Chit Chat Stocks - ThredUp (TDUP) | Deep Dive

Episode Date: May 2, 2021

ThredUp is an online resale marketplace that allows users to buy and sell secondhand apparel and accessories. The company aims to reject fast-fashion and throwaway fashion culture. Listen in as Brad, Brett, and Ryan dive into the company's background as well as what growth factors may impact ThredUp. As always enjoy the show! Subscribe to Potential Multibaggers: https://seekingalpha.com/checkout?service_id=mp_1308 Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (3:35) Industry | (6:53) Management & Ownership | (9:06) Valuation | (11:09) Earnings | (12:29) Balance Sheet | (14:48) Our Analysis | (15:55) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Sunday Deep Dive episode on Chitchat Money with Brad Freeman, who is joining us today. Brad, how are we doing? We're in the heart of earnings season.

Did you have any of the... I don't know if you're a FAANG shareholder. Do you have any big tech earnings this week? Yeah, Microsoft and Facebook. So, Microsoft, good. Facebook, really, really good. Yeah. I don't think there was much to complain about, right? Yeah. Yeah. Zoc strikes again. So that went well. I had Boeing, which did not go very well, but that's going to take some time, I think. And then I'm forgetting the last one, but that's okay. Yeah. Facebook, I guess we're in hot water because we were completely wrong. I was like, this could be it. This could be the end.

Yeah, yeah. We're wrong so far. I think we're probably wrong, but yeah, the not bullish takes on Facebook haven't been going well so far. Absolutely not. Well, I mean, it's not like you guys are short, so. That's true. Yeah, for sure. At least we weren't, we're not dumb enough to be short, but today we're going to be talking about ThredUp, a small cap company, or maybe mid cap, I'm not really sure. Similar business model to Poshmark, which I'll let Ryan get into. But before we do, we have to talk about our flagship sponsor, Potential Multibaggers, from our friend at Growth to Value on Twitter,

Chris, at From Growth to Value. It is a service that recommends stocks that can potentially go up 10x in a decade. So that means 26%, if I'm getting the number right, annualized returns. He has fantastic results picking Shopify at 77 C limited at $54 a share. I mean, these are just amazing results. And with it, you get for every pick, you get five articles, 20,000 words each, but spread out over multiple weeks. Plus he's communicating with you frequently so he can help you out with portfolio management, what he's thinking about.

So it's not just a, I'm going to send this out and then forget about you. Yeah. Ryan, is there anything else we asked? we got to send them over to whatever, whatever website, um, it's at, uh, yeah, I mean, you can go find it. Uh, I think if you just look up from growth, the value of seeking alpha, you'll find it. Uh, and we'll drop a link in the show notes, but it really is kind of a community aspect. It's pretty interactive. So it's not just him writing you reading. I think you're getting a lot out of it. And then, you know, I think his mantra is by and verify, uh, and you can kind of see that play

out, uh, through his service. So yeah, we recommend it. We love Chris. Um, and he's been on the show a few times. So kind of friend of the show. It's nice to have a, I guess you'd call him the flagship sponsor, but yeah, yeah, exactly. Exactly. Or if he's not, or we're just going to keep calling that. And if anything, just follow him at Twitter at from value. Um, great analysis there as well. But Ryan, do you want to kick things off and talk about what ThredUp is? Yeah. ThredUp's essentially an online thrift store. It gets its comparisons to Poshmark because it sells the same kind of clothes, but the business models are a little different. And ThredUp is really just designed for women and kids. There's no men's category.

