ThredUp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 11 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to TreadUp Second Quarter 2023 Results Conference Call. At this time, This call is being recorded on Tuesday, 8th August, 2023. I would like to turn the conference over to Alan Rotem, Chief Legal Officer. Please go ahead, sir.

Speaker 1

Good afternoon and thank you for joining us on today's conference call to discuss thredUP's Q2 2023 Financial Results. With me are James Reinhart, ThredUp's CEO and Co Founder and Sean Stover, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.fredup.com. This call is being webcast on our IR website and a replay of this call will be available on the site's quarterly. Before we begin, I'd like to remind you that we will make forward looking statements during the course of this call, including but not limited to, statements regarding our earnings guidance for the 3rd and 4th fiscal quarter and full year of 2023 future financial performance, including our goal of reaching adjusted EBITDA breakeven, market demand, growth prospects, business strategies and plans, our ability to attract new buyers and the effects of inflation, increased interest rates, changing consumer habits we will be conducting a few questions and general global economic uncertainties.

Speaker 1

These forward looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties and our actual results could differ materially from any projections of future performance all results expressed or implied by such forward looking statements. Words such as anticipate, believe, estimate and expect as well as similar expressions are intended to identify forward looking statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in our SEC filings, earnings press release and supplemental information posted on our IR website. Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition, during the call, we will present certain non GAAP financial measures.

Speaker 1

These non GAAP financial measures should be considered in a dispute, not as a substitute for or in isolation from GAAP measures. You can find additional disclosures regarding these non GAAP measures, including reconciliations with comparable GAAP measures in our earnings press release and supplemental information posted on our IR website. Now I'd like to turn the call over to James Reinhart. Good afternoon, everyone. I'm James Reinhart, CEO and Co Founder of FredUp.

Speaker 1

Thank you for joining FredUp's Q2 2023 earnings call. We are excited to share FredUp's financial results and key business highlights from our Q2. In addition to our financial results, we will provide an update on key company specific initiatives that are contributing to our growth and expansion of adjusted EBITDA. I will then hand it over to Sean Stover, our Chief Financial Officer, to talk through our Q2 of 2023 financials in more detail and provide our outlook for the 3rd and 4th quarters of we'll close out today's call with a question and answer session. We are proud to share that we exceeded the high end of our guidance for revenue, gross margin and adjusted EBITDA, revenue was $82,700,000 increasing 8.2% year over year.

Speaker 1

Consolidated gross margin declined 150 basis points year over year due to the continued growth of our lower margin European business. However, U. S. Gross margins were a record 76.4%, increasing 220 basis points year over year. Our active buyers in Q2 slightly decreased year over year, but were sequentially up 2.5% Q1 to Q2 and have now positively inflected.

Speaker 1

Orders were up 5% year over year. We're very pleased with our improvement to adjusted EBITDA as we posted a loss of just $5,000,000 which was a 11.60 basis point expansion year over year and a sequential improvement of 2 60 basis points from the prior quarter. Before we dive into the rest of the call, I wanted to take a moment to reflect on the past few years of being a public company. It's been a wild ride. Since threat of the Nickel Public Offering in March 2021, we have consistently though hit or exceeded every single quarterly guidance.

Speaker 1

Faced with a persistently challenging macro environment and a competitive retail landscape, our team has demonstrated exceptional rigor in forecasting, predicting we

Speaker 2

are pleased

Speaker 1

to announce that we continue to make progress towards our growth and profitability goals and that notably at the midpoint of guidance through 2023, we're aiming to grow revenues 13.4 percent and expand EBITDA 1,000 basis points. And when we look across the consumer universe on a revenue growth and margin expansion basis, we believe we are one of the very best performing companies in 2023. Our leadership philosophy has always been to control the controllable. How we spend our time, the quality of the decisions we make during times of uncertainty, the urgency we have to invent on behalf of our customers and the willingness to keep learning what's different this time around. My hat goes off to the incredible team here at thredUP making this happen every day.

