ThredUp, Inc. (NASDAQ:TDUP) Q3 2022 Earnings Conference Call November 14, 2022 4:30 PM ET
Company Participants
Lauren Frasch – Senior Director, IR & Strategic Finance
James Reinhart – Co-Founder, CEO & Director
Graden Sobers – CFO
Conference Call Participants
Trevor Young – Barclays Bank
Alexandra Steiger – Goldman Sachs
Tom Nikic – Wedbush Securities
Lauren Schenk – Morgan Stanley
Rakesh Patel – Raymond James & Associates
Dana Telsey – Telsey Advisory Group
Noah Zatzkin – KeyBanc Capital Markets
Edward Yruma – Piper Sandler
Anna Andreeva – Needham & Company
Operator
Good day, everyone, and welcome to the thredUp Third Quarter 2022 Earnings Conference Call. Today’s call is being recorded.
And now at this time, I’d like to turn the call over to Lauren Frasch. Please go ahead.
Lauren Frasch
Good afternoon, everyone, and thank you for joining us on today’s conference call to discuss thredUp’s Third Quarter 2022 Financial Results. With us are James Reinhart, thredUp CEO and Founder; and Sean Sobers, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.thredup.com. This call is also being webcast on our IR website, and a replay of this call will be available shortly.
Before we begin, I’d like to remind you that forward-looking statements during the quarter, including, but not limited to, statements regarding our earnings guidance for the fourth fiscal quarter of 2022. Future financial performance, market demand, growth [indiscernible] business strategies and plans, our ability to attract new buyers and the effects of inflation in create changing consumer habits and general global economic uncertainty.
These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertain actual results could differ materially from any projections of future performance or the rest or implied by siloing 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 affect our operating results in our SEC filings, earnings press release and supplemental information on our IR website. Any forward-looking statements that we make on this call are based on assumptions as of today and the [indiscernible] 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 regard including reconciliations and comparable GAAP measures in our earnings press release the supplemental information posted on our IR website.
Now I’d like to turn the call over to James Reinhart. James?
James Reinhart
Thanks, Lauren. Good afternoon, everyone. I’m James Reinhart, CEO and Co-Founder of thredUp. Thank you for joining thredUp’s third quarter earnings call. As we head into the final months of 2022, we have shared thredUp’s financial results and key business highlights from our third quarter. In addition to our financial results, we will offer our perspective on our environment, how resale is faring and our path to sustainable profits and long-term growth. I’ll then hand over to Sean, our Chief Financial Officer, to talk through our third quarter 2022 financials in more detail and provide our outlook for the fourth quarter and fiscal year 2022 who’ll close out today’s financial section.
Let me start with our Q3. We achieved another quarter of strong financial performance, beating both the top and bottom lines of our guidance. Despite a challenging macro environment and lapping [indiscernible] as last year, we saw continued growth in revenue, active buyers and orders compared to the same quarter last year. Our revenue of $67.9 million is an percent year-over-year, demonstrating our ability to achieve growth even through a promotional retail environment.
Q3 active buyers and orders increased 18% and 24% year-over-year, respectively, and our gross profit and gross margin both declined last quarter, shrinking by 3% and effectively. The [indiscernible] margins due to the outsized growth of Remix and RaaS as both become [indiscernible] overall business. As a reminder, we recognize the majority of our RaaS and supply as owned inventory, which negatively affects our gross margin profile. And finally, our adjusted EBITDA loss of $11 million is primarily due to planned investments across our operating infrastructure and technology stack.
Now let’s turn to [indiscernible] I’d like to acknowledge that we’re still navigating through a challenging consumer environment. As we shared in our last earnings call, it’s been difficult to predict exactly what was going to behave in the back half of the year with a meaningful quarter. As we said last quarter, we observed initial deterioration in consumer health towards the end of Q2 as this continued into Q3.
In Q4, we’re seeing the added impact of a highly promotional environment as retailers are moving through elevated inventory level and the whole [indiscernible] challenge than we had anticipated [indiscernible] for value. And that message is being washed out in this hyper promotional landscape. Confident that this competitive dynamic is temporary, we believe it will subside as retail inventory positions improve, we expect revenue to be challenged in the near term.
