Q2 2022 ThredUp Inc Earnings Call
Good afternoon, and thank you.
For joining us on today's conference call to discuss <unk> second quarter of 2020, Chief financial result with that.
Our James Reinhart, CEO and cofounder and Sean.
CFO , we posted our press release and supplemental financial information on our Investor Relations website at IR <unk> Com. This call is also being webcast on our IR website and a replay of this call will be available on the site shortly.
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 third fiscal quarter and full year of 2022 future financial performance much demand growth prospects business strategies and plans the impact of inflation changing consumer habits and general global economic.
A key priority.
These forward looking statements are not guarantees of future performance involve known and unknown risks and uncertainties, our actual results could differ materially from any projections of future.
Norman result expressed or implied by such forward looking statements.
Words, such as anticipate believe estimate 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. These non-GAAP financial measures should be considered in addition to 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 the IR website.
Now I'd like to turn the call over to James Reinhart.
Good afternoon, everyone I'm, James Reinhart, CEO and cofounder of threat up. Thank you for joining us for threat of second quarter 2022 earnings call.
We're pleased to share threat of financial results and key business highlights from our second quarter. In addition to our financial results I'll give a closer look at how the threat of customers' bearing in this difficult economic environment discussed the unique advantages of our marketplace business model and provide some details on our progress towards profitability.
Up with the discussion of investments in our customer experience our progress in Europe . Following last year's acquisition of remix and updates on our retail as a service offering I will then hand, it over to Sean Silva Chief Financial Officer to talk through our second quarter 2022 financials in more detail and provide our outlook for the third quarter of 2022.
I will close out today's call with a question and answer session.
I'd like to start by acknowledging that we are facing a consumer environment that is much different than it was just two months ago.
All the data that we're seeing indicates that consumer health is deteriorating, especially among the budget consumer who makes up a meaningful portion of our customer base.
As such we saw our business slow in the final weeks of Q2, a trend that has continued into Q3.
Given the volatility we're seeing with the consumer it's incredibly hard to predict exactly how the customer is going to behave in the back half of the year a period during which we also had challenging year over year comparisons.
With that said our priority in the coming quarters and into 2023 is reaching breakeven on an adjusted EBITDA level, we are planning to get there by managing the variables within our control we are actively making adjustments to reduce our cost structure and modify our capex plans to not only weather this challenging economic period, but importantly to come out profitable on the other.
Syed positioning us for share gains when consumer health returns.
I'll provide additional details on our path to profitability later in the call.
Let's turn to our Q2 results.
We achieved another quarter of strong financial performance seeing record revenue resilient gross margins and continued growth in active buyers in orders compared to the same time last year.
Our revenue of $76 4 million is an increase of 27% year over year, even with the deceleration beginning in mid June we are particularly proud of our gross profit totaling $52 6 million representing growth of 19% year over year. We finished the quarter with gross margins at 68, 9% on a consolidated basis in <unk>.
Gross margins in our U S business was 74, 2% as our progress on.
In our logistics strategy more than offset a highly promotional environment active buyers and active orders this quarter increased 29% and 40% year over year, respectively. Our adjusted EBITDA loss of $13 5 million is primarily due to planned investments across our operating infrastructure and technology stack.
Let's turn to the macro environment and the consumer.
Our second quarter results were solid building off a strong first quarter, but as I noted our consumer began to really struggle in the back half of June and that persist today.
It's been well documented the American consumer and particularly the budget consumer has pulled back on discretionary spending admits today's economic climate inflation continues to squeeze the purchasing power of all but the wealthiest Americans.
Recall that approximately 60% of our customer base has a household income below $100000 in our customer data is telling us that this budget consumer feeling particularly pinched.
As a rigorous data driven company, we're sharing some incremental earnings this quarter to demonstrate how consumer behavior in the U S has evolved in our marketplace.
We are witnessing a clear bifurcation of set of customers with premium shoppers trading up and value shoppers trading down.
Year over year, the average order value of the deep discount segment of our customers declined 7%, while our upscale shoppers average order value increased 15%.
When you look at the items being purchased the bifurcation is even more pronounced the deep discount shoppers are trading down to items that are 24% less expensive than the typical budget shopper is trading down to items that are 8% less expensive.
Meanwhile, the upscale shoppers doing the opposite trading up to items that are 8% more expensive.
While it has only seen a slight dip in the number of upscale shoppers buying with us we've seen a 23% decline across discount and budget shoppers in July compared to the same period in may.
Counting budget shoppers make up about one third of our customer base.
Essentially nearly one in four of them are sidelining themself from apparel purchases right now.
