Q3 2022 ThredUp Inc Earnings Call
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Please standby.
Good day, everyone and welcome to the threat up third quarter, 2020 two earnings conference call.
Today's call is being recorded and now at this time I'd like to turn the call over to Lauren Frasch. Please go ahead.
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Good afternoon, everyone and thank you for joining us on today's conference call to discuss <unk> third quarter 2020 financial results.
With us are James Reinhart, CEO , founder and child separate CFO , we posted our press release and supplemental financial information on our Investor Relations website at IR got startup Dot com.
This call is also being webcast on our IR website and a replay of this call will be available shortly.
Before we begin I'd like to remind you that we will make forward looking statements during the course of <unk>, including but not limited to statements regarding our earnings guidance for the fourth fiscal quarter and full year of 2022 future financial performance 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, and general global economic uncertainty.
These forward looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties and our actual results could differ materially from any projections of future performance or the rest or implied by such forward looking statements.
Words, such as anticipate believe estimate unexpected 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 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.
Can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our earnings press release.
Information posted on our IR website, now I'd like to turn the call over to James Reinhart Jamie.
Thanks, Lauren and good afternoon, everyone I'm, James Reinhart, CEO and co founder of threat up. Thank you for joining <unk> third quarter 2022 earnings call as we head into the final months of 2022 of your peer threat of financial results and key business highlights from our third quarter. In addition to our financial results, we will offer our perspective on the consumer.
How resale is bearing in our path to sustainable profit and long term growth.
I hand over to Sean <unk>, our Chief financial Officer to talk through our third quarter of 2022 financials in more detail and provide our outlook for the fourth quarter and fiscal year 2022.
Well close out today's call with a question and answer session.
Let me start with our Q3 results, we achieved another quarter of strong financial performance, beating both the top and bottom lines of our guidance. Despite a challenging macro environment and lapping strong as last year. We saw continued growth in revenue active buyers in orders compared to the same quarter last year, our revenue of $67 9 million is an increase of <unk>.
7% year over year, demonstrating our ability to achieve growth even through a promotional retail environment Q3, active buyers and orders increased 18% and 24% year over year, respectively, and our gross profit and gross margin both declined last quarter shrinking by 3% and 750 basis points, respectively. The decline in our <unk>.
Gross margins is primarily due to the outsized growth of remix and Ras as both become a larger part of our overall business.
As a reminder, we recognize the majority of our rash and European suppliers owned inventory, which negatively affects our gross margin profile and finally, our adjusted EBITDA loss of $11 million is primarily due to planned investments across our operating infrastructure and technology stack.
Now, let's turn to the road ahead I'd like to acknowledge that we're still navigating through a challenging consumer environment.
As we shared in our last earnings call, it's been difficult to predict exactly what's going to behave in the back half of the year with persistent inflation continuing to pinch the budget consumer a meaningful portion of our consumer base as we said last quarter. We observed initial deterioration in consumer health towards the end of Q2 and this continued into Q3.
In Q4, we're seeing the added impact of a highly promotional environment as retailers are moving through elevated inventory levels in the wholesale channel is flooded with excess product. While we were expecting a competitive landscape Q4 is proving to be an even bigger challenge than we had anticipated the thrown up brand stands for value and that message is being washed out and.
This hyper promotional landscape, we're confident that this competitive dynamic is temporary we believe it will subside as retail inventory positions improve while we expect revenue to be challenged in the near term.
Given that backdrop I wanted to take a moment to address the question I frequently get at around how resale should fare in a recession.
James Shouldnt do well at a time like this.
Answer is yes, we believe resale should do quite well in a typical recessionary environment as consumers look to find value, but it's not that simple. This time around that's because over the past 12 months. There has been a massive buildup of apparel inventories to what we're seeing is a combination of demand pullback at a time when retail inventories are overflowing with apparel.
This is resulting in significant price compression in the apparel market.
And while we don't have the same inventory risks that other retailers, we're not immune to the pressure on prices.
But I think it's we think it's really important to step back for a moment and ask how might this play out in the future.
Two things to keep in mind.
What's getting overlooked in this environment is that consumers are becoming accustomed to buying apparel at extremely low prices.