Speaker 1

Now let me turn to provide an update on some of the key company initiatives that have powered our growth and margin expansion. First, we're continuing to refine our marketplace acceptance strategy. As I shared on last quarter's call, we started testing a new fee for our cleanup service to improve the quality of supply in our marketplace. After validating that this increased our bag yield of resellable item as well as the quality and the sell through of items we received, we've rolled out this new fee to nearly all sellers in our marketplace. We're continuing to collect high margin fees, all while creating a better we are pleased to announce that we are executing our best customers and the better selection for our best buyers.

Speaker 1

Demand for our cleanup service accelerated in Q2 we don't anticipate any pullback in demand. With increased processing power, our backlog is now at 6 weeks for regular buyers we are confident that we are in the position of our customers and our customers are in the position of our customers. 2nd, we are doubling down on efforts to boost growth we have reached the highest levels of customer satisfaction in our history. Last quarter, I detailed our efforts to intercept customers when they are most likely to be unhappy with their experience. After a month of testing and offering called seat for credit, where customers can opt to keep select often low priced items in exchange for shopping credit instead of making a costly return, we've now rolled this option out to 100 percent of our customers.

Speaker 1

The work we've done in this area has generated meaningful improvement to our unit economics with our return rate year over year in Q2 decreasing by more than 500 basis points. In connecting with our GRIFF promise efforts, we also rolled out a new Resolution Hub in July, a self-service portal that offers instant fixes to common issues that make our experience fall short of being a 10 out of 10 we believe that collectively through these initiatives, we will be able to deliver an ever better experience that keeps customers coming back again and again. 3rd, we continue to be impressed with the performance and progress of Remix, our European business. The shift to consignment sales we can process an early feedback from customers has been positive. We believe that this change will improve Remix's margins over the long term and also expand the selection of high quality supply.

Speaker 1

4th, our Retail as a Service business continues to provide brands and retailers with the fastest and easiest way to deliver customizable we have a strong balance sheet and scalable retail experiences to their customers. In Q2, we launched new programs with 11 brands, including American Eagle, and SoulCycle. And as a reminder, RASP is the leading provider of end to end retail food for the apparel ecosystem, including global brands like J. Crew and smaller heritage brands like Michael Starz. By leveraging threat of marketplace infrastructure, RAS amplifies our supply advantage, increases our sell through and return on assets and expands our long term profitability metrics by adding sources of recurring fine market revenue.

Speaker 1

And finally, given the proliferation of dialogue around artificial intelligence, I want to briefly mention how we are deploying AI at threat up. As a business that has now processed more than 172,000,000 one of a kind secondhand items, we have relied on AI for many years across our distribution network. AI helped us to reduce processing costs by substituting activities that would otherwise be done manually, in turn creating greater economic value. We're leveraging AI in various ways across our product experience, including enhanced search functionality, so the customers can more easily find what they're looking for across our vast selection. Each of these investments positions our business to drive sustainable growth in the quarters and years to come.

Speaker 1

Now I'd like to provide an update on our goal of reaching adjusted EBITDA breakeven. In Q2, we saw yet another quarter of sequential EBITDA improvement since announcing our intention to hit breakeven earlier this year. With each quarter, our confidence level in achieving this goal increases we have even clearer sight of hitting this milestone in Q4 2023. Let me also emphasize that breakeven is just a waypoint. We are committed to building an enduring business to generate significant free cash flows over time.

Speaker 1

On our road to profitability and growth, it's also important we don't lose sight of our pursuit of purpose. Bright House is and always has been a business rooted in an ambitious mission to inspire a new generation of consumer I'd like to thank secondhand for as we work to further our mission and make a dent in the universe, we hold ourselves accountable for following a business and brand aligned environmental, social and governance strategy that guides us and fuels our success. We recently published our 2nd annual impact report, which outlines our strategy it provides a transparent look at how we're impacting our people, our communities and the planet. We're committed to disclosing our progress here we are raising the bar for what it means to balance purpose and profit. I am also proud to say that we were recognized for the impact we are having as we are one of Time's 100 Most Influential Companies of 2023.