Ross all our shoppers we've seen return rates climb over the past several months, which we believe is an indicator of the customers are being more selective when it comes to their discretionary purchases.
But this tells US is that while there are many customers on the sidelines right now even the customers in market are behaving differently. We expect these trends to continue for some time.
Given this backdrop I want to call your attention to two areas first the vantages of our marketplace model and how we can flex our platform to adjusted demand and second how we're approaching variable expenses in our March towards both sustainable growth and sustainable profits.
Let me start with the structural advantages and built in resiliency of being a marketplace.
I want to remind everyone that we're not a retailer or direct to consumer E Commerce company.
Unlike traditional retailers, whose brand equity around pricing inventory commitments and fashion manufacturing lead times can become a liability in our hyper promotional and slowing macro environment, our consignment structure and flexible responsive supply chain enable us to take minimal inventory risk.
Set trends or have to bet on trends many quarters into the future. We can let the data drive our decision making.
Think of every listed items in our marketplaces snowflake.
It means we have the flexibility to adjust our prices seller payouts processing cadence recommendation algorithms and merchandising mix to adapt to the consumer environment.
For example, we see resilience in spending from higher income customers, we can adjust our assortment and pricing strategy for items that are training with that demographic if customers are trading down into lower price goods, we can adjust our selection and payouts for those items to drive sell through while protecting margins.
One of the lessons learned coming out of the pandemic with how to flex our mix of goods to meet the moment.
Now as a Prime example of how we can flex our traditional retailers have overbought and must work through a glut of inventory, we can more easily dialed back inbound supply and shape, our assortment from our customers to best match, the forecasted demand environment as macro conditions begin to improve we can dial back up our processing can meet the demand curve.
Next I'd like to address in more detail the steps, we've taken to reduce expenses across the organization as a proactive step towards our profitability goals.
Very important to note that again as a marketplace. Many of our expenses are variable not just in supply processing, but more broadly across the P&L.
This past quarter, we reduced expenses across head count R&D, capex and discretionary spending not pertinent to the current growth trajectory of the business.
This includes making the difficult decision to lay off about 15% of our corporate workforce as well as shutter one of our processing centers.
We believe these actions will position us well for the uncertain demand environment ahead, and accelerate our path to profitability.
We prioritize the new approach to expenses is proving hard to predict exactly how the customer is going to behave in the back half of the year and into the first part of 2023.
With that in mind, we thought it best to be Conservative to guide investors to three operating principles on which we're running the business.
First we are focused on maintaining our active customer numbers and engaging our core buyers and sellers through continuous improvements in the product experience we.
We will seek to acquire new customers is acquisition cost continue to come down and we will plan to be spring loaded to surge item processing and growth spend as we have seen green shoots of a recovery.
Second we are focused on maintaining our strong gross margins pricing power with buyers or payout power over sellers and reducing inventory risk to provide maximum flexibility as the customer recovers.
We plan to drive our processing backlog down to allow us to be nimbler in sourcing and shaping the best possible assortment.
Three we will rigorously manage variable expenses and capex is needed to achieve our profitability targets and regulate our cash levels.
While we expect the challenging consumer environment for the foreseeable future and can reduce variable expenses further if needed. We will also be positioning our product and growth strategy to take advantage of a recovering consumer.
Accordingly, we expect to be adjusted EBITDA breakeven in the back half of 2023.
This is assuming a quarterly revenue run rate between 80% and $85 million and on a clear path to sustainable profits thereafter.
Now that we've covered the consumer the advantages in our marketplace and our path to profitability.
Kate you on what we're doing to improve the customer experience and provide some commentary on our progress with our European and retail as a service businesses.
Let's turn to the customer experience across our marketplace. Our team has honed in on high impact high conviction improvement to threat up product experience that will pay dividends in the short and long term.
First it's all about delivering a world class shopping experience that keeps customers coming back.
We offer a one of a cotton catalog, where fresh new items across thousands of brands category styles and price points and listed everyday.
With our expansive assortment one area, we're particularly focused on is curation.
We are building tools like visual filters style matching algorithms occasion based recommendations and mobile swiping favoring features to empower the customer to get exactly what she wants and an increasingly effortless way.
You've used the threat of athlete you may have seen some of this already in beta form.
Of course, we also remained disciplined on acquiring new customers and delighting them. The first time, they engage with threat up.
And I'm excited to share that Noel Sadler has joined <unk> as our chief marketing officer.
All comes from online fashion retailer loose, where she served as chief marketing officer for deep expertise in E Commerce marketing and merchandising will be immensely beneficial as we look to capture an even larger mindshare of Gen Z consumers.