But when you go on to ThredUp, you are hit with two tabs pretty much. So it's shop or sell. And if you hit sell, you can request a clean out kit and ThredUp will send you this big bag. It's got a shipping label attached to it and you put all your stuff in the bag, anything that you find in your closet that you're just trying to clear out, you can put all this stuff in the bag, you attach the shipping label and you send it in and then ThredUp then takes that stuff out of the bag and picks what it wants or thinks it'll be able to sell. And usually it's about 40% of those items. And then ThredUp lists it on its marketplace. And so the supplier, so the person that sent in that bag this is how it used to go would either get paid an upfront price so they say all right we

took the shoes we'll offer you three dollars for whatever it is or you can take a consignment price so you wait until the item is sold um before you get paid and that's usually a lot more than the upfront price but then there is the risk that it isn't sold so uh and they're actually moving all to consignment now apparently so they're getting rid of the upfront cost that's how it used to previously work and then on the shopping side it's basically just an online thrift store so you get cheaper items nicer items they're resold um and then you can also order it's basically there's like this goodie box which is kind of like stitch fix where you put in your data points and they pick a few things they send it to you i think it comes with 10 items you pay for what you want to

keep and then you send it back um and i think it costs 10 for that goodie bag uh i think i'm kind kind of covering the business model there, but it's really just, you're clearing out your closet, you give it to ThredUp, they take it, they resell it. You don't have to do much of the work. Yeah. And then I'll just mention if it's different than, you mentioned it's different than Poshmark. It's not individual sellers. Like you're not like a, it's not supposed to be social at all or having anyone join the platform and become a seller. ThredUp is the only seller. Correct, Ryan? Yeah. And I'll talk about why that is. So James Reinhart is the, he's a founder and he apparently came up with the idea for ThredUp when he was staring at his full closet and he

didn't know what to do with all the valuable stuff he had, but he didn't need, which I don't know. I'm kind of sick of these like perfect epiphanies to discover like this new idea for a business model. But they actually started as a peer-to-peer platform, sort of like Poshmark, where ThredUp never really touched the inventory, but they quickly realized that the sellers wanted ThredUp to do all the work. They wanted to just basically discard it and get some change for it. And so that's what they started doing. And they received a bunch of different rounds of funding throughout the last 10 years. I think their latest round was actually in 2019. And now they're headquartered in Oakland, California, and they've got, I think, five distribution centers across the US.

Yeah, it's different than a lot of these other platforms where they actually have these distribution centers. They're not outsourcing. Well, they're outsourcing some of the shipping, I'm assuming to like the trucking companies, but they have their own fulfillment centers. Yeah. All right. I'll get into industry landscape and competition. So according to their S1, the resale market, which is the secondhand stuff is supposed to grow from $7 billion in 2019 to $36 billion in 2024, which is only less than five years from now. And obviously that's just an estimate. So not guaranteed to come true, but that is some rapid growth if it does come true. They don't really put a dollar figure on their selling opportunity, but they kind of give out the fact that there's 16.9 billion pounds of apparel thrown away in the U.S. that could be recycled and reused.

So there's a ton of opportunity for the secondhand or recycled market. And 40% of Gen Z apparently purchases secondhand clothing, according to a survey, and that is the highest out of any generation. So that's a good sign, I would guess, for something like ThredUp, where you're getting the younger audience in there. the people that are going to move into their prime earning years could potentially be using this platform quite a bit. And then competitors include Poshmark, like we mentioned, Goodwill and thrift stores, like the physical ones. And then there's the RealReal, Mercari, and then standard retail outlets are what they mentioned as well. So basically all retail competitors, but that's a pretty simple industry. And they're kind of trying to build out their own addressable

market? Ryan, do you have anything? Yeah, I would, I would say sort of the biggest competitor really is Goodwill. Like they, most of this stuff is either being thrown, it's people saying, all right, I don't want this anymore. I'm throwing it out. Well, I might as well get a little bit of change for it. Let's see what I can get from ThredUp. Let's see what they offer me. And so that's probably, I mean, Poshmark, that stuff is sort of, I mean, some of the stuff that's on ThredUp is like luxury, but I think a lot of the Poshmark stuff is things that they're saying, let's see if I can get a good price for it

as opposed to just let's throw the stuff away. Well, I think I've seen, I saw on ThredUp it has, they say like Gucci to, Gap to Gucci was one of their slogans. So I think they may have similar stuff, but you're right. Goodwill and just throwing stuff away.

