ThredUp Inc (TDUP) 2022 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the thredUP Q4 2022 Earnings Conference Call. (Operator Instructions) This call is being recorded on Monday, March 6, 2023.

I would now like to turn the call 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 thredUP's Fourth quarter and full year 2022 financial results. With me are James Reinhart, thredUP CEO and Co-Founder; and Sean Silber, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.st.com. This call is being webcast on our IR website, and a replay of this call will be available on the site shortly.

Before we begin, I'd 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 first fiscal quarter and full year of 2023, 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, involve known and unknown risks and uncertainties, and our actual results could differ materially from any projections of future performance or results expressed or implied by such forward-looking statements.

Words such as anticipate, believe, estimate and 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. 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.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations and comparable GAAP measures in our earnings 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 up. Thank you for joining thredUP's Fourth Quarter 2022 and Fiscal Year 2022 Earnings Call.

As we head into a new fiscal year, we're pleased to share thredUP financial results and key business highlights from our fourth quarter. In addition to the financial results, we'll also share our commentary on the consumer environment, strategic focus areas of the company and our continued progress towards profitability.

I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our fourth quarter 2022 and fiscal year 2022 financials in more detail and to provide our outlook for the first quarter and fiscal year '23. We'll close out today's call with a question-and-answer session.

Let me start with our Q4 results. We closed out 2022 with a strong quarter, generating revenue of $71 million, excluding a $2 million catch-up benefit related to annualized gift card breakage, which Sean will address in further detail later in the call, we achieved $69 million in quarterly revenue, far exceeding our own internal expectations. Our gross margins were 63%, 300 points lower than a year ago due to the strong growth of our lower-margin European business remix and the fact that remix is becoming a larger proportion of our overall business.

Year-over-year, our gross margins in the U.S. were actually up slightly at 71%. Active buyers and orders in Q4 reached $1.7 million and $1.5 million, respectively, both declining slightly year-over-year as we reduced marketing spend and what we expected would be a highly promotional fourth quarter. We also continue to make progress towards our profitability goals. Q4 adjusted EBITDA improved by 800 basis points or $5 million quarter-over-quarter.

Even without the $2 million annualized gift card benefit, adjusted EBITDA improved 470 bps quarter-over-quarter. This is a significant step up compared to the previous quarter, and we believe this quarter's solid performance and the sequential EBITDA improvement demonstrate how we're successfully navigating a tough consumer environment in apparel.

I'd like to take a moment to briefly reflect on 2022 and how we're anticipating the resell opportunity evolving into 2023. But the midpoint of '22, we started to see significant headwinds in resale. Macro conditions were deteriorating with inflation and higher interest rate squeezing consumers. This was particularly true for the budget shopper, who represents the majority of Fredric's customer base.

As has been well documented, we saw the budget consumer pull back on discretionary spend during the second quarter of last year and continue to sit on the sidelines into Q3 and Q4. In addition to this demand pullback, we're also seeing elevated inventory levels across retail. For the second half of last year, retailers were aggressively liquidating their overstock via direct and wholesale channels, causing downward pressure on prices across the industry.

This was especially pronounced in Q4 when brands leaned into promotions even further for holiday shopping. While we don't face the same inventory risks as traditional retailers due to our consignment model and flexible supply chain, we believe we were affected by this influx of cheaply priced clothing. The threat our brand stands for the value, and that message was being washed out in this hyper-promotional landscape.

So to summarize, the operating context in Q4, we were facing a combination of budget shoppers flowing back on discretionary purchases at the same time when retailers were overflowing with apparel. So we saw many of our core shoppers sitting on the sidelines. And for those that were in market, resale value proposition was diluted relative to the exceptional bargains being offered for new clothing.

Now a couple of months into 2023, we're still in the midst of a challenging consumer environment and inventories remain elevated relative to historical levels, but we're seeing a few things real time that make us cautiously optimistic about the setup for resale in 2023.

For one, the dynamics in our marketplace today, particularly around the budget shopper, are much more stable and predictable compared to last year. Unlike last year, when we pretty much ripped up the playbook, now it's clear how to delight, track and retain the customer in this new normal.