When retailers sell through their excess inventory prices normalize we believe theres a significant opportunity for resale to take share for a customer that's been conditioned to expect 60% to 80% of retail for their clothes, you're still feeling the effects of inflation retail is going to be a go to for value.
And then when that consumer health starts to slowly inflect as we believe it does falling every economic downturn.
Confident that threat up's value proposition will enable us to capture full wallet share from shoppers across the economic spectrum as we have done many years in the past.
Sometimes in the noisy and if that is the financial markets, it's easy to lose the plot.
Wanted to reiterate five things for those thinking a bit longer term.
One we have $1 7 million active buyers and on average each of those active buyers are spending nearly $170 each year.
Before the pullback just covers ago, our business witnessed five quarters of accelerating growth with Q4 last year growing 68% year over year. This is a business that knows how to grow.
Two we have a structural supply advantage, where we have never had to spend direct marketing dollars for suppliers.
Ever.
Three we have spent many years building infrastructure expertise proprietary data and are winning brand that is increasingly hard to replicate.
Four we are competing in a total addressable market in the U S and Europe for secondhand apparel that is expected to top 150 billion by 2026.
The total size and you can travel with the timing, but virtually all new market innovations are undersized in the beginning until they are not the growth in this market is powered by young people, who are just now starting to flex their purchasing power.
Five our business is founder led on our management team, whose average tenure has more than eight years.
We have navigated through much more challenging environment than this and relentlessly driven by our mission for profits and purpose.
Now that I've gotten that out of the way, let me focus on two areas driving profits and investing in the future.
As we shared during our last earnings call. Our priority remains reaching adjusted EBITDA break back half of 'twenty, three and making prudent investments to create long term shareholder value in 'twenty three and beyond we are operating environment, where we need to play both offense and defense skillfully.
And to put it plainly we are playing to win not just to survive.
So let me first emphasize that we have many tools in our toolbox to manage expenses and drive the business to adjusted EBITDA breakeven.
First our processing cadence inventory sourcing and Phil had mentioned earlier.
Earlier, we are restricting the number of cleanup acts were sending to suppliers to flex supply as well as evolving the mix of goods you put online to meet a more sober demand environment. However, we're keeping up our RASK partner cleanup program and as a reminder, we charge brands a fee for each RASK bag that we process through our cleanup program Iraq business has continued to accelerate.
With Q3, being our best quarter, yet in terms of the high margin fees that we generate.
Second we are leaning into the advantages of our marketplace model as a marketplace. We believe we have structural advantages and built in resiliency compared to traditional retailers online additional peers, we have a flexible responsive supply chain and a variety of levers we can pull around prices payout recommendations and mix position that.
The business to navigate a dynamic environment.
Third we are shaping our distribution network in the U S to best support our growth we have pushed out the opening of our Dallas distribution Center as we focus on better aligning current demand with expenses, we expect to bring the facility online in the next few months upon opening with the completion of phase one we expect our capex investments to slow considerably.
In light of scaling down the volume of inbound bags. We accept we recently closed our remaining dedicated processes that are in Tennessee and have shifted those resources strategically to Dallas, which will be our largest flagship facility upon completion.
Reminder, at full build out a facility in Dallas will bring our network wide storage capacity to $16 5 million items.
We expect to be able to methodically expand into infinity, when consumer pershing's loosen and increase the number of cleanup bags available fourth we remain focused on maintaining our strong unit economics, which will be key to expanding our profits over time, despite raising despite rising labor and logistics costs and higher returns, we expect to continue to delay.
Ever expanding contribution margins as we improve automation and efficiencies in our process.
Lastly, we have reduced operating expenses amidst an uncertain demand environment, we are rigorously managing variable expenses and capex in pursuit of our profitability targets and deregulate levels.
Very important to note that again as a marketplace and 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 discretionary spending not prudent debt to the current growth of the business.
Now I would like to turn to the investments, we're making in the business to drive sustainable growth in years to come we believe the consumer is going to come out of this pullback with higher wages improved sentiment as inflation and I for value and an ever greater commitment to sustainability.
Of course, the win is not entirely clear, but we want to be prepared to capture that moment and to win share. We did this coming out of Covid remember we grew over 50% in the back half of 2021, and we are planning to do it again, let me highlight a few of the investments we are making to position our business to capture the apparel market recovery.
