ThredUp IPO Filing Analysis: Growth & Business Model Shift

ThredUp's IPO Filing: A Detailed Examination

A new initial public offering (IPO) filing has emerged, with ThredUp, a marketplace for pre-owned items, preparing to enter the public market. This follows closely after Poshmark’s successful IPO launch.

Both companies operate within the resale market, though they employ distinct strategies for selling used merchandise. Poshmark empowers users to directly list and sell clothing via its mobile application.

Divergent Business Models

Conversely, ThredUp takes possession of goods from sellers before managing the sales process itself. This represents a key difference in their operational approaches.

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While Poshmark demonstrated profitability in its IPO documentation, ThredUp currently does not. Furthermore, its revenue growth rate is comparatively lower, registering a 13.6% increase in 2020.

A review of ThredUp’s S-1 filing reveals that 2020 presented challenges for the company, partially attributable to the impact of the COVID-19 pandemic.

Analyzing ThredUp's Financial Performance

Today, we will delve into the financial data presented by ThredUp, a company supported by investors including Trinity Ventures, Redpoint, Highland Capital Partners, and Goldman Sachs. The goal is to determine whether its pursuit of an IPO is simply capitalizing on Poshmark’s momentum, or if it possesses a robust and independent business model.

We will assess if ThredUp represents a well-oiled machine capable of sustained success, or if its growth is overly reliant on external factors.

Understanding the ThredUp Business Model

A thorough examination of ThredUp's operations requires a detailed understanding of its sales processes. The company utilizes two distinct approaches: direct purchasing and consignment. Through direct sales, ThredUp acquires merchandise and subsequently resells it.

Revenue is then recorded on a gross basis, with gross profit calculated after subtracting expenses such as the initial inventory cost, inbound shipping fees, inventory write-downs, and costs associated with outbound shipping, labor, and packaging.

This direct sales model is one that ThredUp is actively phasing out. Following a strategic shift towards “primarily consignment sales” in 2019, the company’s operations have become increasingly focused on this method.

The consignment process involves consumers submitting their items to ThredUp, where they are held and potentially sold. A percentage of the final sale price is then paid back to the original owner.

This approach inherently minimizes write-downs and contributes to improved gross margins.

Revenue recognition for consignment sales differs; ThredUp “recognize[s] revenue net of seller payouts,” meaning seller compensation is deducted before calculating gross profit, alongside outbound shipping, labor, and packaging expenses.

The evolving revenue mix is clearly demonstrated by ThredUp’s gross profit generation in 2018, 2019, and 2020. Consignment sales accounted for 38%, 67%, and 81% of the total gross profit in those respective years.

Currently, ThredUp operates essentially as a large-scale, digitally-driven consignment platform.

But what effect has this transition had on the company’s overall financial standing? The following analysis will explore this question.

ThredUp’s Financial Performance

In 2018, ThredUp generated revenue of $129.6 million. This figure increased to $163.8 million in 2019 and subsequently reached $186 million in 2020.

However, the company experienced a deceleration in growth, moving from 26.4% in 2019 to 13.6% in 2020. Concurrently, the proportion of ThredUp’s revenue derived from consignment sales rose from 60% to 74%.

A key question arises: did this shift in revenue composition significantly affect the company’s gross margins, potentially mitigating concerns about the slower growth rate?

The answer is largely negative. ThredUp’s gross margins remained remarkably stable, at 68.7% in 2019 and 68.9% in 2020.

This consistency is notable, especially considering the company reported higher gross margins for consignment revenues in both 2019 (77%) and 2020 (75%) compared to its other revenue model (57% and 51%, respectively).

Reasons for Growth Slowdown

The company’s S-1 filing provides insight into the factors contributing to the slowdown in gross profit growth in 2020. These factors are also applicable to the revenue trends.

It remains to be seen if these conditions will improve in 2021.

Examining the company’s historical performance reveals a clear trend of increasing unprofitability. A declining growth rate coupled with increasing losses is a concerning combination.

In 2018, ThredUp reported a net loss of $34.2 million. This loss increased to $38.2 million in 2019.

Furthermore, the company’s deficit expanded to $47.9 million in 2020.

Even when considering adjusted figures, the picture isn’t significantly brighter. Using the adjusted EBITDA metric, ThredUp’s losses improved from negative $27.2 million in 2018 to negative $24.3 million in 2019.

However, its adjusted EBITDA fell to negative $33.4 million in 2020, representing the largest loss within the three-year period under review.

Key Takeaway: Despite a shift towards higher-margin consignment sales, ThredUp’s profitability did not improve alongside its slowing growth.

ThredUp's Potential and Challenges

A positive outlook for ThredUp can be constructed. The company has strategically adjusted its operational model to prioritize improved gross margins. This transition towards increased consignment sales is projected to yield more robust gross margins in the future.

Furthermore, a potential recovery may be anticipated with the waning of the COVID-19 pandemic, should it prove beneficial for the company’s performance.

However, the company’s initial public offering is occurring amidst a period of declining revenue growth in Q4 2020 when compared to Q4 2019. This is not typically indicative of a highly successful launch.

(In Q4 2019, ThredUp reported $44.6 million in revenue and $31.4 million in gross profits. These figures decreased to $43.4 million and $29.7 million, respectively, during Q4 2020.)

Despite this, the company’s last private valuation, as reported by Crunchbase at approximately $650 million, represents a relatively low multiple of its 2020 revenues.

It is likely that ThredUp will surpass this valuation, unless current market demand for IPO shares has been overestimated – a scenario that appears improbable.

The timing of the IPO could be advantageous: launching shortly after Poshmark, securing capital, navigating the challenges of COVID-19, and subsequently focusing on expanding gross profits. This strategy has the potential to succeed.

Determining the price investors are prepared to offer for ThredUp will be a key observation. Similar to Oscar Health, accurately valuing this company presents a considerable challenge. More insights will be available once the pricing interval is established.

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