And second, we believe inventories are getting leaner across retail and promotional activities are likely to decline. As we prepare the business for the year ahead, we think the conditions for resell could be quite favorable when retailers eventually right size their inventory balances and reset prices to normalized levels, we think there's an opportunity for resell to shine.

Consumers across income levels have been primed to expect significant discounts when shopping for their clothes. We don't expect that sentiment to wane in 2023 and if and when buyer health starts to slowly recover as we believe it does following every downturn, we are confident that our value proposition will enable us to capture wallet share from buyers across the income spectrum, as we've done for many years.

So while we're playing defense in the current environment, we're also positioning the business for offense when buyer and competitive dynamics normalize. So with that backdrop, I'd now like to turn to a few strategic areas we focused on in the fourth quarter that we believe will set us up for success in 2023 and beyond.

First, we are optimizing unit economics with continued experimentation in how we manage our marketplace. As a marketplace, we can make real-time adjustments to both the supply and demand sides of our business. Examples of this include testing a new fee for our cleanout service, experimenting with how we manage returns and calibrating our promotions and merchandising mix based on the real-time data we observe in our marketplace.

Many of these experiments started to take shape in Q4 with early indicators that we're successfully positioning the business to attract and keep more shoppers in 2023 at improving unit economics.

Second, we have increased our processing capacity by officially opening our newest distribution center in Dallas. The opening of our flagship Dallas facility increases our U.S. network-wide storage capacity from 6.5 million items to 9 million items.

This facility has some of our most advanced technology, building upon our years of learning from creating best-in-class infrastructure for single SKU apparel. Such technology includes a multilevel Garmin Storage System, providing 25% higher storage density, while consuming 40% less energy than previous versions in automated tag photo studio that automates size and brand identification and redesign inspection studios optimized for future automation and inbound processing.

This new distribution center will enable us to quickly scale processing when we start to see consumer recovery and already has this pacing to hit our 4-week backlog processing target by mid-summer. As we process bags in real time, we can better scope the mix of seasonal goods we put online, and we think increased buyer engagement, purchase frequency and satisfaction.

Third, we are reinvesting in growth now that the consumer environment appears more stable and is set up for resale more promising. Many of our customers pulled back on overall spend or were able to shop new apparel at bargain prices last year. We think those dynamics are largely behind us, and we see an opportunity to earn more wallet share in the year ahead.

Turning to our resale as a service business or RaaS. We're gaining momentum as brands and retailers increasingly adopt resale as a way to engage new and younger customers. RaaS now serves 42 brand clients, and we have recently launched new programs with J.Crew, Kate Spade and Francesca's.

Those retailers now joined brands like Tommy Hilfiger, Madewell, Athleta, Paxson, Vera Bradley, Michael Stars and Fabletics, among many others who are choosing our RaaS platform as the go-to resale provider for apparel.

As a reminder, RaaS enables the world's leading brands and retailers to offer scalable resale experiences to their customers. By leveraging Threats marketplace infrastructure, RaaS amplifies our supply advantage, increases our sell-through and return on assets and expands our long-term profitability metrics by adding sources of recurring high-margin revenue.

Turning to Remix. Many of you are familiar with Remix, the European fashion resale company we acquired in 2021. 1.5 years in, we are thrilled with Remix' performance and the progress we have made driving consignment supply growth, increasing marketing efficiency and improving the business' margin profile.

As shared last quarter, we opened a new 320,000 square foot i-Tech distribution center near the company's headquarters in Sofia, Bulgaria. This distribution center is expected to triple Remix overall output at full capacity by the end of the year. Despite economic turbulence amidst inflation, rising energy costs in award in Eastern Europe, we believe remix has proven to be resilient and to maintain a strong growth trajectory.

Now I'd like to provide an update on our goal of reaching adjusted EBITDA breakeven in the back half of 2023 and our progress towards being free cash flow positive. I'll start by saying that we remain confident in our path forward to achieve these goals. In past earnings calls, I shared with you how our marketplace model allows us to flex our processing cadence, inventory sourcing, prices, seller payouts, return policies and merchandising mix.

I also shared how we significantly reduced expenses across headcount, R&D, discretionary spending and CapEx to position the business for the uncertain economic environment in which we find ourselves. One area I'd like to put a finer point on is CapEx with our Dallas distribution center to now open.