One, we're making significant improvements to the buying experience we've doubled down on curation efforts building tools like visual filters style matching algorithms occasion based recommendations.
Swiping and favoring features to empower the customer to more easily find the right items for them no matter what theyre looking for.
We're proud that the thrift the left an AI tool that allows customers to shop outfits through image based search technology was recently named one of times best inventions of 2022.
Two we're continuing to focus on remix the European fashion resale company, we acquired a year ago.
Earlier this year, we invested $11 million and a new 320000 square foot high Tech processing and distribution center in the company's headquarters in Bulgaria expansion plans are on track as they moved all inbound and outbound operations over to the new facility. The full capacity. This facility will be able to triple remix of overall output.
We're also investing in expanding <unk> consignment inventory as well as their data science capabilities to improve market efficiencies and its margin profile, though we are seeing the impact of inflation rising energy costs and FX. We remain impressed with the resiliency of <unk> business model and growth trajectory and continue to believe it is well positioned to take share.
Fair in Europe over the long term.
Three we're continuing to grow our resale of the service business.
Or ras by leveraging our marketplace infrastructure RAF amplifies our supply advantage increases our sell through in March 5th and expands our long term profitability metrics by adding sources of recurring high margin revenue. We recently launched new retail programs with Tommy Hilfiger, Athleta, Vera Bradley Francesca and hot topics.
Note Athleta and Vera Bradley both expanded their retail programs from clean out to full scale retail shops.
Overtime, we expect to be able to convert clean out only partners to resale shops as we build full 360 resale experiences for brands. We remain on track to serve 40 brand clients through RASK by year end.
I would now like to take a moment to celebrate that dried up released our inaugural impact report last month.
The report outlines our business and brand aligned environmental social and governance strategy and details the progress we've made across ESG initiatives in 2021.
We frequently discuss the eco impact of choosing used for example, every time, you shop, and where second hand, instead of new you've reduced carbon emissions by 25% on average the Bottomline is as bad up grows. So does our impact. We're also focused on ensuring our own operations are sustainable fostering a high integrity workplace culture.
Supporting an ethical corporate governance framework.
For those interested in learning more about our ESG strategy and disclosures I encourage you to learn more at our revamped impact website <unk> dot com Backflash impact.
Lastly, I want to share some of our exciting recent efforts to educate consumers about the impact of their fashion habits and fight fashion week last quarter, we launched a fast fashion hotline to help Gen Z resist the temptation of fast fashion and embrace more sustainable shopping habits.
Also partnered with Hines, Yes, Heinz the iconic ketchup company to launch a vintage drip collection with ketchup stained apparel together, we created a campaign that celebrates the one of a kind statement, making nature of us quote.
And just last week, we launched our first ever Upcycled holiday collection with designers zero waste Daniel made entirely of secondhand clothes that werent fit for resale and threat up actually includes fun item to pet beds in coasters and demonstrates our commitment to closing the loop for finding new ways to improve our aftermarket business through these efforts we are inspiring a new generation of <unk>.
Tumors to think secondhand first and ushering in a more sustainable future for fashion before I turn it over to Sean I want to close by restating, our confidence in our ability to navigate this challenging consumer environment.
When the consumer environment recovers the quote great apparel liquidation in 2022 is over.
Confident that threat ups mission of providing great brands at great prices in a sustainable way will shine brighter than ever 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 third quarter 2022 earnings call I'll begin with an overview of our results and follow up with guidance for the fourth quarter 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 upcoming 10-Q filing.
We are very proud of our Q3 results for the third quarter of 2002 revenue totaled $67 $9 million, an increase of 7% year over year.
Revenue was down year over year, while product revenue grew 74% the decline in consignment revenue in outsized growth in product revenue is attributable to a mix shift driven by our European acquisition and the relative growth of our <unk> supplier.
Currently the majority of our revenue from both <unk> and our European business Falls under product revenue that we plan to transition these businesses towards consignment overtime.
We are focusing our inbound resources on supporting our raws clients, which has the effect of fueling product revenue at the expense of consignment. During this period of meticulous expense management.
In addition, we see return rates move higher as consumers become more selective we saw this trend continue throughout Q3 negatively impacting our revenue by an incremental $3 million over the same last year and is expected to persist in Q4.
