Dressing fashionably can be rather expensive. Clothing does not come cheap and, at this time of high inflation, that picture is only likely to worsen for the foreseeable future. Fortunately, there are alternatives to buying brand new clothes and other fashion accessories. And that is to buy them used through an online platform like ThredUp (NASDAQ:TDUP). In recent years, management has demonstrated strong revenue growth for the company. That growth is expected to continue into the current fiscal year. For growth investors, this sounds great. But if there’s one downside to the company, it’s that the business continues to hemorrhage cash. and as revenue has risen, so too has the amount of cash the company loses from year to year. Because of this, it’s difficult to call this an attractive opportunity. The company does have a significant amount of cash still on hand and, when put into proper context, the fundamental picture doesn’t look as bad as you might think. Because of this, I have decided to rate the business a ‘hold’ prospect for the moment.
A rapidly-growing firm with cash flow issues
According to the management team at ThredUp, the company operates as one of the world’s largest resale platforms for women’s and kid’s apparel, shoes, and accessories. The company describes its model as catering to the concept of sustainable fashion, with the idea being that quality secondhand clothing should be more widely accepted. At present, the company’s marketplace empowers product owners to list their clothing so that buyers can find attractive deals, sometimes as much as 90% off. Instead of relying on the clothing going straight from the seller to the buyer, however, the company sends its sellers a Clean Out Kit. The sellers then fill that kit and return it to the company using the prepaid label that’s on it. From there, the company handles the distribution of the clothing in question.
Originally, the company’s business model centered around Actually owning much of the clothing itself before selling it to customers. But in 2019, management changed this strategy by shifting its focus to largely consignment sales. With these, the company only recognizes revenue net of seller payouts and it incurs costs of revenue associated with outbound shipping, outbound labor, and packaging. This is not to say that the company does not still generate revenue through direct product sales. For instance, through its Remix platform, it still operates in this way. However, management has said that they intend to move that platform in the direction of consignment sales as well. Also, the company generates some revenue associated with RaaS, or Resale-as-a-Service, activities. In this kind of scheme, clients typically pay an upfront integration fee, as well as ongoing service fees, to leverage the company’s operating platform in order to deliver their own resale experiences to their own customers. As of the end of 2021, the company had 28 clients under this business unit, including major players like Walmart (WMT), The Gap (GPS), and Crocs (CROX). Across its entire ecosystem, when it comes to the other activities the company has, it boasts 1.69 million active buyers. This is up 36% compared to what the company had one year earlier. And on its platform, these buyers placed 5.3 million orders in all.
Over the past few years, management did a really solid job of growing the company’s revenue. Normally, I like to look at things over a five-year window. But unfortunately, we only have data going back for four years. Between 2018 and 2021, sales increased each year, climbing from $129.6 million to $251.8 million. This is great news and, between its acquisition of Remix in 2021 and the launching of its RaaS platform in the middle of last year, the company expects revenue to climb further this year. Overall, sales for 2022 should be between $330 million and $340 million. At the midpoint, this would translate to a year-over-year increase of 33%.
Judging the company solely based on its revenue would make most investors excited. However, when you dig down deeper into the numbers, the picture starts to look a bit scary. Even as revenue increased, net profits for the company worsened. The company’s loss has grown in each of the past four years, going from $34.2 million in the red to $63.2 million in the red. Of course, there are other profitability metrics to consider. One of these is operating cash flow. The trend here is not as obvious. But it is still bad. After improving from a net outflow of $22.5 million in 2018 to $10.1 million one year later, the company’s cash outflows worsened year after year, eventually coming in at $35 million for 2021. Another metric to consider here is EBITDA. Based on the data provided, this has also worsened year after year, turning from a negative $30.1 million in 2018 to a negative $53.2 million last year. Management has not provided any significant guidance for the 2022 fiscal year. The only thing they have said is that the EBITDA margin should be between negative 13.5% and negative 15.5%. At the midpoint, this would imply EBITDA of negative $48.6 million. At least that does mark some improvement compared to 2021.
Some investors would point out, rightfully so, that as a rapidly growing company, the company is investing heavily in its growth. This is a fair point to make. That is why, as part of my analysis, I decided to strip out stock-based compensation, depreciation and amortization, and research and development, from me company’s cost structure. I also, separately, removed marketing expenses. What you see here is that a significant portion of the increased cost structure for the company was caused by a ramping up of marketing expenses. Of course, marketing is a real expense, without which the company would not be able to expand rapidly. On the other hand, it is ultimately a voluntary expense. Looking at the other items, we find that the company, with marketing costs added back in, really didn’t see much change in the past three years when it came to its bottom line. Yes, the picture did worsen from 2019 to both 2020 and 2021. But the actual margin for the company improved from 2020 to 2021. This goes to show that much of the company’s worsening is not due to higher mandatory costs, but, instead, to higher voluntary costs aimed at reinvesting in the company for the purpose of growth. That is, at least, a silver lining for investors.
Operationally speaking, ThredUp is an interesting company. Revenue growth notwithstanding, the picture of the business looks rather bleak. However, when you dig a bit deeper, you find that much of its trouble is related to management continuing to try and grow the company at a rapid pace. If you are going to see cash outflows, this is the place to see it. Add on top of this the fact that the company has cash in excess of debt of $170.5 million, and it does have plenty of time to improve its bottom line before getting in serious trouble. This does not mean that I am a fan of the company from an investment perspective. Frankly, I plan to stay away from it. But at the same time, when you put everything into proper context, it is also difficult to rate it a ‘sell’ at this time.
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