We are planning to reduce our CapEx spend by more than 60% in 2023 versus last year and do not expect further significant CapEx investments until at least 2025. We believe this past quarter's results and sequential improvements in adjusted EBITDA are indicative of our ability to execute across all of these areas. As we look ahead, we remain committed to rigorously managing expenses and CapEx to position the business to not just achieve breakeven, but also expand free cash flow over time.

While we expect a challenging consumer and discretionary environment to persist, we will also be preparing our product, operations and growth strategy, take advantage of a broader recovery. I'd like to take a moment to connect thredUP's core purpose and mission with our ESG strategy.

As we continue our journey to inspire a new generation of consumers to think secondhand first, we are keeping social and environmental impact at the forefront. In Q4, we published our inaugural impact report, outlining how we are helping our people, communities and the planet while growing a sustainable business.

We also announced an exciting partnership with the AZEK Company to recycle all of our return cleanout bags in AZEK techy products, which are recognized for their innovative and environmentally sustainable design. We're also thrilled to have joined the American Circular Textiles Coalition.

ACT will serve as a much-needed advocate for policies to accelerate the adoption of circular fashion business models and solutions in the U.S. For example, we recently endorsed a Maryland Mill that eliminates sales tax on secondhand items under $20. It's exciting to see policymakers amplify the power of circular business models to drive sustainability and to benefit the American consumer.

Before I turn it over to Sean to walk through our financial results and guidance, I want to reemphasize the strength of our 2022 results amidst the challenging macro environment. We've shown adjusted EBITDA improvements quarter-over-quarter and are balancing those efforts with our long-term strategic investments to drive growth in the business.

When the consumer discretionary environment recovers and apparel liquidation moderates, we're confident that thredUP's mission of providing great brands at great prices in a sustainable way will shine brighter than ever. And we'll be ready to capture that moment with an incredible selection of clothing in an ever-improving marketplace with stronger unit economics, a leaner cost structure and increased profit capacity.

With that, I will now turn it over to Sean to go through our financial results and guidance in more detail.

Thanks, James. And again, thanks, everyone, for joining us on our fourth quarter and full year 2022 earnings call. I'll begin with an overview of the results and follow up with guidance for the first 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-K filing. As a reminder, our results now include our Europe business for 1 full year after the 2021 acquisition.

We are very proud of our Q4 results. For the fourth quarter of 2022, revenue totaled $71.3 million, a decrease of 2% year-over-year. This includes a catch-up benefit of $2.1 million related to gift card breakage, and we expect an immaterial benefit from this going forward.

Excluding this, we delivered fourth quarter revenue of $69.2 million, a 5% decline, still exceeding the high end of our guidance. Consignment revenue was down 16% year-over-year, while product revenue grew 20%. The decline in consignment revenue and outsized growth in product revenue is primarily attributable to a mix shift. This is driven by an outstanding performance from our European business during their seasonally strongest quarter and the relative growth of our RaaS supply.

Currently, the majority of revenue from both RaaS and our European business falls under product revenue, though we are continuing to transition each of these businesses towards consignment over time. On top of the difficult macro environment in which our budget customers remain on the sidelines, we also pulled back on marketing spend in work as the highly competitive environment led to a decline in marketing efficiency.

These factors resulted in a 2% decrease in active buyers to $1.7 million for the trailing 12 months. We ended the fourth quarter with 1.5 million orders in the full year, reaching 6.5 million orders, a decline of 8% and an increase of 22% year-over-year, respectively.

For the fourth quarter of 2022, gross margin was 63.1%, a 300 basis point decline over the same quarter last year. Excluding the $2.1 million breakage benefit, our gross margins came in at 61.9% while our U.S. gross margins were up slightly to 71.4%, the 420 basis point decline in our consolidated result over the same quarter last year was due to the outperformance in our lower-margin European business, which is a large portion of our consolidated results for the fourth quarter.

As a reminder, we plan to transition the European business towards a 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. However, we 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. business commands.

For the fourth quarter of 2022, GAAP net loss was $19.5 million compared to a GAAP net loss of $17.9 million in the same quarter last year. Adjusted EBITDA loss was $5.8 million or a negative 8.2% of revenue for the fourth quarter of 2022.