Speaker 1

This list highlights 100 companies making an extraordinary impact globally. We are honored to be listed alongside some of the world's most iconic brands, including Apple, Patagonia and Microsoft. In conclusion and before I turn it over to Sean, I want to close by restating the strength of our Q2 results and our management team's ability to forecast, we will now predict and manage the business effectively quarter after quarter, driving top line growth and EBITDA expansion. As we enter our 3rd year as a public company, could not be more proud of the work we are doing and the progress we have made. We are eager to tackle the opportunity in front of us and remain committed and focused our mission to usher in a more sustainable era for the fashion industry.

Speaker 1

Thanks, James. And again, thanks everyone for joining us on our Q2 2023 earnings call. I'll begin with an overview of our results and follow-up with guidance for the 3rd and 4th quarters and full year. I will discuss non GAAP results throughout my remarks. Our GAAP financials and a reconciliation between GAAP and non GAAP are found in our earnings release, supplemental financials and our 10 Q filing.

Speaker 1

We are very proud of our Q2 results. For the Q2 of 2023, revenue totaled $82,700,000 an increase of 8% year over year. Consignment revenue grew 10% year over year, while product revenue grew 5%. We're happy to report that consignment revenue has inflected growth for the first time in 4 quarters as we make progress in transitioning our European business and our RAS supply to a consignment law. While the transition of these businesses to consignment should be a tailwind to gross margin over time, we expect it to slightly mute revenue growth simply due to the accounting increase.

Speaker 1

As a reminder, consignment payouts reduced revenue, while owned payouts are in COGS and reduced gross margin. Orders increased 5% year over year to $1,800,000 Active buyers declined slightly year over year to $1,700,000 for the trailing 12 months, we have an improved 2.5% quarter over quarter. As we evolve our customer acquisition strategy to focus on higher quality buyers, we are pleased with the quarter over quarter improvement. The Q2 of 2023 gross margin was 67.4%, a 150 basis point decline over the same quarter last year. The decline in our consolidated gross margins was due to the dynamics driven by our European business.

Speaker 1

The continued growth of Europe's lower margin operating model continues to affect our consolidated results has become the larger portion of our total revenue. We are proud to report that our consolidated results exceeded the high end of our guidance, driven by record U. S. Gross margins of 76.4%. This outperformance was the result of continued improvement in how we optimize our marketplace, including pricing, promotions, returns, payouts and fees.

Speaker 1

For the Q2 of 2023, GAAP net loss was $18,800,000 compared to GAAP net loss of $28,400,000 in the same quarter of last year. Adjusted EBITDA loss was $5,000,000 we're negative 6.1% for the Q2 of 2023. This represents an approximate 11 60 basis point improvement compared to the same quarter last year as we tightly manage expenses and leverage our investments on higher revenue, we are proud to report that our hard work drove an 8.2% year over year revenue increase we are on an 8.1% decline in operating expenses, driving us forward on our path to breakeven. Turning to balance sheet. We began the Q2 with $99,500,000 in cash and marketable securities and ended the quarter with $83,000,000 our cash usage from operations was $10,400,000 including our annual payment of D and O Insurance of $2,500,000 while we spent $6,600,000 on CapEx as we complete our investment in our Dallas DC.

Speaker 1

Based on our progress and we remain confident in our ability to reach adjusted EBITDA breakeven in the Q4 of 2023. For us, reaching breakeven has took a waypoint we are on our path to free cash flow and profitability, and we believe that this timeline balances our commitment to reaching breakeven with foundational investments we are pleased to announce that our long term goals of growth and expanding profit. When modeling our free cash flow, adjusted EBITDA and our CapEx we are pleased to report that our key drivers of positive capital given that as a marketplace, our working capital needs are minimal. After spending $56,000,000 in CapEx over the last 6 quarters, we expect to spend $4,000,000 in the back half of 'twenty three we expect maintenance CapEx of $1,000,000 to $2,000,000 per quarter until 2026. Due to our significantly reduced CapEx needs and our ability to manage our expense structure, we expect to be able to fund the core business through our existing cash.

