Increasing losses, stiffer competition and apparel woes: ThredUp’s S-1 annotated

ThredUp is part of a growing group of online resale players, many of which are trying to raise money to grow. Online marketplace Poshmark, for example, IPO’d last January. Vestiare Collective raised $216 million earlier this week. And in 2019, the RealReal went public.

All of these businesses have a similar core offering: They let people buy used apparel. But each has its own business model and target demographic. RealReal and Vestiaire Collective, for example, focus on more expensive clothes. Meanwhile, ThredUp tries to position itself more in the middle.

What ThredUp says makes it different from the rest is its back-end business model intended to help retailers facilitate their own resale services. In its S-1, the platform went to great lengths to showcase its ability to diversify revenue by offering these back-end services. Still, ThredUp faces a tough road ahead. Its losses continue to mount, and 2020 was not friendly to the apparel industry.

Here’s our look into ThredUp’s pitch to investors:

The fundamentals

Thredup’s revenue is growing, but not as fast as in earlier years. In 2020, the company recorded $186 million in sales, a 14% increase from the year before. In 2019, ThredUp’s revenue had grown 26% year-over-year to hit $163.8 million. Also in 2020, the company reported a net loss of $47.9 million, an increase from 2019’s net loss of $38.2 million (which was more than 2018’s net loss of $34.2 million).

For comparison, Poshmark’s 2019 revenue was $208.2 million, and for the first nine months of 2020, it hit $192.8 million, according to its S-1, which was published last December.

This past year, ThredUp had 1.24 million active buyers, which is 24% higher than the year before. Its tally of active sellers last year, however, fell 4% to 428,000. Meanwhile, 80% of its purchases come from repeat buyers, and its distribution centers currently hold 5.5 million individual items of clothing.

The 2020 slowdown can likely be pinpointed to the pandemic. In 2019, resale was a fast-growing part of the apparel industry, but in 2020, apparel sales in both the primary and resale markets slowed. Berkshire Hathaway, for example, estimated that apparel and footwear sales went down by 6.2% in 2020, compared to 2019.

Still, compared to all of apparel, consignment fared slightly better. “Resale did extremely well compared to overall apparel,” said Neil Saunders, managing director of GlobalData Retail. Still, he said, “people aren’t really buying and selling as much as they did before.” With that, Saunders added, “It doesn’t surprise me that there was a bit of a slowdown.”

The business model

Underpinning ThredUp is a stratified business model. Where other resale platforms focus solely on their own marketplaces, ThredUp has been trying to position itself as much as a logistics and technology company. It calls these offerings “resale-as-a-service” (RaaS).

The company offers services to help retailers offer their own version of resale. It has partnered with stores like Macy’s, Madewell and JCPenney. The idea is to build out a full-on B-to-B business — to create a system that lets older retailers use ThredUp’s back-end services to more easily offer resale. “We enable brands and retailers to plug into our operating platform and unlock the resale value in the closets of their customers,” the company wrote in the filing. “Traditional retail and e-commerce models are not set up to intake, process, price and sell millions of unique resale items at scale in a predominantly online marketplace.”

“The partnerships that they are developing with other retailers are very interesting,” said Saunders. “What ThredUp is positioning itself as is a distribution platform,” he went on. “They are setting themselves up as a company that provides technology and logistics.”

It’s certainly a noteworthy differentiation — one that may open ThredUp up to more revenue streams, rather than being a pure resale marketplace. Saunders compared it to Ocado, the grocery business that also sells its fulfillment software to other grocers like Kroger. Of course, building up the technology and staffing all the warehouses to properly intake people’s used clothing and then put it onto a marketplace is expensive. For ThredUp, the secret will be scaling — getting enough retailers, buyers and sellers to use its services.

Jessica Ramirez, research analyst at Jane Hali and Associates, described ThredUp’s resale-as-a-service program as “a way to get their name out there.” That’s to say that the back-end services not only potentially create future revenue diversification, but also make ThredUp a more prominent brand when displayed at top retail stores.

The growing competition

ThredUp is not the only resale platform on the market, and the company knows that. The S-1 frequently cited the growth of the industry. “The resale market is expected to grow from $7 billion in 2019 to $36 billion by 2024, representing a compound annual growth rate of 39%,” it stated.

That means more competition. Not only are there marketplace startups like ThredUp entering the industry, but also a number of retailers are beginning to offer their own resale services. Brands like Levi’s and Patagonia have begun to build their own resale services, for example.

Indeed, ThredUp listed its direct competitors as “other apparel retailers, particularly retailers at an off-price or fast-fashion price point, vendors of new and secondhand items, including branded goods stores, local, national and global department stores, traditional brick-and-mortar consignment and thrift stores, specialty retailers, direct-to-consumer retailers, discount chains, independent retail stores, the online offerings of these traditional retail competitors, resale players focused on niche or single categories as well as technology-enabled marketplaces that may offer the same or similar goods and services that we offer.” That’s a lot of retail players — but it illustrates just how competitive the market is becoming.

With that, ThredUp is pitting a lot of its future prospects on its platform, as well as its marketing abilities. “Our future growth and potential profitability will depend in large part upon the effectiveness and efficiency of our advertising, promotion, public relations and marketing programs as well as our strategic RaaS partnerships, and we are investing heavily in these activities,” the company wrote. Which is to say that its knows it can’t survive alone by organically acquiring buyers and sellers.

A focus on marketing

To get ahead of the curve, marketing is key. The company said one of its major focuses for growth is acquiring new buyers. “Through our targeted, data-driven marketing efforts we aim to generate meaningful returns on our buyer acquisition investments,” the S-1 said.

ThredUp touted its house-built marketing software as crucial to success. This piece of technology, the company said, “[helps] our teams identify which advertising activities are performing, and to calibrate our marketing spend across channels and campaigns to drive return on investment.”

This year, ThredUp reduced its marketing budget as a result of the pandemic, spending $44.8 million in 2020 compared to $45 million 2019. But the company said it plans to ramp up its spending once again. “We expect our marketing expenses to fluctuate as a percentage of revenue as we intend to increase marketing spend to drive the growth of our business,” the company said.

ThredUp is relying on the growth of its category to continue in a post-pandemic world. All the players are now trying to capitalize. “We’re seeing these IPOs and fundraising,” said Ramirez. “It’s just competitive.”

At the same time, Saunders doesn’t think there will be a resale platform fallout anytime soon. “There’s a lot of growth in the market that probably feeds all the mouths that need to be fed,” he said. Even with all of the companies making headlines these days, he went on, “They are not necessarily going to have to compete with each other for growth.”