Excluding the breakage benefit, our adjusted EBITDA loss was $8 million or a negative 11.5% of revenue, an approximate 300 basis point improvement compared to the same quarter last year as we tightly managed expenses and leveraged our investments.

We are incredibly proud that our Q4 adjusted EBITDA loss even without the breakage benefit, improved over Q3 by $3 million or 470 basis points, exhibiting the work we've done to rationalize our cost structure.

Turning to balance sheet. We began the fourth quarter with $130.6 million in cash and marketable securities and ended the quarter with $111 million. Our cash usage from operations was $15.2 million, while we spent $3.9 million on CapEx as we began to wrap up the first phase of investment in our Dallas DC.

Based on our Q4 progress, we remain confident and continue to believe that we are on track to reach adjusted EBITDA breakeven in the second half of 2023, assuming we achieved quarterly revenue of at least $80 million to $85 million. As we've mentioned, reaching breakeven is just a way point on our path to being free cash flow positive and expanding profitability.

Given that our working capital needs are minimal, adjusted EBITDA and our CapEx spend are the key drivers of free cash flow, both of which we believe will improve materially in the second half of this year. We spent $20 million in cash in Q4 and expect the spend level to decrease slightly in the first half of the year and then decreased more significantly in the back half.

Our plan to reduce cash usage this year will be driven by the diminishing CapEx needs and improving EBITDA as we implemented strategic initiatives and streamline our cost structure. After spending $43 million in CapEx in 2022, we are planning to significantly reduce the CapEx to less than $15 million in 2023.

We're planning to spend approximately $6 million in Q1, $5 million in Q2 and the ramp down to maintenance levels of about $1 million per quarter in the back half of the year. Importantly, as we've improved efficiency within our DCs, we do not expect to expand beyond our current global unit capacity until 2025 at the earliest and are planning for maintenance levels of CapEx and so then.

Due to our significantly reduced CapEx needs and our ability to manage our expense structure, we expect to be able to fund the business through our existing cash balance. 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 down on our existing debt before them.

Though we've seen 2022's deteriorating trends stabilized, we believe that the pressure of elevated retail inventories will ease throughout the year. There remains a high degree of instability in the macro economy. Even as spending may shift as shoppers adjust to the new normal, we are managing expenses and refining our model to ensure that we adapt to this environment and emerge a stronger, more profitable business.

Turning to guidance for the first quarter, we expect revenue in the range of $71 million to $73 million, gross margin in the range of 66% to 68% and adjusted EBITDA loss of 12% to 10% of revenue and basic weighted average shares outstanding of approximately 102 million.

For the full year of '23, we expect revenue in the range of approximately $310 million to $320 million; gross margins in the range of approximately 66% to 68% and adjusted EBITDA loss of approximately 8% to 6% of revenue and basic weighted average shares outstanding of approximately 105 million.

In closing, we are pleased with our fourth quarter performance and are confident we can deliver on our growth and breakeven goals as apparel markets normalize and ongoing efforts to improve our business take shape.

James and I are now ready for your questions. Operator, please open the line.

(Operator Instructions) Your first question comes from Trevor Young with Barclays.

(inaudible) results. When you guys gave guide around mid-November, obviously halfway through the quarter, it seemed like you've been a bit more cautious on the outlook at that point in the guide now coming in well ahead of that even excluding the gift card impact.

Was that a result of December picking up more than you expected or maybe not seeing a deterioration in further trend? That's my first question.

Trevor, its James. Yes, I mean I think October was reasonably strong. And then I think November and December, we expect it to be a little softer than they were. So I would say that the business performed better than we expected. I don't think it was that December was amazing by any stretch.

I also think a number of the things that we started to work on across kind of the portfolio of products on the front end, just started to work a little better. And I think you can see in our guidance for Q1, like it's reflective of we think things are working better. And so that's sort of the approach.

Got it. That makes sense. And then on the inventory coming out of 4Q, I think it was up kind of mid-high teens Q-on-Q. Is that where you expect it to be? And do you feel good about the kind of the quality of inventory as you head into '23?

Yes. No, I think that's about where we expect it to be. I think keep in mind that the business that -- the inventory shows up on the balance sheet is the owned inventory only. So that's going to be a small portion of what's related to the U.S. and probably over 50% of it relates to the European business.

