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March 10, 2021

Finance – ThredUp IPO

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The $TDUP ticker is about to get teed-up on the Nasdaq, as secondhand platform thredUP prepares to raise ~$100 Million in an upcoming IPO. We take a look at some of the business-model data in the S-1 and look at what the future might hold for Resale retailer.

None of the below should be construed as advice. The information is presented for analytical purposes only. All data taken from ThredUp S-1 unless otherwise linked.

One of the markets experiencing the greatest shift right now is the global fashion market. Between its environmental footprint coming into focus, the questionable social practices of certain brands, and other ongoing controversies, demand has been rising for sustainable alternatives for the last several years.

… the rapidly emerging resale economy, the fastest growing sector in retail.

thredUP S-1 – page 1

The pandemic did not help the vast majority of fashion houses, even as eCommerce demand soared on some online platforms such as Farfetch. As you will see in the analysis below, thredUP’s growth slowed despite being a Resale eCommerce platform. Was growth slowing (sequentially) an aberration or a trend, that will be the big question.

Fundamentally, what thredUP does is curate a selection of secondhand/consignment clothing from their Sellers and takes a % of each transaction sold to the Buyers (they do hold inventory, it is not purely peer-to-peer like Poshmark).

ThredUp S-1 – page 130
ThredUp S-1 – page 131

While about 3/4 of their business was Consignment between consumers in 2020, they also offer a Resale platform (RaaS) to major fashion brands in order to allow them to sell their own items on consignment or secondhand.

For Resale-as-a-Service (RaaS) Partners.  We offer a robust and varied set of RaaS partnership programs. Our partners include national retailers, premium women’s fashion brands and fashion-focused e-commerce sites, and online marketplaces for the buying and selling of used retail goods.

thredUP S1 – page 131

Younger demographics are flocking to secondhand/vintage platforms like thredUP, both for the value they get from the products and the sustainability factor. Let’s look a bit deeper at the business model and other relevant data points.

The ThredUp Business Model

ThredUp’s core business model is to take a % of garments that are sold on their platform as a rolling % of the price they are sold for.

Their secondary and emergent business model is RaaS (Resale-as-a Service) where they manage the ‘Resale’ platform for major fashion brands and take a % of the revenue earned.

thredUP RaaS platform

“RaaS” is branded to sound like some kind of SaaS-based subscription model, but it is mainly just a service option for fashion retailers and brands that has 4 levers: Clean Out kit distribution, Cash Out with store credit, setup a custom Resale Shop (ie. partnership), and Excess Inventory where they list on other platforms.

ThredUp S1 – Page 15

According to the data in their S-1, 74.2% of their Revenue in 2020 came from ‘Consignment‘ (a cut on % of consumers sales) and the other 25.8% came from ‘Product‘ (the RaaS platform for brands).

thredUP S-1 – Page 75

Cost of Revenue‘ – which includes all the costs related to distribution of the product came in at 24.8% for Consignment, while it was 49.4% for the RaaS Product.

With consignment sales, we recognize revenue net of seller payouts, and cost of revenue includes outbound shipping, outbound labor and packaging costs

thredUP S-1 page 70

This creates a Gross Profit, which as a percentage of Revenue gives you Gross Margin of 68.9% in 2020. That means that from their combined Revenue Streams, roughly $0.69 of every $1 earned is Gross Profit. In 2020, their Gross Profit was $128,148,000.

ThredUp S1 – Page 15

From there, that Gross Profit goes on to pay for Operating Expenses, which in 2020 totalled $174,737,000 in the following categories:

>Operations, product and technology – 58%

>Marketing – 25.6%

>Sales, general and administrative – 16.3%

All told, the business swung to an Operating loss of $46,589,000 in 2020.

An Operating Loss is not necessarily a good or bad thing. What matters is the context it is presented in. We dig in further to the S-1 and the key insights/disclosures around the thredUp IPO.

Secondhand Market Dynamics

>Resale is expected to grow from being a small fraction of the Fast Fashion market to a larger market by the end of the decade. One estimate puts the secondhand market at $60 Billion by 2025.

2020 Resale Report

According to the GlobalData Market Survey, the resale market is expected to grow from $7 billion in 2019 to $36 billion by 2024

ThredUp S-1

>There is a generational shift towards more sustainable purchasing habits, including thrift/secondhand

ThredUp S-1 – page 130

Millennial and Generation Z consumers are adopting secondhand faster than any other age group. 40% of Generation Z and 30% of Millennials purchased secondhand in 2019

ThredUp S-1

>In a recessionary environment, secondhand and thrift goods should be expected to perform well; for consumers, Consignment can help them save money and find value in resale garments from others

Value.  Buyers love shopping value, premium and luxury brands all in one place, at up to 90% off estimated retail price. Since our founding, we estimate that we have saved our buyers $3.3 billion off retail price.

