I downgraded my rating for ThredUp Inc. (NASDAQ:TDUP) stock to a Hold. TDUP is no longer deserving of a Buy, after assessing its second quarter metrics and its full-year prospects. But ThredUp’s move to leave the European market will enhance its future financial profile and possibly allow for value-accretive capital allocation opportunities. This explains why a Sell rating for TDUP isn’t warranted.
My earlier March 7, 2024 update touched on ThredUp’s performance for the final quarter of the previous year and the company’s profitability outlook. In this latest write-up, I highlight TDUP’s Q2 2024 results and its plans to focus solely on the US market.
TDUP’s Key Q2 Financial Metrics Came In Below Consensus Estimates
ThredUp issued the company’s financial results announcement for the second quarter of the current year on Monday, August 5, 2024, after the market closed. TDUP’s latest quarterly financial performance was disappointing.
Top line for TDUP decreased by -4% YoY from $82.7 million for Q2 2023 to $79.8 million in Q2 2024. This represented a -3% revenue miss, as the market’s consensus sales projection was higher at $82.5 million (source: S&P Capital IQ).
The company’s normalized EBITDA loss improved from -$5.0 million in the second quarter of the prior year to -$1.5 million for the recent quarter. In the same time frame, ThredUp’s net loss also narrowed from -$18.8 million to -$14.0 million. However, the analysts had previously expected TDUP to record a positive non-GAAP adjusted EBITDA of +$0.9 million and a narrower GAAP net loss of -$11.6 million in the second quarter of this year, according to S&P Capital IQ data.
At its Q2 analyst briefing, ThredUp attributed the results miss to “the poor performance of its operations in Europe, the failure of “new forms of customer acquisition and promotions” for the US market, and a “challenging consumer environment.”
TDUP’s European business saw its revenue decrease by -18% YoY in Q2 2024, which was far worse than its overall top-line contraction of -3% YoY for the latest quarter. In early-May this year, ThredUp announced the appointment of a new General Manager for its European operations. But the company’s European business has still underperformed in Q2 2024 despite the new leadership, so it is a good thing that TDUP is leaving the European market as detailed in the next section.
The other two negative factors, the US business’ marketing strategy issues and the weak consumer sentiment, will likely weigh on ThredUp’s performance for the foreseeable future.
ThredUp revised the company’s full-year fiscal 2024 guidance downwards in a big way. The mid-point of TDUP’s FY 2024 top-line guidance was cut by -10% from $333 million to $300 million. Furthermore, ThredUp’s EBITDA margin outlook for the current year was changed from +3.0% to -2.8% as per the mid-point of its updated guidance.
TDUP indicated at its Q2 earnings call that it pivoted away from “a traditional onboarding path where you may get incremental credits or loyalty points for” subsequent orders to “a flat dollar-based credit system.” The switch to a new marketing approach for the US business didn’t work well, and ThredUp anticipates its US business’s performance will still be impacted by its marketing strategy mistakes in 2H 2024.
On the other hand, a recent August 2, 2024, Seeking Alpha News article highlighted that the unemployment rate in the US went up from 4.1% in June to 4.3% in July. As indicated in its media releases, TDUP is the operator of “online resale platforms for apparel, shoes, and accessories” which are discretionary items that will be affected by higher unemployment and weaker consumer sentiment.
ThredUp’s Q2 2024 results miss and downward revision in full-year guidance have prompted me to downgrade my rating for the stock to a Hold.
The Company Has Limited Short-Term Liquidity And Long-Term Solvency Risks
The company’s financial position is decent, even though its recent Q2 2024 financial performance was below expectations.
ThredUp’s current ratio as of June 30, 2024, is 1.1 times, implying little concerns with short-term liquidity, as the company’s short-term assets exceed its short-term liabilities.
TDUP’s net debt-to-equity ratio as of end-Q2 2024 is a reasonably comfortable 0.26 times, and this is much lower than the 1 time net gearing typically indicative of long-term solvency issues.
Also, it has sufficient cash to support its operations. The company’s operating cash outflow for Q2 2024 was around -$5 million, while TDUP has $45 million of cash on its books at the end of June. In other words, ThredUp’s cash can sustain its business operations for roughly nine quarters or more than two years, assuming a similar level of operating cash outflow for the future.
ThredUp’s Decision To Walk Away From Europe Is A Positive Development
In its Q2 earnings announcement, TDUP revealed that the company “intends to exit the European market and is evaluating strategic alternatives.”
The European business contributed 16% and 6% of ThredUp’s top line and gross profit, respectively for the second quarter of 2024. A comparison of the profitability for TDUP’s US and European operations makes it clear why it is a good decision to part ways with its business in Europe. The company’s US operations achieved a gross profit margin of 78.8% in Q2 2024, while its European business only managed to record a 27.3% gross margin for the same quarter.
I am of the view that there are two key positives associated with the company’s strategic decision regarding its European operations.
One positive is that TDUP’s overall financial profile will improve without consolidating the European business.
ThredUp stressed at its Q2 earnings briefing that the separation of the US and European business will “immediately increase our gross margins” and “get us to positive adjusted EBITDA and accelerate our path to free cash flow.” At the company’s second quarter analyst call, TDUP noted that it will “present U.S.-only operating results when we report our Q3 earnings.”
As mentioned above, the European business has a much lower gross margin than the US business, and the former is likely to be loss making at the EBITDA level considering its modest gross profitability. As such, TDUP’s future financials will become much better without the drag from the underperforming European operations.
The other positive is that the potential monetization of ThredUp’s European operations via a sale will generate excess capital that is available for allocation.
TDUP could possibly reinvest the sales proceeds from the divestment of the European business into its US operations. It is a good choice to allocate capital to the profitable US business.
On the other hand, it isn’t a bad idea to set aside some capital for share repurchases. The market is currently valuing ThredUp at an undemanding consensus next twelve months’ Enterprise Value-to-Revenue multiple of 0.3 times (source: S&P Capital). Therefore, it will be value-accretive for TDUP to allocate capital to buying back its own shares.
I have made the decision to rate TDUP as a Hold (instead of a Sell) because there are positives relating to the company’s move to concentrate on its US operations going forward.
Conclusion
A Buy rating for ThredUp isn’t appropriate anymore, as TDUP’s Q2 results fell short of expectations and the company’s updated full-year guidance was disappointing. But it isn’t all gloom and doom for the company. TDUP’s decision to leave Europe and monetize its business operations in that market means that the company’s overall financials become better. If ThredUp does sell the European business, the company will also have additional capital to work with.
ThredUp’s future capital allocation moves with regard to either reinvesting in the US business or returning capital through buybacks will be watched closely, before I determine that a change in investment rating is warranted. As highlighted in the previous section, TDUP’s valuations are depressed considering its forward Enterprise Value-to-Revenue metric of 0.3 times, but there aren’t any near-term valuation re-rating catalysts.
In that respect, I have chosen to rate TDUP as a Hold for now.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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