They're trying to build out their own addressable market, really something that hasn't been done before. But Brad, do you want to talk management and ownership? Sure. And in terms of competition, I'll just add maybe like garage sales or yard sales can be seen as sort of a direct competitor to this as well. Um, but interesting to think of Goodwill as well. Uh, so for founders, there are two and they're both still involved with the company. So James Reinhardt is the co-founder

and CEO. He founded Beacon Education Network, which is basically a charter school system sort of low-income neighborhoods, Harvard grad, uh, so casual there. Uh, Christopher Homer is the COO and co-founder. He had been the CTO for a very long time, and he came as a salesman from Microsoft before he joined the company or founded the company along with James. High-level executive team credentials include the former managing partner for Virgin Group, the CFO of a company purchased by OnSemi, and the VP of finance at Cadence Design Systems. In terms of ownership, this is, again, before the offering because this company went public really recently. But before the offering, directors and officers own 64.2% of the company.

A lot of these directors and officers are associated with venture capital funds and private equity funds that are investing in this company or invested in this company. And James Reinhart owns 7.6% personally. Yeah. And one thing I mentioned is that he has all the voting power. I might be remembering that wrong. It might be a different company, but does this have class A and B shares if any of you guys remember?

Sure. I do think there was a dual share class structure, but I don't know if he had all the voting power. There's a girl named or a lady named Patricia something that I'm blanking on that I think was attributed to a venture capital firm who owned a ton of the company. I think twice what James Reinhart owned. Yeah. I guess if I'm remembering, I think it was pretty evenly distributed. It wasn't like one of these founder led companies where they have 50% of the voting power. Yeah. You might be thinking of Squarespace. We just did with Ian where it was like 75% or something like that. Oh, right. Yeah. We're covering too many companies. All right. I'll hit valuation then. Market cap right now is about $1.63 billion. Ticker is TDU up, or excuse me,

I keep seeing thread up in the ticker. It's TDUP. So thread up, just shortened. Price to sales is about 8.8. Price to gross profit is 13, but price to contribution profit is 32. Now that's not something we typically see. So I guess I'll just explain it quick. And it's a pretty standard thing in accounting, but it's not really under your gap income statement, but it just takes into account their fulfillment and payment expenses. So it's really including their full cost of revenue because fulfillment, a lot of that, some of it might be fixed, but I think a lot of it is variable. So that's more of what the profit that could, you know, eventually fall to the bottom line. If you look at the price to sales and price to gross profit,

that looks reasonable for a company like this, but the price to contribution profit is fairly high and they're not gap profitable or cashflow positive. So I have no metrics there. Ryan, do you want to talk earnings then? Just go right to that. Yeah, I will. Did you find a contribution margin? Do you know what that was? I could back into it with some math here, but I don't remember exactly what it was. I'm thinking it's going to be like 30, 40%, maybe lower. All right. Well, I'll dive into the earnings then. So they raised a $175 million round in 2019. So when you look at some of the year over year numbers, it looks like they kind of backtracked

in terms of profitability and they did. But I think that's because they were sort of given this large burn rate to run through and invest into. But their 2020 revenue was $186 million. That was up about 14% year over year. They had 69% gross margin. The big chunk of their cost of revenue is consignment payouts. So paying back the suppliers essentially. And then they have $47 million in operating losses. So that's about a negative 25% operating margin. 55% of revenue was spent on operations, product, and technology. That's the largest operating expense. Surprisingly less in marketing than I would have expected. They had $7.3 million in stock-based compensation, so not too crazy. They were operating cash flow negative. As far as non-financial

metrics go, they had 1.24 million active buyers. That was growing 24% year over year. Their orders grew 27% year over year. 80% of the orders came from repeat buyers and 77% of the supply came from repeat sellers. Kind of interesting. I would have expected to be less honestly, but that bodes well for the company. And then they're currently holding 5.5 million unique stock keeping units. So basically unique items. Yeah, Brett, am I missing anything? Yeah, I would say just to add here, they do have that working capital stuff where they say most people don't get a payment. They wait. It's like a 60-day period until they actually pay out the stuff. So they should have a good accounts payable dynamic that should help with cashflow. But that kind of surprised me that

