Q1 2023 ThredUp Inc Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the threat of Q1 2023 earnings Conference call.

At this time all lines are in listen only mode.

Following the presentation, we will conduct a question and answer session.

If at any time during this call you require immediate assistance. Please press star zero for the operator.

This call is being recorded today Tuesday may nine 2023.

I would now like to turn the conference over to Lauren Frasch head of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss <unk> first quarter 2023 results.

With me are James Brian Hart, <unk>, CEO , and co founder and Sean <unk> CFO we.

Posted our press release and supplemental financial information on our Investor Relations website at IR Dot Dot com.

It is being webcast on our IR website and a replay of this call will be available on the site shortly.

Before we begin I would 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 second fiscal quarter and full year of 2023 future financial performance, including our goal of reaching adjusted EBITDA breakeven market demand growth prospects business strategies and plans are.

Our ability to attract new buyers in 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 results 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.

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 to comparable GAAP measures in our earnings press release and supplemental information posted on our IR website.

Now I'd like to turn the call over to James Reinhart.

Good afternoon, everyone I'm, James Reinhart, CEO and co founder of threat. Thank you for joining us write ups first quarter 2023 earnings call we.

We are excited to share with <unk> financial results and key business highlights from our first quarter. In addition to our financial results. We will provide an update on the current conditions for resale and how the threat of customers fair and it's definitely challenging macro environment. We.

He will then discuss key company specific initiatives, we are pursuing to enable sustainable profits and growth.

An update on our retail service business and <unk> I will then hand, it over to Sean Sobers, Chief Financial Officer to talk through our first quarter 2023 financials in more detail and provide our outlook for the second quarter of 2023 will close out today's call with a question and answer session.

Let's begin with our Q1 results, we kicked off 2023 with a strong Q1 delivering revenue that exceeded the high end of our guidance, we achieved revenue of $75 9 million, increasing 4% year over year and gross profit of $51 1 billion, increasing 2% year over year.

Consolidated gross margin was 67, 3% down from 69, 1% a year ago. We attribute this to the continued growth of remix into more challenging promotional environment in Europe .

However, we're proud to report record U S. Gross margins of 74, 5% active buyers in orders in Q1 remained steady quarter over quarter at $1 7 million and $1 5 billion, respectively with both declining slightly year over year importantly, we have seen active buyer trends improved each month of this year.

And we expect buyer growth turn positive year over year in Q2 and throughout the rest of 2023.

We're proud to share our Q1 adjusted EBITDA of minus eight 7%, which was an improvement of over 900 basis points or $6 million year over year and to put a fine point on our improving operating leverage our operations product and technology costs were down by 8% year over year, while our revenue grew 4%.

As I typically do on these calls I'd like to take a moment to share our perspective on what we're seeing in the apparel landscape for.

For several quarters now we faced a combination of budget shoppers pulling back on discretionary purchases at the same time that retailers have been overflowing with apparel and leaning into promotions to get rid of excess inventory.

As a result resale value proposition has been weakened.

The exceptional bargains being offered for new clothing.

We've been running the business under the assumption that these headwinds do not abate in the near term.

This backdrop, we are managing the variables that are control across our marketplace. We are leveraging our data driven insights to optimize our unit economics, we are evolving our customer acquisition and retention and playbooks to drive customer growth and <unk>.

Focusing product and technology investments in areas, we believe drive margin expansion.

I'd also like to spend a few moments speaking into the budget shopper, specifically a few quarters ago, we provided insights on the budget shopper for our own data.

I'd like to provide an update on what we're seeing today.

After pulling back on discretionary spend at the midpoint of last year, we've observed that by and large the budget shopper has continued to sit on the sidelines into Q1.

Compared to the midpoint of last year, we've seen a 300 basis point decline in the number of budget shoppers on dried up comparatively we've seen a 700 basis point increase in the number of upscale shoppers buying with us during that same time period.

We're also continuing to see a clear bifurcation of threat up customer purchasing behavior.

With more premium shoppers leaning in more value shoppers leaning out year over year, the average order value of our deep discount subsegment of <unk>.

<unk> declined 24%, while our upscale shoppers average order value increased 6%.

While we are benefiting from Sun shoppers quote trading down we're also facing the headwinds of budget shoppers spitting out.

While threat still off course excellent value to budget shoppers, we have been adjusting our strategies in the near term to target. The non budget segment. They are currently more engaged in the apparel market when.

When macro conditions improve retailer promotion normalize we anticipate budget shoppers, we will return to our marketplace and provide a nice tailwind for growth.

