ThredUp Stock: Under Threat (NASDAQ:TDUP)

In March 2021, I believed that shares of ThredUp (NASDAQ:TDUP) were basically a secondhand stock as the platform facilitates the trade of secondhand goods. The company had an aim to become a leading marketplace for secondhand apparel and luxury, being a play on the combination of the pandemic and societal trends related to secondhand apparel.

Focus On Secondhand

ThredUp aims to make consumers think secondhand first, claiming to be a force for the good, aiming to transform the way in which consumers shop to thereby disrupt the future of the fashion industry.

The main idea is to make it effortless to find quality secondhand items at appealing prices, while providing a good shopping experience for buyers, advantaging many stakeholders in the process. At the time of the offering, the platform attracted 1.2 million active buyers with some 400,000 sellers after it was founded in 2009. To date, at the time of the offering, it transacted some 100 million secondhand items, with the company performing all the intermediate steps, including warehouse and logistics.

The company went public at $14 per share, which translated into a $1.27 billion equity valuation, or $1.09 billion if we factor in net cash. This changed a bit as shares rallied from $14 to $20 in the first day of trading, pushing up the enterprise valuation to more than $1.6 billion.

ThredUp generated $130 million in sales in 2018 on which a $34 million operating loss was reported. Revenues rose 26% to $164 million in 2019, yet operating losses inched up to $37 million as well. Growth did slow down to 13% in 2020 with revenues amounting to $186 million, as operating losses rose further to $46 million. Moreover, growth really slowed down to the flat line in the second half of 2020, hardly an encouraging result. Amidst all of this, I was very surprised to see shares display the big gains on the first day of trading, at 9 times sales.

This made me very cautious, even as secondhand usage of clothing seemed here to stay, yet the pace of growth and extent of the losses (even ahead of the pandemic) made me very cautious from a fundamental point of view.

Secondhand Turns Into Garbage

Fast forwarding about one and a half year in time, we have actually seen ThredUp rise to the mid-twenties in the summer of last year, but ever since it has been all downhill with shares now trading at $2 per share, marking 90% declines in this short period of time, indicating the degree of which the company and its stock has failed.

The company has seen reasonable momentum in 2021 with second quarter sales up 27%, third quarter sales up 35% and fourth quarter sales up 68%. With full year sales up 35% and momentum stronger in the final quarter of the year, ThredUp saw full year revenues up to $252 million, yet operating losses rose further to $62 million as well.

This looked somewhat promising, other than the continuation of the growth of the losses, as the company guided for 2022 sales to grow further to a midpoint of $335 million and EBITDA losses seen around 14.5%, or nearly $50 million in dollar terms. This compares to a $36.5 million EBITDA loss in 2021, indicating that no leverage is expected in 2022, and that is ahead of some other charges (notably stock-based compensation expenses) of course.

In May, the company posted a 31% increase in first quarter sales and growth slowed down to 27% in the second quarter. Quarterly revenues came in at $76 million, but the company only guided for third quarter sales at $65 million and $71 million in the fourth quarter, as the full year guidance was cut to $285 million in sales with EBITDA losses seen around 15.5%.

With revenues in the first half of 2022 set to surpass the expected revenues in the second half of the year, we have to recognize that operating losses already came in at $49 million in the first six months of the year. Net cash is down to $120 million, still manageable, but the losses are creating a massive headache for investors here. With the share count up to 100 million shares, the company’s valuation has fallen to just $200 million here, or a fraction of this if we consider net cash balances.

This simply tells you that the market does not believe in the model, simply because revenue growth is going out of the window (based on the third and fourth quarter outlook), but more so the increasing losses which basically are an admittance that the business model is not economical.

No Green Shoots

With inflation rapidly increasing the costs of handling these goods, ThredUp is really “proving” that it is not economical and that there is no quick fix in sight. The losses are quite severe, but by now the company should be in full crisis mode, as there still is a substantial net cash position. The issue is that cost savings cannot save a business model, as I simply fear that the business model is not even broken, perhaps it was never economical after all, with all the merchandise having to go through an expensive fulfillment costs at the company’s central warehouses.