ThredUp Inc
NASDAQ:TDUP
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Good afternoon, ladies and gentlemen, and welcome to the thredUP Second Quarter 2023 Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, 8th of August, 2023.
I would like to turn the conference over to, Alon Rotem, Chief Legal Officer. Please go ahead, Sir.
Good afternoon, everyone. Thank you for joining us on today's conference call to discuss thredUP's second quarter 2023 financial results. With me are James Reinhart, thredUP CEO and Co-Founder; and Sean Sobers, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.thred.com. This call is being webcast on our IR website, and a replay of this call will be available on the site shortly.
Before we begin, I'd like to remind you that we will make forward-looking statements during the course of this call, including, but not limited to, statements regarding our earnings guidance for the third and fourth fiscal quarter and full year of 2023, future financial performance, including our goal of reaching adjusted EBITDA breakeven, market demand, growth prospects, business strategies and plans, our ability to attract new buyers and the effects of inflation, increase interest rates, changing consumer habits and general global economic uncertainty.
These forward-looking statements are not guarantees of future performance, involve known and unknown risks and uncertainties and our actual results could differ materially from any projections or future performance or results expressed or implied by such forward-looking statements. Words such as anticipate, believe, estimate and expect as well as similar expressions are intended to identify forward-looking statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in our SEC filings, earnings press release and supplemental information posted on our IR website.
Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update the statements as a result of new information or future events. In addition, during the call, we will present certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from GAAP measures. You can find additional disclosures regarding these non-GAAP measures, including reconciliations and comparable GAAP measures in our earnings press release and supplemental information posted on our IR website.
Now I'd like to turn the call over to James Reinhart.
Good afternoon, everyone. I'm James Reinhart, CEO and Co-Founder of ThredUp. Thank you for joining ThredUp second quarter of 2023 earnings call. We are excited to share financial results and key business highlights from our second quarter. In addition to our financial results, we will provide an update on key company's specific initiatives that are contributing to our growth and expansion of adjusted EBITDA. I will then hand it over to Sean Sobers, our Chief Financial Officer to talk about our second quarter 2023 financials in more detail and provide our outlook for the third and fourth quarter of 2023. We'll close out today's call with a question and answer session.
We are proud to share that we exceeded the high end of our guidance for revenue, gross margin and adjusted EBITDA. Revenue was at $82.7 million increasing 8.2% year-over-year. Consolidated gross margin declined 150 basis points year-over-year due to the continued growth of our lower margin European business. However, US gross margin were a record 76.4% increasing 220 basis points year-over-year. Our active buyer in Q2 slightly decrease year-over-year, or sequentially up 2.5% Q1 to Q2 and now at positively impacted, quarters were up 5% year-over-year. We're very pleased with our improvements to adjusted EBITDA as we posted a loss of just $5 million, which was a 1,160 basis point expansion year-over-year and a sequential improvement of 250 basis points from the prior quarter.
When we dive into the rest of the call, I wanted to take a moment to reflect on the past few years of being a public company. It's been a wild ride. Since right up to initial public offering in March 2021. We have consistently though, hit or exceeded every single quarterly guidance. Faced with a persistently challenging macroenvironment and the competitive retail landscape. Our team has demonstrated exceptional rigor in forecasting, predicting and managing the business. I'm proud that we continue to make progress towards our growth and profitability goals. And that notably at the midpoint of guidance through 2023, we are aiming to grow revenues 13.4% and expand EBITDA 1,000 basis points. And when we look across the consumer universe, on a revenue growth and margin expansion basis, we believe we are one of the very best performing companies in 2023.
Our leader philosophy has always been to control the controllable, how we spend our time, the quality of the decisions we make during times of uncertainty, the urgency we have to invent on behalf of our customers, and the willingness to keep learning what's different this time around. My hat goes off to the incredible team here at ThredUp that's making this happen every day.
Now let me turn to provide an update on some of the key company initiatives that empowered our growth and market expansion. First, we're continuing to refine our marketplace acceptance strategy. As I shared our last quarter’s call, we started testing a new deeper our cleanup service to improve the quality of supply in our marketplace. After validating that this increase is our bad yield over sellable item, as well as the quality and the self-group items we received. We've rolled out this new feed in nearly all sellers in our marketplace. We're continuing to collect high margin fees, all while creating a better cleanup service for our best customers and a better selection for our best buyer. Demand for our cleanup service accelerated in Q2 and we don't anticipate any pullback in demand. With increased processing power, our backlog is now at six weeks for regular buyer and under one week for those who pay for our VIP services.