they were operating cashflow negative at this scale and with that advantage of working capital. And then I think the reason that they spent all this money on operations product and technology is they are investing heavily into their distribution centers and stuff like that. They kind of tout that a ton in the S1, if I remember. yeah and i think a lot of that was also just going into the tech because it's in the tech yeah it's a difficult logistics problem but uh brad you want to hit balance sheet and liquidity sure after or so i guess post ipo they now have around a quarter billion in cash on hand uh they had 31 million in long-term debt with about 10 of that being current so due in 2021 uh balance

sheet pretty strong uh no no real red flags there were there any convertibles do i remember seeing that was there convertibles outstanding or am i missing uh maybe maybe i'm once again thinking of the right company yeah i do not believe so um yeah i don't think so okay yeah pretty simple balance sheet like a lot of silicon valley or i don't even know if they're silicon valley company but kind of one of those tech companies it seems like they always have you know the really simple balance sheets but the one thing you got to worry about is just that share dilution yeah i mean they've got all that funding now not only from the uh going public but from that 2019 round it just seems like they don't necessarily need to lever up or anything like that uh and hopefully

they don't have to dilute their way out of it so no all right anything else brad or ryan if not uh we're going to hit the second half of the show but first we're going to take an ad break and We'll see you after that. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one. So you don't have to worry about malware. Or when your kid downloads a song from a shady link.

And now all your computer can play is... Red color, red color, where are you? All blocked thanks to advanced security included with Cox Panoramic Wi-Fi. advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back in next up we're going to do anecdotal evidence customer stories brad i'll kick things off with you but it looks like you don't have anything for this one so i mean anything anecdotally with this product or no no this is my first time hearing of the of the company and the product so interested to hear what you two uh have experienced thus far all right ryan yeah i

there's no men's category uh i was actually going on there to look and see like maybe there's something interesting maybe there's some resold stuff no men's category um so obviously don't have any customer stories that on that side of it but i did see some stuff from customers kind of this is a big youtube vlogger company a lot of right a lot of sort of middle-aged women like to vlog about this company so apparently they tend to be pretty picky with the items they sent in or with uh the items that get sent in like thread up is like you can't have anything wrong with it it kind of has to be in season and they give you sort of the criteria of what they want to be sent in um but since the items that don't get picked get given away or get resold to thrift stores

i would think that that kind of deters sellers from choosing thread up over poshmark because because you might just be giving them the items unless there is, you can pay $10 for return assurance. So let's say you put in like, you know, 20 different items and then you pay $10 for a return assurance. They will ship it back to you, anything that they don't end up using, but you could end up losing money if they take a bunch of the items and you, you know, or it isn't enough items in the bag, then you're just wasting money paying for the return assurance. So I don't know. I guess it's kind of interesting from the seller side. I'm surprised it's done as well as it's done. Yeah. It seems like there's some risks and concerns with the

seller process. And that comes into mind as well. Again, no men's section, so I didn't really try anything out, but I found a Reddit forum where they gave ThredUp some pretty bad ratings. I I think there was a quote on it and we'll probably link it on the website since we are doing we're putting all the show notes on the website now. So you'll be able to check that out there. I'll probably link it on there, but it just said like, they, they really didn't like thread ups process. Like Brian said, they were way too picky. They thought, and yeah, obviously you want your stuff to get picked up, but they were basically saying,

yeah, I'm just going to go to Poshmark now. So that's, you know, it's just anecdotal is one Reddit form, but there's like 20 people that had the same concerns. All right. Competitive advantages are up next. Brad, what do you think? Yeah, so I am reaching a tiny bit here, but a lot of liquidity in the system, very low rates. First recession we've ever had where savings rates coincided with an actual economic or rising savings rates coincided with an actual recession. So I'm thinking with all this money floating around, there would be people more inclined to buy things that they potentially do not need. And I'm definitely part of that group of people. So anecdotally, I guess you can include me there.

