The RealReal, Inc.

for financial results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session.

To ask a question during the session, you will need to press star one one on your telephone You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Caitlin Howe, Senior Vice President of Finance at The RealReal. Go ahead, Caitlin.

Thank you, Operator. Joining me today to discuss our results for the period ended March 31st, 2024, our Chief Executive Officer, John Corral, President and Chief Operating Officer, Rathi LaVette, and Chief Financial Officer, Ajay Gopal. 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 reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, We issued a shareholder letter earlier today, both of which are available on our investor relations website. I would now like to turn the call over to John Corral, Chief Executive Officer of the Rail Rail.

Thanks, Caitlin, and welcome to our earnings call. Today, we've reported financial results for the first quarter of 2024. Our continued strategic focus on the core consignment business and driving efficiencies is delivering results. In Q1, healthy supply combined with strong demand resulted in a return to overall top line growth for the first time in three quarters. These results were fueled by double digit growth in consignment revenue, our most profitable segment. Growth wasn't the only story. In Q1, we also reported our highest ever gross margin rate, which resulted in significantly improved bottom line results compared to the prior year. adjusted EBITDA improved by $25 million year over year. For Q1, GMV and adjusted EBITDA came in above the high end of our guidance range and revenue came in at the high end of our guidance range. The RealReal is starting 2024 with strong momentum in the core business. We continue to refine our approach to sales and marketing to drive profitable supply. We reoriented our sales team's compensation to better align incentives with our strategic focus on profitable supply, and we used more targeted marketing spend to attract higher lifetime value consignors. We are focused here for Q2 and the back half of the year. As we transition back into overall growth mode, we are beginning to strategically test new initiatives that we believe are key to growing our core business. We are in the early stages of realizing further efficiencies across our unique marketplace, which encompasses our functional areas of sales, marketing, authentication, and operations. We see opportunities to invest in automation and AI as we leverage our data to improve client experience and to profitably scale the business. We project that we are on track to deliver positive adjusted EBITDA for the full year 2024. Today, we provided Q2 2024 guidance and updated our full-year guidance with an increase in the midpoint of our full-year adjusted EBITDA range. We believe our continued focus on the core consignment business is working. We are growing our consignment revenue, expanding margins, delivering exceptional experiences to our consignors, and providing outstanding luxury goods to our buyers. I am very excited about the momentum in our business and believe we will continue to capitalize on our position as a leader in luxury pre-sale. With that, let's open the call for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask the questions, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile our Q&A list. Our first question will come from Marvin Fong of BTIG. Go ahead, Marvin.

Good morning, or good evening. Thanks for taking my questions. Congratulations on all the progress. question on just sort of consumer behavior. You know, I could see from the earnings deck that, you know, both units, UPT was up as were ASTs. Could you just kind of drill down for us on, you know, what that indicates to you about the health of the consumer? You seem to be kind of bucking the trend compared to some of the, some other retailers out there. So I just thought I'd give you kind of an open-ended question about what you're seeing as far as your customers going.

Yeah, no problem. Hi, Marvin. This is Rati. Yeah, you know, I think your kind of observations are correct. We saw our average order value go up about 8%. We saw average selling price also go up as well as UPT. So, and you saw that our consigned revenue is growing about 13% year over year. You know, the buyer, I would say, is quite healthy overall. I'm looking at the top of the funnel. We look at both the buyer and seller being a marketplace. I am seeing, you know, the funnel being healthy in that I'm talking about marketing-generated opportunities to lead to eventually becoming a buyer or seller. So we feel pretty optimistic. One of the things that we also look at during this time is average selling price. So if the consumer is being a little more cautious in what they're buying, sometimes we'll see average selling price go down a bit. So something that we're watching. Didn't see that too much in Q1, but we're continuing to watch that. But I will say we're cautiously optimistic right now. We feel pretty good about the trends there.

Okay, that's terrific. Thanks, Rati. And my follow-up question, I just kind of expand on what John was saying about integrating automation and AI. And I know you've been doing that for quite some time in your authentication centers. I'm just wondering, as you work more on introducing AI and automation into specifically like pricing and the sales effort, is that Is that a measurable improvement you're seeing or think you will see from integrating AI into sort of, you know, setting prices and how dynamic you can adjust that?