I want to take a moment to address the question I frequently get asked around how resale should fare in a recession. James, shouldn’t it do well at a time like this? Well, the answer is yes, we believe resell should do quite well in a typical recessionary environment as consumers [indiscernible]. But it’s not that simple this time around. That’s because over the past 12 months, there’s been a massive buildup of apparel. So what we’re seeing in nation of demand pullback at a time when retail inventories are overflowing with apparel, which is resulting in significant price compression in the apparel market. And while we don’t have the same inventory risks that other retailers have, we’re not immune to the pressure on prices.
But I think it’s really important to step back for a moment and ask, how might this play out in the future? A few things to keep in mind. One, what’s getting overlooked in this environment is that consumers are becoming accustomed to buying apparel at extremely low prices. When retailers sell through their excess inventory prices normalize we believe there is a significant opportunity for resale to take share. For a customer that’s been conditioned to expect 60% to 80% of retail for this still feeling the effects of inflation, resale is going to be a go-to for value.
Two, and then when that consumer health starts to slowly inflect as we believe it does following every economic downturn, we’re confident that thredUp’s value proposition will enable us to capturing full wallet share from shoppers across the economic spectrum as we have done many years in the past.
Sometimes in the noisiness it is the financial markets, it’s easy to lose the plot. So I wanted to reiterate 5 things for those thinking a bit longer term. One, we have 1.7 million active buyers. And on average, each of those active buyers are spending nearly $170 each year. Before the pullback just a covers ago, our business witnessed 5 quarters of accelerating growth. with Q4 last year, growing 68% year-over-year. This is a business that knows how to grow.
Two, we have a structural supply advantage, where we have never had to spend direct marketing dollars for suppliers, ever. Three, we have spent many years building infrastructure, expertise, proprietary data and a winning brand that is increasingly competing in a total addressable market in the U.S. and Europe for secondhand apparel that is expected to top $150 billion by 2026.
And you can [indiscernible], but virtually all new market innovations are undersized in the beginning until they are not. The growth in this market is powered by young people. who are just now starting to flex their purchasing power.
Five, our business is founder-led on a management team whose average tenure is more than 8 years. We have navigated through much more challenging environments than this and relentlessly driven by our mission for profits and purpose.
Now that I’ve gotten that out of the way, let me focus on 2 areas: driving profits and investing in the future. As we shared during our last earnings call, our priority remains reaching adjusted EBITDA for [indiscernible] and making prudent investments to create long-term shareholder value in ’23 and beyond. We are operating in an environment where we need to play both offense and defense skillfully. To put it plainly, we are playing to win, not just to survive.
So let me first emphasize that we have many tools in our toolbox to manage expenses and drive the business to adjusted EBITDA breakeven. First, our processing cadence, inventory sourcing and so [indiscernible] as mentioned earlier, we are restricting the number of cleanout bags we’re sending to suppliers to flex supply as well as evolving the mix of goods we put online to meet a more sober demand environment. However, we’re keeping up our RaaS partner cleanout program. And as a reminder, we charge brands a fee for each RaaS bag that we process through our cleanout program. Our RaaS business to accelerate with Q3 being our best quarter yet in terms of the high margin fees that we generate.
Second, we are leaning into the advantages of our marketplace model. At the marketplace, we believe we have structural advantages and built-in resiliency compared to traditional retailers. Additional peers, we have a flexible, responsive supply chain and the variety of levers we can pull around prices, payout, recommendations and mix position the business to navigate a dynamic environment.
Third, we are shaping our distribution network in the U.S. to best support our growth. We have pushed out the opening of our Dallas distribution center as we focus on better aligning current demand with expenses. We expect to bring the facility online in with the completion of Phase 1, we expect our CapEx investments to slow considerably. In light of scaling down the volume of inbound bags we accept. We recently closed our remaining dedicated processes center in Tennessee and have shifted those resources strategically to Dallas, which will be our largest flagship facility upon completion.
Reminder, at full build-out, the facility in Dallas will bring our network-wide storage capacity to 16.5 million items. We expect to be able to methodically expand into its consumer persons loosen and increase the number of cleanup bags available. Fourth, we remain focused on maintaining our strong unit economics, which will be key to expanding our profits over time, raising — despite rising labor and logistics costs and higher returns, we expect to continue to deliver expanding contribution margin as we improve automation and efficiencies in our process.