For the trailing 12 month active buyers rose, 18% to $1 7 million third quarter orders reached $1 6 million, increasing 24% as compared to the same period last.
For the third quarter of 2002 U S. Gross margins declined slightly to 72, 4% a 40 basis point decrease over the same quarter last year.
Even as we continue to growth and shipping logistics and automation, we are facing a gross margin headwind due to the remix our to do the revenue mix shift into product revenue, which carries a lower margin. This shift is being fueled by the strength of our <unk> channel as I described earlier.
Consolidated gross margin was 65, 5% and 740 basis.
Point decline over the same quarter last year due to the consolidation of our lower margin European business.
We have begun to transition the European business towards higher margin consignment supply as we seek to improve its gross margin profile over time.
In the near term Europe's product margins are significantly lower than the U S. See many opportunities to improve these margins through investments in automation and data science in order to be closer to the 50% range that the U S commands.
For the third quarter of 'twenty to GAAP net loss was $23 7 million compared to GAAP net loss of $14 7 million in the same quarter last year.
Adjusted EBITDA loss or a negative 16, 2% of revenue for the third quarter of 2002, and approximately 380 basis point decline compared to the same quarter last year.
The deleverage was largely due to the consolidation of our European business. Our Q3, adjusted EBITDA loss improved over Q2 by $2 $5 million or 150 basis points exhibiting the work we've done to rationalize expenses.
Turning to the balance sheet, we began the third quarter was $155 7 million in cash and marketable securities and ended the quarter with $136 million or cash use variations with $12 $1 million. While we spent $11 7 million on capex largely attributable to our infrastructure build out.
We remain confident in our plans to reach adjusted EBITDA breakeven in the second half of 'twenty three assuming we achieved quarterly revenue of $80 to $85 million.
Expect growth in the first half of <unk> to be broadly flat to the first half of 'twenty, two but then believe that apparel markets and the consumer environment, the slightly better shape in the back half of the year.
We continue to make progress in reducing expenses and preserving cash during this period of uncertainty as we described on our last conference call. We've undertaken a companywide initiative to prioritize expense rationalization and cost efficiency. We continue to expect to realize $70 million in savings in 2023 based on our current forecast.
We've also trimmed our capex plan and 23 to less than $15 million based on the current environment reduced from our previously discussed $20 million would.
We do not expect this to negatively impact to grow in 23 or 24 in Q4, we expect to spend $5 million to $6 million on Capex. In fact, the bulk of our Capex plans are related to our Texas distribution center, and our annual maintenance Capex, which exclude any new DC build is approximately $3 million.
We spent $25 million in cash in Q3 and expect this level of spend to steadily decrease in the coming quarters, our plan to reduce cash burn will be driven by the diminishing needs of our DC network and our cost savings initiatives because of our ability to manage our expense structure, we expect to be able to fund the business through our existing cash balance.
And $70 million debt facility until we reach free cash flow positive as a result, we want to reiterate that we do not anticipate our cash our marketable securities balance falling below $50 million without drawing down any further debt before reaching free cash flow positive nor do we expect to turn to the capital markets before them.
Turning to Q4, though the competitive environment is proving to be especially difficult to navigate we see a clear path to the other side. Our top line continues to be affected by weakness in our core lower consumer on top of that the current promotional environment in the retail industry is impacting us more severely than we had expected beginning in mid October .
We saw an unprecedented degree of early holiday promotion pressure on our business and our updated outlook assumes that this trend continues through the balance of the year.
With this in mind the fourth quarter, we now expect revenue in the range of <unk> $62 million to $64 million gross margin in the range of 62% to 64% as we now expect revenue from rise to be a larger portion of sales, which carries a lower margin and adjusted EBITDA loss of 16, 5% to 14, 5% of revenue and <unk>.
Weighted average shares outstanding of approximately $100 million.
For the full year of 2002, we now expect revenue in the range of approximately $279 million to $281 million gross margins in the range of approximately 8% to 66% 67%.
And adjusted EBITDA loss of approximately 17% to 16, 5% and basic weighted average shares outstanding of approximately $100 million.
In closing we are pleased with our third quarter performance and then Q4 is proving to be more competitive than we originally expected we are confident in our ability to navigate this challenging environment.
