ThredUp: How second-hand retailers navigate high inflation

Shares of ThredUp are trading lower on Tuesday despite the company's positive fourth quarter results. The company beat revenue expectations, posting $81.39 million against an expected $80.33 million, up 15% from a year ago. The company also forecasts that the global second-hand market could reach a valuation of over $350 billion by 2027.

William Blair Consumer Research Analyst Dylan Carden joins Yahoo Finance to discuss the company's performance against the consumer environment, where discounted branded or quality goods are a "winning equation." He also notes the impact of reduced stigma surrounding second-hand goods, particularly among younger generations.

Carden also weighs in on ThredUp's potential to withstand recession or inflationary pressure: "They showed in the pandemic they weren't necessarily macro-proof. The business collapsed along with any other apparel retailer, and that was simply because they are selling a fair amount of goods for people going into the office or for occasion-based. So to the extent you have a consumer making a decision between buying Lululemon (LULU) at Lululemon or Lululemon at ThreadUp, the same discretionary overhang is gonna impact this business as much as any other. It's not countercyclical."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Sticky inflation is helping drive sales of second-hand shops. And ThredUp is one of the businesses getting a boost here. The company out with quarterly results this morning. Revenue topping the Street's expectations. It's up 15% from a year ago. And the thrift retailer sees more growth ahead, revealing it expects the global second-hand market to nearly double and reach $350 billion by 2027.

For more on this, we turn to Dylan Carden, who is the William Blair Consumer Research analyst here. Great to have you here with us this morning, Dylan. Help us both go into the environment here that companies could be beneficiaries of if they are able to strike the right platform tone or, at least, embrace consumers with the right inventory as well that they would like to see up for resale.

DYLAN CARDEN: Yeah. Sure. It's not overly complicated. You have effectively two things going on here. One is that there's an ever present need for value in the consumer space. If you look at effectively the rise of the off price retailers in the last 20, 30 years, they've won primarily because they offer compelling value to consumers. And if you look at of where inflation and crowding out spending is in the consumer landscape, we're spending increasingly more on health care, housing, and education.

So most any other discretionary category is deflationary to flat, at best, more pricing standpoint. So if you can offer branded or quality goods at a discount, that tends to be the winning equation in retail.

The other thing that's happening here as it relates specifically to ThredUp and the resale market is just you've removed the stigma around second-hand goods. So historically, there's been a dismissal of second-hand goods as cheap or-- I don't know-- stigmatized. So by removing that from a younger generation standpoint and offering these branded goods at compelling value, that's why it's a compelling space, so to speak.

SEANA SMITH: Dylan, it is still an uncertain macro backdrop, obviously, when you take a look at the economy. The fact that inflation still high, the fact that there is still this risk of recession, how big of a challenge is that to a name like ThredUp? Or are they relatively recession proof compared to some of their rivals outside of the second-hand space?

DYLAN CARDEN: They showed in the pandemic that they weren't necessarily macro proof. The business collapsed along with any other apparel retailer. And that was simply because they are selling a fair amount of goods for people going into the office or for occasion-based.

So to the extent that you have a consumer that's making a decision between buying Lululemon at Lululemon or Lululemon at ThredUp, the same discretionary overhang is going to impact this business as much as any other.

So I think it's not countercyclical. The best you could say is that potentially it is somewhat more resilient, if you get a pure recessionary environment that's an overhang on discretionary spend. And that it was a 20%, 30% value to what you would, otherwise, be considering for a like purchase.

BRAD SMITH: It's interesting because some of-- even the companies that you mentioned there in Lululemon, Canada Goose, they're all starting their trade-in programs, and then allowing some of that inventory for themselves to be relisted. And they're just shuffling it under a resale or gently used gear. Like New, I think, is Lululemon's one. And so all of that considered, how does that impact a company like ThredUp?

DYLAN CARDEN: The apparel space is the second most wasteful space when it comes to the environmental impact, only after oil and gas. And so to the extent that-- and I know ESG and all of that, the environmental concern on some of this stuff has been pushed to the sidelines more recently-- but to the extent that the industry has to show some forward progression and from an environmental footprint standpoint, that's what's going on there.

And there's a couple things here. If you sell a durable product-- so luxury and outdoor. You mentioned Canada Goose. If your product is actually durable in nature, such that it can have second lives and be used more than once, you have an opportunity. And Patagonia does this. Arc'teryx does this to sell it again. Hermes--

So you can buy the product back. And there, it's actually compelling from an economic standpoint, because you're selling the same product two, three, four, multiple times. So if you think about the gross margin impact of that, you actually get to above 100% gross margin in theory.

If you sell a good that is less durable in nature, so GAP, basics, everything that ThredUp effectively targets, you don't stand as good a chance in doing that. So what ThredUp is doing now from its resell as a service model is effectively taking advantage of that dynamic.

That if you are a GAP or an Abercrombie or whatever, and you can't buy and sell the goods in the same way, ThredUp sweeps in. And says, hey, we'll co-brand a similar type of website. And then you-- optically, look like you're supporting the secondary market.