ThredUp Inc. (TDUP) FY 2024 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full calendar year or any other period.

Overview

ThredUp operates one of the world’s largest online resale platforms for apparel, shoes and accessories. Our mission is to inspire the world to think secondhand first. We believe in a sustainable fashion future and we are proud that our business model creates a positive impact to the benefit of our buyers, sellers, clients, employees, investors and the environment. Our custom-built operating platform consists of distributed processing infrastructure, proprietary software and systems and data science expertise. This platform is powering the rapidly emerging resale economy, one of the fastest growing sectors in retail, according to a GlobalData market survey conducted in January 2023.

ThredUp’s proprietary operating platform is the foundation for our managed marketplace, where we have bridged online and offline technology to make the buying and selling of tens of millions of unique items easy and fun. The marketplaces we have built enable buyers to browse and purchase resale items for primarily apparel, shoes and accessories across a wide range of price points. Buyers enjoy shopping value, premium and luxury brands all in one place, at up to 90% off estimated retail price. Sellers enjoy ThredUp because we make it easy to clean out their closets and unlock value for themselves or for the charity of their choice while doing good for the planet. ThredUp’s sellers order a Clean Out Kit, fill and return it to us using our prepaid label. We take it from there and do the work to make those items available for resale.

In addition to our core marketplace, some of the world’s leading brands and retailers are taking advantage of our RaaS offering, which allows them to conveniently offer a scalable closet clean out service and/or resale shop to their customers. We believe RaaS will accelerate the growth of this emerging category and form the backbone of the modern resale experience.

Recent Business Developments

Discontinued Operations

On November 30, 2024, we divested 91% of our European business and Bulgarian subsidiary, Remix, which qualified for reporting as a discontinued operation. As a result, Remix’s results, including the loss on divestiture, are presented as a single line item, loss from discontinued operations, net of tax in the consolidated statements of income and excluded from continuing operations for all periods presented. Accordingly, any discussion of historical information in Management’s Discussion and Analysis below reflects Remix’s results as a discontinued operation, and amounts, including key operating metrics, and disclosures below pertain to our continuing operations for all periods presented, unless otherwise noted.

In the third quarter of 2024, we recorded a $9.8 million impairment of long-lived assets in connection with the decision to exit the European market, coupled with the decline in our market capitalization. In the fourth quarter, we recognized an $11.3 million loss on the Remix divestiture. Both amounts were included within loss from discontinued operations, net of tax in the consolidated statements of operations for the year ended December 31, 2024.

See Note 15, Discontinued Operations, to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further details on the transaction.

Overview of 2024 Results from Continuing Operations

Revenue: Total revenue was $260.0 million, an increase of 0.6% year-over-year.

Gross Profit and Margin: Gross profit totaled $207.1 million, representing an increase of 4.4% year-over-year. Gross margin increased by 290 basis points to 79.7% from 76.8% year-over-year.

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Loss from continuing operations: Loss from continuing operations was $40.0 million, or a negative 15.4% of revenue, for the year ended December 31, 2024 as compared to a loss of $52.4 million, or a negative 20.3% of revenue, for the same period in 2023.

Non-GAAP Adjusted EBITDA (loss) from continuing operations(1): Non-GAAP Adjusted EBITDA from continuing operations was $8.7 million, or 3.3% of revenue, for the year ended December 31, 2024 as compared to a non-GAAP Adjusted EBITDA (loss) from continuing operations of $(5.3) million, or (2.1)% of revenue, for the same period in 2023.

Active Buyers and Orders: Active Buyers totaled 1.3 million and Orders totaled 4.9 million in 2024, representing decreases of 6.1% and 0.6%, respectively, compared to the prior year.

Key Financial and Operating Metrics from Continuing Operations

We review a number of operating and financial metrics, including the following key business and non-GAAP metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. These key financial and operating metrics are set forth below for the periods presented.

(1)Non-GAAP Adjusted EBITDA (loss) from continuing operations and Non-GAAP Adjusted EBITDA (loss) from continuing operations margin are non-GAAP measures which may not be comparable to similarly-titled measures used by other companies. See below for a reconciliation of Non-GAAP Adjusted EBITDA (loss) from continuing operations to its most directly comparable GAAP measure, loss from continuing operations.