We expect this hyper promotional landscape to subside as retailers rightsize their inventory levels permitting us to once again compete with resales compelling value proposition as apparel malaise in the ongoing improvements, we're making in our business materialized. We are confident we can deliver on our breakeven goal in 'twenty three.
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 lines.
Thank you if you would like to ask a question simply press the star key followed by the digit one on your telephone keypad also if youre using a speakerphone. Please make sure. Your mute function is to allow your signal to reach our equipment. Once again press star one at this time, we will pause for a moment.
And we'll first hear from <unk>.
<unk> with Wells Fargo.
Hey, guys. This is Jesse Olson on for Ike.
You guys mentioned flat growth in the first half of 2023 as expected and are confident in your ability to reach $5 million in the back half of the year to achieve breakeven each quarter, what sort of macro expectations underpinning that view.
Okay.
Yeah. This is Sean yes, I think the one thing to keep in mind is that we do not expect to consumer recovery to get there. The only thing that we are assuming and are assuming in our plan for 2023 is that the extreme promotional environment and the inventory excess will subside at that time.
About how do we go through 2023, yes Jesse.
I would add is that during this very competitive sort of Q4 environment. We continue to pull back on some of our growth investments and what kind of get back to some of those as we get into the first half of next year and see the things compound as we get into the back half of next year.
Thank you.
Our next question comes from Trevor Young of Barclays.
Great. Thanks, James I think last quarter, you had flagged that the budget value consumer kind of stepped away from apparel broadly can you talk about how they trended quarter and now into <unk> in light of the updated <unk> Guide and then on the other on just what's trending on the upscale shop or is that holding up better than expected.
Yeah, Hey, Jonathan Yes, I mean, both of those things continued through Q3, and then have continued through the first part of Q4 I think the only difference is that beginning in October with kind of second Prime day, Walmart promotion targeted promotions you just saw this this real move earlier on that on the consumer's wall.
And I think that caused a little bit of friction for us in the business and so right now.
Our guidance says that we expect that to continue through the end of the year.
And then with.
But at the same sort of trends on the budget shopper in the more premium shopper are consistent that really is a customer that.
That's sitting out right now from what we can tell.
That's really helpful and if I could just follow up on that you had flagged before.
Expecting to flex on price promo discounts as well as seller payouts to stay competitive is there any one of those that's performing particularly well or better in this environment than another.
Yes, I mean, I think we're trying to make sure that we can flex promotions and.
And price.
All the stuff in Q4 that sort of.
In season and holiday themes on trend I think we're really trying to make sure that we can flex around the stuff that the consumer wants.
Right now and so I think a lot of our efforts is flexing price and promotion around those hot categories.
It's incumbent on us to continue to source.
That high quality staff for the Q4 holiday season, but again Q4 is always been it's always in the U S been the slowest quarter in our business customers don't turn to thrift around the holidays, and we think that's even more acute today as customers' wallets are feeling pinched and they think about gets around the holiday we think there.
They are focused more than ever on new than used it it sounds like this.
Okay.
Great. Thanks.
Yes.
Our next question comes from Alexandra <unk> of Goldman Sachs.
Thank you for taking my questions can you maybe share what youre seeing across the customer base in the U S versus Europe over the past few weeks in terms of what these customers are purchasing on the platform and how they engage with the platform given the macro headwinds you laid out did you notice any change in auto frequency versus <unk>.
To value and then just on user growth you saw negative quarter over quarter user growth versus steady solid growth over the past few quarters can you just like walk us through the underlying drivers behind that decline. Thank you so much.
Yeah, Hey, Andrew I mean.
On the second piece I mean, I think the again the budget shopper I think is a customer who who has slowed right now given given sort of in the competitive environment. I think that's what's really hit the the user growth number.
Expect that to kind of rollover as we get into 'twenty three.
To your original question U S versus Europe , I think in the U S. The trends that youre seeing where it's been this incredibly promotional environment.
Kicked off in mid October as I said.
And I think that has really changed the dynamics.
Apparel purchasing.
And our expectations in Q4, I think Europe has been a little different.
I think the inflation numbers have been higher there. So I think consumer wallet have been a little bit more stretch you have impending winter.
Coming with the cost of gas prices and then also unseasonably warm conditions in a bunch of parts of Eastern Europe , where <unk> operates.
Pushed back what typically.