Lastly, we have reduced operating expenses amidst an uncertain demand environment. We are rigorously managing variable expenses and CapEx in pursuit of our profitability targets and to regulate models. Again, as a marketplace, many of our expenses are variable, not just in supply processing, but more broadly across the P&L. This past quarter, we reduced expenses across headcount, R&D, CapEx and discretionary spending not pertinent to the current growth of the business.
Now I’d like to turn to the investments we’re making in the business to drive sustainable growth in years to come. We believe the consumer is going to come out of this pullback with higher wages, improved sentiment as inflation and an ever greater commitment to sustainability. Of course, the win is not entirely clear, but we want to be prepared to capture that moment and to win chair. We did this coming out of COVID, Remember, we grew over 50% in the back half of 2021, and we are planning to do it again.
Let me highlight a few of the investments we are making to position our business to capture the apparel market recovery. One, we’re making significant improvements to the buying experience. We’ve doubled down on curation efforts, building tools like visual filters, style matching algorithms, occasion-based recommendations mobile swiping and favoring features to empower the customer to more easily find the right items for them, now what they’re looking for. We’re proud that [indiscernible] the look, an AI tool that allows customers to shop outfits through image-based search technology was recently named 1 of Time’s Best Inventions of 2022. Continuing to focus on Remix, the European fashion resale company we acquired a year ago. Earlier this year, we invested USD 11 million in a new 320,000 square foot high-tech processing and distribution center in the company’s headquarters in Bulgaria.
Mansion plans are on track as we moved all inbound and outbound operations over to the new facility. In the full capacity, this facility will be able to triple Remix’ overall output. We’re also in consignment inventory as well as the data science capability through market efficiencies and its margin profile. Though we are seeing the impact of inflation, rising energy costs and FX, we remain impressed with the resiliency of Remix business model and growth trajectory and continue to believe it is well positioned to take share in Europe over the.
Three, we’re continuing to grow our resell as a service business or RaaS by leveraging our marketplace infrastructure, RaaS amplifies our supply advantage, increases our sell-through and rice and expands our long-term profitability metrics by adding sources of recurring high-margin revenue.
We recently launched new resale programs with Tommy Hilfiger, Athleta, Vera Bradley, Francesca’s and Hot Topic. Of note, Athleta and Vera Bradley both expanded their resell programs from cleanout to full-scale resell shops. Over time, we expect to be able to convert cleanout only partners as we build full 360 resell experiences for brands. We remain on track to serve 40 brand clients through RAS by year-end.
I’d now like to take a moment to celebrate that Trade released our inaugural impact report last month. The report outlines our business and brand aligned environmental, social and governance details the progress we made across ESG initiatives in 2021. We frequently discussed the eco impact of choosing used. For example, every time you shop and wear secondhand instead of new, you reduce carbon emissions by 25% on average.
The bottom line is, as thredUp grows, that does our impact. We’re also focused on ensuring our own operations are sustainable, fostering a high integrity workplace culture and supporting an ethical corporate governance framework. For those interested in learning more about our ESG strategy and disclosures, I encourage you to learn more at our revamped impact website, thredup.com/impact.
Lastly, I want to share some of our exciting recent efforts to educate consumers about the impact of their fashion habit and flight fashion waste. Last quarter, we launched a fast fashion hotline in to help Gen Z resist the temptation of fast fashion and embrace more sustainable shopping habits. We also partnered with Heinz, yes, time, the iconic catch-up the launch of vintage DRIP collection with “catch-up stained apparel. Together, we created a campaign that celebrates the one-of-a-kind statement making nature of used clothes.
Just last week, we launched our first ever upcycled holiday collection with Designer Zerowaste Daniel, made entirely of secondhand closed that weren’t fit for resale and thredUp, actually includes fun item bean coasters and demonstrates our commitment to closing the loop by finding new ways to improve our aftermarket business. Through these efforts, we are inspiring a new generation of consumers to think second and first and ushering in a more sustainable future for fashion.
Before I turn it over to Sean, I want to close by restating our confidence in our ability to navigate this challenging consumer environment. When the consumer environment recovers, the great apparel liquidation in 2022 is over, we’re confident that threats mission of providing great brands at great prices in a sustainable way will shine brighter than ever.
With that, I’ll now turn it over to Shawn to walk through our financial results.