Active Buyers

An Active Buyer is a ThredUp buyer who has made at least one purchase in the last twelve months. A ThredUp buyer is a customer who has created an account or purchased in our marketplaces, including through our RaaS clients, and is identified by a unique email address. A single person could have multiple ThredUp accounts and count as multiple Active Buyers. The number of Active Buyers is a key driver of revenue for our marketplaces.

Orders

Orders means the total number of orders placed by buyers across our marketplaces, including through our RaaS clients, in a given period, net of cancellations.

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Non-GAAP Financial Measures from Continuing Operations

Non-GAAP Adjusted EBITDA (Loss) from continuing operations and Non-GAAP Adjusted EBITDA (Loss) from continuing operations Margin

Non-GAAP Adjusted EBITDA (loss) from continuing operations means loss from continuing operations adjusted to exclude, where applicable in a given period, stock-based compensation expense, depreciation and amortization, severance and other reorganization costs, interest expense, and provision for income taxes. Non-GAAP Adjusted EBITDA (loss) from continuing operations margin represents Non-GAAP Adjusted EBITDA (loss) from continuing operations divided by Total revenue. We use Non-GAAP Adjusted EBITDA (loss) from continuing operations and Non-GAAP Adjusted EBITDA (loss) from continuing operations margin, which are non-GAAP measures, to evaluate and assess our operating performance and the operating leverage in our business, and for internal planning and forecasting purposes. We believe that Non-GAAP Adjusted EBITDA (loss) from continuing operations and Non-GAAP Adjusted EBITDA (loss) from continuing operations margin, when taken collectively with our GAAP results, may be helpful to investors because they provide consistency and comparability with past financial performance and assist in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results.

The following table provides a reconciliation of loss from continuing operations to non-GAAP Adjusted EBITDA (loss) from continuing operations:

Presentation

Revenue

Our revenue is comprised of consignment revenue and product revenue.

Consignment revenue

We generate consignment revenue primarily from the sale of secondhand apparel, shoes and accessories on behalf of sellers. We recognize consignment revenue, net of seller payouts, discounts, incentives and returns. We expect consignment revenue to continue to increase as we grow our Active Buyers and Orders. Additionally, consignment revenue includes bag fees charged to sellers for processing Clean Out Kits.

Product revenue

We also generate product revenue primarily from the sale of items that we own, which we refer to as our inventory. We recognize product revenue, net of discounts, incentives and returns. We expect the percentage share of product revenue to decrease in the long term as we continue to focus on our consignment model and reduce owned inventory.

Cost of Revenue

Cost of consignment revenue

Cost of consignment revenue consists of outbound shipping, outbound labor and packaging costs. We expect cost of consignment revenue to decrease and gross profit to increase as a percentage of consignment revenue as we continue to scale our business due to our ability to drive leverage in shipping, labor and packaging.

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Cost of product revenue

Cost of product revenue mainly consists of inventory cost, inbound shipping related to the sold merchandise, outbound shipping, outbound labor, packaging costs and inventory write-downs. We expect cost of product revenue to decrease and gross profit to increase as a percentage of product revenue as we continue to scale our business due to our ability to drive leverage in shipping, labor and packaging.

Operating Expenses

Operations, Product and Technology

Operations, product and technology expenses consist primarily of distribution center operating costs and product and technology expenses. Distribution center operating costs mainly include inbound shipping costs, other than those capitalized in inventory, as well as personnel costs, distribution center rent, maintenance and depreciation of equipment and leasehold improvements. Product and technology costs include personnel costs for the design and development of product and the related technology that is used to operate our distribution centers, merchandise science, website development and related expenses for these departments. Operations, product and technology expenses also include an allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect operations, product and technology expenses to increase in absolute dollars in future periods to support our growth, especially as costs to increase our supply (inbound costs) are generally incurred prior to the expected revenue growth. Additionally, we expect to continue investing in automation and other technology improvements to support and drive efficiency in our operations. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments, including business acquisitions. We expect these expenses to increase in absolute dollars and decrease as a percentage of revenue over the longer term due to better leverage in our operations.

