TDUP - ThredUp: Consider Consumer Segment Focus And Profitability Target

2023-09-19 11:37:56 ET

Summary

• ThredUp Inc. move to place a stronger emphasis on more well-to-do consumers should allow it to maintain robust top line expansion even if the economy weakens.
• ThredUp thinks it can achieve EBITDA breakeven in Q4 2023 and generate positive EBITDA for full-year FY 2023.
• I change my rating for ThredUp Inc. to a Buy, as I think that its undemanding valuations aren't reflective of its decent revenue growth and operating profitability improvement.

Elevator Pitch

I rate ThredUp Inc. ( TDUP ) stock as a Buy.

With my earlier November 21, 2022 initiation article for TDUP, I assessed ThredUp's forward-looking financial guidance, the company's long-term growth prospects, and the stock's valuations. In this latest write-up, I evaluate TDUP's new consumer segment focus and its EBITDA outlook.

ThredUp can achieve pretty strong top line expansion due to its focus on wealthier consumers. Also, the company's operating profitability is expected to improve in a meaningful way going forward. But TDUP's current valuations are depressed considering its consensus forward Enterprise Value-to-Revenue multiple of below 1 times. Therefore, I have decided to upgrade my investment rating for ThredUp from a Hold previously to a Buy now.

Focus On New Consumer Segment Will Support TDUP's Top Line Growth

ThredUp is expected to deliver reasonably decent low-to-high teens percentage revenue expansion going forward, even though the macroeconomic environment is challenging. In specific terms, the Wall Street analysts see TDUP recording top line growth rates of +13.6%, +14.2%, and +17.8% for FY 2023, FY 2024 and FY 2025, respectively.

In my opinion, TDUP's ability to identify and grow a new customer segment successfully makes the market confident that the company can sustain a pretty good level of revenue growth going forward.

At Goldman Sachs ( GS ) 30th Annual Global Retailing Conference on September 13 this year, ThredUp emphasized that it has "built this new base of customers" which is "driving the kind of margin expansion and the revenue (growth) that we have seen."

Revenue for TDUP increased by +8.2% YoY to $82.7 million in the second quarter of 2023, and this translated into a +1.8% top line beat. ThredUp's normalized EBITDA loss narrowed meaningfully from -$13.5 million in Q2 2022 and -$6.6 million in Q1 2023 to -$5.0 million for Q2 2023. Prior to the company's second quarter results release, the sell side was expecting TDUP to register a wider non-GAAP adjusted EBITDA loss of -$6.7 million (source: S&P Capital IQ ) in the most recent quarter.

In the past, ThredUp was heavily reliant on "budget shoppers" with yearly household incomes of $60,000 or below who accounted for approximately a third of the company's customer base, as disclosed at the recent GS investor conference last week. This is the group of consumers that has been the most badly hurt by the weakness in the economy.

TDUP had made a conscious effort in recent quarters to make its online resale platform more attractive for wealthier consumers, or more specifically those customers whose annual household incomes exceed $90,000. ThredUp has enjoyed success in attracting a larger number of more well-off shoppers, and this is reflected in the company's better-than-expected top line and EBITDA for Q2 2023.

The company's active buyers, defined as those "who has made at least one purchase in the last 12 months" in its Q2 2023 earnings presentation , grew on a sequential basis for two consecutive quarters. Active buyers for TDUP increased from 1,651,000 in Q4 2022 to 1,668,000 in Q1 2023, before rising further to 1,710,000 for Q2 2023. ThredUp noted at the company's second quarter results briefing that a more favorable mix of "incrementally higher income" consumers have contributed to the growth in its number of active buyers.

ThredUp Expects EBITDA Breakeven By End-2023

TDUP guided at its Q2 2023 results call that the company expects to "end the year at breakeven in Q4 (2023)" and "march our way through expansion of EBITDA in 2024."

The company's management commentary at the most recent quarterly earnings briefing is aligned with the market's consensus financial projections. Consensus forecasts taken from S&P Capital IQ point to ThredUp posting a marginal EBITDA loss of -$25,000 in the final quarter of the current year and recording a positive EBITDA of $6.1 million for full-year FY 2023.

There are two key factors that are supportive of ThredUp's profitability improvement in the future.

One factor is positive operating leverage.

As mentioned in the preceding section, TDUP is likely to be able to maintain robust revenue growth, thanks to its move to attract consumers with relatively higher incomes than its existing core budget shopper customer base. This means that ThredUp is well-positioned to witness better margins, as it grows its top line on a high fixed cost base. As an operator of an online resale platform, additional buyers for ThredUp don't translate into substantial incremental (or variable) costs.

The other factor is the company's intention to strike a delicate balance between top line expansion and operating profitability.

ThredUp noted at the recent GS Global Retailing Conference on September 13 that the company intends "to expand margins over time" without giving up on "opportunities to continue to be a dominant force" in the apparel resale market. In other words, TDUP won't sacrifice profitability to achieve strong growth at all costs.

Closing Thoughts

ThredUp Inc. is now trading at a consensus forward next twelve months' Enterprise Value-to-Sales or EV/S ratio of just 0.95 times (source: S&P Capital IQ ), which is way lower than its all-time historical mean EV/S multiple of 2.75 times. As ThredUp continues to expand its revenue at a decent growth rate and improve its operating profitability, TDUP should eventually be valued by the market at a higher valuation multiple. This explains my decision to award a Buy rating to ThredUp.

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