Graden Sobers
Thanks, James. And again, thanks, everyone, for joining us on our third quarter 2022 earnings call. I’ll begin with an overview of our results and follow up with guidance for the fourth 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-Q filing. We are very proud of our Q3 results for the third quarter of 2 and revenue totaled $67.9 million, an increase of 7% year-over-year.
Consignment revenue was down year-over-year, while product revenue grew 74%. The decline in consignment revenue and outsized growth in product revenue is attributable to a mix shift driven by our European acquisition and the relative growth of our RaaS supply. The majority of our revenue from both RaaS and our European business falls under product revenue so we plan to transition these businesses towards consignment over time. We are focusing our inbound resources on supporting our RaaS clients, which has the effect of fueling product revenue at the expense of consignment during this period of meticulous expense management. In addition, we see return rates move higher as consumers become more selective and continue throughout Q3 negatively impacting our revenue by an incremental $3 million over the same last year and is expected to persist in Q4.
For the trailing 12 months, active buyers rose 18% to $1.7 million. Third quarter orders reached $1.6 million, increasing 24% as compared to the same period last [indiscernible] for the third quarter of ’22, U.S. gross margins declined slightly to 72.4%, a 40 basis point decrease over the same quarter last year. Even as we continue to rein shipping logistics and automation we are facing a gross margin headwind due to the Remix — due to the revenue mix shift into product revenue, which carries a lower margin. This shift is being fueled by the strength of our RaaS channel, as I described earlier.
Consolidated gross margin was 65.5%, a 740 basis point decline over the same quarter last year due to the consolidation of our lower-margin European business. We’ve begun to transition the European business towards 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. 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. commands.
For the third quarter of ’22, GAAP net loss was $23.7 million compared to GAAP net loss of $14.7 million in the same quarter last year. Adjusted EBITDA loss or a negative 16.2% of revenue for the third quarter of ’22, an approximate 380 basis point decline compared to the same quarter last year.
The deleverage was the consolidation of our European business, our Q3 adjusted EBITDA loss improved over Q2 by $2.5 million or 150 basis points, exhibiting the work we’ve done to rationalize expenses. Turning to the balance sheet. We began the third quarter with $155.7 million in cash and marketable securities and ended the quarter with $130.6 million. Our cash [indiscernible] was $12.1 million, while we spent $11.7 million on CapEx, largely attributable to our infrastructure build-out.
We remain confident in our plans to reach adjusted EBITDA breakeven in the second half of ’23, assuming we achieved quarterly revenue of $80 million to $85 million. We expect growth in the first half of the year to be broadly flat to the first half of but then believe that apparel markets and the consumer environment will be slightly better shape in the back half of the year. We continue to make progress in reducing expenses and preserving gas during this period of uncertainty. As we described on our last conference call in it to prioritize expense rationalization and cost efficiency, we continue to expect to realize $70 million in savings in 2023 based on our current forecast.
We have also trimmed our CapEx plan in ’23 to less than $15 million based on the current environment, reduced from our previously discussed $20 million. We do not expect this to negatively impact to grow in ’23 or ’24. In Q4, we expect to spend $5 million to $6 million on CapEx. In fact, the bulk of our CapEx plan to a distribution center and our annual maintenance CapEx, which excludes any new DC build is approximately $3 million.
We spent $25 million in cash in Q3 and expect this level of spend to steadily decrease in the coming quarters. Our plan to reduce cash burn will be driven by the diminishing needs of our DC network and our cost savings initiatives. Because of our ability to manage our expense structure, we expect to be able to fund the business through our existing cash balance and $70 million debt facility until we reach free cash flow positive. As a result, we want to reiterate that we do not anticipate our cash or marketable securities balance falling below $50 million without drawing down any further debt before reaching free cash flow positive nor do we expect to turn to the capital markets before then.
Turning to Q4. Though the competitive environment is proving to be especially difficult to navigate, we see a clear path to the other side. Our top line continues to be affected by weakness in our core lower consumer. On top of that, the current promotional environment in the retail industry is impacting us more severely than we had expected. Beginning in mid-October, we saw an unprecedented degree of early holiday promotion pressure on our business and our updated outlook assumes that this trend continues through the balance of the year.
