• Brett Schafer

Deep Dive: ThredUP

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  2. Apple Podcasts

Show Notes

(Ryan) What they do: ThredUp is essentially an online thriftstore. Gets its comparisons to Poshmark because of the kind of clothes it sells, but the business models aren’t quite the same. ThredUp is designed just for women and kids, no mens category. When you go on to Thredup, you are hit with two basic tabs (shop or sell). If you hit sell and request a clean out kit, ThredUp will send you a big bag with a shipping label attached. You put all your stuff in the bag, put the shipping label on it and send it in.

ThredUp then takes the stuff inside the bag out, picks out what it thinks it will be able to sell (usually 40% of the items) and lists it on its marketplace. The supplier of those items either gets paid an upfront price (paid immediately upon receival even though it hasn’t sold) or a consignment price which is typically higher but you have to wait until an item sells. Now it’s all consignment according to the S-1.

On the shopping side, shoppers are choosing from resold items that ThredUp has picked so they’re much cheaper and ThredUp actually offers a goody box based on style data points the customer provides. Comes with 10 items and you pay for what you keep and send it back. Basically a fix. But really the shopping side is an online thriftstore for women and kids.

(Ryan) History: James Reinhart apparently came up with the idea for ThredUp when he was staring at his full closet and didn’t know what to do with all the valuable stuff he had but didn’t need. (I’m tired of these perfect epiphanies). They actually started as a peer to peer platform where ThredUp never touched the inventory, but they quickly realized that the sellers wanted thredUp to do all the work. Sellers just wanted to get rid of the clothes and get paid a decent price for doing it. They’ve received several rounds of funding since and they’re now headquartered in Oakland, CA and have 5 distribution centers across the US.

(Brett) Industry/Landscape/Competition:

  1. According to data from the S-1, the resale market is supposed to grow from $7 billion in 2019 to $36 billion in 2024 (obviously just an estimate, not guaranteed to come true)

  2. They don’t but a dollar figure on selling opportunity, but give out that 16.9 billion pounds of apparel thrown away in the U.S. could be recycled/reused

  3. 40% of gen Z purchased secondhand clothing, according to a survey

  4. Competitors include Poshmark (a lot less social), Goodwill/thrift stores, The RealReal, Mercari, and standard retail outlets

(Brad) Management and Ownership:

Founders:

James Reinhart – co-founder CEO

– founder of the beacon education network – charter schools serving low income neighborhoods

– Harvard grad

Christopher Homer COO & co-founder

– had been the CTO

– was a salesmen at Microsoft

Executive team credentials:

– former managing partner of Virgin Group

– CFO of a company purchased by On semi & VP of finance at Cadence Design Systems

Before the offering ownership

– Directors & Officers (most are associated with a VC fund) own 64.2% of the company

– Reinhart owns 7.6%

(Brett) Valuation:

  1. Market cap of $1.63 billion, ticker TDUP

  2. P/S of 8.8

  3. P/GP of 13

  4. P/CP of 32 (contribution profit, takes into account fulfillment expenses)

  5. Not GAAP profitable or cash flow positive

(Ryan) Earnings: Raised $175M round in 2019, so they poured a lot of extra money into the business this year

  1. 2020 Revenue of $186M, up ~14% YoY

  2. 69% gross margin. (Consignment payouts are a big chunk of that COGS)

  3. $47M in operating losses for 2020, -25% OM

  4. 55% of revenue is spent on operations, product, and technology

  5. $7.3M in SBC

  6. Used $19M in cash for operations (not OCF positive)

Non-financial:

  1. 1.24M active buyers, up 24% YoY

  2. Orders grew 27% YoY

  3. 80% of orders come from repeat buyers

  4. 77% of supply comes from repeat sellers

  5. Currently holding 5.5 million unique SKU’s

(Brad) Balance sheet and liquidity:

Balance Sheet and Liquidity

– $85M in cash & equivalents on hand

– raised $168M in the IPO so roughly quarter billion on hand

– $31 million in long term debt with about $3.2 million of that being current (so due in 2021)

– not perfect but pretty close to perfect

Anecdotal Evidence/Customer Stories:

  1. (Ryan) They seem to be pretty picky with the items that are sent in. And since the items that don’t get picked get given away to organizations or resold to thrift stores, it can kind of deter sellers from picking ThredUp over a poshmark. Or they have to pay the $10 return assurance, which means they could be losing money.

  2. (Brett) No mens section so hard to tell. Found this though https://www.reddit.com/r/FrugalFemaleFashion/comments/bszfln/am_i_crazy_or_is_thredup_a_total_scam/ They get some bad ratings online

  3. (Brad) I got nothing 🙂

Competitive Advantages:

  1. (Ryan) Free supply. Not paying to develop brands or apparel, it’s just given to them. Lack of any physical manufacturing makes it less capital intensive to scale. And gets a much higher margin on the platform GPV, since they’re ones doing the dirty work. (Taking pictures, pricing, listing, shipping to buyers)

  2. (Brett) In theory, the marketplace dynamics are here, although I sound like a broken record and don’t actually believe it with this one. If everyone has a flywheel effect, what’s the point of the flywheel effect?

  3. (Brad) Ridiculous liquidity and low rates will probably push people to buy a lot more things that we don’t need — myself included. I am reaching a little bit but that could be a powerful tailwind for secondhand supply… thinking Peloton here

Future growth opportunities:

  1. (Ryan) Would’ve said men, but I’m not sure this model works that well for men. Seems like the most important thing for them to do right now is automate and optimize their distribution centers as much as they can. From order intake, to selection, to storing, to pricing, to listing, and finally to shipping out. Because once they’ve found the formula and built the tech to do that, it’s easier to replicate at more distribution centers. Not sure what that takes, but put the emphasis on the engineers.

  2. (Brett) More retail partners. Interesting strategy here where they are trying to get their service out to as many sellers and buyers as possible. Only problem that could occur with this is not owning the transaction or keeping everything on one site/app. For example, the partnership with Walmart likely gives them good demand, but it opens up some risks long term.

  3. (Brad) Also reaching here but maybe an AR partnership with SnapChat could be a very cool fit for them. Allow users to try things on from home which for a thrifty model without a million different sizes is attractive

Highlights and lowlights:

  1. (Ryan) Highlights: I like the CEO James Reinhart. Seems extremely competent. The economics are pretty nice as well. People send you clothes for free, you sell it and give them back a part of the profit. Lowlights: It’s a difficult infrastructure problem, and resale feels like it’s getting a little crowded.

  2. (Brett) Highlights: Sold gross margins, switching to consignment seems smart, lots of opportunity to take out the Goodwill shops, value proposition is theoretically there for buyers and sellers. Lowlights: Worried that distribution center costs will be more variable than fixed. Contribution profit actually went down in 2020, need to decide whether this is temporary because of COVID or no. Feels a bit like a “make it up in volume” type operation which always gets me scared. RaaS is mentioned over 100 times in the S-1. Feels like this is something you’d see pitched in one of those fake commercials in a Portlandia episode (which is not a good thing).

  3. (Brad) They’re spending $0 on direct marketing to acquire new sellers & generations are more & more embracing secondhand goods. Seems like there is a strong network effect here (pardon cliche) they’re leveraging effectively. Can even push the sustainability ESG label here. Women only

More or less interested?

All three of us were less interested in ThredUP after recording this show. Listen to the episode and to find out why!

Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get $10 off your first month of the service.

Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.

#TDUP #ThredUP

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