I'm thinking a company focusing solely on secondhand supply like they are is going to have an advantage over companies focusing on on direct to consumer sales. Just because or branded sales, I should say, just because there is going to be this this there there has been this pent up interest in retail purchasing. And now I'm thinking like Peloton and in all these secondhand markets that are popping up for Peloton and how that could hurt the company and actually a company like ThredUp would actually be boosted and helped by that if they have more supply on hand to work with. Yeah, and I would add that their contribution profit, I think a concern people would have when looking at their financials is that their contribution profit, I believe, was either flat or down in 2020. So I believe there could have been a headwind in the pandemic where people, their closets were fine for staying at home, but now there's going to be a lot of dollars in the system and there could be demand for, I mean, classic reopening play potential here. But yeah, and I do agree that that focus, like if 90% of the energy in retail or 95% or 98% of the energy in retail is on first-party stuff, and they're really trying to build out their own thing, you don't really have much competition except for, I guess, Poshmark as well. But Ryan, do you want to talk about your thoughts on competitive advantages? Yeah, I will.

Well, and I'll also add that, I mean, I don't know if this is necessarily a competitive advantage in any way, but when you go to the customer demographic, I was shocked to see, because this is an online thrift store and a lot of this stuff is really cheap, but I think the largest spending demographic were earners of more than a hundred thousand dollars a year. So it's people with a lot of discretionary income. So I guess that kind of plays into what Brad said. You're correct on that. It was a hundred thousand and Gen X was their largest demographic. So I mentioned that Gen Z thing earlier, but in reality, their actual numbers, Gen X is their biggest cohort. And that's like ages 34 to like 54, right? Something like that.

50. Yeah. Something around there. Yeah. Okay. All right. Well, my competitive advantage is free supply. I think this is like probably the big one to their business model. So they don't have to pay to develop any apparel. There's no sort of physical manufacturing involved, which makes it a little less intensive capital intensive to scale um i mean they're just being they're being literally given clothes uh and they're the ones that get it i guess they get to do the dirty work uh and because they do the dirty work that allows them to take a higher margin on the platform gross payment volume so when you think about poshmark their tape rates like 20%. And you're seeing, I think, I guess, 69% gross margins or higher take rates

from ThredUp because they're taking the pictures, they're doing the pricing, they're doing the listing, they're finding the buyers, they're shipping to the buyers, they're doing all that stuff. So it allows them to take a higher price on it. And people are just giving it to them for free. So I guess that's a big advantage compared to some other platforms. Yeah. And if they get that right where, you know, you could argue, all right, well, what's the quality of the clothes being given to them? I think that's kind of the big concern you think about right away, but if they can get that right, yeah, that is an advantage. All in my competitive advantage, you know, in theory, there's the marketplace dynamics here. I think I've said this like

of the last few months, I think I've said this on like 70% of the episodes. So I sound like a broken record and I'm thinking about it now. If all these marketplaces exist, is the marketplace actually a competitive advantage? Like if everyone has a flywheel, what's the use of the flywheel? You know what I mean? I don't know if you guys have any thoughts on that, whether the marketplace here could give them any sort of competitive advantage. I don't necessarily know if it does. I mean, well, obviously the more buyers that there are, that's better. But at the end of the day, they're still getting sort of closet clearing stuff. And I know 77% of the sellers or whatever are recurring sellers, but I wouldn't imagine that just because you have more buyers that more

people are clearing out their closet and going to you. I guess there's maybe some brand awareness in that, but I don't know if it necessarily attracts more sellers. Yeah. Just because someone has a flywheel doesn't necessarily make it a good business. I think people get lazy with that sometimes. Brad, do you have any thoughts on that? And if not, you want to move on to your future growth opportunity? It just kind of reminds me of like, everyone is special like that argument. And if everyone is special, then is anyone really special? But moving on to future growth opportunities. No need to get existential here, Brad. And for my future growth opportunity, again, I'm reaching a little bit, but