Shifting to the international front, we remain focused on remix the European fashion retail company, we acquired in Q4 of last year.
As mentioned on last quarters call. We are focused on driving supply growth and margin expansion within the remix business. We're also learning to manage and optimize the more seasonal nature of its operations in central and Eastern Europe , where Q3 tends to be sales of low price keys tanks, and shorts and Q4 tends to be sales of higher priced pants jackets and outerwear.
As we learn more about these customer preferences, we're leveraging the threat of a playbook to improve pricing merchandising payoffs and sell through.
We're pleased that how well remix continues to exhibit resiliency in its top line and margins despite economic turbulence in Europe .
Turning to throw up the resale of the service business also known as Ras.
We recently launched resale $3 60 for Tommy Hilfiger, a classic American brand dedicated to embracing circularity at the same time, we launched open for a minimalist sustainable fashion brand showing that our rasp platform can effectively serve brands across the apparel ecosystem.
In addition, madewell one of our early RASK clients expanded into 15 categories outside of denim growing listings on a retail shop by over 400%.
Despite a tough environment for retailers, we remain on track to have more than 40 brands on our RASK platform by year end and many of our existing clients are expanding their businesses with us as we prove out the value of our model.
Leveraging our marketplace infrastructure Ras amplifies, our supply advantage places our brand in front of new customers increases our sell through and return on assets and expands our long term profitability metrics by adding sources of recurring high margin revenue.
In conclusion, let me reemphasize that our priority in the coming quarters and in 2023 is reaching breakeven on an adjusted EBITDA level and we are planning to get there by managing the variables within our control while positioning us for share gains when consumer health returns.
I also want to acknowledge that the mission of dried up which is to inspire a new generation of consumers to think secondhand first.
Our mission of our company ultimately comes to life through the incredible work of our team and I'm really proud of their collective resilience the year to date corporate employee retention rate remains a remarkable 96%.
The average tenure of our most senior executives approaching eight years.
This quarter. We also released our 10th annual 2022 reset report conducted by third party retail analytics firm global data.
Turning to global data the resale market is expected to exceed $80 billion by 2026.
While we remain confident in its long term growth prospects.
Acutely aware of the near term economic challenges in front of us.
One final comment before I turn it over to Sean.
Like to note that while this is a challenging moment for the budget shopper and a discretionary category. The American consumer has proven to be incredibly resilient over time and when discretionary spend comes roaring back as it has in every other previous recovery, we will be poised to serve that surging demand with an incredible selection of great clothing and in <unk>.
Ever improving marketplace with strong unit economics, and with a meaningfully improved cost structure.
With that I'll now turn it over to Shaun to walk through our financial results and our guidance.
Thanks, James and again, thanks, everyone for joining us on our second quarter of 2022 earnings call.
I'll begin with an overview of our results and follow with guidance for the third quarter and the 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 in our upcoming 10-Q filing.
We are extremely proud of our Q2 results for the second quarter of 2022 revenue totaled $76 $4 million, an increase of 27% year over year.
Consignment revenue was flat year over year, while product revenue grew 145%.
Q2, consignment revenue saw an outsized impact from slowing demand in the U S. In the final weeks of the quarter. The deceleration that so far has continued into Q3.
Product revenues growth is due to our Q4 2021 European acquisition and growth in our <unk> channel.
Currently the majority of revenue from both <unk> and our European business Falls under product revenue. So we plan to transition these businesses towards consignment revenue overtime.
For the trailing 12 month active buyers rose, 29% to $1 7 million.
Second quarter orders totaled $1 7 million, increasing 40% as compared to the same period last year.
For the second quarter of 2022 U S. Gross margins expanded to 74, 2% a 60 basis point increase over 73, 6% for the same quarter last year, representing our highest U S gross margin ever.
Our progress in outbound shipping logistics, along with our ongoing work and improved automation larger distribution centers and expanded utilization. Despite elevated returns in a more promotional strategy towards the end of the quarter.
Over the course of Q2 2022, we did see return rates move higher as consumers became more selective negatively impacting our revenue by an incremental $2 $5 million over Q2 of 2021.
<unk> seen this trend continue in Q3.
Consolidated gross margin was 68, 9% a 470 basis point decline over the same quarter last year due to the consolidation of the lower margin European business.
Over the next few years, we plan to migrate the European business towards higher margin consignment.
In the near term Europe's product revenue margins are materially lower than threat up U S. As product margin and we see ample opportunities to improve its product revenue margins through investments in automation and data science in order to be closer to the 50% range. The U S product margins command.
For the second quarter of 2022, GAAP net loss was $28 $4 million compared to GAAP net loss of $14 $4 million for the second quarter of 'twenty one.