As I noted at the top of our call. We are beginning to see the green shoots of this budget shopper momentum with sequential improvement each month of this year.

I'd now like to turn to the specific initiatives, we're implementing to improve monetization in our marketplace and to optimize our unit economics.

First we're experimenting with a variety of levers around inventory acceptance.

Recently started testing a new fee for our cleanup service to improve the quality of supply in our marketplace.

Initial results indicate that our bag yield of re sellable items and the sell through of items. We received at both increase since enacting this change.

We're also collecting high margin fees that enable us to invest in a better clean out service for our sellers.

We've seen no reduction in demand for our cleanup service.

And this is no small feat.

Better supply better yield better sell through higher fees.

Secondly in conjunction with these fees were shaping inbound supply through seller in fact, the messaging around the types of clothing, we want and when.

And that supply is being processed at our distribution centers.

<unk> inventory more aggressively to lift and more desirable assortment online.

Third as we've ramped processing of cleanup kits, while becoming more selective in our acceptance in merchandising our bags backlog has come down now sitting at an average of six weeks. This as low as one week, if you pay for our VIP services.

This is the lowest our backlog has trended since before the pandemic.

With a tighter backlog, we can better incentivize the right sellers flex our fees and payouts to accelerate the right mix of goods and lowering the overall tax of managing long backlogs in terms of storage customer service and seller satisfaction.

Fourth we're shaping a new vision for customer retention and returns reduction using our data platform.

It's called the thrift guarantee and with it we boldly envisioning that customer journey that aims to achieve the highest levels of customer satisfaction.

The thrift guarantee enabled this by intersecting customers when they are most likely to be unhappy with their experience on.

Offering an easy immediate and automated resolutions that drive them back to shop. Our first project for thrift guarantee has been centered around reshaping our returns experience with a feature called keep for credit with Keith for credit.

We're offering customers, who would like to return low priced items the options to keep those items in exchange for shopping credit with the key for credit approach, we've seen a positive impact on customer satisfaction and repurchase rates as well as fewer costs that returns for items, whose price points don't justify the return and reprocessing costs.

Across Britain guarantee and keep for credit our overarching goal is to delight, our customers drive retention and improve the margin profile of our business early signals showed these strategies have been very effective in accomplishing these goals.

So to summarize through the implementation of cleanout fees supply shaping and thrift guarantee experiments, we are unlocking new and better ways to acquire and retain our customers while simultaneously bolstering our unit economics and positioning our business for sustainable growth. We believe that continued execution of these initiatives will result in enterprise value at <unk>.

Patients over time.

Let me turn to remix provide an update on the progress, we're making with our European retail business.

Nearly two years since <unk> became part of setup and were impressed with how resilient. The business has been and it's high inflation high energy costs and the war in Ukraine Q.

Q1 was a strong quarter for remix they continue to grow active buyers and net revenue year over year.

<unk> also officially launches their consignment offering in Q2 and our goal is to shift an increasing portion of the business to confine that overtime. This marks the start of a long term strategic shift for remix that we expect to improve <unk> gross margins Jeff.

<unk> further gross profit that contribute to long term free cash flow.

All in all we remain excited about remix is positioning to take share in the secondhand market in Europe , a market, which global data expects to grow to $95 billion by 2027.

Now I'd like to turn your attention to our retail as a service business also known as <unk>. We closed out 2022, serving 42 brand clients grew at strong momentum has carried into 2023 as more retailers look to adopt more circular business model and attract and retain customers.

Notably, we're seeing more global brands entering the reseller ecosystem, we recently launched new programs with American Eagle <unk>, Tom and full cycle as one of the leading end to end retail providers, we're thrilled to enable resale for brands across the apparel ecosystem.

We also recently announced an exciting partnership with the container store, where shoppers will be able to get a threat up cleanup kit from any of the container stores 97 retail locations across the country.

It's exciting to venture outside of the fashion industry and work with a non traditional retailer to extend our impact by reaching a broader swath of American consumers looking to be more sustainable. This further cements threat ups. Ras is the go to destination for restarting apparel, and we hope to expand our client roster with more strategic partnerships.

This one.

As a reminder, Ras enables the world's leading brands and retailers to offer scalable retail experiences to their customers by leveraging threat ups marketplace infrastructure Ras amplifies, our supply advantage increases our sell through and return on assets and expand our long term profitability metrics by adding sources of recurring Hyatt.

Margin revenue.

Next I'd like to provide an update on our goal of reaching adjusted EBITDA breakeven. We have made significant progress each quarter since we announced our intention and I want to reiterate our plan to achieve EBITDA breakeven on a quarterly basis and specifically in Q4 of 2023.