As I move into winter clothing in outerwear, and so I think that is starting to change right. Now I think last week was the coldest it's been in that part of the world. This year and so we expect to see some movement.
As we get through the rest of the quarter.
Thank you.
Okay.
Okay.
Okay.
Tom.
Nick <unk> of Wedbush Securities.
Okay.
Hey, everybody. Thanks for taking my question.
Jamie Sean.
Yes.
Obviously, a lot can happen between now and the second half of 2023, but.
Kind of based on.
What's your Q4 guidance is for this year.
To get to $80 million to $85 million run rate.
In the second half of 2023, so just fairly healthy.
On a year over year revenue growth.
In late 2023.
Is it just that you kind of think that the customer comes back.
You guys when they can't find.
<unk>.
The primary market or I guess kind of what sort of informs the.
The growth that Youre kind of assuming comes late next year to get to the EBITDA breakeven.
Yeah, Hey, Tom sure I mean keep in mind right. The last couple of quarters, we pulled back pretty significantly on processing.
And on marketing right on the growth side as we think that this is a consumer environment that we're leaning in on processing leaning in on growth doesn't make a lot of sense, especially right now given given where inventories are across across retail.
Like it's not a fight worth fighting.
With how we spend some of those dollars I think that really changes as you get midway through next year, where the.
The processing ramp the demand curve improves.
We spend more dollars on the growth side I think those things really come together, but I think <unk> been catches a consumer just like a slightly different.
Environment, there's not nearly as promotional.
And it's painful.
<unk> for the budget shopper. It is right now so that's kind of the thesis and we've been through this before right. Tom I mean, similar to go back to 2020.
2020, very similar type of dynamic in the back half of 'twenty.
And then the business really risk for five quarters, and so I'm not suggesting that that's what's going to happen, but what we've been through these types of cycles before and affiliate.
So we can kind of meet that meet the moment as we get into 'twenty three.
Okay.
Understood.
James Best of luck for the holiday season.
Yes.
Next we'll hear from Rick Patel of Raymond James.
Thank you good afternoon guys.
Hoping you could provide color on the outlook for return rates I'm, just curious how much of a drag you have embedded in the fourth quarter got it and any initial thoughts on 'twenty three and then can you talk about any initiatives underway to improve this whether it's being more selective with the product that you take on or maybe leaning into data to improve.
Customer satisfaction to lessen that drag.
Hey, Rick This is John here I'll start I think Joseph initiatives.
Our assumptions in Q4 would be very similar to what we saw in Q3. It was about a $3 million drag on revenue. So we've seen the return rates continue to increase those times I've got worse and things are below more challenging the consumers, obviously, maybe a little more.
Focus on cash back or buyers, where morris whatever it is but we've seen the return rate kind of spike up and we're working on quite a few different things internally to help resolve that and I'll, let James talk about those.
Yes, Rick I mean, I think across you can see it across many.
Our retailers are rethinking how to retain.
How do returns work in this new environment and.
We have a bunch of stuff we're working on.
Right now not even not just like changing the price equation to the consumer but how do we present the product in better ways that reduce returns.
Or how do we change what can be returned to what can't be returned as.
As well as waiving some of the items that get returned to us in letting you keep them. So theres a bunch of things that we're working on that I think will take returns down as we get into 'twenty three but it is 100% a real headwind here in the back half of the year.
And you are pushing forward with resale at a service on track for I believe 40 clients by year end, which is great progress can you give us any initial thoughts on 2023.
I'm curious if you see potential partners moving ahead with their circular economy strategies or if they're just pausing given the uncertain economy.
Yes, I mean, I think 'twenty is going to be a really important year for Ras I mean, I'm thrilled that we've managed to continue to meet or are both of new client signings I mean getting to 40 by the end of the year in this apparel environment I think is really.
Speaks to the value proposition and Nebraska, So I actually think into 'twenty, three youre going to see more retailers.
Think about this especially as their inventory positions.
Get better and to focus they don't have quite as much excess so.
So no I don't think I have any night news to news to share on how we're thinking about client growth in 'twenty, three but I think 23 will be a good year.
For Ras and <unk>.
We've already signed a number of clients. This year that we're ready to launch in the first part of next year. So so good momentum I think on that Rick.
