We're going Long ThredUP (TDUP). In the simplest terms, TDUP is a play on the apparel resale market as it is uniquely invested and positioned in dominating the low price apparel resale category. The secondhand market is expected to grow rapidly, roughly 15% per year, resale is expected grow faster than total secondhand, and online resale likely grows faster than total resale. As a leading online apparel resale company, that all bodes well for big long term growth for TDUP.
The Business
The company IPO'd back in March and did very well in its initial trading. Through the spring the stock saw volatility like many recently public names, but has stabilized around the mid 20s over the last few months. The business is relatively simple, sellers send clothes to be reviewed, accepted items are given resale value options to the seller, the unaccepted items get recycled or resold off platform. The seller then chooses to sell via consignment or hand them over to ThredUP at a lower price. Consignment is given 90 days to sell and if unsold is recycled or sent back to the seller if she paid for the return option. The important point from the seller supply side is that this model uses a closet “cleanout”, as sellers are generally choosing ThredUP as an alternative to throwing out the clothes or driving them to Goodwill. Dollar compensation for the clothes is a low priority and the money generated by a seller is relatively small. The quality of the product sent in ranges from junk to good condition high end brands, depending on the seller (about 40% of items received are accepted). The seller value proposition is an easy cleanout process, feeling like clothes find a new home, environmental benefit, and a little money in the pocket. On the buyer side, thrift/bargains shoppers can find name brands (ThredUP states the range as Gap to Gucci) anywhere from 50% to ~95% off new pricing. A clear value on the items being bought, plus the benefit of helping the environment. ThredUP only does Women’s and Kids, no Men’s, since men don’t turnover clothing enough on both the demand and supply side.
The other part of the business is known as RaaS, or Resale as a Service. With RaaS retail brands partner with ThredUP to offer their own brands in a resell model facilitated by ThredUP. Some notable partners include Madewell, Gap, and Fabletics. Historically the partnerships were used more as marketing/customer acquisition vehicles, but starting mid 2021 new ones are being structured with upfront integration fees, service fees, and revenue sharing fees to be real revenue drivers. We think it’s a consumer trend much like Buy Now Pay Later. To win the marginal consumer in the millennial/Gen Z generations BNPL became a popular offering of retailers for shoppers that didn’t like credit cards and wanted to match purchasing disbursements closer to their cash inflows. Now the marginal consumer will prefer brands/retailers with the resale option available as a sign of being more environmentally friendly.
Key Considerations (Moat, Cash Conversion, Management)
RaaS is evidence of a clear moat that ThredUP has built, which is solving low price apparel resale logistics. To have average rev per order sub $50 and deliver 70% gross margins is very challenging in ecommerce. It’s created by a mix of the “cleanout” and high consignment model mixed with state of the art fulfillment technology. TDUP’s Chief Systems Officer is credited with building the automation for Netflix’s DVD by mail offering, and had some experience at SpaceX and Cisco. This means that unlike other resale platforms like EBAY or POSH, TDUP has control over the logistics experience for customers that are shopping for bargains at low to mid prices. On seller fulfilled platforms, customer satisfaction becomes a big issue, and prices this low aren’t seen given effort vs payout for sellers. We don’t think the TDUP model can be easily replicated, if at all.
Another highlight of this business model is the cash conversion. Given the consignment model, seller offering fees, and time to process apparel and pay sellers vs cash from the buyer, the business has an incredible cash conversion cycle which clocked in at negative 18 days in 2020. The company will generate operating cash flow rapidly as it scales even if not to the level of P&L profitability.
Lastly, we don’t have a long history following this management team, but the talent assembled here looks impressive and we like what we have seen so far. Investors that are close to this story think it has one of the best management teams in all of consumer.
Catalysts and Valuation
We view TDUP as a powerful long term Tail growth story as a leader with a competitive moat in what will be one of the best growing categories in consumer over the next decade. As for why we are adding this to the long list now, there are several reasons.
- First is the fundamental rate of change as the business is accelerating into easy compares in 2H.
- Second is the industry tailwinds around apparel inflation that should help boost growth in resale pricing as much as we are seeing in regular retail. We also think that resale could start to see accelerated adoption from consumers given that inventories in retail are tight, and discounting is almost nonexistent, meaning bargains are relatively hard to find. This might push bargain shoppers into trying resale.
- Third is the recent acquisition. On July 26th TDUP announced a $28.5mm acquisition of Bulgarian based resale platform Remix. ThredUP stated that Remix has a similar logistics infrastructure which allows for an easy integration into the company. Remix was founded in 2012 currently services the Eastern and Central European markets, so the acquisition helps accelerate ThredUP's European expansion plans while being an independent business unit with senior management staying on. Remix's revenue in 2020 was $33.9mm, its expected to close 4Q21 and be dilutive on GM% but accretive to adjusted EBITDA. TDUP knows exactly the right next steps to scale the Remix business.
- Lastly is the moderate discount vs its brief public history in terms of EV/sales multiple. We think TDUP is being dragged down by some of the other resale stocks that had ugly earnings prints (REAL & POSH), whereas business trends at TDUP look bullish.
Valuation is likely the sticking point for many investors on TDUP. It is after all a company with a -20% EBIT margin trading at 7x revenues. However when you have a category leader in a huge growth category, this kind of valuation at this point of the growth cycle is reasonable. And if the business is accelerating, it tends to support high multiples going higher. Also, when we look at the valuation in the context of gross profit and growth, it actually looks reasonable compared to other ecommerce names. W trades at 9.6x EV/Gross Profit while 2021 GP is expected to be down per consensus. TDUP at 12x gross profit while growing it in the mid-30s seems reasonable.
We think in the coming quarters as the company accelerates top line and beats expectations this can trade back up to 10x sales into the low 30s or about 30-40% upside over 6-12 months. Over a tail duration we think it’s a double.