The performance we've had in Q1 and what we're seeing in Q2 only confirms our confidence in achieving this milestone and importantly increases our confidence in achieving free cash flow breakeven shortly thereafter.

With that in mind I want to emphasize that as a management team. We have turned more of our attention to the opportunities in front of us to grow faster and to delight more customers over time.

We see a number of ways to invest in growth. This year that we believe create improved free cash flow dynamics in the future.

We've played good defense over the past year.

We look forward to sharing more of our offensive playbook in the quarters to come.

While we remain steadfast in our progress towards profitability, we recognize that profits alone do not encompass the entirety of our mission right.

<unk> is a company that also has a strong sense of purpose, which is evident in the impact we are making on the fashion industry and the planet, we take pride in our business and brand aligned ESG strategy today, we reaffirmed our commitment to balancing purpose and profit by dual listing on the long term stock exchange for LTC.

<unk> was designed to align businesses like ours with investors, who support long term value creation and good governance with the social and environmental content given.

Given the growth of the secondhand market, we see an opportunity for threat up to make an outsized impact.

We believe the next wave of generational enterprises lie at the intersection of purpose and profit and we are excited to be at the forefront.

So let me wrap up but before I turn it over to Sean I want to close by restating the strength of our Q1 results. Despite a choppy environment out there in particular I want to highlight the flexibility and strength of our marketplace business model.

It is precisely the fact that we run a marketplace that has allowed us to react and flex everything from the customer mix for the supply mix through our monetization.

Second as I said in our earnings from a year ago, we will continue to balance the demands of near term scrutiny with our commitment to investing for long term value creation. I believe we are delivering on this commitment and while we aren't done yet.

Densely proud of our progress.

And I wanted to take this opportunity to applaud the whole setup team for their incredible work over the past nine months, meaning every challenge with grit and Grace I want to give a high five to each of you for your creativity resilience adaptability and the relentless pursuit of profit for the purpose I am looking forward to what we will invest next ushering in a more.

Sustainable future for fashion, it's an exciting time to be a threat right now and I'm fired up about the road ahead and with that I will turn it over to Sean to go through our financial results and our guidance in more detail.

Thanks, James and again, thanks, everyone for joining us on our first quarter 2023 earnings call I'll begin with an overview of our results and follow up with guidance for the second 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 in our 10-Q filing.

We are very proud of our Q1 results for the first quarter 2023 revenue totaled $75 9 million, an increase of 4% year over year.

Revenue was down 2% year over year, while product revenue grew 17%.

The outsized growth in product revenues attributable to a mix shift driven by the growth in our European business and our routes supply.

Currently the majority of revenue from both <unk> and the European business falls under product revenue, but we are at different points in the process of transitioning of each of these businesses towards consignment we.

We expect the majority of our raws clients to operate on a consignment basis by the end of the year. So the process of transitioning Europe to U S levels of consignment will take place over the next few years.

As a result of these changes we would expect consignment trends to improve in the second half.

While the transition of these businesses to consignment should be a tailwind to gross margins over time, we would expect it to slightly mute revenue growth due to the accounting treatment.

As a reminder, consignment payouts reduced net revenue by one payouts are in Cogs and reduced gross margins.

Active buyers declined to $1 7 million a decrease of 3% for the trailing 12 months, while orders declined $1 5 million a decrease of 8%.

These declines were due to a difficult macro environment in which our budget customer remains on the sidelines as well as a reduction in our Q1 marketing spend as we expect to see the promotional environment subside and the return on these dollars improve in the second half we plan to increase our marketing spend on a year over year basis.

For the first quarter of 2023 gross margin was 67, 3%, a 180 basis points to client over the same quarter last year.

We are proud to report that our U S. Gross margin reached a record 74, 5% despite an aggressive promotional environment.

The decline in our consolidated gross margin was entirely due to the dynamics driven by our European business.

Continued outperformance of Europe's lower margin operating model continues to pressure our consolidated results as it becomes a larger portion of our total revenue.

We are excited to pursue the meaningful growth opportunity in Europe , even though it will come with a near term drag on gross margins. However, when we look down the road to expanding our consignment revenue base and driving sustainable profits. We believe this is the right strategy for our long term goals.

For the first quarter of 2023, GAAP net loss was $19 8 million compared to a GAAP net loss of $20 7 million in the same quarter last year.

Adjusted EBITDA loss was $6 6 million or negative eight 7% of revenue for the first quarter of 2023.

This represents an approximate 910 basis point improvement compared to the same quarter last year as we tightly manage expenses and leverage our investments on higher revenue.