With this in mind, the fourth quarter, we now expect revenue in the range of $62 million to $64 million. Gross margin in the range of 62% to 64% as we now collect revenue from RaaS to be a larger portion of sales, which carries a lower margin [indiscernible] 16.5% to 14.5% of revenue and basic weighted average shares outstanding of approximately $100 million.
For the full year of ’22, we now expect revenue in the range of approximately $279 million to $281 million. Gross margins in the range of approximately 66% to 67% [indiscernible] and basic weighted average shares outstanding of approximately $100 million.
In closing, we are pleased with our third quarter performance, and though Q4 is proving to be more competitive than we originally expected, we are confident in our ability to navigate this challenging environment. We expect the hyper promotional landscape to subside as retailers rightsize their inventory levels, permitting us to once again compete with resales compelling value proposition. As apparel line and the ongoing improvements we’re making in our business materialize, we are confident we can deliver on our breakeven goal at 23. As mentioned, we are not sure when the consumer environment will recover but we know that when it does, we will be in a position to emerge as a stronger, more profitable business on the other side.
James and I are now ready for your questions. Operator, please open the line.
Question-and-Answer Session
Operator
[Operator Instructions]. And we’ll first hear from Ike Boruchow of Wells Fargo.
Unidentified Analyst
This is [indiscernible] for Ike. You guys mentioned flat growth in the first half of 2023 is expected and our confidence in your ability to reach $5 million in the back half of the year to achieve breakeven this quarter. What sort of macro expectations underpin that view?
Graden Sobers
Yes, this is Sean. Yes, I think the 1 thing they the only thing that we are assuming in our plan for 2022 is that the extreme promotional environment and the inventory access will have subsided — that’s how I would think about as we go through 2023.
James Reinhart
Yes. And Jesse, the other thing I’d add is that we — it’s a very competitive sort of Q4 environment. We continue to pull back on some of our growth investments. And we’ll kind of get back to some of those as we get into the first half of next year and see those things compound as we get into the back half of next year.
Operator
Our next question comes from Trevor Young of Barclays.
Trevor Young
Great. James, I think last quarter, you had flagged that the budget value consumer from apparel broadly. Can you talk about how they trended quarter and now into 4Q in light of the updated 4Q guide? And then on the other end, just what’s trending on the upscale shopper? Or is that holding up better than expected?
James Reinhart
Trevor, yes, I mean both of those things continue through Q3 and then have continued through the first part of Q4. I think the only difference is that beginning kind of second Prime Day, Walmart promotions, target promotions, you just saw this real move earlier on the consumer’s wallet. And I think that caused a little bit of friction for us in the business. And so right now we have to continue through the end of the year. And then — but the same sort of trends on the budget shopper and the more premium shopper are consistent. That really is a customer that’s sitting out right now from what we can tell.
Trevor Young
That’s really helpful. And if I could just follow up on that. You had flagged before expecting to flex on price promo discounts as well as seller payouts to stay competitive. Is there any 1 of those that’s performing particularly well or better in this environment than [indiscernible]
James Reinhart
Yes. I mean I think we’re trying to make sure that we promotions on and price on all the stuff in Q4 that sort of in-season holiday themes on trend. I think we’re really trying to make sure that we can flex around the stuff that the consumer wants right now. And so I think a lot of our efforts is flexing price and promotion around those hot categories. And I think it’s incumbent on us to continue to source that high-quality stop for the Q4 holiday season.
But again, Q4 has always been — it’s always in the U.S. been the slowest quarter in our business. Customers don’t turn to thrift around the holidays, and we think that’s even more acute today as customers’ wallets are feeling pinched and they think about gifts around the holiday, we think they’re focused more than ever on the used at a time like this.
Operator
Our next question comes from Alexandra Steiger of Goldman Sachs.
Alexandra Steiger
Can you maybe share what you’re seeing across the thredUp customer base in the U.S. versus Europe over the past few weeks in terms of these customers are purchasing on the platform and how they engage with the platform given once you laid out? Did you notice any change in order frequency versus order value?
And then just on user growth, you saw negative quarter-over-quarter user growth versus fairly solid growth over the past few quarters. Can you just like walk us to the underlying drivers behind that decline?