Alright, thanks, very much all the best in <unk>.
Thank you.
Edward.
Of Piper Sandler.
Hey, guys. Thanks for taking the question I guess two for me first on the ops product and tech side I noticed that it actually fell sequentially I just want to click down on that a little bit I understand I know you've been doing cost cut. So is that is this the level, we should baseline going forward should we expect this to ramp up at all and then second I know you delayed some of your Capex could you just help us understand exactly when.
Incremental capex will hit the cash flow and as you guys kind of talked through some of the cash flow dynamics. I think you said that you wouldn't need to raise capital, but do you expect to have to draw on that bank line or do you think that your existing cash is sufficient thank you.
Yes. This is John So do we do you think are our current cash is sufficient we don't expect to draw on the bank line.
I think from a capex perspective, we've kind of lowered what we had talked about spending in the last earnings call.
<unk> for Q4, and under 15 for all of 'twenty, three and if you think of just kind of a quick comparison of what we spend in 2004 when were talking about spending starting in 'twenty. Two we're going to spend about $45 million in Capex, where now we're talking to 'twenty $315 million. So a significant reduction in the amount of Capex, we are going to spend.
And I think the first question maybe was on OTT.
And <unk> is pretty much what you saw in Q3 is fully impacted for what youre going to see in Q4 and beyond except for the fact that it's truly variable so as demand increases we're going to process more items in as we have more items to sell so thats one area, where I would say is as you see revenue go up youre going to see the OBG lines.
Similar to marketing.
Yes, the only thing I would add is just I mean, I think as you get through Q1 of 'twenty. Three you are really the infrastructure for the business is pretty well built out for the next few years.
I mean, I don't think we expect to do much on the Capex side, even into 2024, it'll be pretty pretty small so by the time you exit Q1.
To be in very good shape with with what we need from an infrastructure perspective for a number of years, which Sean said significantly reduces the burn.
So that puts us in a really nice position to invest and grow the business as we get into the back half of 'twenty three and ultimately I think we get to adjusted EBITDA breakeven in the back half of the year I think free cash flow positive a couple of quarters after that.
Okay, great. Thanks, so much.
Our next question comes from Dana Telsey of Telsey Advisory group.
Good afternoon, everyone. As you think about the marketing budget not only for but going to next year, how you're planning that marketing budget and also as you think about the levers fixed and variable expenses.
Gentlemen, you are making as we go through this environment. Thank you.
Hey, Dana Ms. James I think on the marketing side, we continue to see very attractive acquisition costs.
And typically on marketing in Q4, as I said because of the holidays.
And how retail is not top of mind necessarily during the holiday period, and then we kind of get.
We get going and then again in Q1 and look I think the acquisition environment Youre going to be a very attractive next year and so I think the combination of <unk>.
Apparel pricing normalizing acquisition economics being good I think there is actually a very nice setup.
For the back half of next year.
And then I think on that on the fixed versus variable I think as Sean said much of our businesses is variable when it comes to processing and growth investments, but I think the infrastructure and the fixed.
Investments R R.
We're pretty much done once we get through Q1 of next year and I think that's a really really good position to be in for the foreseeable future.
In an environment, where the customer is going to be looking for value and we're going to have all of the opportunity to meet that demand.
Got it and then just on the Dcs, how do you think of the capacity utilization, whether its dallas or the European Dcs anything you could do to manage that cost through this time period.
Yes, I mean, I think we have now built.
We have plenty of capacity I think in 'twenty, three 'twenty four potentially even beyond that.
And we will continue to sort of ramp up.
<unk> and marketing investments, given where the consumer environment is.
I think again I think this is a really tricky time with where apparel inventories are and so I don't think this is a time when we really wanted to lean in but I think that's really going to inflect.
You get into 'twenty three.
I think it's going to be great that we have the capacity and the processing capabilities to do that in a time when the consumers are going to be searching for value again, I think that's a really nice setup for us as we get into 'twenty three.
Got it.
You.
And our next question comes from knowing I'm, sorry, Noah that kin of Keybanc capital markets.
Hi, Thanks for taking my question just to drill down a bit on Ras could you provide any color on how youre thinking about the P&L impact there over time really.
Relatedly as partnerships ramp from a timing perspective, how should we be thinking about any upfront costs versus the timing of revenue flow.