Speaker 1

As a result, we want to reiterate that we do not anticipate our cash and marketable securities balance falling below $50,000,000 before reaching free cash flow positive, nor do we expect to turn to the capital markets or draw down on our existing debt before them. We are pleased to provide guidance that emphasizes our control of the levers in the path of long term revenue growth and free cash flow. Turning to the guidance for the Q3, we expect revenue in the range of $82,000,000 to $84,000,000 which is a 22% growth rate at the midpoint gross margin in the range of 66.5% to 68.5% of revenue adjusted EBITDA loss of 6.5% to 4.5% of revenue, which is a 10 80 bps improvement at the midpoint and basic weighted average shares outstanding of approximately 106,000,000 for the Q4, we expect revenue in the range of $84,500,000 to $86,500,000 which is a 20% growth rate at the midpoint. Gross margin in the range of 64.5% to 66.5% of revenue adjusted EBITDA breakeven, which is an 8 20 basis point improvement basic weighted average shares outstanding of approximately $108,000,000 For the full year of 2023, we now expect revenue in the range of $325,000,000 to $329,000,000 gross margins in the range of 66.5% to 67.5% of revenue adjusted EBITDA loss of 5.5% to 4.5% of revenue and basic weighted average shares of approximately 105,000,000 in closing, we are excited to deliver second half outlook that illustrates our confidence in our ability to generate strong growth while achieving adjusted EBITDA breakeven and ultimately profitability.

Speaker 1

We believe that our first half results and our second half guidance demonstrate our capacity to flex our marketplace model as we execute on a variety of strategic initiatives, allowing us to distinguish ourselves in the current environment. Ian and I are now ready for your questions. Operator, please open the line.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. You will hear a 3 tone prompt acknowledging your request. Your first question comes from the line of Ike Boruchow from Wells Fargo. Your line is now open.

Speaker 3

Hey, guys. Congrats on the quarter. Just wanted to dig in a little bit more on the scale to profitability. It sounds like you're highly confident in the margin progression into next year. I was wondering, James or Sean, if you could give a little bit more color.

Speaker 3

It sounds like adjusted EBITDA profitability is the plan for next year. Just kind of curious if you could give a little bit more our framework for fiscal 2024, whether it's on the gross margin line or just adjusted EBITDA margin line. And then again on the CapEx, Sean, so we should be thinking $1,000,000 to $2,000,000 a quarter throughout through next year as well? And I guess that's all my question. Thanks.

Speaker 2

Sure. Thanks, Ike. Yes, I mean, I think as we said, we feel very good about the path to Q4 breakeven. And we continue to sort of generate that through margin expansion and sort of the elements of our marketplace that are really working. And I think as we get into 2024, I think we feel confident that you can continue to see expansion quarter after quarter.

Speaker 2

Obviously, like there's some seasonality in our business and so it's probably not a straight line, but I think we're hopefully putting these questions of can thredUP be breakeven behind us And kind of excited about the ability to expand those margins into 2024. And I think that relates to the free cash flow question, which I'll let Sean address around CapEx.

Speaker 1

Yes. And I would say even in when you're thinking about we end the year at breakeven in Q4 and then we march our way through expansion of EBITDA in 2024 is free cash flow shouldn't be too far off of that, right? It's not far away from when we get to breakeven EBITDA. But as it relates to your CapEx question, yes, I think $1,000,000 to $2,000,000 kind of the maintenance mode, Actually all the way through 2025. So it's not until about 26 we start to think about CapEx again at a greater size than that.

Speaker 1

Thank you.

Operator

Your next question it comes from the line of Trevor Young from Barclays. Your line is now open.

Speaker 4

Great. Thanks. Just on RASK for a second, you're continuing to add some well known Brands there, of some of the brands that you've had for a year or more like a Health Figure, for example, how are those programs ramping? Not specific to any one brand, but just overall, our volumes and engagement from buyers as well as the brands themselves where you expected, any key learnings there, any changes in strategy? And then any sort of mark to market in terms of the proportion of inventory or volumes or even revenue coming from RAS programs?