Adjusted EBITDA loss was $13 5 million or 17, 7% of revenue for the second quarter of 2002, and approximate 265 basis point decline compared to the adjusted EBITDA loss of $9 million or 15, 1% of revenue for the second quarter of 'twenty one.
The deleverage was largely the result of operations product and technology investments as we continue to build out our Texas D C, which will ultimately increase our current capacity by over 150% in the U S alone.
Q2, GAAP operating expenses increased by $23 million or 40% year over year.
Just over half of this increase was related to higher operations product and technology costs related to our infrastructure expansion in both the U S and Europe .
Stock based compensation accounted for $7 million of the increase as we awarded employees our annual RMC refresh.
Turning to the balance sheet, we began in the second quarter with $191 1 million in cash and investments and ended the quarter with $155 7 million.
Our cash usage from operations was $18 $2 million, while we spent $14 9 million on capex largely attributable to our infrastructure buildout.
As we look forward our priority in the balance of the year and into 2023 is to direct the business towards adjusted EBITDA breakeven on our way to profitability.
With the acknowledgment that the challenges in the macro economy or something we cannot control and that we will likely be facing a slower demand environment in the near term. We believe we have mapped a path to adjusted EBITDA breakeven thats dependent upon what we can control expenses.
So that is clearly aligned on our adjusted EBITDA breakeven goal with the entire organization prioritizing expense rationalization and cost efficiency.
At the same time, we remain dedicated to investing in our customer experience and operations. So that we are well positioned to take share when consumer health returns to steadier footing.
We acknowledged at the timeframe to reach adjusted EBITDA breakeven on a quarterly basis could shift depending on the macro environment.
Based on our current assumptions, we believe that we'll be able to reach breakeven by the back half of 2023, assuming a reach a quarterly revenue base of 80% to $85 million.
An example of the work we have done and re examining our expense structure is that we have made the difficult decision to lay off 15% of our corporate workforce towards the end of Q2.
One of our processing centers and eliminated a significant portion of discretionary spend.
We are continuing to find opportunities to reduce costs and we expect many of the expense rationalization initiatives. We put in place will materialize over future quarters. We're also pulling back on variable spend in response to slowing demand in areas, such as marketing and inbound processes.
In Q3, and Q4, we expect to realize approximately $12 million and $18 million of savings from these initiatives respectively.
Based on the current revenue trends in 2023, we expect $70 million in savings over half of which our operations and marketing related which we expect to redeploy when revenue trends improve.
Even in a slowing demand environment that we are facing we are confident in our ability to reach adjusted EBITDA breakeven due to the fact that our expense structure is highly variable <unk>.
This expense flexibility is a key of our business model that can serve us well in a weaker economic environment. For example, inbound costs that sit in operations product and technology are responsive to revenue trends if.
If we're selling fewer items and we need to process for your items in naturally reducing our expenses.
Furthermore, we have the ability to react to revenue trends and defer or re prioritize our capex commitments as well for example, we have taken a modular approach to building our Texas DC. This means we can push out the second phase and the associated Capex and cost until demand requires additional capacity based on the current environment, we expect to spend 12 to 13 million.
In Q3, $5 6 million in Q4 and are planning for less than $20 million in total for 2023.
So we spent $33 million in cash in Q2, we expect to spend level to significantly decrease by Q4 is our capex expanding eases as we near the end of completion of phase one of our Texas DC combined with the significant improvements in EBITDA were expecting due to the ongoing cost saving initiatives were implemented.
Even in a slower growth environment, the variable nature of our expenses combined with the ongoing work, we're doing to drive out excess costs provides us with the confidence that we expect to be able to fund the business through our existing cash balance <unk> debt facility until we reach free cash flow positive.
In fact, we believe our recently refinanced $70 million debt facility can entirely finance, our near term capex requirements if needed.
As a result, we do not anticipate our balance of cash cash equivalents restricted cash and marketable securities falling below $50 million before reaching free cash flow positive nor do we expect the need to turn to the capital markets before that.
We are electing to take a highly conservative approach the second half as visibility consumer behavior is low, particularly among the low end consumer. In addition, we are facing a difficult second half comparisons due to the step up in processing power in 2021.
Our outlook assumes that the trends we are seeing today extend through the balance of the year with these factors in mind I would now like to share our financial outlook.
For the third quarter of 2022, we expect revenue in the range of $64 million to $66 million.
Gross margin in the range of $65 to 67% Keith.
Keep in mind that our Europe business is highly seasonal with its lowest gross margin quarter in Q3 during the summer selling period. In addition to our weaker than expected U S performance are lower margin European business will be a larger portion of our business in Q3.