thredUP S-1 page 118

Business Model Analytics

>as of the end of 2020, they ‘promoted circularity‘ for 21 brands on their RaaS (Resale-as-a-Service) platform. This could be a major growth area for major fashion brands going forward, and in-turn drive growth for thredUP (although as we see below, RaaS gross Revenue declined in 2020)

A number of the world’s leading brands and retailers are already taking advantage of our RaaS offering. We believe RaaS will accelerate the growth of this emerging category and form the backbone of the modern resale experience.

thredUP S-1 page 70

>Product revenue (related to RaaS) actually decreased from 2019 to 2020, from $66 Million to $47 Million, a decline of 27%

thredUP S-1 page 93

># of Active Buyers continued to grow to 1.24 Million at the end of 2020, although the rate of growth decreased significantly

thredUP S-1 page 77

># of Total Orders in 2020 reached almost 4 Million, but similar to Active Buyers the rate of growth declined versus 2019. % of Repeat Buyers was steady at 80%

thredUP S-1 page 77

>The Cohort breakdown shows that a large number of customers continue to remain loyal to the brand over several years

thredUP S-1 – Page 78

>Unit Economics for Consignment show that thredUP’s strong Gross Margin helps feed towards a good Contribution Margin

thredUP S-1 page 74

>Overall, Revenue growth (up 26% in ’19 vs. up 14% in ’20) and Gross Profit growth (up 44% in ’19 vs. up 14% in ’20) decreased meaningfully YoY (year-over-year) between 2019 and 2020

thredUP S-1 page 86

$TDUP Overall Sentiment

Growth slowed significantly in 2020, and according to thredUP it was attributable to decreased revenue per order due to discounting, etc. in Q2.

The 14% increase in total revenue compared to the prior year was primarily attributable to a 27% increase in Orders, which was primarily driven by growth in Active Buyers of 24% and partially offset by a decrease in revenue per Order of 10% over the same period … the decrease in revenue per Order was due in part to increased discounts and incentives beginning in the second quarter of 2020 in response to the economic uncertainty as well as a higher percentage of our sales being consignment sales.

thredUP S-1 page 93

The company continued to invest in Customer Acquisition, although Marketing spend between 2019 and 2020 was basically flat ($44.98 Million in ’19 vs. $44.75 Million in ’20), while revenue in Consignment grew ~40% YoY.

The increase in Active Buyer growth in early 2020 was due to our investments in buyer acquisition. We maintained our active buyer base through 2020 despite the economic uncertainty caused by the COVID-19 pandemic.

thredUP S-1 page 93

What thredUP does seem to have going for it is a loyal consumer base, and that should count for something going forward in such a competitive market.

$POSH (Poshmark) is a similar service, and they listed earlier late last year to great fanfare, yet have pulled back in recent weeks. Their current Market Cap is $3.63B. $REAL (the RealReal) focuses on the luxury end of the resale/secondhand market and have performed well (judging by stock movement) in recent months. Their current Market Cap is $2.01B. The major difference between the models (outside of pricing/segments) is the way they handle inventory.

Unlike ThredUp and The RealReal, Poshmark doesn’t touch any inventory, earning its keep by charging a 20% fee on sales $15 or more or a flat $2.95 for smaller sales.

Forbes

With all these emergent platforms in the market, competition will be fierce; yet, with the expected CAGR (Cumulative Annual Growth Rate) in secondhand fashion over the next several years, there is room for several players at the top. And the big fashion houses are getting involved in the market too. Kering – who owns brands like Gucci and Balenciaga – acquired a 5% stake in French e-tailer Vestiare Collective (€215M invested at over $1 Billion valuation) last week, adding more fuel to the market.

The bet we are making is it’s creating a bit of a flywheel effect. If you’re bringing your pieces to a McQueen store to sell secondhand, and you use the credits to shop the new collection, and other times you buy vintage…the more you do this, the more engaged you are with the house, and [the more inclined you are] to keep buying these high-quality pieces that can have several lives. More and more of our clients are thinking about circularity that way, and our younger clients are paying extra attention to sustainability. Both are going to shape the luxury industry for decades to come.”

Vogue

Given the nature of their business and the business model, thredUP bears modest inventory risk ($3.5M on the Balance Sheet at the end of 2020) and moderate lease liabilities ($21.6M on the Balance Sheet at the end of 2020) . But they don’t need to service huge debt in order to keep storefronts open, etc. like many other retail brands. This is one big advantage compared to major retail brands who want to dip their toe in the resale market and compete with these digital brands.

It is not clear at what valuation thredUP will open at or how the stock will trade in the short-term; but all of the headwinds the company has with the state of the economy, generational shifts in spending, the need for more sustainable solutions, and more, will persist for many years to come.

Overall, thredUP is a fresh face in fashion. It isn’t necessarily sexy or glamorous, but as a resale brand it does help consumers save money and efficiently sell old clothes. In past eras where a fragile economy was looming, these types of businesses have performed well. Let’s see how $TDUP performs.

None of the above should be construed as advice. The information is presented for analytical purposes only. All data taken from ThredUp S-1 unless otherwise linked.

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