Snapchat is doing a lot in the augmented reality field in terms of testing new products, to try on clothing and for a secondhand, uh, vendor like this, who won't have eight different sizes for, for one style, I think maybe partnering with a company like Snapchat that can enable them to, um, to, to use these products is really attractive when, I mean, there's an, you don't really know what an extra large is or a largest for a random product. So, so, um, I don't have any insight on if that actually will happen, but I think that would be a really cool idea for the company. Yeah. And I agree. AR, like it's a bit, you know, they're not doing it now, but it totally makes sense for something like this. That's the huge concern that people have

is the trying on clothes thing. I think Ryan and I have talked about that with like Stitch Fix, Poshmark, et cetera, and stuff like that. But Ryan, what do you have for future growth opportunities? Well, I would have said a men's category, but when I actually think about it, I'm not sure this model works that well for men. Like, I don't know if they're really doing the closet clearing stuff it feels like they're hoarders i don't know yeah we're i mean we're lazy you just you take it to goodwill you might throw it away and all reality i think most of the time you just leave it at the bottom of the drawer so like we don't think i don't know i don't really think about my closet as much as i imagine women do uh but i think the thing that's probably the

most the other thing is international expansion obviously but those are i mean every platform sort of has those same growth opportunities but i would say the most important thing right now is automating and optimizing their distribution centers as much as they can because it isn't a super it's a pretty complex logistics problem when you think about it because there's so there's there's an element that's pretty discretionary um so from order intake to selection uh the storing pricing listing that stuff can all be automated shipping out that can all be automated but there's the selection part where you have to sort through the orders you get and see if it's viable for your marketplace. That's hard, I think, to automate. So I don't know how you do that. I

don't know if it means you're just pouring money into engineers. I think we're seeing it because you saw how much money was spent on the income statement and product and technology. I think you got to solve that. And once you sort of automate those distribution centers, I think that formula is easier to replicate at the next distribution center. Instead of trying to like figure it out one by one, you can kind of just build the tech, then replicate it over and over at the different distribution centers. Yeah. And it's, they better get a good ROI on all these operating expenses because they are, they are spending a lot. Like what was your number, Ryan? 55% of revenue was spent on those things. Yeah. I mean, they better get a good ROI. You

got to be looking at increasing that efficiency there. I'll let my future growth opportunity, again, this is a very simple one because in reality, the growth opportunity to just continue what they're doing. So adding more retail partners, this is something we haven't covered yet, but they have an interesting strategy where they try to get their service out to as many sellers as possible and as many buyers as possible. So they're partnering with example, Walmart, and that gives them more demand. They're on walmart.com, I believe. So that gives them a lot more demand from customers.

But the only problem that could happen with this is that you're not really owning the transaction or keeping everything on one site or app. So the advantage of saying like, for some of these places, you want everything to be on one place. Like if you make a video, you don't want it to be on everyone's YouTube channel.

You want it to be on your own one, right? because you don't want, you know, that quality to go to everywhere else. But, you know, it does give them a boost in demand, hopefully with partnering with Walmart or something like that. And I think they have 21 or some like 21 or 23 retail partners. They all do kind of different things. But yeah, I don't, it's hard to understand what they're doing here. And it may not make sense, but I think there's some opportunity here.

Guys, did you guys look at this stuff at all? Well, when you look at the S1, they really talk about the retail partners. But then when you look at the website, they really put the emphasis on it's just normal people clearing out their closet. So it's kind of like a conflict there. It's kind of interesting. But no, I mean, I guess I didn't give it too much thought. And then I guess some of the people are, sorry, some of the retailers are basically cleaning out their closets themselves. They're giving thread up, I'm assuming at like some bulk deal, some of their discount, some of their old stuff that isn't selling. How many closets does one person have to clean out? I don't get that. I don't get how there's so many repeat sellers. They fill it up again and then they empty it back out and then fill it back up. They're selling on consignment. The payouts are terrible. I just don't, they're just losing over and over. That doesn't make any sense.