Marketing

Marketing expense consists primarily of advertising and public relations costs, and personnel costs for employees engaged in marketing. Marketing costs also include an allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect our marketing expenses to fluctuate as a percentage of revenue as we intend to increase marketing spend to drive the growth of our business.

Sales, General and Administrative

Sales, general and administrative expense consists of personnel costs for employees involved in general corporate functions, including accounting, finance, tax, legal and people services, and customer service. Sales, general and administrative also includes payment processing fees, professional fees and allocation of corporate facilities and information technology costs such as equipment, depreciation and rent. We expect to increase sales, general and administrative expense as we grow our infrastructure to support operating as a public company and the overall growth in our business. While these expenses may vary from period to period as a percentage of revenue, we expect them to increase in absolute dollars and decrease as a percentage of revenue over the longer term.

Interest Expense

Interest expense consists of interest and debt issuance costs relating to our term loan facility. Certain 2023 interest costs in conjunction with the build-out of our distribution centers were reclassified from interest expense and capitalized.

Other Income (Expense), Net

Other income (expense), net primarily consists of non-operating income and expenses such as interest income earned on our investments in marketable securities.

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Financial Results from Continuing Operations for the Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

Revenue

Total revenue increased $1.5 million, or 0.6%, for the year ended December 31, 2024 as compared to the same period in 2023. The increase in revenue for the year ended December 31, 2024 as compared to the same period in 2023 was driven by a 15.5% growth in consignment revenue, partially offset by a 69.5% decrease in product revenue. The shift reflects our strategic decision to transition our RaaS clients from a product to a consignment model in the third quarter of 2023. The increase in total revenue was due primarily to a 10.6% increase in the average order value, offset by a 6.1% decrease in Active Buyers and a 0.6% decrease in Orders.

Gross Margin

Consignment revenue is recognized net of seller payouts. Seller payouts related to product revenue are included as a component of cost of product revenue. As such, product revenue has a lower gross margin than consignment revenue.

Gross margin was 79.7% and 76.8% for the years ended December 31, 2024 and 2023, respectively, representing an increase of 290 basis points.

The increase in gross margin for the year ended December 31, 2024 as compared to the same period in 2023 was primarily driven by a significantly higher proportion of revenue from the consignment model, which has a higher gross margin than the product model. The transition of our RaaS clients to the consignment model in 2023 contributed to the growth in our consignment revenue, positively impacting our gross margin.

Consignment Gross Margin

Consignment gross margin was 81.5% and 81.4% for the years ended December 31, 2024 and 2023, respectively, remaining relatively flat with a modest increase of 10 basis points, primarily driven by slightly lower outbound shipping and labor costs.

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Product Gross Margin

Product gross margin was 47.2% and 55.3% for the years ended December 31, 2024 and 2023, respectively, representing a decrease of 810 basis points.

The decrease in product gross margin for the year ended December 31, 2024 as compared to the same period in 2023 was primarily due to a 840 basis point increase in product inventory costs. This decrease was partially offset by a 30 basis point decrease in shipping, labor, and packaging costs. The significant decline in cost of product revenue was primarily driven by the transition of our RaaS clients to the consignment model in 2023.

Operations, Product and Technology

Operations, product, and technology expenses decreased $1.1 million or 0.8% for the year ended December 31, 2024 as compared to the same period in 2023. The decrease was primarily driven by a $4.6 million decrease in personnel-related costs following our workforce reorganization in March 2024 and a $0.9 million decrease in facilities, technology and other costs, partially offset by a $3.0 million increase in accelerated depreciation of certain warehouse equipment , a $0.8 million increase in inbound shipping related to consignment revenue, and a $0.6 million increase in severance costs as a result of our workforce reorganization. The decrease in operations, product, and technology expenses as a percentage of total revenue was primarily due to a decrease in operations, product, and technology spend offset by an increase in total revenue, reflecting our ongoing efforts to optimize costs, improve operational efficiency, and leverage economies of scale.

Marketing

Marketing expenses decreased $2.7 million or 5.3% for the year ended December 31, 2024 as compared to the same period in 2023. The decrease was primarily due to a $5.6 million decrease in personnel-related costs following our workforce reorganization in March 2024, of which $3.0 million was related to stock-based compensation expense, partially offset by a $2.7 million increase in advertising costs and a $0.2 million increase in facilities, technology and other costs. The decrease in marketing expenses as a percentage of total revenue was due to a decrease in marketing spend offset by an increase in total revenue, reflecting our efforts to optimize marketing efficiency while leveraging higher revenue growth.

