Description

We believe TDUP  one of the largest digital thrift shops.  TDUP is attractive given ~33% of the market cap is in cash, another ~40% is in unique PP&E, with a valuation (~0.5x sales), largely sunk CAPEX with go forward CAPEX of $3-4 million a year, with guidance of positive EBITDA 2H’23 (close proxy to FCF). We think this interesting business model selling a very large collection of brands at up to -90% off new prices with industry growth tailwinds, w/ real barriers to entry, and a good flow of consignment inventory of roughly 36 million items a year from a highly diversified collection of retail brands. While the company came public at $21 two years ago (rich valuation/early) and with recent 4Q tax loss selling crushed the stock from $4 to $1’s we think the company can work higher over the next year if they hit their guidance. The company in its S-1 was targeting 20% EBITDA margins at scale. While they are a long way off from that now the story makes sense and the signposts are playing out with organic revenue growth, and major RAAS customer wins (effectively outsourcing resale business to TDUP) including Wal-Mart, Target, H&M, and a number of other major retailers. We believe this business has a good demand curve in a recession while solving a pain point for women. 

POSH was recently acquired for ~2x sales and was losing money, Etsy paid a crazy valuation for Depop 12x sales, and TDUP is roughly 0.5x sales and guiding for EBITDA + 2H. 

We believe TDUP's offering gives women the best solution for cleaning out their closets:

Choices are" 

A) Donate (which involves packing up and driving to drop off somewhere and that is it) 

B) Sell on Poshmark/eBay, this involves the effort...of taking pictures, managing buyer, and shipping, and might be harder to sell each item one by one

C) TDUP-> Women simply put what they don't want into a box and TDUP does the rest and sends them a check if they sell on a sliding scale. We believe that this proposition really resonates with a lot of women 

The perception of TDUP, POSH, TDREAL, RENT, and SFIX is they are all deeply flawed business models for various reasons. While POSH was just acquired for 2x sales which a do-it-yourself marketplace with a 20% take rate. SFIX is nearly the opposite of TDUP, instead of SFIX mailing consumers clothing, consumer mail in their clothes to TDUP the only do-it-for-me scale consignment model. TDUP has sold over 137 million pieces of apparel since 2010 and is handling roughly 100,000 items per day now. The supply side is not a problem here is a quote the CEO from December: “We don't have any problem with sellers. So we spend very little time talking about sellers. We're just trying to get them to not knock down the gates. So sellers is like a true competitive advantage for us.”

We have been impressed with the CEO James Reinhart 

TDUP has distribution centers (DC) have gotten progressively more efficient over time and they just moved into version 7. This new DC in Dallas which is four stories and roughly 600,000 square feet and cost over $70 million combined can currently process over $550 million a year and eventually up to $750 million a year. Capacity is roughly 12 million items in inventory if needed. It is interesting to see how much the economics have improved with each new DC. Finally, TDUP has built a database that tracks over 100 million SKU’s from 5,000+ brands on all sorts of proprietary data re: pricing, probability of sale, time to sell, dynamic pricing to turn, and seasonality. TDUP knows that 97% probability a pair of Crocs will sell if listed and 70% chance of Polo selling. Approximately 50% of the apparel sent in is good enough to be listed.

We think TDUP is worth $5-7 over the next 12-24 months or $450-600 million EV if the company can achieve $400-450 million in revenue with 10% EBITDA margins or $.40-.45 cents. The company at scale model is targeting 20% EBITDA margins which are consistent with retail secondhand/consignment shops due to free inventory/reduced working capital/low-cost leadership (good demand curve in a recession due to trade down).

What we think makes TDUP model compelling

• No inventory risk or No retail square footage required
• A highly diversified collection of American women’s closets A-Z
• Low-cost advantage up to -90% off new
• Take rate business model
• Industry tail winds
• Supports environmentally friendly and creates new revenue stream vs. donating
• Do-it-for-me model, people are lazy-> Ship it and forget it.
• Backend infrastructure to support processing 100,000 items a day
• Database that is large on pricing used clothing

Why we believe major retailers joining TDUP RAAS program?

• Very start-up high fixed costs; DC (cleanse, price, photograph, list on the website, ship, etc)
• High volume orders in and out (TDUP handles 100,000 orders a day)
• Requires significant scale $350 million +/- in revenue
• Requires a database built from scratch on the value of second-hand clothes from 1000+ brands on how to value/price/turn these items
• TDUP allows these major brands to white-label TDUP so it appears to be an extension of the core brand
• Finally, it is good for the Brand partners to show their customers they are “environmentally friendly” and thinking about resale of their brands (extending life).

How RAAS works: https://www.raas.thredup.com/how-it-works

Wal-Mart/TDUP -> https://www.walmart.com/browse/5438_1045804_1045806_5393351

Made Well/TDUP-> https://madewellforever.thredup.com/

Pac Sun/TDUP -> https://pacsun.thredup.com/

TDUP powers the RAAS for the following customers -> Wal-Mart, Target, J. Crew, H&M, Gap, Athleta, Torrid, Madewell, Tommy Hilfger, Rent The Runway, Fabletics, Vera Bradley, Kate Spade, Banana Republic, and about 30 others.