In fact, we are proud to report that our hard work drove a 4% year over year revenue increase on a 7% decline in operating expenses.

Turning to the balance sheet, we began the first quarter with $111 million in cash and marketable securities and ended the quarter with $99 5 million our cash usage from operations was $4 $5 million, while we spent $5 7 million capex as we wind down the first phase of investments in our Dallas DC.

Based on our Q1 progress and strategic initiatives, we are executing in our business. We now believe that we'll be able to reach adjusted EBITDA breakeven in the fourth quarter of 2023.

For us reaching breakeven it is just a waypoint on a path to free cash flow and profitability and we believe this timely balances our commitment to breakeven with foundational investments in our long term goals of growth and expanding profits.

When modeling our cash flow adjusted EBITDA and our Capex spend are the key drivers of positive cash flow given that our working capital needs are minimal we believe that both of these will improve materially in the second half of 2023.

We significantly reduced our cash burn by nearly half in Q1 versus the previous quarter and we expect to spend level to decrease even more significantly in the second half of the year our plan to reduce cash usage will be driven by diminishing capex needs and improving EBITDA as we implement a number of strategic initiatives across our business streamline our cost structure and leverage our <unk>.

<unk>.

After spending $43 million in Capex in 2022, we continue to plan to significantly reduce our capex in 2003 to about $15 million.

Maintenance levels until 2025, we currently expect to spend approximately $6 million in Q2, and then ramp down to maintenance levels of about $1 million per quarter in the back half of the year.

Due to our significantly reduced capex needs and our ability to manage our expense structure, we expect to be able to fund the core business through our existing cash as a result, we want to reiterate that we do not anticipate our cash and marketable securities balance falling below $50 million before reaching free cash flow positive nor do we expect to turn to the capital markets or draw on our existing.

Yet before that.

We are pleased to provide guidance.

That reflects both our ability to operate in a challenging environment and the strength of our marketplace model.

So the promotional landscape remains competitive and the stability of our consumer remains uncertain. We are not fully flexing the advantages of our marketplace, but also executing on strategic improvements in managing expenses to make sure that we adapt to this environment and emerge a stronger more profitable business.

Turning to guidance for the second quarter, we expect revenue in the range of $80 million to $82 million gross margins in the range of 64, 5% to 66, 5% due to our growth in our European business and adjusted EBITDA loss of $9, 5% to seven 5% of revenue and basic weighted average shares outstanding of approximately $104 million.

For the full year of 2023, we now expect revenue in the range of $320 million to $330 million.

Gross margins in the range of approximately 65% to 67% as we now expect our European business to grow faster than originally anticipated.

And adjusted EBITDA loss of approximately seven 5% to five 5% of revenue and weighted average shares outstanding of approximately $106 million.

In closing, we believe that our first quarter performance demonstrates our ability to flex our marketplace model in response to a highly dynamic environment.

Our model allows us to react to the environment in which we find ourselves a feature which we believe has allowed our results to distinguish themselves in the current landscape.

We are also excited to deliver our Q2 outlook and our full year guidance that convey confidence in our ability to make substantial progress towards breakeven and ultimately profitability.

We believe that Q1's results and our Q2 plan demonstrate our capacity to execute on a variety of strategic initiatives that enable us to control our destiny, even amidst the challenging consumer environment.

James and I are now ready to take your questions.

Operator, please open the line.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad.

If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two.

And if you are using a speaker phone please lift your handset before pressing any keys.

One moment. Please for your first question.

Your first question will come from Ike Chau at Wells Fargo.

Please go ahead.

Hey, everyone. Thanks for taking the question one for James and I have a follow up I think for Sean but James.

Just at a high level so clearly.

Retail the retail alarm and others slowing people are struggling but.

You guys seem to be kind of reflecting in bucking the trend guiding of the reps for the year. So.

Can you just maybe speak to the confidence that you're gaining.

Our real time, and then also what gives you the confidence to.

With the expected further inflection in revenue growth that youre guiding for the second half of the year.

Yes sure.

Yes, I mean, I think look we've said for a number of years, we don't think about ourselves as a retailer.

Really as a marketplace and I think what's working as all of the elements of our marketplace business model.

And so I would say, it's all of the stuff we're doing internally.

Around everything from from sellers and improving the merchandise to how we're changing the mix to address what buyers.

<unk>.

To the curation that were that were working on the site. The improvements we've made in returns with our keep for credit initiatives. So so I think it's really just showing the power and flex up the business model at a time like this which I think is causing that distinction from from a traditional retail environment.