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Sales, General and Administrative

Sales, general, and administrative expenses remained relatively flat, with a modest increase of $0.2 million or 0.3% for the year ended December 31, 2024 as compared to the same period in 2023. The increase was primarily due to a $1.0 million increase in facilities, technology, and other costs, partially offset by a $0.8 million decrease in personnel-related costs following our workforce reorganization in March 2024.

Interest Expense

Interest expense increased $0.3 million for the year ended December 31, 2024 as compared to the same period in 2023. This increase was primarily due to a $0.6 million capitalization of interest costs in the first quarter of 2023 in conjunction with the build-out of our distribution centers, which did not recur in 2024, partially offset by $0.3 million in lower interest costs in 2024 due to reduced outstanding balances.

Other Income, Net

Other income, net increased $0.3 million for the year ended December 31, 2024 as compared to the same period in 2023. The increase was primarily due to a $0.7 million increase in interest income from our marketable securities due to a higher interest rate environment, partially offset by a $0.4 million decrease in claim proceeds for lost shipments.

Liquidity and Capital Resources

We have historically generated negative cash flows from operations and have primarily financed our operations through private and public sales of equity securities and debt. As of December 31, 2024, we had cash, cash equivalents and short-term marketable securities of $44.2 million. Additionally, we have a term loan facility (“Term Loan”) under which $22.5 million remained available to be drawn as of December 31, 2024 for the purchase of certain equipment, and we were in compliance with our debt covenants under the Term Loan as of that date. See Note 8, Long-Term Debt, to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a further discussion on our Term Loan.

We expect operating losses to continue in 2025 as we continue to invest in growing our business and our infrastructure. Our primary sources of liquidity are cash flows generated from operations, cash on hand and borrowings available under the Term Loan. Our primary use of cash includes seller payouts and product inventory costs, operating costs such as distribution network spend, product and technology expenses, marketing expenses, personnel expenses and other expenditures necessary to support our operations and our growth. Additionally, our primary capital expenditures are related to the set-up, expansion and/or automation of our distribution network. Based upon our current operating plans, we believe that our existing cash, cash equivalents, short-term marketable securities, and remaining availability under the Term Loan will be sufficient for at least the next 12 months to meet our short- and long-term capital requirements, and we do not anticipate expanding our distribution network to include additional locations in the near term. Our cash flow forecast is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

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Our future capital requirements will depend on many factors, including but not limited to, the timing of our increased distribution center automation and expansion plans to support planned revenue growth, the expansion of sales and marketing activities, the potential introduction of new offerings and new RaaS clients, the continuing growth of our marketplaces and overall economic conditions. However, we expect that our capital expenditures will remain modest in 2025. See the section titled “Risk Factors—Risks Relating to Our Indebtedness and Liquidity—We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders.”

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Changes in Cash Flows from Continuing Operating Activities

Net cash provided by continuing operating activities was $4.9 million for the year ended December 31, 2024, compared to net cash used of $9.8 million for the same period in 2023. The $14.7 million increase in continuing operating cash inflows was primarily driven by a $12.4 million reduction in our loss from continuing operations, offset by a $2.2 million decrease in non-cash charges, and $4.5 million of improvements in operating assets and liabilities. This Improvement in operating assets and liabilities was primarily due to: a $12.2 million increase in accounts payables, accrued and other liabilities, primarily reflecting the timing of payments and increased vendor spending; a $3.9 million decrease in accounts receivable due to timing of cash receipts from payment processors; and a $1.0 million increase in operating lease liabilities. This change was partially offset by a $10.7 million decrease in seller payables, primarily due to timing of seller credit cash-outs or redemptions and conversions to gift cards, as well as a $1.5 million decrease in cash inflow from inventory, reflecting a shift in mix from product to consignment following the transition of our RaaS partners to the consignment model in late 2023.