And adjusted EBITDA loss of 18% to 16% of revenue, which is a 70 bps sequential improvement at the midpoint of our outlook and basic weighted average shares of approximately $100 4 million.
For the fourth quarter of 2022, we expect revenue in the range of $70 million to $72 million gross margin in the range of 64% to 66% or lower margin European business has their seasonally strongest quarter in Q4, making it the greatest percentage of total revenue for the year.
Pressuring gross margins.
And adjusted EBITDA loss of 10% to 8% of revenue, which is an 800 bps sequential improvement at the midpoint as we expect to benefit from a full quarter of our cost saving initiatives and.
The basic weighted average shares outstanding of approximately $101 3 million.
For the full year of 2022, we now expect revenue in the range of approximately $283 million to $287 million.
Gross margin to be in the range of approximately 67% to 69%.
And adjusted EBITDA loss of approximately 16% to 15%.
We continue to expect sequential progress in our adjusted EBITDA rate in dollars until we reach breakeven.
Spite the topline pressures to our business, we are expecting an improved EBITDA loss versus the midpoint of our previous guidance due to the meaningful actions, we have taken to reduce expenses across the organization.
And basic weighted average shares of approximately $100 million.
In closing, while we are pleased with our second quarter performance. We know there is much more work to be done.
While we are lowering our top line expectations for the remainder of the year due to the consumer environment, we want to reiterate that our adjusted EBITDA margins continue to improve sequentially and are in line with our previous guidance for the full year.
We are confident that we will make progress on our path to profitability as we flex the variable cost within our control and we believe that our marketplace model is uniquely positioned to weather this uncertain economic period.
As James mentioned, we are not sure when the consumer environment will recover but we know that when it does we will be in a position to emerge as a stronger more profitable business on the other side.
James and I are now ready for your questions. Operator, Please open the line.
Yes.
Thank you.
I would like to ask a question. Please signal pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again that is star one if you'd like to ask a question.
We will take our first question from Trevor Young with Barclays. Please go ahead.
Great. Thanks.
On the path to breakeven in two H 'twenty, three and I think you said $80 million to $85 million run rate revenue required to get there can you just help us understand what needs to go right for that to come to fruition and does that outlook imply that current trends that you saw in July and August from underlying consumers persist does it get better or a little bit does it get worse just trying to understand.
Or get a sense as to what's baked into that.
Yeah.
Sure hey to ever since.
Yes, and then I think we saw this the step down in the back half of Q2 and I think.
The way, we're thinking about the back half of the year and into 2023 is that things sort of remain where they are at these depressed levels.
We continue to work on the business and continue to optimize what we can do around pricing promotions payouts, but we're not assuming any any big recovery in that.
But we're also not assuming things get materially worse right. So I think we serve.
Kind of a level that we're seeing right now and we expect that to persist for several quarters.
Okay.
Great. Thank you.
Thank you we'll take our next question from Edward <unk> with Piper Sandler. Please go ahead.
Hey, guys. Thanks for taking the questions I guess two for me first just to kind of underscore that last question.
Are you seeing trends stabilize at this lower level or are they continuing to deteriorate and I guess, what does guidance contemplate and then as a bigger picture question.
As the traditional first party environment gets more promotional is it your belief that you need to kind of come down in price further so that you maintain kind of a differential.
Second hand versus new or kind of how do you think about adjusting pricing.
Yes.
Youre offering and kind of when should we start to see those changes. Thank you.
Yes, Thanks Ed.
Yes, I mean I think we.
We're starting to see the trend stabilized I think you saw that that step down and ended June and into July .
But now we've been seeing it would be pretty consistent and so we're.
We're projecting that we're going to kind of live in these levels for for some time Ed.
The way, we're managing the business is being super flexible aware.
Things start to recover we can accelerate into that recovery and if things are now already getting materially worse.
Pull the levers to manage that variability so I think our posture running the businesses is.
To be flexible.
But we do think the world is stabilizing I think on the competition piece of your second question.
Sort of built that into our assumptions that its going to be more competitive and so we're going to have to flex.
Rice promotion.
Discounts payouts to our sellers.
So we're willing to flex all of those things to be competitive in the environment.
Our guidance reflects what we expect to be a competitive environment in the back half of the year and into 'twenty three.
Ed I would just add is that <unk> being mostly consignment based business right as our prices come down our payouts come down so the gross margin themselves are a little more protected than most.
Thanks, so much.
Okay.
Thank you we'll take our next question is from Tom <unk> with Wedbush Securities.
Okay.
Everybody. Thanks for taking my question.