There are multiple advantages to Raas: it de-risks the inbound process (partner pays for most of processing), steady supply of higher quality apparel and potential buyer coming through partner sites. Here is their site that tracks all recommerce brands: https://www.recommerce100.com/

What makes TDUP work for the consumer?

Supply Side-> Why Women like TDUP Clean out kit’s->

a) Cleans out their closet for new clothes

b) They believe they are being environmentally friendly

c) Additional use for someone else as well as affirms taste in clothing w a sale

d) Provides cash/found money

All that is required is to go to  www.thredup.com print a prepaid label take on likely many boxes lying around the house from Amazon deliveries put whatever apparel they don’t want into the box and ship to Thredup.

TDUP fees:

• $2.99 if they mail you a box sent to you with a label to send in (otherwise TDUP pays for the shipping inbound)
• $10.99 if you want your clothes back that they wont list (they wont list 50%, and there are specific rules on what can be sent in)
• $14.99 processing fee is deducted from the sale
• $22.99 fee for expedited processing of 3 weeks (usual turnaround is 3 months)
• Sliding scale payout of which TDUP keeps between 20-90% (actually 100% if under $15).

This link explains how it works for the consumer->

https://www.thredup.com/cleanout/consignment?shop_local=false&state=listed

Since TDUP is the only scale processor, most women that send in clothing actually do not care about earning money from the sale but are most interested in the other attributes of listed above. This is a major positive, as TDUP gets a large source of very low cost inventory that is all based on consignment. The seller is using TDUP as a convenient replacement of dropping bag full of clothes at Goodwill.

Demand side-> Diversified collection of brands at up to -90% off new prices

• Very rapid turnover 30 days they pull,
• Dynamic pricing adjust based on time on site
• TDUP covers sections like new w/ tags on, shoes purses/handbags, shoes, apparel, and kids.

Why we like TDUP: 

We believe in a recession there will be a good demand curve for brand names at up to -90% off new prices, a high turning diversified collection of brands from A-Z, solves a pain-point, free inventory w/ consignment model take rate, and with real barriers to entry. We also believe that the last 6-9 months in retail might be one of the most aggressive environments for discounting over the last several decades (nearly every retailer had 1.5-2x normalized inventory given supply chain backlog, then Russia/Ukraine blew everything up and consumer paralyzed inflation, then fire sale discounting).

Here is a link to their database of brands/pricing/inventory over 1000-> https://www.thredup.com/brands

This was built out and opened in 2022.... 

Above: ”The state-of-the-art facility is designed to be thredUP’s first four-level distribution center and upon completion will store as many as 10 million items – more than doubling the company’s total capacity to 16.5 million items across its network. thredUP plans to invest $70 million in capital for the new distribution center.” -Source https://www.idilogistics.com/press_release/idi-logistics-pre-leases-construction-dallas-area-warehouse-thredup/

Management has mentioned no new capex in capacity needed till revenue >>$500mm. At $500mm of revenue, assuming flattish fixed costs, GP = ~$360mm (72%GM, not a stretched goal as consignment % of revenue mix will increase vs product) and EBITDA ~$40-50mm|8-10%. From a unit perspective, 10mn orders (up from 6.5mn in FY22, growth has been 25-35% historically), AOV = ~$50 (in line historically), GP/order = $36, Contribution Margin/order = $16 (implies CM% = 32%, CM has been in the ~$12-17+ range over last few yrs). With $120mm of fixed costs (flattish to FY2022), EBITDA = ~$40mm. There is upside to the $40mm given no/little improvements in CM% which should materialize as the new Dallas DC is now up and running (lower unit processing costs). If using company estimates of 37% CM%, EBITDA = $65mm. With historical growth rates, should hit ~$500mm of revenue in ~FY25

A key risk for any digital marketplace: Does the value proposition resonate for BOTH the supply side and demand side? To date, TDUP has tapped into a very significant source of supply without much effort. They will need to continue to scale the demand side. To this point, 80% of customers are repeat buyers and make three purchases per year. It is also encouraging that the growth RAAS adds both new buyers and sellers and liquidity to TDUP marketplace. If repeat purchases, supply slows, or customer acquisition increases it would obviously hurt TDUP. 

 DISCLAIMER: This does not constitute a recommendation to buy or sell this stock. We own shares of the company, and we may buy shares or sell shares at any time.

Catalyst

2H EBITDA profitability 

More RAAS wins...last week added H&M 

10% organic revenue growth in a challenging retail world is not a bad result

CAPEX is largely sunk costs and will decline materially 

Strong balance sheet with currently $70 million in cash 

Low valuation of 0.5x sales 

Hard to replicate assets-> $70-100 million DC, supply side 100K new items a day/6.5 million buyers annually