Second, we're doubling down on efforts to boost growth, retention and achieve the highest levels of customer satisfaction in our history. Last quarter, I detail their efforts to intercept customer when they're most likely to be unhappy with their experience. After a month of detecting and offering called deeper credit where customers can opt to keep select often low priced items in exchange for topping credit instead of making a costly return, we've now rolled this often out to 100% of our customers. The work we've done in that area has generated meaningful improvements to our unit economics. With that return rate year-over-year in Q2 increasing by more than 500 basis points. In connection with our grip promise efforts, we also rolled out a new resolution [inaudible] in July, a self-service portal that offered instant fixes to common issues that make our experience fall short of being a 10 out of 10 for customers.
We believe that collectively through these initiatives, we will be able to deliver an ever better experience that keeps customers coming back again and again. Third, we continue to be impressed with the performance and progress of remix, our European business, the ship to consignment sales in process, early feedback from customers has been positive. We believe that this change will improve remixes margins over the long term, and also expand the selection of high quality supply.
Four, our resellers of service business continue to provide brands and retailers with the fastest and easiest way to deliver customizable and scalable retail experiences to their customers. In Q2, we launched new programs with 11 brands, including American Eagle, SoulCycle and as a reminder, RaaS is the leading provider end-to-end retail solution for the apparel ecosystem, including global brands like Big Brew, and smaller heritage brands like Michael Stars. By leveraging ThredUp marketplace infrastructure, RaaS amplifies our supply advantage, increases our sell-through and return on assets and expand our long-term profitability metrics by adding sources of recurring high market revenue.
And finally, given the proliferation of dialogue around artificial intelligence, I want to briefly mention how we were deploying AI at ThredUp. As a business that has now processed more than 172 million one of our clients secondhand items. We have relied on AI for many years across our distribution network. AI helped us to reduce processing costs by substituting activities that would otherwise be done manually, in turn, creating greater economic value. We're leveraging AI in various ways across our product experience, including enhanced search functionality, so the customers can more easily find what they're looking for across our vast selection. Each of these investments positions our business to drive sustainable growth in the quarters and years to come.
Now I'd like to provide an update on our goal of reaching adjusted EBITDA our breakeven. In Q2, we saw yet another quarter of sequential EBITDA improvements, since announcing our intention to get breakeven earlier this year, with each quarter our competence level and achieving this goal increases. And we have even clearer sight that's hitting this milestone in Q4 2023. Let me also emphasize the breakeven it's just a waypoint. We are committed to building an enduring business to generate significant free cash flows over time. On our road to profitability and growth, it's also important that we don't lose sight of our pursuit of purpose. ThredUp is and always had been a business rooted in an ambitious mission to inspire a new generation of consumer to think secondhand for. As we work to further our mission and make a dent in the universe. We hold ourselves accountable to following a business and brand aligned environmental photo and governance strategy that guides us and fuels our success.
We recently published our Second Annual Impact report, which outlines our strategy and provides a transparent look at how we're impacting our people, our communities, and the planet. We're committed to disclosing our progress this year and raising the bar for what it means to balance purpose and profit. I'm also proud to share that we were recognized for the impact we're having it's one of the TIME100's Most Influential Companies of 2023. This list highlights 100 companies making an extraordinary impact globally. We are honored to be listed alongside some of the world's most iconic brands, including Apple, Patagonia, and Microsoft. Three conclusions before I turn it over to Sean, I want to close by restating the strength of our future results. And our management team's ability to forecast, predict and manage the business effectively quarter after quarter, driving top line growth and EBITDA expansion. As we enter our third year as a public company could not be more proud of the work we are doing and the progress we have made. We are eager to tackle the opportunity in front of us and remain committed and focus on our mission to occur in a more sustainable era for the fastest industry.