<unk> you mentioned in your prepared remarks, when you when you gave kind of like the three principals are from the pillars that you were focusing on.
You talked about maintaining your customer count and you made a comment about acquiring new customers as acquisition costs come down is that something that you're already seeing or are you seeing that come down or are you kind of saying that youre assuming that any.
Environment, a more moderate demand.
Tax would come down and you'd be able to.
We continue to acquire new customers in that environment.
Yes, Tom I think just to just to double click on both parts of that I mean, I think on the one hand, you are seeing our existing customers. Many of them are in market and purchasing and Theres a segment of customers, who I think are sitting sitting out and buying and I think it's a really important thing to understand around what's happening with our active customer base, which is <unk>.
Customers are end market. They are buying lots of stuff, but there are people who are on the sidelines and I think that influences.
Thinking and then frankly, what we're seeing around around the marketing piece, which is we are seeing AD rates come down I think all the big marketplace, all the big add.
Marketplaces have talked about.
Cost per click and CPM is coming down and we are seeing that trickle.
Trickle through but.
But we're not expecting like that to materially change over the next few quarters. It's just that it is lower than it has been over the prior few quarters and so I think we're kind of watching both both.
Both parts of the business existing active customers and new customers coming in and feeling like there may be a chance to take advantage of some discontinuities in over the next couple of quarters.
Understood. Thanks, guys and best of luck the rest of the year.
Thanks Thomas.
Thank you we'll take our next question from Laurent <unk> with Morgan Stanley .
Great. Thanks, just to I guess put a finer point on one of the earlier questions I guess what level of promotional activity is assumed in the second half gross margin outlook.
And then what are you seeing on the supply side are you seeing customers are sellers, perhaps wanting to monetize know causes a little bit more curious any changes there. Thanks.
Yes, Robert I mean, I think we're anticipating it's going to be very competitive in Q3, and Q4 I think our guidance reflects what we expect to be a very competitive environment.
We've seen some of that already.
Quarter to date.
I think as you know on the supplier side I mean, we just have never had trouble acquiring sellers and we continue to see strong.
Demand from our sellers and think theres going to be a resilience in that selling community, but I am not sure that necessarily theres going to be more and more sellers in market than there was historically.
Given given what we're seeing.
So hopefully that answers your question.
Thanks.
Thank you we'll move on to our next question is from Andrew <unk> with Needham <unk> Company.
Great. Thank you so much good afternoon guys.
Two quick ones I wasn't sure if you covered this.
Sean James how did <unk> perform during the quarter versus your plan and what are you guys implying for remix in the back half and secondly, we saw you started charging for cleanup.
Can you talk about what's behind that decision and just curious how has customer reaction bill. Thank you so much.
Sure.
So I'll talk about Phoenix first for all of the remix side. They are performing really well performed pretty much up to our expectations I think the piece to keep in mind as you start to look at Q3 and Q4, there is a much more seasonal business than we've seen in the U S. So in Europe when the summer, it's pretty much summer everywhere I, when it's winter and fall, it's called everywhere. So I think <unk> see over.
Raul Asp's decline in Q3 tanks T shirts shorts things like that so theyre GM goes down and then you get to Q4, it's their biggest quarter asps are higher gross margins higher and actually their revenue contribution to the whole company is at its highest so thats, where youre looking forward Q4 will be their biggest quarter.
And on your on your question around charging for cleanup costs. This is an experiment we've run.
Overtime over over many many years.
So.
This current variation we've just seen continued.
Continued real demand for our clean out service and so exploring.
Willingness to pay on the clean outside and how that affects the <unk>.
Customer experience and.
There's some interesting data that hopefully level to share next quarter around how that influences the types of customers that choose to clean out what's dried up because as I said in the prepared remarks, we're really looking to influence the assortment.
And this is one experiment that we've been running two to see how that materially changes what people send us so.
So stay tuned for more information on that.
Alright, thanks, so much guys.
Thank you we'll take our next question from Dana Telsey with Telsey Advisory Group. Please go ahead.
Good afternoon, everyone. As you think about the categories of merchandise that are selling and the difference between the income cohorts what are you seeing there.
How is your pricing adjusted.
Lastly, you mentioned about one of the processing facilities are you delaying it closing it.
What exactly is happening there. Thank you.
I'll, let Sean talk about the processing centers and then I'll hit your question Dana on the on the merchandize mix, Yes, it's part of our restructuring and closed one of the processing Center I think we mentioned that in our prepared remarks, and then as it relates to your GTO segment, which is a large facility in Dallas, we've been able to flex that down and slow down the build out will build out phase one at first.
