Unraveling ThredUp’s IPO filing: Slow growth, but a shifting business model

Another day, another venture-backed IPO filing. Today it's ThredUp, a used-goods marketplace that is approaching the public markets in the wake of Poshmark's own strong debut.

Both companies have a related market focus, albeit different approaches to selling used goods. Poshmark allows users to sell clothing items through its app. ThredUp, in contrast, acquires goods from users and sells them itself.

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But while Poshmark had profits to brag about in its own IPO filing, ThredUp does not and is also growing more slowly, expanding revenues just 13.6% in 2020. Reading its S-1 filing, it's clear ThredUp did not have the best 2020, thanks in part to COVID-19.

This morning, let's get into the numbers posted by the company backed by Trinity Ventures, Redpoint, Highland Capital Partners and Goldman Sachs to decide if it's just merely to catch Poshmark's wave, or if its business is a fine machine in its own right.

ThredUp's model

To understand ThredUp's business, we have to get into the mechanics of how it sells things. The company has two methods: direct sales and consignment. In the former, ThredUp buys goods and sells them. It then recognize[s] revenue on a gross basis" and generates gross profit after deducting inventory cost, inbound shipping and inventory write-downs, as well as outbound shipping, outbound labor and packaging costs."

That is the model that ThredUp is leaving behind. After shifting to primarily consignment sales" in 2019, the company's business has skewed sharply in that direction. Consignment works by having consumers send ThredUp their goods, which it holds, and perhaps sells, remitting to the user a portion of the sale price. The method reduces write-downs and boosts gross margins.

Consignment sales at ThredUp recognize revenue net of seller payouts," deducting outbound shipping, outbound labor and packaging costs" to reach gross profit results.

The revenue-mix focus change can be seen in how ThredUp generated gross profit in 2018, 2019 and 2020. In those years, consignment gross profit came to 38%, 67% and 81% of total gross profit. ThredUp's business today is effectively a large, digital consignment effort.

What impact has that shift had on the company's financial health? Let's find out.

ThredUp's growth

ThredUp posted $129.6 million in 2018 revenue, a figure that grew to $163.8 million in 2019 and $186.0 million in 2020. The company's growth slowed from 26.4% in 2019 to 13.6% in 2020, a sharp deceleration. But at the same time, the portion of ThredUp revenues that came from consignment sales grew to 74% from 60%. Did that change have a material impact on the company's gross margins, thus rendering its slow growth more palatable?

Not really. The company's gross margins came to 68.7% in 2019 and 68.9% in 2020. That's about as flat as Texas. And notably the number stayed flat despite the company noting that consignment revenues had stronger gross margins in 2019 and 2020 (77% and 75%, respectively) than its other model (57% and 51%, respectively).