Your next question comes from Ike Boruchow with Wells Fargo.

This is Kate on for Ike. I'm wondering if you could just elaborate a bit more on the stabilization that you called out with your budget shopper. Just anything that you're seeing from like a behavioral or a category perspective that you're finding encouraging? And then, James, you mentioned it in your remarks, you guys are just getting sharper at appealing to that customer. Just any key learnings kind of coming out of the holiday that you were particularly pleased with that you're even more encouraged by looking towards 2023?

Yes, sure. Yes, Keith, I mean, I would characterize it more as the transition of budget shoppers who were maybe not in market is often right or who are on the sidelines, as that starts to stabilize, you just have better data both quantitative and qualitative around what that shopper is looking for.

So then we can start to bend the mix, the promotions, the marketing messages, everything can sort of work a little bit better once you really understand the context that you're living in. And so I think as we move through '22, we just got sharper around that type of messaging and the storytelling we were doing to those budget shoppers.

And I think a lot of that work in Q4 is really informing how we're moving into '23. And so I think in a world where the environment is very competitive and consumers are feeling pinched, you can just get sharper around what you're discounting, how you're discounting, the type of message you're putting in market that I think really allow that shopper to relate to the product offering.

And so like any management team, I think now that we understand where we are and what we're dealing with, we can make the right moves to make the business work better. And I think that's where -- I think we're feeling some confidence as we move into '23.

Your next question comes from Anna Andreeva from Needham & Company.

I wanted to follow up. We noticed that the $299 cleanout beds now in addition to $14.99 processing fee. And James, you mentioned you guys are testing some of that stuff. Just curious how did you think about that and tested those amounts specifically and also recognizing it's early, but just curious what the response has been from the sellers thus far. I guess, are you getting better supply coming in as now the seller is actually paying for it.

Yes, Anna. Yes, I mean, we continue to test it. I think part of the insight was, as you know, and you've been following us for some time, just incredible demand for our cleanout service has never really waned.

And so we were looking for ways where we could prioritize our best sellers and also ways to monetize the brand equity that we built at thredUP as being the most convenient place to clean out your closet.

And so yes, we've been testing fees at different price points and also similarly with paying for the cleanout bag. And I have to say, we feel very good about the test results. We're seeing consumers really understand why we're making some of these changes. And I think the limited number of bags that we're processing already from these cohorts suggest like that is better stuff.

And as you might imagine, when people are paying for a service, they're putting more items in the cleanout kits, so the amount of items we're getting are higher and the quality of those items are better.

So I think -- we think this is a good positive sign for the business.

Your next question comes from Dylan Carden with William Blair.

Can we just stay on that for a second? How -- maybe you want to disclose this, but how many -- or I guess, what percent of sales are you charging? Any way to sort of think of the reach of that piling program? Is that pretty broad-based? Or is it in a small segment of the market?

Dylan, it's a pretty meaty experiment. So we have enough data now to feel pretty good about the results that we're seeing. But I think we're going to continue to evolve the mix to make sure that we get the seller experience, right, and we get the best product for our buyers. And I think we've talked a lot about the ability to flex both sides of our marketplace.

And I think over the last couple of years, we've done more on the demand side. And I think now we're really balancing out how to get the marketplace to spend as fast as possible. So I think we all feel pretty good about where we are.

And then that's not -- you kind of ran through their sort of some of these optimization unit economic optimization efforts you're doing. I guess what else? if we could sort of spend some time on other initiatives you're doing? And is that embedded including sort of the charging for the cleanout kits? Is that embedded in breakeven EBITDA? Or is it that would be incremental?

Yes. I think we talked about sort of the 3 areas, the cleanout bag charges as well as work that we're doing around returns, a number of things around what the customers' experience of returns is how many products can be returned sort of the unit economics in there is we're continuing to kind of figure out the best way to make those work.

And then the work we're doing around merchandising and the sculpting of the mix of product that's coming in. I think those 3 things are experiments that are in market. And I think to the best that we can, that's reflected in the guidance for the year, but it is still early.

And -- but we continue to work on a number of other things on the front-end experience for buyers that we think also have some upside. So I think our guidance reflects the best case of where we think the business will be in '23, but we come to work every day and work really hard to make it better. So we're working on some new stuff as well.

