Another day, another venture-backed IPO filing. Today it’s ThredUp, a used-goods marketplace that is approaching the public markets in the wake of Poshmark’s own strong debut.
Both companies have a related market focus, albeit different approaches to selling used goods. Poshmark allows users to sell clothing items through its app. ThredUp, in contrast, acquires goods from users and sells them itself.
The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.
But while Poshmark had profits to brag about in its own IPO filing, ThredUp does not and is also growing more slowly, expanding revenues just 13.6% in 2020. Reading its S-1 filing, it’s clear ThredUp did not have the best 2020, thanks in part to COVID-19.
This morning, let’s get into the numbers posted by the company backed by Trinity Ventures, Redpoint, Highland Capital Partners and Goldman Sachs to decide if it’s just merely to catch Poshmark’s wave, or if its business is a fine machine in its own right.
ThredUp’s model
To understand ThredUp’s business, we have to get into the mechanics of how it sells things. The company has two methods: direct sales and consignment. In the former, ThredUp buys goods and sells them. It then “recognize[s] revenue on a gross basis” and generates gross profit after deducting “inventory cost, inbound shipping and inventory write-downs, as well as outbound shipping, outbound labor and packaging costs.”
That is the model that ThredUp is leaving behind. After shifting to “primarily consignment sales” in 2019, the company’s business has skewed sharply in that direction. Consignment works by having consumers send ThredUp their goods, which it holds, and perhaps sells, remitting to the user a portion of the sale price. The method reduces write-downs and boosts gross margins.
Consignment sales at ThredUp “recognize revenue net of seller payouts,” deducting “outbound shipping, outbound labor and packaging costs” to reach gross profit results.
The revenue-mix focus change can be seen in how ThredUp generated gross profit in 2018, 2019 and 2020. In those years, consignment gross profit came to 38%, 67% and 81% of total gross profit. ThredUp’s business today is effectively a large, digital consignment effort.
What impact has that shift had on the company’s financial health? Let’s find out.
ThredUp’s growth
ThredUp posted $129.6 million in 2018 revenue, a figure that grew to $163.8 million in 2019 and $186 million in 2020. The company’s growth slowed from 26.4% in 2019 to 13.6% in 2020, a sharp deceleration. But at the same time, the portion of ThredUp revenues that came from consignment sales grew to 74% from 60%. Did that change have a material impact on the company’s gross margins, thus rendering its slow growth more palatable?
Not really. The company’s gross margins came to 68.7% in 2019 and 68.9% in 2020. That’s about as flat as Texas. And notably the number stayed flat despite the company noting that consignment revenues had stronger gross margins in 2019 and 2020 (77% and 75%, respectively) than its other model (57% and 51%, respectively).
Why did ThredUp’s growth slow in 2020? Its S-1 filing has a good explanation of what happened to gross profit growth, a series of points that should apply to revenue as well:
2020 gross profit dollar growth slowed primarily due to the overall impact of the COVID-19 pandemic, including lower demand for apparel in general, higher discounts and incentives plus fewer secondhand items being listed for sale on our marketplace.
Fair enough. Perhaps that turns around in 2021.
Sticking to the past, the company’s rising unprofitability is unavoidable when reading its results. Losing more money as your growth rate falls is not a super-lovely combination. In 2018, ThredUp lost $34.2 million. That net loss grew to $38.2 million in 2019. And then in 2020, the company’s deficit swelled to $47.9 million.
The adjusted numbers aren’t much better. Calculating with the generous adjusted EBITDA metric, ThredUp’s losses improved from negative $27.2 million in 2018 to negative $24.3 million in 2019. But its adjusted EBITDA came to negative $33.4 million in 2020, the worst of the three years we have on record.
Now what?
You can make a bullish case for ThredUp. It has shifted its business model to a more gross-margin positive stance; the move toward consignment sales should generate stronger gross margins over time. And if COVID-19 was bad for the company, perhaps its end will prove salubrious.
But the company is going public on the back of negative Q4 2020 revenue growth compared to Q4 2019. That’s hardly the stuff of legends. (In Q4 2019, ThredUp posted $44.6 million in revenue and gross profits of $31.4 million; those numbers fell to $43.4 million and $29.7 million, respectively, in Q4 2020.)
Still, the company’s final private valuation, some $650 million, according to Crunchbase, is a low multiple of its 2020 revenues. The company should be able to best that figure unless we’ve overestimated the current appetite in the market for IPO shares, which seems unlikely. The IPO timing may make sense for the company: Debut in Poshmark’s warm shadow, bank the cash, get through COVID-19, and then try to grow its gross profits? It might work out.
What investors will be willing to pay for ThredUp is going to be very interesting. A bit like Oscar Health, it’s a hard company to price. More when we get an interval.
Early Stage is the premier ‘how-to’ event for startup entrepreneurs and investors. You’ll hear firsthand how some of the most successful founders and VCs build their businesses, raise money and manage their portfolios. We’ll cover every aspect of company building: Fundraising, recruiting, sales, product-market fit, PR, marketing and brand building. Each session also has audience participation built in — there’s ample time included for audience questions and discussion.
Comment