Thanks James and again, thanks everyone for joining us on our second quarter 2023 earnings call. I'll begin with an overview of results and follow up with guidance for the third and fourth quarters and full year. I will discuss non-GAAP results throughout my remarks. Our GAAP financials and reconciliation between GAAP and non-GAAP are found in our earnings release, supplemental financials and our 10-Q filing. We're very proud of our Q2 results. For the second quarter of 2023, revenue totaled $82.7 million, an increase of 8% year-over-year, consignment revenue grew 10% year-over-year, our product revenue grew 5%. We're happy to report that consignment revenue has inflected growth for the first time in four quarters as we make progress in transitioning our European business and our RaaS supply to a consignment model.
While the transition of these businesses to consignment should be a tailwind to growth margin over time, we expected to slightly mute revenue growth simply due to the accounting treatment. As a reminder consignment payout reduce revenue, while own payouts are in COGS and reduce gross margin. Orders increased 5% year-over-year to $1.8 million. Active buyers declined slightly year-over-year to 1.7 million for the trailing 12 months, but improved 2.5% quarter-over-quarter. As we evolve our customer acquisition strategy to focus on higher quality buyers, we are pleased with the quarter-over-quarter improvement. The second quarter of 2023 gross margin was 67.4%, a 150 basis point decline over the same quarter last year. The decline in our consolidated gross margin was due to the dynamics driven by our European business. The continued growth of Europe lower margin operating model continued to affect our consolidated results as it becomes a larger portion of our total revenue. We are proud to report that our consolidated results exceeded the high end of our guidance driven by record US growth margins at 76.4%. This outperformance was a result of continued improvement and how we optimized our marketplace, including pricing, promotions, returns, payouts and fees.
For the second quarter of 2023, GAAP net loss was $18.8 million, compared to GAAP net loss of $28.4 million in the same quarter of last year. Adjusted EBITDA loss was $5 million, or negative 6.1% for the second quarter of 2023. This represents an approximate 1,160 basis point improvement compared to the same quarter last year as we tightly manage expenses and leverage our investments on higher revenue. We are proud to report that our hard work drove an 8.2% year-over-year revenue increased on an 8.1% decline in operating expenses, driving us forward on our path to breakeven.
Turning to balance sheet, we began the second quarter with $99.5 million in cash and marketable securities and ended the quarter with $83 million. Our cash usage from operations was $10.4 million, including our annual payment of D&O insurance of $3.5 million while we spent $6.6 million on CapEx as we complete our investment in our Dallas DC.
Based on our progress and our strategic initiatives, we remain confident in our ability to reach adjusted EBITDA breakeven in the fourth quarter of 2023. For us reaching breakeven and tuck away point on our path to free cash flow and profitability. And we believe that this timeline balances our commitment to reaching breakeven with foundational investments in our long term goals of growth and expanding profit.
When modeling our free cash flow, adjusted EBITDA and our CapEx and our key drivers of positive cash flow given that, as a marketplace, our working capital needs are minimal. After spending $56 million in CapEx over the last six quarters, we expect to spend $4 million in the back half of ‘23 and expect maintenance CapEx of $1 million to $2 million per quarter until 2026. Due to our significantly reduced CapEx needs and our ability to manage our expense structure, we expect to be able to fund the core business through existing cash. As a result, we want to reiterate that we do not anticipate our cash and marketable securities balance falling below $50 million before reaching free cash flow positive nor do we expect to turn to the capital markets or draw down on our existing debt before them.
We are pleased to provide guidance that emphasizes our control of the levers in the path of long term revenue growth and free cash flow. Turning to the guidance for the third quarter, we expect revenue in the range of $82 million to $84 million, which is a 22% growth rate at the midpoint, gross margin in the range of 66.5% to 68.5% of revenue, adjusted EBITDA loss of 6.5% to 4.5% of revenue, which is 1,080 bps improvement at the midpoint and basic weighted average shares outstanding of approximately 106 million.
For the fourth quarter, we expect revenue in the range of $84.5 million to $86.5 million, which is a 20% growth rate at the midpoint, gross margin in the range of 64.5% to 66.5% of revenue, adjusted EBITDA breakeven, which is an 820 basis point improvement, and basic weighted average shares outstanding of approximately 108 million.
For the full year of 2023, we now expect revenue in the range of $325 million to $329 million. With margins in the range of 66.5% to 67.5% our revenue, adjusted EBITDA loss of 5.5% to 4.5% of revenue and basic weighted average share of approximately 105 million.