Speaker 2

Sure. Thanks, Trevor. Yes, I mean, I think I'm pleased with the overall adoption of RASP by the brands, right, I mean, you've seen pretty significant growth. I think it varies a bit brand by brand around the momentum and who's leading the charge at the brand side. It's been a difficult time for retailers over the last 6 quarters.

Speaker 2

So I do think you're going to continue to see momentum as we get into a normal inventory environment that's certainly been a headwind, I think for retail, Trevor. But look, I think lots of these brands have gotten I think it's going to be one of these things that you're going to see continued momentum year over year. We put in our impact report how many bags we've been processing through our RAS partners and I think we put that in there to show it's a pretty significant amount of supply that we're continuing to generate through that platform and we expect to grow that again in 2024. So I think RAS is an integral part of our business and I think we'll continue to see momentum there.

Speaker 4

That's really helpful, James. And just a quick follow-up. What are you seeing kind of in the competitive environment from retail in terms of promo? You always have some good color on that. What are you seeing today and what do you think evolves over the next couple of months?

Speaker 2

Things seem to be getting better, Trevor, but I think you're still having lingering inventory overhang that's going to be real. And I think as we get into back to school, which we're sort of already in and as we get into holiday, I think it's going to continue to be competitive out there. And I think from where we sit, holiday is never really the strong suit of retail. And so I think it's an area where we're going to be observers of what happens in Q4 across the retail environment, but I expect things to continue to get better. And, I think as we get into 2024, you'll start to see the purchasing behavior of retailers that we've seen over the past year like start to kind of hit the P and L.

Speaker 2

And I think that's an area where resale should really shine as the inventory environment has finally kind of rolled over.

Speaker 4

Great. Thanks, James.

Operator

Your next question comes from the line of Dylan Carden from William Blair. Your line is now open.

Speaker 5

Hey, thanks. I'll kind of just follow-up on that thought actually, James. Why then sort of in the guidance it's Q4 and albeit I take that it's modest, but inflecting, from just a pure absolute dollar Number from 82 ish to 85, 86 and your expectations?

Speaker 2

Yes, Dylan, part of that is the seasonality in our business. So specifically in Europe, Q4 tends to be a seasonally stronger quarter for them than Q3 given the summer holidays. So that's what you're seeing as you move from Q3 to Q4.

Speaker 1

Got it. Dylan, I would add in on to that too because you'll see it in the guide is the Q4 guide for gross margins is down for that exact same reason. Europe gets to be a bigger piece of the pie in Q4, which has a structurally lower gross margin now. And so that drags down gross margins a bit in Q4.

Speaker 5

Excellent. Thank you. Actual question, just on the fee, it's exciting that you're kind of rolling that out. Can you speak to timing when you rolled it out more broadly in the quarter, and then kind of how that shows up in the model? Is that something where we would expect to see higher revenue per order or is that a sort of a contra cost?

Speaker 5

What's sort of the best way to think about modeling that rollout out?

Speaker 2

Yes, I'll start with yes, I mean, Dylan, I think we treated it as an experiment for some time. And then I think month over month, we've expanded the number of sellers that are in that treatment. And so, yes, I would say almost all sellers now exposed to it. There are obviously some pockets of experimentation that we do around when do we waive fees, when do we give people expedited service for a shorter fee, and I think those are areas we'll continue to investigate, but it is fully deployed. As to where it will hit in the P and L, I'll sort of let Sean hit that.

Speaker 1

Yes. It's in consignment revenue on the line in the P and L and it would show up in revenue per order too as well.

Speaker 5

Okay. And then if you'd indulge me here, just from a capacity utilization standpoint, how are you thinking about the new distribution capacity ramp? Any sort of change there in expectations as far as timing, I guess, because the breakeven target is still in place, probably not a lot, but just wanted to make sure.

Speaker 2

No change on timing. I think we actually provided incremental guidance around the CapEx needs as not Meaning any new CapEx still until 2026. Previously, we thought that would come in 2025. So I think we feel very good about the capacity that we have in place and the fact that we can continue to grow into that capacity through the next you have 10 quarters before we have incremental CapEx, and I think that's a really nice place to be able to grow the business and generate free cash flow over time.