All of those things are still relatively early in their cycle for how they're impacting our P&L and so I think all of those internal improvements.

Pounded with what we're seeing with sequential improvements on the buyer front.

Think are giving us increased confidence that that the pieces are coming together for the business to really work.

Quite well, even despite really a choppy environment in the back half. So I think the team is pretty confident in the guidance and what we're thinking for the back half of the year.

You said you had a follow up got it.

Yes, James I'm not sure. If this is for you, Sean but I'm just trying to make sure I understand.

Now to the P&L, so you've been talking about now for <unk>.

Almost a year about the run rate of $80 million to $85 million kind of getting you to that.

Adjusted EBITDA breakeven in terms of you're making sure you're confident that amount for Q4, but.

So youre guiding $80 million to $82 million in Q2, and still there is an EBITDA loss. There. So I guess I'm just trying to reconcile I kind of thought that if that run rate of revenue there would be an ability to breakeven, but maybe I'm trying to understand like why why you wouldn't see that sooner or is there something seasonally about the second quarter from a cost perspective, it's different in the back half. So that's kind of my question.

<unk>.

Yes, I'll take it and John you jump in if there's anything else, but I just think as we said in our prepared remarks, we see opportunities to.

Do you invest in the business, specifically on sort of the customer acquisition and at the macro level and what we're seeing with <unk>.

The choppers coming back sequentially into the platform opportunities to invest further in what we're doing on the operation side that I think drive unit economics.

Improvements over the next several quarters. So I think we thought we could pursue two strategies I mean, one would be to be much more conservative and achieve those breakeven target based on the prior communication, but frankly, we see opportunities to build a better business.

You know they were actually EBITDA profitable because you know they're there.

Maybe a little under invested are you finding that you're able to drive growth of remix.

Western less investment than you originally thought and that's you know contributing to the the the path profitability.

Yeah mm mm.

I mean I can remix continues to.

Exceed our expectations and and I think given the relative size of that business and the opportunities for the size of the market in Europe . We just continued ways to deploy capital to grow that business and very similar to what we did in the U S. Because you know there was a time when threat up within a police assignment business either we could acquire.

Lots of customers a minute.

Send it to expand margins over time, as we move more and more to consignment and we see a similar playbook.

Come to come to fruition in Europe , and so we don't want to turn down opportunities to really grow that business given the payback that we're seeing EM and how the customer L. T. DS are playing out and so I think we're leaning in in a European business and and believing that we have the playbook to convert the gross margins over time I don't know.

<unk>, Yeah, I mean, I was just double down on the fact that they are exceeding our original expectations. So in in a very tough environment and thank Jamie pointed out as just like their paybacks on their marketing spend is is really pleasing and it looks really good. So that's how we're being able to do it.

Thanks, very much but for the rest of the year and before getting to break even at two four.

Thanks, Tom Thanks, Ma'am.

Your next question comes from Dylan Carden at William Blair. Please go ahead.

[noise], thanks trying to dig in on the fees business can can you just give us a sense sort of how.

How broad that trial has been.

And then it said that kind of intuitive I think for people to the comments about how that hasn't really impacted demand.

Does that kind of on a net basis, just given the improvements that you've seen in the business just you know.

Seemed to kind of help understand.

How that impacts the model and how broad it is and how may be brought it could be given kind of what you've seen initially from it.

Yeah, Hey, Dylan, it's still early in the deployment.

The cross across the business. So we expect to continue to generate more more fees over time from sellers, but I would still bucketed in the in the experimental phase, but but we are seeing really promising resolved then and I think what it points to you is just how how strong a product market.

The <unk> clean out experience really is.

Consumers are willing.

To pay the fees because we value. This service, so highly and and so I think we're starting to to really be able to.

Process more bangs.

You know increase our processing time, and so sellers really appreciate that and so we see the fees are the ninth <unk> you know over the next over the next few years and and yeah, well it sounds counterintuitive that there would be there would be no pushback remember that you know people really value the clean out service for its convenience and it's not necessarily just.

About making money and so I think for a period over the last few years, where we had to turn sellers away on a regular basis I think so many are are really glad to have the service available.

At all times for them, you know, even with a little bit of this fee involved in so so yeah. I think it's all around really positive for our cellar community and it impacts the piano and a possible.

Okay, and then when I would probably added to just give you a little clarity on for all those out there trying to model it and see how it works remember <unk>.

<unk> doesn't charge fees and then R. Raz suppliers don't we are charging them visa as well. So there's a piece of the population that is just not cover from a feature perspective, and we're still in the testing phase too. So it's not out of 100 per cent, but as you look forward into 2425 stinker those two things keep those two things in mind as you model out what <unk>.