In closing, we are excited to deliver second half outlook that illustrates our confidence in our ability to generate strong growth while achieving adjusted EBITDA breakeven and ultimately profitability. We believe that our first half results and our second half guidance demonstrate our capacity to flex our marketplace model as we execute on a variety of strategic initiatives, allowing us to distinguish ourselves in the current environment. Jim and I are now ready for your questions. Operator, please open the line.
[Operator Instructions]
Your first question comes from the line of Ike Boruchow from Wells Fargo.
Hey guys, congrats on the quarter. Just wanted to dig in a little bit more on the scale to profitability. Sounds like you're highly competent in the margin progression into next year. I was wondering James or Sean, if you could give a little bit more color. It sounds like adjusted EBITDA profitability is the plan for next year. Just kind of curious if you could give a little bit more framework for fiscal ‘24, whether it's on the gross margin line or adjusted EBITDA margin line, and then again, on the CapEx, Sean. So we're we should be thinking $1 million to $2 million a quarter throughout -- through next year as well. My guess that's the follow up question. Thanks.
Sure, thanks, Ike. Yes, I mean, I think, as we said, we feel very good about the path to Q4 breakeven. And we continue to sort of generate that through margin expansion, and sort of the elements of our marketplace that are really working. And I think as we get into 2024, I think we feel confident that you can continue to see expansion quarter after quarter, obviously, like there's some seasonality in our business. And so it's probably not a straight line. But I think we're hopefully putting these questions of can ThredUp be breakeven behind us, and kind of excited about the ability to expand those margins into ‘24. And then I think that relates to the free cash flow question, which I'll let Sean address around CapEx.
Yes. And I would say even in when you're thinking about, we end the year at breakeven in Q4, and then we march our way through expansion of EBITDA in 2024 is free cash flow shouldn't be too far off of that, right. It's not far away from when we get to breakeven EBITDA but as it relates to our CapEx question, yes, I think $1 million to $2 million kind of the maintenance mode, actually all the way through ‘25. So not until about ‘26, we start to think about CapEx again at a greater size than that.
Your next question comes from the line of Trevor Young from Barclays.
Great, thanks. Just on RaaS for a second. You're continuing to add some well-known brands there, and some of the brands that you've had for year or more like a Hilfiger, for example, are those programs ramping not specific to any one brand, but just overall their volumes and engagement from buyers as well as the brands themselves? Were you expected any key learnings there or changes in strategy? And then any sort of mark-to-market in terms of the proportion of inventory or volumes or even revenue coming from RaaS programs?
Sure. Thanks, Trevor. Yes, I mean, I think I'm pleased with the overall adoption of RaaS by the brands, right. I mean, I think you've seen a pretty significant growth, I think it varies a bit brand by brand around the momentum. And who's leading the charge at the brand side. I mean, it's been a difficult time for retailers over the last six quarters or so. So I do think you're going to continue to see momentum as we get into a more normal inventory environment. That's certainly been a headwind. I think for retail, Trevor, but look, I think lots of these brands have gotten started. And I think it's going to be one of these things that you're going to see, continue to momentum year-over-year, we put in our impact report, how many bags you've been processing through our RaaS partners. And I think we put that in there to show it's a pretty significant amount of supply that we're continuing to generate through that platform. And we expect to grow that again in 2024. So I think RaaS is an integral part of our business. And I think we'll continue to see momentum there.
That's really helpful, James. And just a quick follow up, what do you see in kind of in the competitive environment from retail, in terms of promo you always have some good color on that? What are you seeing today? And what do you think evolves over the next couple of months.
I think seem to be getting better, Trevor. But I think you're still having lingering inventory overhang that's going to be real. And I think as we get into back to school, which we're sort of already in and as you get into holiday, I think it's going to continue to be competitive out there. And I think from where we sit holiday is never really the strong suit of resale. And so I think it's an area where we're going to be observers of what happens in Q4 across the retail environment, but I expect things to continue to get better. And I think as we get into 2024, you'll start to see the purchasing behavior of retailers that we've seen over the past year, like start to kind of hit the P&L. And I think that's an area where resale should really shine, as the inventory environment is finally kind of rolled over.
Your next question comes from the line of Dylan Carden from William Blair.