Speaker 1

Yes, just for a point, so you guys know that Dallas is open at about 1,500,000 slots or available spaces.

Speaker 5

Great. Thank you very much. Nice work.

Speaker 1

Thanks. Thank you.

Operator

Your next question comes from the line of Anna Andreeva from Needham. Your line is now open.

Speaker 6

Great. Thank you so much and congrats guys. Nice quarter. A couple of questions. Curious if there was any variability in the business by month in the Q2 and what are you seeing quarter to date.

Speaker 6

James, anything to call out about the budget shopper behavior? You had talked about seeing some stabilization there previously. And to Sean, as we think about the bridge to get to EBITDA break Even in the Q4, just anything we should be mindful of in the model by line item? Thank you, guys.

Speaker 2

Sure. And I mean on the variability by month, I think sort of consistent with what we've seen in prior years, I think June was a little stronger than previous Junes and I think we did a bunch of work to really hit the consumer as they've moved into their summer holiday. So I think, June was a little better probably than it had been in previous years and I think quarter to date, I think we're seeing the sort of same patterns we've seen in previous years. And you're really starting to see back to school kick in now. And so I think that's sort of the story for the rest of Q3.

Speaker 2

As for the budget shopper, I mean, we continue to see that, that is a customer that is more challenged, right? I mean, I think it's definitely a customer who is feeling the pinch across their discretionary purchasing power. So while I think the numbers on a have stabilized. I would not say that that customer is in better shape than they were 90 days ago. And so I think as we continue to evolve the supply mix, we're going to have to continue to evolve our customer acquisition strategy and how we retain those customers over time.

Speaker 2

I'll let Sean talk about the walk on 4th quarter.

Speaker 1

Yes, I think of it this way, it's probably simple as in revenues are up, Europe expands, at the same point that drives gross margin rate down a little bit in Q4. And then it's offset really by leveraging OpEx across the board, SG and A, OP and T and marketing. I historically, you guys have known for quite a while from a U. S. Perspective, marketing is slightly less in Q4 than any other quarter.

Speaker 1

That helps us drive towards breakeven when we get to Q4.

Speaker 2

And I would say one thing on it, which I think should make people feel pretty good is 4th quarter tends to be the softest quarter for us in the year and so I think the fact that that can be a quarter where we're achieving breakeven in what is traditionally not our best quarter, I think it's really important I think then as you roll the calendar forward to 2024 and you get into Q1, Q2, Q3, which tend to be at least historically stronger quarters, I think that gives us a lot of confidence in the momentum that's building in the business.

Speaker 6

All right. That's great. Thanks so much, Dave.

Operator

Your next question comes from the line of Edward Yruma from Piper Sandler. Your line is now open.

Speaker 7

Hey, good afternoon. Thanks for taking the questions. I guess 2 for me. First, I know you've implemented this new fee, but are there other enhancements that you can do to the supply side of economics given the backlog that can kind of put you back on there or continue on down the path of And then as a second question, I noticed that Anthony departed the business. I guess kind of how have you no dramas response at all.

Speaker 1

Thank you.

Speaker 2

Sure, Ed. I mean, I think, yes, we continue to look at other ways to balance monetization of the seller community, but making sure we have deliver them a great experience. I think one of the things that we've become very confident in is that the fees help us really deliver a high quality seller experience by enabling really the best sellers in the marketplace to have their bags processed in a timely way. As we pointed out in the call, I processing times have continued to come down and I think for our VIP sellers who are people who are really passionate about the threat of selling experience, They're getting processing times in days. It's under 1 week.

Speaker 2

And so we feel very good about that mix of sellers and we'll continue to try and manage optimizing both their experience and the ways that they generate revenue for the business. I think Anthony has been a threat up for Anthony Marino has been a threat up for 10 years. He was an integral, vital part of everything that we did. And he was great and I think now he's just decided to pursue another passion in his life and we have an incredibly talented bench of folks I feel very good about picking up that mantle and doing them proud.

Speaker 7

Thanks very much.

