brands and retailers are compelled to join the platform as a partner.
In terms of the addressable market, compared to an estimated $28 billion in the U.S. sales of secondhand items between thrift, donation, and resale, the forecast is for the market to more than double to $64 billion by 2024. The proportion of online penetration from 11% in 2015 has grown to 25% in 2019, likely propelled even further in 2020 during the pandemic. At play is a trend where used apparel is gaining share among consumers spending from 4% in 2010 to 9% in 2020, with a forecast to reach 18% by 2030.
(source: company IR)
Our take is that ThredUp is well-positioned to capture these trends with just a slice of this growing market representing hundreds of millions of dollars in potential growth over the next decade. In our view, the business model can work with enough visibility for the marketplace to remain vibrant drawing in a regular group of new and repeat, buyers and sellers.
When considering UpThred's market position, one advantage is the company's early leadership role with the RaaS model and focus on secondhand clothing. The logistical infrastructure and specialty "single SKU" technology represent a barrier of entry to any smaller player. That said there is a broader group of companies that offer a platform for used clothes to be resold by individuals including eBay Inc (EBAY), Amazon.com (AMZN), and even Facebook Inc (FB) which has its own marketplace. Again, remember that ThredUp's core business is a consignment service of secondhand clothing with end-to-end fulfillment which is unique even within this group. In general, the company competes with both traditional mass-market retailers and discount stores for the same customer with the goal of gaining market share as consumers shift spending habits.
Considering management guidance for revenue of around $225 million, shares of TDUP are trading at a forward price to sales multiple of around 11x. This is the context of consensus estimates forecasting revenue growth to average about 20% per year through 2025. Notably, the market revenue forecast for 2021 at $237.2 million is slightly above the management guidance, placing the forward P/S closer to 10x.
(source: company IR)
To answer the question "Is ThredUp Stock a Good Investment"; our answer is yes as a long-term opportunity, recognizing that the stock falls into a high-risk category considering its small-cap profile and negative recurring earnings. We believe the current valuation is at least reasonable based on the growth trends and market opportunities. There is also some room here where the estimates may prove to be too conservative setting the company up to outperform going forward which would likely support a higher growth multiple and valuation.
We mentioned the acquisition with Europe-based "Remix Global AD". In our view, this deal reinforces ThredUp's bullish case as it opens a door into a major new market. Management explains that Remix as a secondhand online retail platform in Europe has developed a similar "single-SKU" logistics that can process millions of unique garments efficiently which will be leveraged by ThredUp's RaaS technology to capture a new growth opportunity with European brands and retailers. Remix generated $33.9 million in revenue during 2020 with sales accretive to ThredUp's results when the deal closes expected by Q4 of this year.
Putting it all together, ThredUp has the flexibility to take many different strategic directions that can add to growth. One area of the business that is currently missing is men's apparel which would seem to be the next logical step beyond women's, children's, and accessories. The deal with Remix also serves to raise brand awareness which can ultimately drive more visitors to the website as prospective customers. Down the line, there are opportunities to expand into new regions like leveraging the existing infrastructure. In this regard, the Remix deal is the first step in a global expansion.
There's a lot to like about ThredUp which is both disruptive to the apparel industry and a value-added solution to clothing brands and traditional retailers at the same time. The ability for companies to incorporate a resale option through the RaaS platform is a win-win scenario for all involved including shoppers attracted to the deep discounts.
We rate shares of TDUP as a buy with a price target for the year ahead at $30.00 representing a 10x price to sales multiple on the current consensus 2022 revenue estimate. On the upside, the company reports Q2 results on August 10th and a strong result with positive guidance from management be a catalyst for shares to climb higher. We'd like to see some more color regarding updated long-term targets with the addition of the Remix deal.
The biggest risk we see is that the brand and online marketplace fails to gain momentum with consumers. The base case right now is centered on the industry forecast for the growth in the secondhand clothing market. Any downside to those estimates would likely force a reassessment of the company's long-term earnings outlook. TDUP is also exposed to macro trends including consumer spending and financial market volatility.
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This article was written by
BOOX Research is now Dan Victor, CFA
15 years of professional experience in capital markets and investment management at major financial institutions.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in TDUP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.