How much it will hold about 5 million items and then we'll build out the second half as needed as we go through it what that really does is allow us to conserve capex spend all through 'twenty three kind of fits in nicely, what I talked about us spending capex less than $20 million in 2023.
On the shopping trends and I think what we're seeing is.
Youre definitely seeing this trade down.
Where are your discount shoppers of your budget shoppers there they are buying cheaper items, but they are buying a fair amount of them right. So I think we are capturing incremental share in the closet, whereas youre upscale shopper is buying more expensive.
The item that I think still remains a pretty resilient on the luxury side.
And I think Thats, what were projecting will be true.
Over the next few quarters and.
Our job as it relates to shape that assortment to best serve where the customer is and that's where our focus is right now.
And are you seeing the same customer trends and with remix in Europe , that's what you're seeing here in the U S.
Yes, I think what we're seeing is again I want to really emphasize that there are there are plenty of customers that are in market and in buying and some of them are trading trading down and some of them are trading sort of neutral and some are trading up.
The bigger challenge is there is just a segment of customers that are just not in market and so I think what we're seeing in the U S is that customer on the sideline waiting to digest, the cost of groceries and gas and rent.
And we expect that customer at some point to come back in the market and I think the same thing is true in remix.
But just at a much smaller scale. So so yes, hey, Dan I would say if you like across the company. The revenue per active buyer is at its highest ever we've ever had before in Q2, yes.
Yeah.
And then just one last thing on the customer base do you notice any regional trends in terms of what Youre, saying.
We don't have any regional trends that we're that we're talking about right now so but no nothing nothing to share there Dan.
Thank you.
Thanks, Okay.
Thank you, we'll hear next from Ashley Higgins with Jefferies.
Hey, Thanks for taking our questions you mentioned a pullback in marketing in the back half just any more color you can provide there and then any category trends you can call up from the second quarter I think last quarter, you called out category like workwear cocktail attire.
That'd be helpful. Thank you.
Okay.
Sure Hey, Ashley Yes, I mean, typically what happens is that we we spend more marketing in the beginning of the year and then it tends actually come down quarter over quarter. That's been the historical trend same thing is true. This year, we tend to spend a fewest amount of marketing dollars in Q4, because typically thrift.
It's not a big holiday category and so we don't try to compete.
In the holiday season.
Like other retailers so same trends that we've observed previously.
Those are in play this year.
As for the trend trend piece, we didn't comment on it in the prepared remarks, but but very similar sort of themes that we were seeing around as others are seeing around back to school categories.
I think the one thing that we are seeing is youre seeing fall and winter spending be pulled forward.
So more wool coats more jackets more outerwear.
Earlier in the season than I think we saw previously.
So that's probably the one thing to note for you.
Great. Thanks.
Thank you we'll take our next question from Alexandra <unk> with Goldman Sachs.
Thanks for taking my question.
I just wanted to follow up on your higher income shoppers could you maybe talk about how you can attract more of the spire to your platform and how quickly can you actually adjust your assortment. Thank you so much.
Yes.
I think it's been reported widely I think that the.
The upscale shopper is actually faring pretty well in this economy and so we're we're confirming that in our data I think we said that their trade.
Trading up the items that are a more 8% more expensive and so I think what we've been doing is continuing to focus our sourcing strategy on products that are going to delight.
That customer and I think what we found is that it.
Many marketplaces and drive up is not.
Not unlike others, it's really the products that you have really drives the customers who come onto the platform and so I think.
We will continue to try and find great product to serve that more premium shopper.
But I don't think were going to materially go go chasing in that direction I think we have a great selection and a broad assortment.
We can do incrementally better job of making sure that products available.
Thank you.
Thank you we'll take our next question from Dylan Carden with William Blair <unk> Company.
Thanks, a lot just curious on the.
Sort of scaled down Desio seven plan does that does that affect sort of the maturity curve and the profit contribution as you had sort of previously envisioned it sort of a related question thinking of breakeven by the back half of next year.
You can kind of quantify or bucket or rank kind of are you getting there evenly between cost cutting and sort of a maturing fleet or is it more cost cutting.
I appreciate it thanks.
Yes, I think from the <unk> perspective, I think it'll be about half the size as we close out.
2022.
We are actually starting a quarter later due to some basically some challenges in the supply chain. So that instead of starting in Q3 will be starting in Q4, so that has an impact on EBITDA.
At quarter of about about the same as what it was before about two point to your point $3 million and Thats supposed to open up for revenue in Q4, and it will start to move that headwind. So I don't think the overall scale of.
The business other than starting later is going to change what we had already assumed changes take time to ramp into the $5 million and then further time to build out the final five and then go up to the total of $10 million in the D C.
