TDUP - ThredUp Faces Inventory Overhang And Consumer Credit Availability Questions

2023-04-13 11:40:55 ET

Summary

• ThredUp went public in March 2021, pricing its IPO at $24.00 per share.
• The company operates an online used clothing marketplace.
• TDUP has been negatively impacted by retailer inventory overhang and soft demand from consumers for apparel.
• Given the continuing inventory overhang and a worsening credit availability environment, I'm Neutral [Hold] on TDUP stock in the near term.

A Quick Take On ThredUp

ThredUp ( TDUP ) went public in March 2021 in an IPO that priced at $24.00 per share.

The firm operates an online marketplace that enables users to sell their secondhand clothing and accessories.

Given the ongoing retail inventory overhang and growing consumer demand softness at the lower income levels, my outlook for TDUP in the near term is Neutral [Hold].

ThredUp Overview

Oakland, California-based ThredUp was founded to develop a marketplace for the sale of secondhand goods provided by consumers, brands and retailers.

Management is headed by co-founder and CEO James Reinhart, who was previously co-founder of the Beacon Education Network.

The company’s primary offerings include:

• Women's apparel

• Kids apparel

• Shoes

• Accessories

The firm seeks users of its marketplace via online search engine optimization, earned media and word of mouth.

ThredUp’s Market & Competition

The global market for selling clothing online is extremely large, in the hundreds of billions of dollars and has been growing quickly.

The industry grew during the Covid-19 pandemic, although it has been hampered to some degree from logistical challenges both during the pandemic and now that the pandemic has waned.

According to a 2022 market research report by Grand View Research, online apparel sales was an estimated $553.1 billion in 2021 and is forecast to reach $1.16 trillion by 2030.

This growth, if achieved, would represent a CAGR of 8.6% from 2022 to 2030.

Industry growth is predicated on an increasing number of working women, changing fashion trends and continued product innovation by manufacturers and designers.

The chart below shows the historical and projected future growth rate of the U.S. E-commerce apparel market from 2020 to 2030:

Major competitive or other industry participants include:

• eBay

• Mercari

• JD.com

• Poshmark

• Shopify

• Rakuten Group

• The RealReal

• Amazon

• Kohl's

• Walmart

• Burlington Stores

• Ross Stores

• TJX Companies

ThredUp’s Recent Financial Trends

• Total revenue by quarter has largely plateaued in recent quarters:

• Gross profit margin by quarter has trended materially lower in recent quarters, due to outsized growth in its lower-margin European segment Remix:

• Selling, G&A expenses as a percentage of total revenue by quarter have moved lower in the most recent quarter:

• Operating income by quarter has improved recently but still remains heavily negative, as the chart shows here:

• Earnings per share (Diluted) have also remained substantially negative:

(All data in the above charts is GAAP)

In the past 12 months, TDUP’s stock price has fallen 69.5% vs. The RealReal's ( REAL ) drop of 84.05%, as the chart indicates below:

Management did not disclose any company retention rate metrics, saying only that its European Remix business was ‘doing very well across its customer acquisition and retention metrics.’

For the balance sheet, the firm ended the quarter with cash, equivalents and short-term investments of $104.9 million and total debt of $29.7 million.

Over the trailing twelve months, free cash used was a hefty ($95.4) million, of which capital expenditures accounted for $43.3 million.

The company paid $26.8 million in stock-based compensation in the last four quarters, which is the highest rolling figure since it has been a public company, so management is ramping up the SBC.

Valuation And Other Metrics For ThredUp

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be The RealReal; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

Future Prospects For ThredUp

In its last earnings call (Source - Seeking Alpha ), covering Q4 2022’s results, management highlighted the reduced buying activity as the firm lowered its marketing spend and appears to be focused on profitability over growth.

The firm has seen the combination of a consumer pullback and elevated inventory levels from retailers, resulting in more aggressive retailer discounting.

So far in 2023, management has seen a continuation of tepid buying by consumers and elevated inventory levels by retailers as they work their bloated inventory positions down without having to discount too heavily.

Looking ahead, management guided full-year 2023 revenue to $315 million at the midpoint of the range, or growth of 9.3% year-over-year.

The company also expects an adjusted EBITDA loss of 7% of revenue. Adjusted typically excludes stock-based compensation, which is materially rising in TDUP’s case.

The company's financial position is relatively strong in the short term, but the firm used in excess of $95 million in operating cash and CapEx in the past four quarters.

Management said it does not expect cash and equivalents to drop below $50 million before reaching free cash flow positive, so we’ll see how well they do in this regard.

Leadership is pinning its 2023 hopes on retail inventories returning to normal and consumer buying picking up.

However, with the recent U.S. and Swiss banking failures, the banking sector has apparently already begun to reduce lending, negatively impacting consumer credit availability.

With credit tougher to come by, especially the lower end of the consumer market will have a hard time picking up their spending in the near term.

While management may be able to make small improvements around the edges, I doubt they will be able to meaningfully improve the market dynamics in play.

A potential upside catalyst to the stock could include a pause in interest rate hikes, reducing downward pressure on the company's valuation multiples.

But, such financial effects may have limited positive upside if revenue growth is hampered, leading to increasing operating losses.

Given the ongoing retail inventory overhang and growing consumer demand softness at the lower income levels, my outlook for TDUP in the near term is Neutral [Hold].

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