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Thrift Stores: In Style, When Food Inflation Is Hot

Thomas Paulson
Apr 14, 2023
 Thrift Stores: In Style, When Food Inflation Is Hot

As we have been writing about over the past six months, “value” is in “style” including off-price, hard-discount grocery, and thrift stores, as consumers stretch their dollars in the face of high food inflation. This week, we thought we’d take a closer look at the thrift store category, starting with Savers Value Village (which operates 300 stores under the Savers, Value Village, Village des Valeurs, Unique, and 2nd Ave. banners), as well as Goodwill, Salvation Army, Plato’s Closet, and Buffalo Exchange.

  • As shown below, Savers and Value Village locations pull in a lot of visits per location (we've included Old Navy with our peer group to provide relative perspective). For context, Saver and Value Village stores (just north of 20,000 square feet) are far larger than the typical Plato’s Closet or Buffalo Exchange stores (3,500-4,500 square feet).
  • The customer mix is as we would have expected. The small True Trade Area (TTA) of Value Village and Buffalo Exchange means that these brands are more shopped by locals. Of note, visitors to Buffalo Exchange and Plato’s are both sellers and buyers to / of the shop. Frequently they are both, with the cash made on hand by the individual from selling part of their wardrobe, being used to acquire new items for the wardrobe. Moreover, store “credit points” for an item, are substantially more than what the cash payment would be.
  • Plato’s Closet’s 2022 systemwide sales were up +7% in 2022 and average sales per store increased to $1.3M (according to the 2022 10-K filing for parent company Winmark). Winmark also franchises Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round. Of the larger brands, Once Upon A Child produced the fastest growth at +11%. Winmark’s royalty revenue growth for Q4 2022 accelerated to +15% versus the +9% growth from earlier quarters, thus making Q4 the strongest quarter of the year. This was the also the case for off-price retailers.  
  • Savers Value Village filed registration statements for an initial public offering in late 2021. While, it still has yet to go given the market turmoil, its business, like its peers, has continued to add momentum, building upon the strong gains of early 2022. From Savers Value Village’s IPO filing we learned that comparable-store sales for 2021 were up +16% to 2019 and that its average unit retail was very modest at around $5. And while the annual comp gains are modest, it is a compounding machine as shown in the table below. Stores on average produce $5M in sales. $5M per location compared to visits per venue comes out at roughly $16 per visit. For comparison, Old Navy’s figure is $40, or 2.5X more. The second graphic below explains Saver’s supply chain and re-processing.

Source: Saver Value Village S-1 Registration Statement (May 2022)

  • Like off-price retail, thrift or secondhand retail is a treasure hunt and a continuous flow of great values is key to a store's success. Saver's IPO filing reads, “We deliver a well merchandised environment that maximizes customer engagement and supports a core tenet for any thrifter—the treasure hunt. Our stores offer a wide selection of quality items across clothing, home goods, books and other items at convenient locations. More than 38,000 items are merchandised per store every week. Our merchandise is also regularly rotated and refreshed, with inventory turns of roughly 15X a year, providing our customers with an extensive, ever-changing selection at tremendous value.” For perspective, Ross' Stores Inc. in-store inventory turns were 11X. And so, Savers Value Village is offering shoppers a lot of freshness and treasure hunt.
  • In terms of Savers Value Village's business model, they enjoy a relatively high gross margin of 58%. The 58% is far above Five Below and Dollar Tree’s rate of approximately 37%. Five Below and Dollar Tree locations average around $2M per location; Savers Value Village as such produces 2.5X the sales volume of these two and 1.75X the visits (below). That works out of around $11.76 per visit for the average of Five Below and Dollar Tree, substantially below Savers at $16.00. But the real punch is the penny-profit per location given Savers' higher gross margin rate. That figure works out to $9.25 per visit vs. $4.35, or more than double.
  • Given Savers Value Village's superior unit economics, it also generates a superior level of FCF per location, 7.5X more per location than these dollar stores.
  • ThredUP publishes an annual report each year on the secondhand market. We share two exhibits from that report below (though we have not verified the reported figures ourselves). Their figures don’t include the liquidated, salvaged, and fenced goods sold at Amazon, eBay, and flea markets. The National Flea Market Association says, “The country's over 1,100 U.S. flea markets provide opportunities for approximately 2.25 million vendors conducting over $30B in sales annually. The markets are visited by over 150 million customers each year.” $30B is nearly double Ross Dress for Less’ net revenue. And so, including flea markets, the secondhand + thrift + salvage market is far larger than the $39B shown in the exhibit below. Additionally, instead of the 9% market share figure shown for secondhand clothing in the second exhibit, we’d estimate the market share to be in the 20%-range. Lastly, given its lower average unit retail (AUR), the unit share is substantially higher than 20%. We are doubtful of the +26% growth rate that the report forecasts for 2023. However, >20% share growing at +10% is over 200 bps of market share in a flat category (i.e., it’s meaningful).

Source: ThreadUP 2023 Resale Report

  • As implied in the ThredUP graphic above, rental is part of this consumer’s choice, or consideration, which comes in the form of Rent The Runway and UO’s Nuuly business.
  • Rent-the-Runway reported January-end quarter results, with management providing a stronger-than-expected outlook for subscriber growth in 2023 of 20K to around 159K (implying +25% growth year-over-year). Work-from-home was devastating for the brand as subscribers plummeted from 134K in 2019 to 55K in 2020. And so, with consumers exercising greater thrift and needing to return to the office, they are increasingly turning to rental.
  • As the chart below shows, the revenue from 2022’s new subscribers exceeds the 2021 cohort, and the 2021 cohort generated a similar level of revenue in 2022 to what it generated in 2021. That said, while the brand may be winning with the "thrifter" back-to-the-office consumer, we are not sold on the business’ unit economics yet and its ability to generate cash. Management expects the business to consume $50M in cash during 2023. Should that come to fruition, that will leave the business with only $115M in cash, against $275M in debt. (The market cap is around $190M.)

Source: Rent The Runway Q4 2022 Earnings Presentation

  • In addition to the above-noted drivers of new subscriptions, the company just recently introduced more value in the subscription during 2022 by adding more items to their plans, which is described in the first chart below. And that value enhancement is resulting in less churn, more referral, and a better business, as the second chart describes, and as strong guidance Q1 subscriber growth implies.

Source: Rent The Runway Q4 2022 Earnings Presentation

  • Are there other factors behind the resurgence of secondhand beyond inflation? Yes, including circularity, sustainability, individuality, and social. How these interplay is shown in the Venn diagram below. Adding nitro to the fuel are social media and influencers, where shopping for fashion via secondhand is once again perceived as cool and savvy (we view the industry as counter-cyclical), and new digital platforms that were imagined to center around these motivators and striving to be the Millennial and Gen-Z generations’ version of eBay like StockX (below).

Source: StockX Homepage

  • Of importance, many analysts see secondhand and re-sale directly competing with off-price for Millennial and Gen-Z consumers. Given that the high unit share of secondhand / resale (>20%) is one-third larger than off-price’s unit share, outsized/double-digit growth in secondhand/resale/rental/circular will encroach on off-price’s growth.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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