Revenue can be for sellers.

And it's it's on the back end right. So it's actually deducted from I guess functionally how does it work as well yeah, nuance, though right.

Yeah, Yeah, Yeah, it'll give you a <unk> <unk> <unk> <unk> <unk>.

So you don't you don't get your credit card upfront or anything like that it comes out of your pay out so.

There's no friction on the front and other then you'll get to know that you're gonna pay some of your payout for the seller fees or the supply of fees and what's really good about that is what we found out is not only does it really create more items at a given kit or giving bag. This is actually higher quality items. So what we're able to accept out of a bag.

Number so.

So it's been really fruitful not just from a fee generation test, but also on the quality of supply and the amount and we get out of <unk> and.

Alright, and then just quickly on those sort of a budget versus higher income customer can you just remind us.

How your customer base historically skewed between those two buckets and and I guess falling off from the sea initiatives does the intention here or is the actuality that you're kind of shifting that further up the ladder.

I mean, I think when we talked last year, we I think we we communicated about a third of our customers fell into that budget Chopper segment.

And I think now the budget shopper mix up a smaller portion of our customer base and I think many of them are getting.

Getting squeezed on a discretionary basis, you know given inflation a number of those I think are sitting out but the goal isn't to become a luxury business by any means but subtly shift the mixed up goods that were getting you know to me a slightly more premium shopper and again I think that speaks to the the power.

<unk> of our marketplace, which is we can evolve subtly the customer mix both on the buyer's side. The seller side, we can subtly shift that mixed up good the price point.

To meet sort of the moment of where we are in a cycle, but we feel very confident that you know at the budget shopper returns, we will have an incredible assortment to meet their needs as well, but I think it speaks of the power and flexibility in the business right now.

Excellent. Thank you very much.

Your next question comes from Anna and Dresser at Needham and company. Please go ahead.

And great. Thank you to my 10 good afternoon.

We had two quick questions I guess to to Sean first what is your understanding gross margin pressure and that's it you were expecting in the second quarter is that entirely driven by remix and the U S. Gross margins are expected to be up and then what's driving their recovery in the back half.

As implied by Daniel Guide Uhm, I guess, especially it's not remixed now is growing faster than expected, which is great and then secondly, with processing times I think you're at six weeks currently is that the right number to think of for the second quarter and curious on the fees what are some of the learning.

When the seller picks up the rush option I think that's about 23 Bucks in cost currently is that their rush growing as a percentage of the next.

Thanks, so much.

Thanks to Anna I'll I'll start and then James can finish but on the gross margin pressure I think you said it it is really the Europe mix.

Giving pressure in Q2, and a little bit for the full year and it's not just the size of the business. It's the promotional environment as in Europe as well. So I think there's kind of a double hit their from Europe , but when you look out into the queue to Eric into Q3 into Q for you start to see the gross margins improving Q3 and really it's from the <unk>.

<unk> that the U S business starts to become a bigger portion compared to Q too. So that that is a driver there as well as Europe overall, we're improving gross margins generally so that helps I think once you if you're thinking it out to how we get to queue for the other side of it is and maybe too much detail is Q4 is Europe's largest quarter. So we kind of swing back a little bit there of your.

Modeling Europe business is bigger so we have a little bit of headwind in queue for so if you're thinking of future you'll be better than Q2, Q4 will be a little lower than Q3.

Yeah and on on the processing times, you know I think on a we'd send in the past we really want to look at that two to three week window as being you know being ideal and I think I think that's still remains true I think being under a month is probably the right timeline for the consumer and we continue to make to make progress.

Yes, but we we have found that just even getting down to 66 has been a really nice positive sign that we're hearing from sellers.

So that's sort of the target enrollment VIP side for for a rush processing.

He's always been a modest art.

What we do and and that tends to be a seller who is more professional tended to have higher end luxury items.

You know, they're trying to monetize ended up.

You know at a higher rate their west Uhm.

Lack of our normal selling population is really looking for convenience if we want to meet the needs of that teller, but we're really focused on the majority of our of our sellers, which are looking to clean out their whole closet and do it in the most convenient way.

Alright. Thank you. Thank you so much super helpful.

Your next question comes from Alexandra Tiger at Goldman Sachs. Please go ahead.

Alright, Thanks for taking my question and congrats on making progress on a number of initiatives. So as a follow up to the first question on revenue trends can you maybe comment on that on a month over month cadence for Q1 specific specific beauty, etc versus January Nevertheless, as it relates to some broader consumer trends, but also some of the <unk>.