Hey, thanks. I'll kind of just follow up on debt thought, actually, James, why then sort of in the guidance is fourth quarter. And albeit take this modest, but inflecting from just a pure absolute dollar number from 82-ish to 85-86 and your expectation?
Hey, Dylan, part of that is the seasonality in our business. So specifically in Europe, it tends, Q4 tends to be a seasonally stronger quarter for them than Q3 given the summer holidays. So that's what you're seeing as you move from Q3 to Q4.
Got it.
Dylan, I would add to that, too, because you'll see it in the guide is the Q4 guide for gross margins is down for that exact same reason. Europe gets to be a bigger piece of the pie in Q4, which has a structurally lower gross margin now, so I dragged it down gross margin a bit in Q4.
Thank you. Actual question just on the fee. It's exciting that you're kind of rolling that out. Can you speak to timing, when you rolled it out more broadly in the quarter? And then kind of how that shows up in the model? Is that something where we would expect to see higher revenue per order? Or is that kind of contract cost? What's sort of the best way to think about modeling that rollout out?
Yes, I'll start with, yes, Dylan. I think we treated it as an experiment for some time. And then I think month over month, we've expanded the number of sellers that are in that treatment. And so, yes, I would say almost all sellers are now exposed to it. There are obviously some pockets of experimentation that we do around when do we waive fees, when do we give people expedited service for us for a shorter fee. And I think those are areas we'll continue to investigate, but it is fully deployed as to where it'll hit in the P&L, [inaudible] what Sean hit that?
Yes, it's in consignment revenue on the line on the P&L and it would show up in revenue per order too, as well.
Okay. And then if you'd indulge me here, just from a capacity utilization standpoint, how are you thinking about the new distribution, capacity ramp, any sort of change there and expectation as far as timing, but I guess because the breakeven target still in place, probably not a lot, but just wanted to make sure.
No change on timing, I think we actually provided incremental guidance around the CapEx means is not meaning any new CapEx still until 2026. Previously, we thought that would come in ‘25. So I think we feel very good about the capacity that we have in place. And the fact that we can continue to grow into that capacity through the next 10 quarters before we have incremental CapEx and I think that's a really nice place to be able to grow the business and generate free cash flow over time.
Yes, just for a point. So, you guys know that Dallas has all been in about a million and a half slots are available spaces.
Your next question comes from the line of Anna Andreeva from Needham.
Great, thank you so much. And congrats, guys. Nice quarter. Couple of questions. Curious if there was any variability in the business by month in the second quarter? And what are you seeing quarter to date? James, anything to call out about the budget shopper behavior. You had talked about seeing some civilization there previously. And to Sean, as we think about the bridge, to get to EBITDA breakeven in the fourth quarter, just anything, we should be mindful off in the model by line item. Thank you, guys.
Sure, and I mean on the variability by month, I think sort of consistent with what we've seen in prior years, I think June was a little stronger than previous June's. And I think we did a bunch of work to really hit the consumer as they've moved into their summer holiday. So I think June was a little better, probably than it had been in previous years. And I think quarter-to-date, I think we're seeing that sort of same pattern, as we've seen in previous years. And you're really starting to see back to school kick in now. And so I think that's sort of the story for the rest of Q3. As for the budget shopper, I mean, we continue to see that is a customer that is that it's more challenged, right? I mean, I think it's definitely a customer who's feeling the pinch across their discretionary purchasing power. So well, I think the numbers on have stabilized that would not say that that customer is in better shape than they were 90 days ago. And so I think as we continue to evolve the supply mix, we're going to have to continue to evolve our customer acquisition strategy and how we retain those customers over time. Now, Sean talks about that walk on fourth quarter.
Yes, I think of it this way, it's probably simple as in revenues in RaaS, Europe expands at the same point that drives gross margin rate down a little bit in Q4. And then it's offset really, by leveraging OpEx across the board, SG&A, OP&T and marketing. I think historically, you guys have known for quite a while from a US perspective, marketing is slightly less in Q4 than any other quarter. So that helps us drive towards breakeven, when we get to Q4.
And I would say one thing, Anna, which I think should make people feel pretty good as fourth quarter tends to be the softest quarter for us in the year. And so I think the fact that can be a quarter where we're achieving breakeven in what is traditionally not our best quarter, I think is really important. Because I think then as you roll the calendar forward to 2024, and you get into Q1, Q2, Q3, which tend to be at least historically stronger quarters. I think that gives us a lot of confidence in the momentum that's building in the business.