James Reinhart
Alexandra, I mean, on the second piece has slowed right now, given sort of in the competitive environment. I think that’s what’s really hit the user growth number as we get into ’23 to your original question, U.S. versus Europe, I think in the U.S., the trends we were seeing were — it’s been this incredibly promotional environment that kicked off in mid-October, as I said. And I think that has really changed the dynamics for apparel purchasing and our expectations in Q4. I think Europe has been a little different. I mean, I think the inflation numbers have been higher there. So I think consumer wallets have been a little bit more stretched. You have impending winter coming with the cost of gas prices.
And then also unseasonably warm conditions in a bunch of parts of Eastern Europe, where Remix operates has sort of pushed back what typically is a move into winter clothing and outerwear. And so I think that is starting to change right now. I think last week was the coldest it’s been in that part of the world. So we expect to see some movement as we get through the rest of the quarter.
Operator
Tom Nikic of Wedbush Securities.
Tom Nikic
James, Sean, I guess, obviously, a lot can happen between then and the second half of ’23. But kind of based on what your Q4 guidance is for this year, to a $80 million to $85 million run rate in the second half of 2023. So just fairly healthy year-over-year revenue growth in late 2023. Is it just that you kind of think that the customer comes back to you guys when they can’t find deals in primary market or like harms the growth that you’re kind of assuming comes late next year to get to the EBITDA breakeven?
James Reinhart
Tom, sure. I mean keep in mind, right, the last couple of quarters, we pulled back pretty significantly on processing and on marketing, right, on the growth side as we think that this is a consumer environment that we’re leaning in on processing, leaning in on growth doesn’t make a lot of sense, especially right now, given where inventories are across retail, it almost feels like it’s not a fight worth fighting with how we spend some of those dollars.
I think that really changes as you get midway through next year, where the processing ramp, the demand curve improves, we spend more dollars on the growth side. I think those things really come together, but I think it then catches the consumer just like a slightly different environment that’s not nearly as promotional and it’s painful for the budget shopper it is right now.
So that’s kind of the thesis. And we’ve been through this before, right, Tom? I mean, similarly go back to 2020, very similar type of dynamic in the back half of ’20 and then the business really ripped for 5 quarters. And so I’m not suggesting that that’s what’s going to happen, but we’ve been through these types of cycles before and feel like we can kind of meet the moment as we get into ’23.
Operator
Next, we’ll hear from Rick Patel of Raymond James.
Rakesh Patel
Hoping you could provide color on the outlook for return rate in the fourth quarter on [indiscernible] any initial thoughts on ’23. And then can you talk about any initiatives underway to improve this, whether it’s being more selective with the product that you take on or maybe leaning into data to improve customer satisfaction to lessen that drag?
Graden Sobers
Rick, this is Sean. I’ll start, and I think Jay will finish it. Our assumptions in Q4 would be very similar to what we saw in Q3. It was about a $3 million drag on revenue. So we’ve seen the return rate times have got worse and things a little more challenging. The consumers obviously maybe a little more focused on cash back or buyer’s remorse, whatever it is. But we’ve seen the return rate kind of spike up, and we’re working on quite a few different things internally to help resolve that. And I’ll let James talk about those.
James Reinhart
Yes, Rick, I mean, I think across — you can see it across many retailers rethinking how to — how do returns work in this new environment. And we have a bunch of stuff we’re working on right now. not how do we present the product in better ways that reduce returns? And — or how do we change what can be return on what can’t be returned as well as like waiving some of the items that get returned to us and why didn’t you keep them. So there’s a bunch of things that we’re working on that I think will take to get into ’23, but it’s 100% a real headwind here in the back half of the year.
Rakesh Patel
And you’re pushing forward with resale as a service on track for, I believe, 40 clients by year-end, which is great progress. Can you give us any initial thoughts on 2023? I’m curious if you see potential partners moving ahead with their circular economy strategies or if they’re just pausing given the uncertain economy.
James Reinhart
Yes. I mean I think 2023 is going to be a really important year for RaaS. I mean, I’m thrilled that we’ve managed to continue to meet our client signings. I mean getting to 40 by the end of the year in this apparel environment, I think, is really speaks to the value proposition in RaaS. So I actually think into ’23, you’re going to see more retailers think about this, especially as their inventory positions, get better into focus, they don’t have quite as much excess. So no, I don’t think I have any news to share on how we’re thinking about client growth in ’23, but I think will be a good year for RaaS and in the first part of next year. So good momentum, I think, on that, Rick.