Changes in Cash Flows from Continuing Investing Activities

Net cash used in continuing investing activities was $10.3 million for the year ended December 31, 2024, compared to net cash provided of $46.6 million for the same period in 2023. The $56.8 million increase in continuing investing cash outflows was primarily driven by a $49.5 million decrease in maturities in marketable securities and a $13.9 million increase in purchases of marketable securities, partially offset by a $6.5 million decrease in purchases of property and equipment following the completion of the first phase of our Texas distribution center build-out.

Changes in Cash Flows from Continuing Financing Activities

Net cash used in continuing financing activities was $4.4 million for the year ended December 31, 2024, compared to net cash used of $3.6 million for the same period in 2023. The $0.8 million increase in continuing financing cash outflows was primarily driven by a $1.5 million decrease in proceeds from issuance of stock-based awards, partially offset by a $0.7 million increase in payroll taxes paid on stock-based award activity.

Contractual Obligations

Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2024, the value of our non-cancellable unconditional purchase obligations was $9.4 million. See Note 11, Commitments and Contingencies, to the consolidated financial statements included in Part I, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information regarding our purchase obligations.

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For a further discussion on our operating lease commitments and long-term debt as of December 31, 2024, see the sections above as well as Note 7, Leases, and Note 8, Long-Term Debt, to the consolidated financial statements included in Part I, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss or consolidated statements of cash flows.

Critical Accounting Policies and Estimates

Use of Estimates

U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses. Actual results could differ materially from those estimates.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We generate revenue primarily from the sale of secondhand apparel, shoes and accessories on behalf of sellers and partners. We retain a percentage of the proceeds received as payment for our consignment service. We report consignment revenue on a net basis as an agent and not the gross amount collected from the buyer. We recognize consignment revenue upon purchase of the seller’s secondhand item by the buyer.

We also generate revenue from the sale of our purchased inventory which we refer to as product revenue. We sell our purchased inventory mainly through our online marketplaces. We recognize product revenue on a gross basis. Online sales and sales to our retail partners are recognized upon shipment of the purchased secondhand items to the buyer.

Both consignment and product revenue are recognized net of discounts, incentives and returns. Sales tax assessed by governmental authorities is excluded from revenue.

Loyalty points and rewards are accounted for as separate performance obligations and accrued as deferred revenue in the amount of the transaction price allocated to the points and rewards. The allocated transaction price is based on the estimated fair value per point, net of breakage. Breakage is estimated based on our historical redemption rates. Revenue is recognized when the loyalty rewards are redeemed or expire.

We recognize revenue from gift cards when the gift cards are redeemed by the customer. Additionally, we recognize breakage revenue for the portion of gift card values that are not expected to be redeemed. Previously, breakage revenue was estimated when gift card redemption was deemed remote. Beginning in 2024, with more historical data available, breakage revenue is estimated based upon historical customer redemption patterns. Judgment is required in determining the appropriate grouping of gift cards for analyzing breakage rates, redemption patterns, and estimating the ultimate value of gift cards not expected to be redeemed.

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Stock-Based Compensation

We estimate the fair value of stock options and the ESPP at the grant date using the Black-Scholes option-pricing model (the “Black-Scholes Model”). The fair values of RSUs are determined based on our stock price on the date of grant. The fair values of equity awards are recognized as compensation expense over the requisite service period or over the period in which the related services are received (generally the vesting period), using the straight-line method. We account for forfeitures as they occur.

The Black-Scholes Model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include per share fair value of the underlying common stock, expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term. For all stock options granted to date, we calculated the expected term using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). We determine volatility using the historical volatility of the stock price of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on United States Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not subject to amortization but will be reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. Operating as one operating and reportable segment, the Company performs a qualitative assessment annually during the fourth quarter to determine if it is more likely than not that the fair value of its single reporting unit is less than its carrying amount. If it is determined that it is more likely than not that the fair value of its single reporting unit is less than its carrying amount, the Company will perform a quantitative assessment, in which it would use a discounted cash flow approach to estimate the fair value of its single reporting unit. If the fair value of the single reporting unit is less than its carrying amount, then an impairment charge is recognized for the difference between the fair value and carrying amount of goodwill.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. Accordingly, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

New Accounting Pronouncements

See discussion under Note 2, Significant Accounting Policies, to the consolidated financial statements included in Part I, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for information on new accounting pronouncements.