Okay. And then the consignment versus product outlook, I know you're not going to kind of break out revenue guidance by those 2 items. But do you think that sort of where the consumer is in the first quarter, they're kind of rounding out the bottom of the declines in the consignment business. Is that fair?

Yes. No, I think the mix in Q4 was pushed towards product because we had turned off supply from the non-RaaS business. So we have a lot more supply coming in from RaaS, which a good portion of that is owned. And then you also had an outsized quarter from Europe and Europe is -- the majority of that is owned.

So I think that's what you saw happen in Q4. That being said, when you get into '23, we do have to kind of burn through a lot of that rat supply. So I wouldn't expect a dramatic shift taken time in 23, but I would just improve slight improvement as we go through 23.

Excellent. Okay. And then lastly, any -- I guess you had mentioned that you sort of turned supply offered. Any update on processing throughput, kind of where you stand there?

Yes, I think on in our remarks, that we expect the backlog to be in a really good place by mid-summer. We turned on DTS7. And so processing is in a good place. We think the mix of bags coming in, RaaS-related versus CMP-related is in a good place. I mean we think the unit economics of all those bags coming in is as good as it's ever been.

So I think everything is really coming together nicely for us across processing and the unit economics.

Your next question comes from Alexandra Steiger from Goldman Sachs.

I do want to follow up on your full year EBITDA guide. Could you please discuss how you think about margins progressing through the year and given your goal to achieve profitability in the back half? And then second, could you help us understand the different building blocks of your EBITDA guide in terms of the factors that are inside versus outside of your control?

Yes. From an EBITDA perspective, as you kind of roll from, let's take it from Q4 of '22, if you take out the impact of the breakage, we kind of had 4 consecutive quarters of improving EBITDA rates. And we kind of expect that evolution to continue through '23.

How do we get there? I think it's as simple as growth and improving unit economics and growth, you'll see in kind of our overall guidance, we're going to be able to spend more, spend more on marketing, spend more on operations, both of those are going to fill growth.

And then on unit economics, we talked about the new DCs and the strategic initiatives that James has mentioned. But I think those are your drivers towards what happened in 2022, where we're headed in '23 and how are we going to get there from an overall breakeven perspective on EBITDA rate perspective.

And Alexandra, the only thing I would add is that none of the guidance for '23 implies some big consumer recovery, right? I think our implicit in that is these are investments we're making in the conditions in which we find ourselves. And so I think we're navigating the business in this environment to a really good place. And I think if the market recovers and gets better, that would be good for everyone, and we can take advantage of that.

Your next question comes from Tom Nikic with Wedbush Securities.

James, I want to ask about the customer count. So I think quarter-over-quarter, it's been down each of the last 2 quarters. When do we think about that kind of bottoming and starting to get back to growth again?

Tom, yes, I mean, I think you should start to see that inflect this year as we reinvest in growth in some of the sort of key initiatives that we're working on. I think what you had while you saw the last couple of quarters where they were is we had very successful and high spend quarters throughout 2021.

The business was really growing at a nice clip. And so you're sort of lapping some of that as you got into the back half of '22 on top of which you were spending a lot less in marketing. And so now I think as we turn the page into '23, feel like the macro environment is more stable, we feel very comfortable spending into that with the economics that we're seeing. And so you should start to see that improve as we move through this year.

Got it. And quasi follow-up there. Obviously, the budget shopper has been pressured lately. But how do you think about potential trade down and maybe a higher-end consumer who's never shopped resell before, never shopped your business before potentially becoming more discount hungry and gravitating to thread up?

I'll give you a quite easy answer to your quasi follow-up. I mean, I think we've been clear, right? Like I think the conditions for resale in '23 are promising. If you start to see retailer promotions come down and you still feel like the shopper is looking for value.

I think that intersection of those 2 things suggests that resell could really do quite well in this environment. And some of that is from trade down, as you suggest. And some of that is just prices getting more normalized in traditional retail context means that they're just going to be more expensive.

And so then the value proposition for resale should be stronger. And so that's how we think the setup in 23 looks, and we'll see whether it plays out that way. But I think we're feeling cautiously optimistic.

Your next question comes from Rick Patel with Raymond James.