Operator
Edward Yruma of Piper Sandler.
Edward Yruma
I guess two for me. first ops product and tech side. I noticed that it actually fell sequentially. I just want to click down on that a little bit and understand. I know you’ve been doing cost cuts. So is this the level we should baseline going forward? Should we expect this to ramp up at all? And then second, I know you delayed some of your CapEx. Could you just help us understand exactly when that incremental CapEx will hit the cash flow. And as you guys kind of talked through some of the cash flow dams, I think you said that you wouldn’t need to raise capital, but do you expect to have to draw on that bank line? Or do you think that your existing [indiscernible]
Graden Sobers
Yes, this is Sean. So we do think our current cash is sufficient. We don’t expect to draw on the bank line. I think from a CapEx perspective, we kind of lowered what we had talked about spending in the last earnings call. I think we’re at 5% to 6% for Q4 and under 15% for all of — and if you think of just a kind of a quick comparison of what we spent in ’24, what we’re talking about spending in — sorry, in we’re going to spend about $45 million in CapEx, where now we’re talking a $23 million $15 million, so a significant reduction in the amount of CapEx we’re going to spend.
And I think your first question maybe was on the OPT piece is pretty much what you saw in Q3 is fully impacted for what you’re going to see in Q4 and beyond, except for the fact that it’s truly variable. So as demand increases, we’re going to process more items in. So we have more items to sell. So that’s 1 area where I would say is as you see revenue go up, you’re going to see the OP line go up, similar to marketing.
James Reinhart
Yes. And the only thing I would add, Ed, is just, I mean, I think as you get through Q1 of ’23, you’re really — the infrastructure for the business is pretty well built out for the next few years. I don’t think we expect to do much on the CapEx side, even in 2024, it will be pretty small. So by the time you exit Q1, we’re going to be in very good shape with what we need from an infrastructure perspective for a number of years, which, as Sean said, significantly reduces the burn. And so that puts us in a really nice position to invest and grow the business as we get into the back half of ’23. And ultimately, I think we get to adjusted EBITDA breakeven in the back half of the year, I think free cash flow positive a couple of quarters after that.
Operator
Our next question comes from Dana Telsey of Telsey Advisory Group.
Dana Telsey
As you think about the marketing budget, not only for but going to next year, how are you planning that marketing budget? And also, as you think about the levers, fixed and variable expenses, what adjustments are you making as we go through this environment?
James Reinhart
Dana, it’s James. I mean, I think on the marketing side, we continue to see very attractive acquisition costs. And typically act on marketing in Q4, as I said, because of the holidays and how retail is not top of mind necessarily during the holiday period. And then we kind of get — we get going then again in Q1. And look, I think the acquisition environment are going to be very attractive next year. And so I think the combination of apparel pricing normalizing, acquisition economics being good, I think, is actually a very nice setup for the back half of next year. And then I think on the fixed versus variable, I think as Sean said, much of our business is variable when it comes to processing and growth investments. But I think the infrastructure and the fixed is are — we’re pretty much done once we get through Q1 of next year. And I think that’s a really, really good position to be in for the foreseeable future in an environment where the customer is going to be looking for value and we’re going to have all of the opportunity to meet that demand.
Dana Telsey
Got it. And then just on the DCs, how do you think of the capacity utilization, whether it’s Dallas or the European DCs? Anything you could do to manage that cost through this time period?
James Reinhart
Yes. I mean I think we have plenty of capacity, I think, in ’23, ’24, potentially even beyond that. And we will continue to sort of ramp up processing and markets given where the consumer environment is. I think, again, I think this is a really tricky time with where [indiscernible] are. And so I don’t think this is a time when we really want to lean in, but I think that’s really going to inflect as you get into ’23. And I think it’s going to be great that we have the capacity and the processing capabilities to do that in a time when the consumers are going to be searching for value. Again, I think that’s a really nice setup for us as we get into [indiscernible]
Operator
And our next question — I’m sorry, Noah Zatzkin at KeyBanc Capital Markets.
Noah Zatzkin
Just to drill down a bit on RaaS, could you provide any color on how you’re thinking about the P&L impact there over time? As partnerships ramp from a timing perspective, how should we be thinking about any upfront cost versus the timing of revenue flow?