And then on the profitability piece I think.
It's more on the managing through the variable costs in the business.
That I think gives us the confidence in profitability in the back half of the year.
We're not as weak as we gave you explicit guidance around the revenue run rate like we're not expecting a massive consumer recovery to get us there, but we are expecting too.
You can see the benefits of a lot of the things we've done on the on the variable expense side and also the work we continue to do around pricing and promotions and discounts and returns and all of those sorts of things that we've been working on and I think kind of speaks to the power of the marketplace.
That we can bend.
When those cost curves and those decisions to get to where we want to be.
Great and then I guess on the marketplace on the supply side.
You would think that in this environment and people might be selling more into the marketplace to earn cash.
Offset some purchasing I mean is there some lag time, there potentially when you might see a bit benefit are you seeing that benefit and I guess, yes, just maybe to ask the question again, just around can you sort of shift the model to me.
We more fully leverage the people that are spending right or is it just that it's just so the contribution from that lower income customer so great that it's hard to kind of more fully offset that impact.
Thanks.
Yeah, I don't want I mean, I think we are shifting some of the attention and efforts.
But I think it's tough to overcome.
One in four of the or discount on budget shoppers just sort of being.
Being out of out of market.
And so I think.
We're we're what's nice about it is that we can measure and manage kind of the variability piece on the expense line and really be poised.
To accelerate on the growth side right as the recovery takes place because those customers are going to be surging in the market.
Which I think will be an exciting time for us.
But I don't want to shift we don't want to shift the business too much in one direction knowing that.
We don't expect this to be a many many years challenge right, we think about it as several quarters.
Sure that makes sense. Thank you guys.
Thanks.
Thank you, we'll hear next from Noah <unk> with Keybanc capital markets.
Yeah.
Thanks for taking my question just one for me.
<unk> can you provide some color around number of clients.
Line of sight to additional clients in the back half.
How youre thinking about 2023, and the P&L impact Paul Henning.
Your plan. Thank you.
Yeah, Hey, Noah.
I think as we said we still feel like we're on track to be around 40 clients.
By the end of the year and so I continue to think that the <unk> business is showing resilience.
In an environment, where I think apparel retailers or <unk>.
Broadly struggling so feel very good about Ras as penetration.
We haven't put any numbers out there around 2023 <unk>.
<unk>, but keep in mind that every RASK client, we sign provides real leverage on both sides of our business.
And we're seeing that today on the supply side and as we launch new clients, We just launched Tommy Tommy Hilfiger last week.
It drives incremental demand for us so I think a really nice vector for growth and maybe there will be one of those things that we're going to stack every quarter.
And really see those results compound over time.
Thank you.
Thank you and we'll take our final question from Rick Patel with Raymond James.
Thank you good afternoon I appreciate you squeezing me in here.
You touched on this earlier, but can you provide additional color on the puts and takes for gross margins as we think about the U S and remix businesses separately.
I know youre not guiding to 'twenty, three specifically, but I'm, hoping you can help us.
<unk> had better have a better understanding what you see at the low hanging fruit to improve gross margins once we presumably get through this rough economic fashion.
Yes, so on the gross margin piece, you kind of touched on it on the seasonality as it relates to remix so as you add the business, that's a little lower than us and they take they become.
Bigger portion of our business it drags down gross margin overall I think the piece to keep in mind. It is remix itself is mostly direct and their margins are well below our 50% for our direct business. So we have a great opportunity there to move that business up to what the standard rate is for threat up. In addition, we will be moving that business over time over two to three years.
Consignment model that will be a tailwind overall in addition to now moving into more automated facilities using more data more algorithms a larger unified facility just a ton of other things to get out here, yes rig and the only thing I would add as you go into 2023 is.
As you can see the economy potentially improving.
Over time is is there some improvements you get from promotions.
From returns normalizing back to where they were pre.
Pre distress I would say in the apparel market is I think there is a bunch of things in there and I think what we're really trying to do is focus on how do we surge out of this recovery.
We start to see the green shoots of that and I think youll see that top line I think youll see that in gross margin and I think you'll see that in EBITDA. So.
It's really trying to be able to manage the business through through a time. When you really don't have a lot of clarity around what the next few quarters are going to look like.
Thanks very much.
Thanks.
Thank you and that does conclude today's question and answer session I would like to turn the conference back over to management for any additional or closing remarks.
Great well. Thank you everybody thanks, everybody for joining us.
For this earnings call and look forward to seeing you next time around.
Thanks.
Thank you and that does conclude today's conference. We do thank you all for your participation you may now disconnect.
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