Well done on the progress. I have a follow-up to Tom's last question on the consumer. So as you look at how the first quarter is shaping up versus how you performed in the fourth quarter, any key differences to highlight in terms of behavioral changes? And what your -- maybe elaborate on what your expectations are for the consumer for the rest of the year?

Yes, Rick, I mean, I think we've had this conversation a few months ago, I thought retailer inventories would have been a little cleaner into Q1, but I still think based on the commentary across the apparel sector, right, inventories are still elevated in lots of places. So you're still seeing that promotional environment creates sort of downward pressure on price.

So I think that's really in Q1 of the continuation of the themes of last year. But I would say that like it's clear that there is an end in sight right around this. And so I think the shopper and the value proposition at thredUP is going to be more attractive as we sequentially move through the year.

But I don't think the conditions have changed meaningfully on the inventory environment. I do think though that like consumer sentiment is still quite negative. I still think people think interest rates can go higher. And so I do think you're going to have a consumer that's a little bit more cautious, at least for the time being.

And that's why in our guidance and sort of how we're operating the business, we don't expect any sort of big inflection in consumer behavior. But we think we can continue to invest and grow the business under the conditions in which we find ourselves and have a lot of success kind of quarter-over-quarter.

And can you also talk about the outlook for the remix business? You touched on opportunities to implement threat up U.S. best practices there. So which inning are you in, in terms of those improvements? And when should we expect to see a more meaningful improvement in terms of the contribution to the margins?

Yes. I think it's still relatively early on that transition. I mean I think 2022 was a difficult year in Europe. And so we felt like it didn't make sense to try to introduce some big, large-scale changes into the way Remix sort of processed and operated its P&L.

I think we're starting to make some of those changes slowly. And I think you'll see as we transition more of the business to consignment that you'll see some of those gross margins go up. But the business is executing very well to top line. It's doing very well across its customer acquisition and retention metrics.

And so we're pleased with its progress, and we will be patient to see some of these consignment mix transitions. But we'll get there, and -- but we feel very optimistic about where that business is headed.

Your next question comes from Ashley Helgans from Jefferies.

It's Blake on for Ashley. I wanted to talk about the pipeline for RaaS deals. It looks like you, I think, close to doubled your client count this past year. Just wondering if we could get an update on how those conversations are going, especially in a challenged macro?

How is the competitive environment? And if you could comment on how much incremental should the RaaS business contribute to sales and EBITDA in 2023 versus 2022?

Yes. Sure, Blake. I mean I think, yes, we exited the year feeling very good about the total RaaS clients. I think there's good momentum in the business, as you saw with the launches of J.Crew and Kate Spade, who are 2 of our best-selling brands on front. And I think 22 was a challenging year for retail.

I expect '23 will be also a challenging year. It certainly is right now, although it may very well get better. But the pipeline feels solid. I think we're taking the long view on how branded resale evolves in the ecosystem.

But I think you continue to see us launch more brands, launch some big brands, small brands that I think are all sort of accretive to the bottom line, but we don't break out '23 over '22 on an incrementally basis. But I think every brand partner that we bring on drives incremental demand. And for the right partner drives incremental supply. And I think both of those things are really positive for our business.

Got it. And then our follow-up is on just your marketing budget. Wondering if you could comment on that for 2023. And then kind of post the (inaudible) change, if we could reassess and if you could give us an update on just on your marketing strategy and the ways you're now marketing to try to acquire customers?

I'll start with the strategy, and then I can turn it over to Sean to just walk through some of the numbers. But I mean, nothing has really changed since the IDFAs for us or no news since the last time that we talked about it. We've continued to focus on building sort of a wide range of channels, both direct response and then I think upper funnel as we continue to build the brand. So no real change, I would say, on the strategy, but I'll let Sean talk about the math.

Yes. On the marketing dollars is expecting to go up from '22, but down as a total percentage. And think about that, this as us investing in the growth of the business. So think about that when you start to model out in '23.

Your next question comes from Ed Yruma from Piper Sandler.

(technical difficulty) I guess, first on the marketing, you anticipate having digital marketing backdate ahead of what you expect consumer more coincidence. Just follow that you guys have experimented with different types of motions. You kind of moved like pricing transparency in lateral where you think you all on that at now in terms of strength of write-downs in how low is price versus promotional handle.