James Reinhart
Yes. No. Yes, I mean on the RaaS side, remember, RaaS does a couple of things for us. It amplifies sort of our supply advantage to think about that as we take a fee for every bag that we process on behalf of a brand. and that is very, very high-margin revenue drops to the bottom line. And so it has implications on the bottom line as we scale RaaS supply.
And then I think on the resell shop side, as we launch them, ultimately, it’s continuing to build incremental points of distribution where the same product that’s sitting in our facility can be sold across many different websites. And so ultimately, that increases turns and sort of return on fixed assets in our DCs. So I think in both areas, RaaS really amplifies like what the business is doing and it continues to grow nicely. And I think ’23 will be [indiscernible] as we continue to expand the 40-plus clients that we’ve signed in ’22. So I’m pretty bullish on how RaaS plays out over time.
Operator
Anna Andreeva of Needham.
Anna Andreeva
Two questions, I guess, to Sean, just curious what was the dentin the business in the third quarter? And what are you guys seeing quarter-to-date? You mentioned elevated promotions in October, but I am curious if you already saw a step down in the business or just expecting that ahead as we get through the holiday? And then secondly, I guess this is to James. What are you seeing in the resale space just in terms of new entrants? Feels like it’s getting a little bit more competitive, maybe not so much at your price point, but just curious about your thoughts there.
Graden Sobers
Yes. So Anna, yes, from the Q3 monthly cadence, it was pretty much what we have seen historically. There wasn’t anything like a big outlier. I mean, back-to-school, [indiscernible], it looks pretty good. I think once we got to October, that’s where we started to see everybody get promotional and get promotional early. I think we talked about Black Friday was started in early October, middle of October, whatever it is, or Walmart Black Friday every Monday. I think that’s where we started to see the impact on the business was really happening in October. And we’ve gotten to a point now, I think, where we feel like it’s leveled off, but it’s definitely a promotional environment out there.
James Reinhart
Yes. I mean, to echo that, I mean, I think we feel like Q4 is now pretty stable in our guidance is we just think it’s going to continue to be to be promotional. And then what was the — can you say the second part of your question again?
Anna Andreeva
Just what are you seeing in the resale in terms of new entrants?
James Reinhart
Oh, that’s it. Got it. Yes. I mean I think that there are — there’s always going to be start-ups that attack any kind of big category. I don’t think we’re seeing anything in our business that’s where we feel like competitors are making inroads. So — but I think — look, I think in general, as I said, with a market that’s this big, expect there to be some push and some innovation. And I think over time, the more resell the better, and I think we’ll take our chances with our model over time and the opportunities to scale that.
Operator
Lauren Schenk of Morgan Stanley.
Lauren Schenk
One for Sean. Just on the fourth quarter guide versus the previous implied guide, I think revenue down $8 million in years about EBITDA losses down in incremental $4 million. I think sort of the change in the top line outlook is clear. But I guess just given the variable nature of the model, where is that incremental $4 million coming versus expectations?
Graden Sobers
Yes. No, I think it’s — you have the kind of the impact to the business is a portion of the business. So that comes down as well. I think you’re seeing the promotional environment. So that’s starting to hit it as well. I think you’re dropping some of the overall impact to the bottom line on EBITDA.
James Reinhart
Yes. I think you see contribution margins come down, Lauren, as the environment gets more promotional. And so even though you’re taking revenue down that revenue is less productive than it would have been in prior periods. And look, I think we’re sort of tucked in and prepared for things in Q4 to continue to be challenging. And so I think that’s also reflected in the guide. And so we felt like it was prudent as we think about what is it going to look like for retailers over the next over the next 45 days, like it could get bloody out there and we want to sort of level set expectations for that.
Operator
And it appears to no further questions. At this time, I’ll turn the call back over to our presenters for any additional or closing comments.
James Reinhart
Great. Thanks, everyone, for joining us on the [indiscernible] Thank you to all the employees who are doing all incredible work into the broader team. And we’ll get through this. It’s a difficult time in Q4 given the environment, but we’ll look to fight another day on the other side of it. So thank you all, and we’ll see you next time. Thank you.
Operator
That does conclude today’s conference. Thank you all for your participation. You may now disconnect.
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