Your next question comes from the line of Edward Yruma from Piper Sandler.
Hey, good afternoon. Thanks for taking the questions. I guess, two for me first, I know you've implemented this new fee. But are there other enhancements that you can do to the supply side of economics given the fat backlog that can kind of put you back on or continue on down the path of adjusted EBITDA profitability?
And then as a second question, I noticed that Anthony departed the business I guess, kind of have you moved around his responsibility. Thank you.
Sure, and I mean, I think yet we continue to look at other ways to balance, monetization of the seller, the seller community, but making sure we have delivered them a great experience. I think one of the things that we've become very confident in is that the fees help us really deliver a high quality seller experience by enabling really the best sellers in the marketplace to have their backs processed in a timely way. As we pointed out in the call, I mean processing times has continued to come down. And I think for VIP sellers, who are people who are really passionate about the ThredUp selling experience, they're getting processing times in days. It's under one week. And so we feel very good about that mix of sellers. And we'll continue to try and manage optimizing both their experience and the ways that they generate revenue for the business.
I think Anthony, Anthony has been at ThredUp for, I think Anthony has been up at ThredUp for 10 years, he was an integral, vital part of everything that we did. And he was great. And I think now he's just decided to pursue another passion in his life. And we have an incredibly talented bench of folks, and feel very good about picking up that mantle and doing him proud.
Your next question comes from the line of Dana Telsey from Telsey Advisory Group.
Hi, good afternoon, everyone. And nice to see the progress, as you think about the number of active customers, I think it was down just under 1%. How are you thinking of the active customer cohorts? What are you seeing, how is it different at all? And then James, you've given out some product trends in terms of what you're seeing, given the consumer environment, overall, anything you'd note there? And then just lastly, on the gross margin, anything to unpack ticks and ties of how you're thinking about the components of the gross margin go forward? Thank you.
Sure, Dana, I mean, on the active buyer side, I think, probably more than anytime recently, we're really focusing on the quality of the customer, and how she is engaging, and shopping the mix of goods that we have on ThredUp. So as we talked about, over the last couple of calls, with the efforts around sculpting and the mix and sellers, we're generating, like, incrementally better product on the site. And so I think as part of that you're -- we're really focused on that incrementally more premium buyer. And again, I want to emphasize, it's not a luxury buyer by any means, but incrementally more premium. And we think that strategy really has legs, because I think that buyer population is more stable in the macroenvironment, they tend to have to generate higher LTVs over time. And so you're seeing a little bit of a mix, in the tactics that I think actually will compound as we get into 2024.
As for the product side, I think, I don't have any news to break on that, Dana, I think what we're really focused on is making sure that the seasonal mix on ThredUp is as good as ever. And I think it's an area where as a two sided marketplace, you can often end up not being able to hit the mark right on seasonality because you're a little bit exposed to what people send you, I think we've done a really great job, the team has done a really great job of educating sellers on what we want. And therefore the seasonal mix ThredUp, I think, has been as good as ever. And so I think that gives me a lot of confidence as we move through the back half of the year. And I think those learnings will help in ‘24 as well.
And then on that gross margin. I mean, you guys saw in Q2, we posted like record US gross margins that's really due to the transition of the RaaS business more to consignment as well as kind of improving across the board unit economics. And then as we go forward from here, we still have some more room to go there on the consignment switch or transition on the RaaS business. So there's more to go there. And then Europe has just started the consignment switch. So that transition is going to take some time, but it'll start to become a tailwind. And keep in mind is a little bit of a headwind on revenue growth as well. But so as you go forward from here, I'll probably all the way through next year, you'll start to see some nice tailwind on the gross margins side.
Your next question comes from the line of Alexandra Steiger from Goldman Sachs.
Hi, this is Pierre on for Alexandra, thank you so much for taking our questions. So just one from us on fulfillment and contribution margins. You've previously talked about how your more recent distribution centers can carry higher contribution margins relative to older generations. So just wondering how we should think about the broad messaging around that bigger potential tailwind from margins for the US business kind of both in current results in over the next several quarters, as you see kind of utilization improve and I assume those volumes also come in at higher unit margins. Thank you.