Keep your eyes or your tracking and then second Uhm I also wanted to follow up on the cost reduction initiative gets laid out can you give us an update on where we are and have you essentially identified any opportunities that could end up being incremental thank you.

Sure I'll <unk> I'll start with the first couple of and then I'll turn it over to Sean on on the cost reduction piece you know I.

I think we.

We saw January be be reasonably strong you know out of the gate I think we saw February and March that'd be a little bit a little bit slower than January but I think that's sort of at a macro level and I think a lot of the work that we were doing internally I think with countering you know some of those macro trends. So I think the work we've been doing.

On sculpting and improvements to returns and keep for credit and all those internal initiatives.

You know those started right towards the end of two four and then really started to gain some momentum as we move through the first quarter and then has continued into the second quarter and so I think it's it's the internal dynamics in our business the marketplace dynamics that I think we're sort of <unk> on both sides that are allowing.

US to you know to perform I think better than more traditional retailer would.

And so we continue to feel good about how those those continued to trend into Q2 and dropped the year.

John I Dunno, if there's anything else on the cost side, yeah on the cost side like that you know what we've laid out last year at the end of the year. We discussed is pretty much in full force now so it's impacting Q1, it will impact Q too, but I think it also just to put emphasis on we're being very mindful of every new dollar that we spend whether it's a new hire or travel.

<unk> or anything associated with costs in general So we're being hyper focus on that and then I think if you also look at things like returns, we often talk about improving returns that improves revenue, but there's also a cough aspect there. So as we improve returns they have less returns we have less operations around bringing the item back in and that ended up being a paw. So I think we're working on all facets.

An overall cost control.

Alright, thank you.

Your next question comes from Trevor Young at Barclays. Please go ahead.

Great. Thanks first one for James just on the the rasp model with more retailers and brands skating in that direction of embracing that as an opportunity when brands you know come to you or do you go to them and those instances, where you don't win that partnership what are like the two or three reasons why they might opt to work with another partner or maybe upgrade.

Our involvement higher touch versus you know kind of powering it for them and then second question on the buyer's side or the new buyers that are coming in changing behavior at all in terms of like average order value number of items in an order or how frequently they come back for a follow on purchase just wondering if there's any change either given the macro.

Show or given the composition of your inventory shifting away from that budget oriented shopper.

Yeah sure Trevor Yeah on the bright side I mean, I think generally if a brand goes with somebody else I think it's on two dimensions. One is they want a task and explore and appeared appear.

Environment and so they they would really prefer task.

With a fully hands off approach, but we're finding increasingly brands. It start that direction are finding there's not enough liquidity in those marketplaces, given the friction on the sellers side and so we're starting to see some of those brands and retailers come to us to say, okay. We we tried from Nevada definitely appear to be working.

You know how can how can thrown up support us. So you know I feel like that that is one of the things that happened and then the other is brands that are really committed to refurbishment and repair and are much more higher touch premium experience and ultimately we think that that is a very tough model to scale on there.

Refurbishments retouching repair side, and so you know those or deal with it but frankly I don't think we're interested in winning I actually don't think the margins are there in those models. So so those are the two reasons. Trevor you know that we tend to lose a deal and then on the new buyer side, you know the the new bars that we're adding into the into the.

Marketplace.

The unit economics, and the dynamics of their performances, it's all it's all.

All quite positive so they tend to be buying the price points to make the most sense for us the L. T V's look good.

The <unk> have been you know had been strong so we feel very good about the customers that we're adding in and you know you mentioned that we need to have the right mix for those customers and I think that's where the changes in supply have really work uhm, but at the same time. We also have a great assortment for that budget shopper and so I think if that budget shopper comes back you know whenever it.

Over the next few quarters.

We feel good about supporting them as well.

That's helpful. Thanks.

Your next question comes from Rick Patel at Raymond James. Please go ahead.

Okay.

Well done on the progress question on the mixture between budget and upscale shoppers.

How much of this reflects natural market conditions as budget consumers get squeezed in and how much of it is by design as a threat up market to those.

More specific.

Ricky we're sort of breaking up there. It was that that was at the end just a mix on the budget versus upscale shopper.

Sorry about that yeah, just sorry about that just a question on the mix shift between budget and upscale shoppers I'm curious how much of it reflects natural market conditions as as budget folks get squeezed in how much of it could.

Could be by design as the company goes after those consumers.

Yeah, I would say, it's a little it's a little bit of each I think what we're finding is that that that customer who potentially fits the trade down narratives was looking for great brand, but it is slightly more value price I think those are the customers that we see that a threat at value proposition resonating, particularly.

