FilippoBacci
Elevator Pitch
My investment rating for ThredUp Inc. (NASDAQ:TDUP) shares is a Buy. I wrote about TDUP’s efforts to target a new consumer segment and its operating profitability prospects in my prior update written on September 19, 2023.
The current article evaluates ThredUp’s recently announced Q4 2023 financial results and the company’s forward-looking financial guidance. I remain bullish on TDUP, as I think that investors should look beyond its below-expectations bottom line and EBITDA for the fourth quarter, and focus on the company’s favorable FY 2024 EBITDA guidance. ThredUp’s Q4 2023 results miss was largely attributable to a one-off item, while TDUP is expected to turn EBITDA positive this year as per its guidance.
Q4 EBITDA Loss Missed Expectations Due To Non-Recurring Item
TDUP disclosed its financial performance for the fourth quarter of the previous year with a results press release published on March 4 after trading hours. The company’s EBITDA loss and net loss were worse than what the market had anticipated earlier.
ThredUp’s EBITDA loss narrowed from -$5.8 million in Q4 2022 and -$3.6 million in Q3 2023 to -$2.1 million for Q4 2023. But TDUP’s most recent quarterly EBITDA loss was still wider than the Wall Street analysts’ consensus EBITDA loss forecast of -$0.97 million (source: S&P Capital IQ).
Similarly, the company’s actual Q4 2023 net loss of -$14.6 million represented an improvement as compared to its Q3 2023 and Q4 2022 net losses of -$18.1 million and -$19.5 million, respectively. However, ThredUp’s latest fourth quarter bottom line wasn’t as good as the sell side’s consensus net loss estimate of -$14.1 million as per S&P Capital IQ data.
Revenue for TDUP grew by +14% YoY to $81.4 million for the final quarter of 2023, which exceeded the market’s consensus top line projection of $80.3 million slightly by +1%. As such, the company’s below-expectations EBITDA loss and bottom line in Q4 2023 are most probably attributable to higher-than-expected expenses, instead of slower-than-expected top line expansion.
ThredUp revealed in its fourth quarter results press release that it recorded a “$1.9 million inventory write-off in Europe” for the recent quarter. TDUP noted at its Q4 2023 earnings briefing that this specific write-off was due to “aged and unproductive inventory in Europe” that it bought one year ago. The company estimated that its Q4 2023 EBITDA loss would have been much narrower at -$0.2 million (versus consensus projection of -$0.97 million) excluding this particular write-off.
In other words, TDUP’s EBITDA loss and bottom line for the latest quarter would have surpassed expectations, if adjusted for this one-off item.
Fiscal 2024 EBITDA Margin Guidance Is A Positive Surprise
ThredUp sees the company achieving a top line of $345 million and an EBITDA margin of 1.0% this year as per the mid-point of its FY 2024 financial guidance. TDUP’s FY 2024 revenue guidance is largely in line with expectations, as the sell side’s consensus top line forecast for the current year is just slightly lower at $343.1 million as per S&P Capital IQ data.
More significantly, ThredUp anticipates that its EBITDA margin can improve from a negative -5.4% for FY 2023 to +1.0% in FY 2024. Moreover, TDUP’s 1.0% EBITDA margin guidance for FY 2024 is better than the analysts’ prior consensus EBITDA margin estimate of 0.7% (source: S&P Capital IQ). This implies that ThredUp’s FY 2024 EBITDA margin guidance is a positive surprise.
There are multiple factors contributing to TDUP’s better-than-expected EBITDA margin outlook this year.
Firstly, the $1.9 million inventory write-off for Q4 2023 is unlikely to recur in 2024. At the company’s recent fourth quarter earnings call, ThredUp stressed that the write-up is “definitely not something we anticipate doing again” as this was a one-off action taken to avoid having “legacy products holding us back.”
Secondly, the clearance of the old inventory for the European market purchased a year ago, which came at the cost of a $1.9 million write-off in Q4 2023, should have a favorable impact on TDUP’s future revenue growth (and earnings). TDUP noted at its latest Q4 results briefing that its inventory clearance move will enable “an improved customer experience, allowing shoppers to more easily access fresh inventory.”
I am of the view that this is a good example of trading off short-term pain for long-term gains. While the $1.9 million inventory write-off is painful and led to a fourth quarter EBITDA miss, this has paved the way for ThredUp to guide for better-than-expected EBITDA margin for FY 2024.
Thirdly, ThredUp’s profitability should continue to benefit from a favorable shift in its revenue mix. In its corporate filings, TDUP indicated that the company has been gradually pivoting from “the sale of items that we own” (product revenue) to selling “secondhand women’s and kids’ apparel, shoes and accessories on behalf of sellers (consignment revenue).” ThredUp’s sales contribution from consignment revenue as a proportion of its total top line increased from 60.7% for FY 2022 to 66.3% in FY 2023 as indicated in its investor presentation.
The company’s goal is to have consignment revenue account for as much as 80.0% of its FY 2024 sales, which is likely to translate into an improvement in its profitability. As a reference, the gross margins for TDUP’s consignment and product revenue streams were 81.4% and 36.8%, respectively in FY 2023.
Final Thoughts
The market currently values TDUP at a forward price-to-sales multiple of 0.61 times based on its FY 2024 top line guidance of $345 million and its last done share price of $1.97 as of March 5, 2024. I believe that ThredUp can command a superior price-to-sales ratio of at least 0.8 times (pegged to historical one-year mean P/S multiple of 0.84 times), when it proves to the market that it can record positive EBITDA this year as per its guidance.