But yeah, as you guys, as, as the listeners might hear, we have some concerns with this business model, which brings us into the highlights and lowlights. Brad, do you want to talk about yours? Sure. I will start with my highlights. So I find it impressive that they're spending $0 on direct marketing to acquire new sellers, which is a direct quote out of their S1. So, I mean, pretty, I mean,

it doesn't get more efficient than that in terms of acquiring new supply to, offer to consumers. And I'll pair that with, you could argue there's a pretty strong ESG factor with this company, reduce, reuse, recycle. And I could see our generation, especially really buying into that and getting behind that. In terms of my low light, Ryan talked about maybe this business model doesn't work for men. I really have to believe that they could figure it out or figure out a product offering or a way to make this attractive to the other 50% of the population. And I don't generally like companies that are focused solely on one gender or another, just because you're immediately cutting your TAM in half. I've heard

Kevin O'Leary say this on Shark Tank several times. But I really feel like they could figure it out and find a nice complimentary product offering for men as well. Yeah. The, the thing about the men's part, it's not just getting them online, but if you're, so their biggest demographic is people with better Gen X. And I'm assuming, I guess it has to be women that are Gen X and that are earning over a hundred thousand dollars a year. That typically means you're a household. So getting all the households on board would just be, you know, it's not just adding the men, it's getting an entire family to start doing this. That would probably lock them in. to doing it more often. But Ryan, do you have your highlights and lowlights?

Yeah. I like the CEO, James Reinhart. I watched a few interviews with him and he seems really solid. He's honestly the reason that I picked this one out to do it because I wanted to see what the business was like because I enjoyed listening to him talk. The other thing, the economics are pretty nice. People literally just send you clothes and you sell them and then pay back and you sell them so other than goodwill where you don't pay them back i can't think of better economics um low lights uh it is a pretty difficult infrastructure problem like there is so much discretionary parts to it that make it a little tough to automate and then i think resale is getting pretty crowded um we've done a few shows now where uh we talk about it posh marks

one um but the other thing it just feels like they've pissed off half their stakeholders and you see that with the reddit stuff like i just don't see the compelling value proposition from a seller here and the payouts are abysmal they're terrible yeah it feels fleeting feels fleeting gimmicky at least make yourself feel good by giving it to goodwill like i just don't see Yeah. And the other part with the stuff that's not sold, instead of them just giving it straight to charities, they sell it to thrift stores. I mean, maybe they give some to charities, but that seems weird to me. I think you could at least just maybe make yourself seem a little better by giving it to charity. Yeah. There are a few questions to have with this business.

Is that it? Is that it, Ryan? Yeah, that's it for me. Okay. My highlights, solid gross margins, as we've seen. Consignment, the switch to assignment seems a lot smarter that the product way they were doing it felt pretty risky to be honest so i like that switch um there's lots of opportunity to take out of the goodwill shops it's kind of it sounds bad as a person to say like yeah this this one company could take out every goodwill shop uh it's a little sad to say but you know it's it is what it is they have that opportunity in front of them on the value proposition is theoretically strong for both the buyers and sellers but you guys have both already harped on it again uh there are the

problems that the sellers are having currently. Lowlights for me, I'm worried that the distribution center costs will be more variable than fixed. Contribution profit actually went down in 2020. So you need to decide whether that's temporary because of COVID or not. They're making these investments and they're talking about, oh, gross profit's strong, stuff like that. But I really would be, it'd be hard to argue against contribution or sorry, fulfillment expenses being fixed, I think, right? You got to hire more people, the more stuff you get, you got to build out more distribution centers. You have to pay more shipping costs. Ryan, go ahead. And the other thing is, since we saw they got that funding around 2019, and then they poured

all that money into operating expenses, and we didn't really see the boost in the top line. So it makes me question if they're going to be able to peel back the spending and still make as much money. Yeah. And then a few other things that are less serious, but all this first one series, it feels a bit like the make it up in volume type operation, the joke from the Silicon Valley show with the pizza guy, you know, with the delivery stuff that gets me scared. It feels like this is a make it up. We'll make it up in volume type of operation. They talk about retail as a service. They call it the RAS partnership. And I think that is resale as a service. Sorry. Sorry. Resale. i said that wrong resale as a service with their retail partnerships tough to say uh i still don't