Well with and so I think we have a mix of goods that supports conversion rates among those customer. So so I think that that naturally speaking.

The platform is more attractive.

Since trade down shoppers.

And I think that's why you're seeing the next grow and I think on the budget shopper side.

The the the mix isn't attracted to the budget chopper. It's just it it's harder for them to take the plunge as a new customer given the discretionary consumer environment, but at the end of the day. We you know we sell 35000 brands across 100 category you wanted to make sure. We have a platform that means that broad section of customers.

And I think that's what we're building for the long term, but in the near term I do think will will probably say it a little bit more towards that that's slightly more premium shopper none of the data suggest.

And can you also provide a little more color on what's embedded in guidance for both to Q and a year for the Opex line item. So as we think about option Tech marketing SG&A, how should we think about modeling those and and if the momentum that you have does get disrupted how do you feel about finding new expense savings.

Yeah, because of Sean I think on the <unk> side and marketing is very tied to revenue. So it's consistently variable. So how have you been modeling. It uhm previously as revenue goes up it's fairly linear at that point I think you get a lot of leverage out of SG&A and then I think your your broader question is if the <unk>.

Less is more challenge do we have the levers and dials to turn to make sure that we continue to improve needed to break 80. The dawn. The answer is yes, not only that the variable side that we've talked about already but I think there is overall.

Improvements efficiency and cost reductions that we can do that we haven't done yet to help us get there if we need to.

That's kind of how I would ask that.

Thank you all the best.

Thanks.

Thanks.

Your next question comes from Ed E Rhema at Piper Sandler. Please go ahead.

Hey, guys. Thanks for taking the question Ah back on the topic of this more upscale customer I know you guys do have some authentication capability, but as you think about the Tesco kazmi talking about kind of more premium brands or like true luxury that has to go through an authentication process.

And then as a follow up in terms of that lowering customer are you seeing kind of increase in performance. If you run more promos or sharper price points. There's anything you can do kind of in this environment to stimulate that lowering consumer to consume more thank you.

Yeah, I had no I mean, we're definitely not moving more into luxury products that need to be authenticated that that's not part of the strategy at all I think it's just incrementally.

You know accepting brands and and sculpting, it's definitely get out in the bag for a slightly more premium shopper and so I'm not luxury.

By any means so call those sort of the bridge the bridge brand crowd and I think that's resonating very well with that tray down shopper and you know as for <unk>.

Customers respond are responding more to the promotional environment.

For sure we definitely see some elasticity around discounts and around promotions and I think actually what we're starting to see is that as a retailer inventory.

And the traditional.

Retail environment start to get leaner and.

And the price going to start to eat up a little bit you know as as sort of being spent through their cohort of inventory I think the threat up value proposition is starting to resonate more and so even our stock offerings of up to 70 to 80 per cent off of a traditional retail environment is starting to resonate incrementally more.

As we've moved sequentially through the year.

<unk>, we've been consistent with where we think when retailer inventories normalize I think they started a value proposition really does thing and what we see opportunities for that throughout the year.

Thank you.

Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.

Your next question will come from Lauren Chang at Morgan Stanley . Please go ahead.

Great. Thanks, I just wanted to follow up maybe on on on the first question I think last quarter, we talked about achieving EBIT profitability in the second half of the year now it sounds like it's it's more fourthquarter just wondering if there is any anytime and <unk> and that's <unk>. That's really just we talked about earlier in terms of bleeding and a little bit.

More.

Any kind of that that'd be great. Thanks, so much.

Yeah, Hey, Laura.

We'd always had the back half and.

Two four with something that we had been anticipating for some time and so we just wanted to clarify since we were getting lots of questions about it is it <unk>. So we wanted to be clear that it is Q4 and right now we see a number of ways to invest across the business that I think generate better returns not <unk>.

This year, but I think move into 2024, and we wanted to take advantage of <unk> and that operating environment now, which.

Which I think is reflected in the guidance and and the numbers throughout the year. So we feel very good about that breakeven you know opportunity in queue for an even better frankly about our ability to continue to grow free cash flow as you get into 24.

Okay, great. Thank you.

There are no other questions. So I will turn the conference back to James Reinhart for any closing remarks.

Yeah, Thanks, everyone for joining us for our queue on earnings call asking some thoughtful questions and your continued interest in drugs business and we will see you next time. Thanks.

Ladies and gentlemen, this does conclude your conference call for this afternoon, we would like to thank you all for participating and ask you to please disconnect your lines.

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