Operator

Your next question comes from the line Dana Telsey from Telsey Advisory Group. Your line is now open.

Speaker 8

Hi, good afternoon, everyone, and nice to see the progress. As you think about the number of active customers, I think it was down just under 1%. How are you thinking of the active customer cohorts? What are you seeing? How is it differing at all?

Speaker 8

And then James, you've given out some product trends in terms of what you're seeing given the consumer environment overall, anything you'd note there? And then just lastly, on the gross margin, anything to unpack ticks and ties of how you're thinking about the components of the gross margin go forward? Thank you.

Speaker 2

Sure, Dana. I mean, on the active buyer side, I think probably more than any time recently, we're really focusing on the quality of the customer and how she is engaging and shopping the mix of goods that we have on thredUP. So as we talked about over the last couple of calls, with the efforts around sculpting and the mix sellers were generating like incrementally better product on the site. And so I think as part of that, we're really focused on that incrementally more premium buyer. And again, I want to emphasize it's not a luxury buyer by any means, but incrementally more premium.

Speaker 2

And we think that that strategy really has legs because I think that buyer population is more stable in the macro environment. They tend to have they tend to generate higher LTVs over time. And so you're seeing a little bit of a mix in the tactics that I think actually will compound as we get into 2024. As for the product side, I think, I don't have any news to break on that, Dana. I think what we're really focused on it is making sure that the seasonal mix on thredUP is as good as ever.

Speaker 2

And I think it's an area where as a 2 sided marketplace, you can often end up not being as able to hit the mark right on seasonality because you're a little bit I'm exposed to what people send you. And I think we've done a really great job. The team has done a really great job of educating sellers on what we want. And therefore the seasonal mix on threat, I think has been as good as ever. And so I think that it gives me a lot of confidence as we move through the back half of the year, and I think those learnings will help in 'twenty four as well.

Speaker 1

And then on the gross gross margin, I mean, you guys saw in Q2, we posted like a record U. S. Gross margin. That's really due to the transition of the RAS business is more to consignment as well as kind of improving across the board unit economics. And then as we go forward from here, we still have some more room to go there on the consignment switch we're transitioning on the RAS business, so there's more to go there.

Speaker 1

And then Europe has just started the consignment switch. So that transition is going to take some time, but it will start to become a tailwind. Keep in mind, it's a little bit of a headwind on revenue growth as well. But so as you go forward from here, probably all the way through next year, you'll start to see some nice tailwinds on the gross margin side.

Speaker 8

Thank you.

Operator

Your next question comes from the line of Alexandra Steiger from Goldman Sachs. Your line is now open.

Speaker 9

Hi, this is Pierre on for Alexandra. Thank you much for taking our questions. So just one from us on fulfillment and contribution margins. You've previously talked about how your more recent distribution centers can carry higher contribution margins relative to older generations. So just wondering how we should think about the broad messaging around that being a potential tailwind for margins for the U.

Speaker 9

S. Business kind of voting current results and over the next several quarters as you see kind of utilization improve assume those volumes also come in at higher unit margins? Thank you.

Speaker 2

Yes. Hi, Pierre. Yes, I mean, I think you hit the nail on the head, which is we're continuing to focus on our most productive distribution centers that would be DC06 in Atlanta NDC-seven coming online or that's online in Dallas. And so as we flow more product through those two important hub, you will see some flow through on the contribution basis, both on the shipping and outbound logistics side as well as labor and fulfillment. So we do think those are tailwinds over time.

Speaker 2

And I think even so if you roll it forward into 2025 and into 2026 as those become even bigger parts of the network, you should see continued flow through. So I'm feeling very good about contribution margin expansion and then ultimately how that flows through to free cash flow?

Speaker 1

Yes. You'll start to see some different pieces of automation and innovation through both of those DCs. So As you look into 'twenty four and 'twenty five, if you guys get a chance to visit, you can come see those in person.

Speaker 9

That's great. Thank you.

Operator

Your next question comes from the line of Noah Batson from KeyBanc. Your line is now open.