really get what the i was trying to understand it like five different times i to be honest i still don't understand it a hundred percent but they mentioned rass over a hundred times in the s1 which kind of just rubbed me the wrong way um a bit ridiculous guys that we have to make everything as a service but again this also feels like something like i don't know it's just like a crazy idea that would be pitched it feels like something that would be in one of those portlandia episodes as a fake commercial i'm not sure if you guys watch that show like a fake commercial at the beginning where they're like oh yeah send us your clothes no no everyone send us your clothes and then they just you get every single person's garbage and they're like oh shit what do we do

well it kind of feels like what this is their distribution centers are a little more optimized than that but yeah yeah they got the funding to do that but i joke those are kind of jokes but uh still a bit of a bit of a concern there brad yeah yeah and i also so i did argue earlier that maybe reopening tailwinds from the supply dynamic but reopening headwind i i so i've been thrift shopping before i think most of the excitement in thrift shopping is going to the store and kind of treasure hunting for that thing that you don't know that you want yet so i don't know how well e-commerce serves as a long-term substitute for that as this whole pandemic hopefully fades over time. So yeah. Yeah. It seems like it's hard to replicate that process online

where Stitch Fix, theoretically now they haven't proven it out. They've proven it out somewhat, but Stitch Fix theoretically optimizes e-commerce and data by basically making it super efficient for you. You don't have to even think about anything or they give you the items that are optimized for you, but this search and stuff with 5 million items, I mean, it's just really hard to replicate on a webpage or an app. Yeah. All right. Ryan, do you have anything else before we wrap up? Nope. All right. We're going to do more or less interested to close things out. Brad, what do you have here? Yeah. Just nothing that really stands out to me that makes me excited to own it. I would say less interested. Agreed. Less interested for me. I have some questions

about the business model. And then the valuation, honestly, is not great. I mean, I guess you could make the argument that it's not crazy on a sales multiple, but there's a ton of these operating expenses that are really kind of variable. And gosh, I don't know. It doesn't look like they're anywhere close to returning cash to shareholders. So I guess that makes it easier to discard. Brett? Yeah. Well, that's interested for sure. I think you guys could all tell listening to this, that all three of us were less interested. I think we looked at it kind of as, all right, this was the competitor to Poshmark. We'll check them out because we were interested in that one. But yeah, on the valuation front, I would look at price to contribution profit.

That's a 32, seems pretty high. A PE of 32 is high or a free cashflow multiple of 32 is high. And I hate to say this, but I do worry about it being like Blue Apron. I think it's not as bad as a blue apron. That was not something that, you know what I mean? Does it feel like that at all? Or am I kind of stretching there of how bad this is? I think that's a stretch. It's weird. You go and listen to the CEO and then you read the S1 and it just feels, maybe he's a good salesman, but it feels like he's very competent. And then the business model seems like it's got its question. So yeah, I'm definitely more, or sorry, less interested. Um, yeah. Got concerns about the business model and its sustainability, but, uh, we didn't talk about this before, but Brad,

you have a stock for next week. If you didn't prepare, we can talk about it right now. Uh, but I have a stock for next week. Um, or should I, should I say now? Yeah. Say now, say now. okay so we are going back to SPAC land for my next pick of course we're doing I don't own it but we're doing AGC uh Altima Growth Capital uh the Brad Gerstner SPAC that just announced a 40 billion dollar merger with Grab which is an Asia-Pacific kind of super app play um so maybe some similarities and parallels to Coupang that we just did a few weeks ago but it's uh it's very interesting for sure. And I would love to dig in. Okay. Yeah. And that, uh, that's competitor to see limited, correct? I, I, so they do so many things that I don't think we can call

anyone a direct competitor, but in terms of, um, product overlap, yeah, that's definitely one of the main, um, one of the main companies to, to focus on for sure. Okay. So maybe kind of a WeChat type deal. All right. Well, that's exciting. Should be fun. Ryan, do you have anything else on that? I'm good. Okay. Well, that's going to do everything on this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Clients in Arch Capital may hold securities discussed on this podcast. Again, thank you all for listening. We'll see you next week.