Ed, we couldn't really hear you. It's very garbled on our end. So I don't know I couldn't make out the question. Maybe try again.

(technical difficulty) Yes, let me get a lot more hear you better now?

No, it's still bad. It sounds like you're under... Okay... Sorry about that.

Your next question comes from Dana Telsey with Telsey Advisory Group.

As you think about the trends with the European consumer from remix and the U.S. consumer, what are the biggest differences that you're seeing so far? And then as you plan for 2023, what are the -- under the hood or the breakouts of how you're thinking about the gross margin on both consignment and product and what the puts and takes may be.

Sure, Dana. I mean, I think on the European first U.S. consumer, I think both consumer businesses, I mean, Remix operates in Central and Eastern Europe, they have some revenue concentration in a few key markets where I think it's like it's incrementally less competitive than it is in the U.S.

And so I think the resale business in Europe, I think we invest more dollars in that business can have greater sort of share gains across kind of value retail. So I think that European consumer has slightly less choice than they do in the U.S., where I think the U.S. consumer right now is certainly -- I mean, frankly, the consumer is benefiting from how attractively priced apparel is for new stuff.

And I think that, that will be true at least for another quarter or 2. But I think you probably know as well as others that will certainly start to dissipate. So I think that's how we think about the European consumer versus the U.S. consumer, and I'll let Sean talk a little bit about the margin piece.

Yes. On the gross margin, you're looking at '22 versus 23%. I think overall, I just think it's going to be slightly better than $22 million -- and obviously, our assumption is that the inventory kind of over is just going to start to settle down. Promotional environment will start to improve. But I think you can also break that down whether you're talking about consignment or product. So it's slightly going to improve there as well. And the same thing would go if you're going to split it between the U.S. and Europe, slight improvements across the board.

Got it. And then just lastly, as you look at the environment now for apparel where value is certainly the mainstream of the day. In terms of whether it's orders, whether it's active customers, how are you navigating this environment? Is it at all different in your history from what you've seen before in terms of the value offering?

I don't think it's too different, Dana, than sort of where we live prior to the pandemic. I think prior to the pandemic, the business was really growing very, very nicely. And I think the value in resale was very clear to the U.S. consumer. And then I think the pandemic created a bunch of volatility in that sort of value proposition.

So I think as we move through the year, I think you'll get back to a more standard assessment of the value of secondhand, which I think is more a cadet the value you would have in the off-price context that I know we've talked about in the past.

So I think the value opportunity this year, certainly as we get further into the year, it's going to be attractive given resales price point.

Your next question comes from Ed Yruma with Piper Sandler.

Guys, hopefully, this is a little bit clear. Let me try this again. I guess first on the promotional strategy. I know you guys have experimented quite a bit in '22 being less promotional or experiencing more promotional.

I guess I want to continue to consume is today and how are you kind of nailing that formula is a follow-up to the previous question on marketing expense, did you say how you rebuild marketing kind of in front of when consumer demand approves or coincident...

It was a little better, Ed. So I think we'll get it. So I think the first question was around promotional strategy and how that's evolved. And so I think where we are today and where we finished the back half of '22 was just understanding both the mix of goods that we're really going to delight the buyer and the context that they were in.

And so how do we acquire more of those goods, how do we shape the assortment of what's coming in? And then what are the types of categories that are in demand, right?

And so I think we got sharper around how that budget shopper and broadly, the resell shopper was thinking about value. And again, it's a -- we're a very data-driven organization. So we were really relying on the quantitative data around pricing promotion discounting. But we'll continue to sort of evolve our thinking on that.

On the marketing spend, I think what you're asking is do we spend ahead of the customer recovery. And I think the answer is that I think we feel very good about the dollars that we're spending now based on the customer acquisition costs and the LTVs that we're seeing. But I don't think we're leaning in ahead of any potential consumer recovery.

I think we're playing the game on the field sort of as we see it but feeling very good about those investments.

(Operator Instructions). There are no further questions at this time. Please proceed.

Thank you, everyone, for joining us on the call. I appreciate all the good questions. Appreciate all the hard work that the right-up team does every day to inspire a new generation to think secondhand first.

So thanks, everyone. We'll see you next time.

(Operator Instructions). And after you complete, disconnect your lines.