Yes, hi, Pierre. Yes, I mean, I think you hit the nail on the head, which is we're continuing to focus on our most productive distribution centers that would be DC-6 in Atlanta. And DC-07 coming online, or that's online, in Dallas. And so as we flow more product through those two important hubs, you will see some flow through on the contribution basis, both on the shipping and outbound logistics side as well as labor and fulfillment. So, we do think those are tailwinds over time. And I think even so, if you roll forward into ‘25, and into ’26 as those become even bigger parts of the network, you can see continued flow through. So I'm feeling very good about contribution margin expansion, and then ultimately how that flows through to free cash flow.
Yes, you'll start to see some different pieces of automation innovation through both of those DCs. So as you look into ’24 and ’25, you guys get a chance to visit you can come see those in person.
Your next question comes from the line of Noah Zatzkin from KeyBanc.
Hi, this is Ash on for Noah. Just wanted to dial in a little bit on the backlog. The timing continues to tick down. Just curious on any updated thoughts on the timeline, it'll take to get to that two to three week target. And then on RaaS, I'm just hoping you can provide some more color around the line of sight for additional clients in the back half. And then just also how you're thinking about 2024. And the impact on the P&L as you transition a lot of these clients to consignment. Thanks.
Yes, hi. I don't know if there's Ashley, does that right? Okay. Yes, I think on the backlog, we continue to make progress. I think where we've ended up is that those customers who want superfast service are paying for VIP services, and we're getting it to them on under a week. And those customers who want regular service, I think, are getting that in that six week range. So I think we'll make a little bit more progress towards that. But I think we've identified they are really two segment population, those who want it normal speed and those who want VIP and I think the current backlog estimates, I think hit that bid very well. On the RaaS side, we ended the year, last year with 40-ish clients. And I think we continue to grow from there. And I think right now we're focused on adding new clients and also really growing the engagement of clients and how they're working with their customers. And I think RaaS will continue to see momentum into 2024. And as I mentioned, I think as the inventory environment for broader retail gets better, I think RaaS will actually have an opportunity to work a little bit harder for so feel so good about that.
Your next question comes from the line of Rick Patel from Raymond James.
Hey, guys, congrats on the progress. Can you talk about what you're seeing with remix early on, is that most to a consignment model? Are you getting the kind of products that you would deem to be attractive from a merchandising perspective, like you are in the US, or does this take time? And then secondly how should we think about you implementing best US practices over at remix? Things such as charging fees for the cleanup kits and the opportunity there?
Yes, sure, Rick. I mean, I think on the remix consignment side, we've been pleasantly surprised with how well the team has been able to execute on that. And then the customer adoption. I mean, there's clearly product market fit for the cleanout kit, right in the lives of consumers. And so I think the fact that there's willingness to pay in the US for that experience only solidifies how strong we think product market fit is. And so far, we have not seen that the European seller is different in that way of looking for convenience. And I think consignment has become an increasingly acceptable part of the way that selling happens online. And so I think the team has rolled it out well, and we felt good about the adoption, I think, to your question about best practices, I think one of our core thesis in buying a business was that we had learned so much over the past 10 years that we could bring over to remix and I think the team there has been incredible with the learning and the ability to adopt what we've done in the US and then adapt that to how to roll it out in Europe. So yes, we feel great about how that businesses are executing and performing and the team there and I think that environment in Eastern Europe is then really challenging over the past year and despite all that the team has done great. So we feel we feel really confident we roll the calendar in ‘24 as well.
Any additional color on the drivers for the quarter-over-quarter acceleration in active customers just curious if that represents higher income consumers or a different cohort than you've seen in the past?
It's a little bit incrementally higher income. But I think also just as we have the right product mix online, Rick, you're just seeing customers conversion improve, right, the seasonality mix has hit the bid. And so I think there's going to continue to be some puts and takes as we get the right mix of goods and we really find the right buyer but feeling very good about that sequential improvement and ultimately how we drive that into ‘24.
There are no further questions at this time. I will now hand the call back to James. Please continue.
Well, thanks, everyone for joining us on the earnings call. I appreciate all the good questions. And for those of you who dialed in, big shout out to the ThredUp team for continuing to execute at such a high level. Appreciate all the work that you guys have been doing and we'll continue to do. And we're optimistic and excited for the year ahead. So thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.