The RealReal, Inc.

Good day and welcome to the Real Reels Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Caitlin Howe, Senior Vice President of Investor Relations. Your line is open.

Thank you, Operator. Joining me today to discuss our results for the period ended March 31st, 2023, our Chief Executive Officer, John Corral, President and Chief Operating Officer, Rossi Levesque, and Chief Financial Officer, Robert Julian. Before we begin, I would like to remind you that during today's call, we will make forward-looking statements which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties, and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Today's presentation will also include certain non-GAAP financial measures, both historical and forward-looking, for which historical financial measures we have provided reconciliation to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a stockholder letter earlier today, both of which are available on our investor relations website. I would now like to turn the call over to John Correll, Chief Executive Officer of The Real Rails.

Thanks, Caitlin, and welcome to our Q1 2023 earnings call. Today, we reported financial results for the first quarter with revenue exceeding the midpoint of our guidance and adjusted EBITDA exceeding the high end of our guidance range. The improvement in profitability was largely driven by our ability to continue to grow a higher margin consignment business. During the first quarter, consignment revenue grew 22% and direct revenue declined 49% year over year. This resulted in our gross margin improving 980 basis points compared to the prior year. In addition, during the quarter, we increased take rate, reduced our company-owned inventory balance, and narrowed our adjusted EBITDA loss in both dollars and percentage compared to the prior year. We also took steps to reduce our cost base during the quarter. Beyond our financial metrics, we saw positive trends with total active buyers reaching over 1 million for the first time in the RealReal's history. We are also making progress on our customer satisfaction and consignor experience, which is critical to the long-term health of the business. Let me provide more details on our key initiatives. First, we made updates to our commission structure late last year, which are now starting to deliver results. If you remember, the goals of updating our commission structure were to optimize our take rate, limit consignment of lower value items, and increase consignment of higher value items. We believe the updates are mostly working exactly as we planned. Our Q1 take rate increased 170 basis points, lower value supply has decreased, and higher value supply has increased year over year. Therefore, the commission structure changes are doing well overall. One area where we have more work to do is in the mid-value supply. We are currently testing commission rates for different consignor cohorts at various price points to optimize our mid-value supply. In addition to supply, customer satisfaction and consignor experience continue to be a major focus area for the company. We have been busy rolling out our new consignor concierge team, which pairs each consignor with a small, dedicated team of consignment customer service experts. With the rollout now complete, the initial feedback from our new approach has been overwhelmingly positive. Our customer service ratings have increased, and it's helped us improve our net promoter score. Going forward, we will continue to look for ways to improve both the consigner and buyer experience. It's critical that we continue to improve our consigner experience and manage our costs effectively. Over the past two months, we have assessed our cost base and believe there is further opportunity to reduce our operating expenses. Our company-wide focus on managing costs, particularly those that do not directly impact our consigners and buyers, will be one of our keys to achieving profitability. The other key initiatives of optimizing product pricing and pursuing new revenue streams are making progress, and we look forward to discussing them more in depth in the coming quarters. With all these in mind, we are confident these key initiatives will help move the business to profitability, and we believe they will be particularly impactful in the back of this year. Overall, the business is headed in a positive direction. We're growing our consignment revenue. We're expanding both our gross margin and gross profit dollars, and we're improving our customer satisfaction and the consignor experience. We're also managing costs as we drive forward profitability. Given our strong Q1 results and our progress on initiatives, I reaffirm that we believe we will attain profitability on an adjusted EBITDA basis in full year 2024. With that, let's open the call for questions.