Thank you.
Yeah, Hey, Noah.
And then on the Ras side.
Remember rast is a couple of things for us it amplifies serve our supply advantage. If you think about that as we take a fee for every bag that we process on behalf of our brand and that is <unk>.
Very very high margin revenue nearly drops to the bottom line and so it has implications on the bottom line as we scale RAF supply.
And then I think on the resale shop side as we launch them ultimately, it's continuing to build incremental points of distribution, where the same product that is sitting in our facility can be sold across many different websites and so ultimately that increases turns.
And sort of return on fixed assets in our Dcs. So I think in both areas Ras really amplifies like what the business is doing.
And it continues to grow nicely and I think 23 will be will be a good year as we continue to expand to 40 plus clients that we've signed in 2020 two so.
So I'm pretty bullish on how <unk> plays out over time.
Thanks, a lot.
Andrew <unk> of Needham.
Great. Thanks, Todd and good afternoon guys.
Two questions I guess to Sean.
Curious what was the cadence in the business in the third quarter and what are you guys seeing quarter to date you.
You mentioned elevated promotions in October , but I'm curious have you already saw a step down in the business or just expecting that ahead as we get through the holiday and then secondly, I guess this is to Jane what are you seeing in the retail space.
In terms of new entrants feels like it's getting a little bit more competitive maybe not so much at your price points, but just curious about your thoughts there.
Thank you. Thank you.
Yes.
Yes from the Q3 monthly cadence was pretty much what we have seen historically there wasn't anything like a big outlier I mean back to school it looks pretty good I think once we got the October that's why we started to see everybody get promotional I'll get promotional early.
I think we talked about Black Friday was.
<unk> in early October Middle of October whatever it is our walmart's Black Friday every Monday, so I think that where we started to see the impact on the business was really happening in October and we've got as you pointed out I think where we feel like it's leveled off.
But it's definitely a promotional environment out there.
Yes.
<unk>.
Two.
And to Echo that I mean, I think we feel like Q4 is now pretty stable.
And our guidance as we just think it's going to continue to be to be promotional.
And then what was the can you say that.
Second part of your question again.
Just just what are you seeing in the retail in terms of new <unk> got it yeah, I mean, I think that there are.
Theres always going to be startups.
That attack any kind of big Big category.
I think we're seeing anything in our business.
Where we feel like competitors are making are making inroads.
So but.
But I think look I think in general as I said with a market. This big you expect there to be.
Some questions on innovation.
Over time, the more resale, but better than I think we will take our chances with with our model over time.
And the opportunities to scale that.
Okay.
Alright, Thanks, So my bad.
And next we will hear from Laurent <unk> with Morgan Stanley .
Great. Thanks, and one for Sean just on the fourth quarter guide versus the previous implied guide I think revenue down $8 million.
EBITDA losses, Donlin incremental for I think sort of the change in the topline outlook is clear, but I guess, just given the variable nature of the model where is that incremental $4 million coming versus your previous exit expectations. Thanks.
Yes, no I would think you have the kind of the impact to the business as Europe becomes a bigger portion of the business. So that comes down as well I think youre seeing the promotional environment, So thats starting to it as well thanks Tiger dropping.
Some of the overall impact to the bottom line on EBITDA.
Yes, I think you see contribution margins come down Lauren as as the environment gets more promotional and so even though you've taken revenue down.
That revenue with less productive than it would have been in prior periods.
Okay, I think we're sort of tucked in and prepared for things.
Q4 to continue to be challenging and so I think thats also reflected.
In the guide and.
And so we felt like it was prudent.
As we think about what is it going to look like for our retailers over the next over the next 45 days like you could it could get body out there and we want to sort of level set expectations for that.
Understood. Thank you.
And it appears there are no further questions at this time I will turn the call back over to our presenters for any additional or closing comments.
Great. Thanks, everyone for joining us on the Q3 on the Q3 call.
Thank you to all the employees are doing incredible work erythrite up into the broader team and we will get through this difficult time in Q4, given the environment, but.
If I heard today on the other side of it. So thank you all and we'll see you next time.
Thank you.
That does conclude today's conference. Thank you all for your participation you may now disconnect.
Yes.
Okay.
Everyone else has left to come.
Okay.
Yes.
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