Speaker 6

Hi, thanks. This is Ashley on for Noah. Just wanted to dial in a little bit on the backlog. The timing continues to tick down. Just curious on any updated thoughts on the timeline it will take to get to that 2 to 3 week target.

Speaker 6

And then on RAS, I'm just hoping you can provide some more color around the line of sight for additional clients in the back half and then just also how you're thinking about 2024 and the impact on the P and L, as you transition a lot

Speaker 2

Yes. Hi. I don't know if it's Ashley or Ashley, is that right?

Speaker 6

Yes, Ashley.

Speaker 2

Okay. Yes, I think on the backlog, we continue to make progress. I think where we've ended up is that those customers who want superfast service are paying for VIP services and we're getting it to them under a week. And those customers who want regular service, I think are getting that in that 6 week range. So I think we'll make a little bit more progress towards that, but I think we've identified there are really 2 segment populations, those who want it normal speed and those who want a VIP.

Speaker 2

And I think the current backlog estimates, I think hit that bid very well. On the RAS side, we ended the year last year with 40 ish clients and I think we continue to grow from there. And I think right now we're adding new clients and also really growing the engagement of clients and how they're working with their customers. And I think RAS will continue to see momentum into 2024, as I mentioned, I think as the inventory environment for broader retail gets better, I think RAS will actually have an opportunity to work a little bit harder for us, so feel good about that.

Speaker 6

Great. Thank you.

Operator

Your next question comes from the line of Rick Patel from Raymond James. Your line is now open.

Speaker 10

Hey, guys, congrats on the progress. Can you talk about what you're seeing with Remix early on as that moves to a consignment model? Are you getting the kind of products that you would deem to be attractive from a merchandising perspective like you are in the U. S? Or does this take time?

Speaker 10

And then secondly, how should we think about you implementing best U. S. Practices over at Remix, things such as charging fees for the clean out kits and the opportunity there.

Speaker 1

Yes, sure, Rick. I mean,

Speaker 2

I think on the remix Consignment side, we've been pleasantly surprised with how well the team has been able to execute on that and then the customer adoption, I mean there's clearly product market fit for the clean out kit right in the lives of consumers. And so I think the fact that there's willingness to pay in the U. S. For that experience only solidifies how strong we think product market fit is and so far we've not seen that the European sellers is different in that way of looking for convenience and I think consignment has become an increasingly acceptable part of the way that selling happens online. And so

Speaker 1

I think the team has rolled it out

Speaker 2

well and we feel good about the And so I think the team has rolled it out well and we feel good about the adoption. I think to your question about best practices, I think one of our core thesis in buying new business was that we had learned so much over the past 10 years that we could bring over to Remix. And I think the team there has been incredible with the learning and the ability to sort of adopt what we've done in the U. S. And then adapt to that to how to roll it out in Europe.

Speaker 2

So Yes, we feel great about how that business is executing and performing and the team there. And I think that environment in Eastern Europe it's been really challenging over the past year. And despite all that, the team has done great. So, we we feel really confident as we roll the calendar into 2024 as well.

Speaker 10

And any additional color on the drivers for the quarter over quarter acceleration in active customers. Just curious if that represents higher income consumers or a different cohort than you've seen in the past?

Speaker 2

It's a little bit incrementally higher income, but I think also just as we have the right product mix Online, Rick, you're just seeing customers conversion improve, right? The seasonality mix has hit the bid. And so, I think there's going to continue to be some puts and takes as we get the right mix of goods and we really find the right buyer, we're feeling very good about that sequential improvement and ultimately how we drive that into 2024.

Speaker 1

Thank you.

Operator

There are no further questions at this time. I will now hand the call back to James. Please continue.

Speaker 2

Well, thanks everyone for joining us on the earnings call. I appreciate all the good questions. And for those of you who dialed in, big shout out to the ThredUP team for continuing to execute at such a high level. I appreciate all the work that you guys have been doing and will continue to do. We're optimistic and excited for the year ahead.

Speaker 2

So thanks everyone.

Operator

Ladies and gentlemen, this concludes

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Earnings Conference Call
ThredUp Q2 2023
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