Yes, Marvin. So, you know, when I zoom out for a second, I think about where do we enable AI. And we always kind of focus on our mode, you know, being supply constrained business. Authentication is a big one for us. um so around supply and operations mostly so i will say uh pricing is a big one we're definitely seeing the impact life for life items getting smarter about how we price there on the sales side getting smarter about who we're calling and when so targeting the right seller at the right time we're testing our way into that those are a little bit earlier stages authentication and pricing we have been that has been impacting our business directly, and we're farther along in that area. You're going to hear us talk about accelerated inbound over the next few quarters. I think there's a lot of opportunity in inbound and efficiencies there, and really leveraging AI there as well. So I don't know if I missed anything.

No, I think you nailed it. We've been known for doing it for authentication and pricing, as you talked about, from a sales perspective. Instead of saying, here's your laundry list of people to call on any given day, Now what we're giving is our sales folks rank order list based on web activity, historical trends, you know, people who have consigned Miu Miu with us before, you know, and Miu Miu is really hot right now. We would like them to go back to those consignors as a for instance. The other area is a real way of reducing costs. From a customer support perspective, what we're trying to do is make sure we more intelligently route the customers as we can. Consignors especially need to be high touch. That's why we invested in the concierge pods before. But there's a lot of opportunity as where's my order? We don't necessarily need to have a human spend a lot of time on that kind of thing. That sounds obvious. But we're getting more and more intelligent as we try to reduce costs in the customer service area for what I would call rote questions and answers.

Got it. Thanks so much, Rathi and John. Appreciate it. Thanks, everyone.

Thanks, Marvin. Thank you. Please stand by for our next question. Our next question will come from Ike with Wells Fargo. Go ahead, Ike. Hey.

How are you guys doing? Congrats on the quarter. Here's two for me. I would love if there's any color you guys can offer either for the year, remainder year, on the gross margin line. Is this kind of in some way like the new normal that you guys are putting up in Q1, or is this a seasonality we should think about? And then just when I look seasonally at the business from an EBITDA perspective, it kind of feels like 2Q should be better than the guide you guys are giving. And maybe it's just conservatism, just looking at it just historically, that usually I think the losses are better sequentially. So I guess I'm just trying to understand, is there anything funky in the second quarter versus what you guys just put up? Or is this just conservatism, which is great? Those are my two questions.

I can take that. Hi, this is Ajay. Thanks for the question. Gross margin, what I would say there is Q1 was really strong. We reported 74.6% gross margin, and that, as we pointed out, is the highest ever we've seen in the business. That benefited from the percentage of direct GMV, which, as you know, has an impact on our reported gross margin rates. So the mix was favorable in Q1. We also saw a benefit from continued expansion of consignment margins, which were also up pretty noticeably versus prior years. I would say you should expect us to be in somewhere close to this range, very plus or minus a couple of points, depending on things like the mix, as I pointed out, and business dynamics through the course of the year. Your second question was on Q2 and how we're thinking about it. So going from Q1 to Q2, there's a couple of things that are reflected as you look at our guidance. We always see Q2 being seasonally slightly smaller than Q1, and you'll see that reflected in our volumes. So our GMB shows that small sort of seasonal reduction that tends to happen in Q2. On the EBITDA side, we are looking at a couple of things that put some pressure on us. Most notably, these are not unique to us. You know, we have salary increases like most other companies. We do that every year at this time. So that puts a little bit of pressure on Q2 versus Q1. More importantly, and I think this was discussed in the past, you know, we have some operational investments that we are planning on investing in. These are things that will drive efficiencies in our operations and help us expand margins in the longer term.

So some of that is reflected in our Q2 guidance as well.

Thanks so much. Thank you. Please stand by for our next question. And our next question comes from Ashley Owens, KeyBank Capital Markets.

Go ahead, Ashley.

Hi, this is Chandana on for Ashley today. So my first question is just any updates? I know it's early. I think the capability just launched this quarter, but maybe just looking at the opportunity for like dropship consignment as a side business there, and maybe from expanding supply as well, from that perspective as well.

Yes. Thanks, Shandana. I can take that question. Yeah, you know, we're always looking at new channels for supply. So I think that's, you know, the important part here, dropship being an example of that, continuing to bring trust to our consumers. and focus there, whether that's dropship or watches, whether it's international, looking at other partnerships as well. I'd say we're in super early days with dropship. We're happy with the launch, and we're continuing to be optimistic on where we're going. We're really thinking about this as a new channel strategy, so for watches, for example, and how do we expand that market into men's watches. So again, super early stages. I don't want to share too much on how that's been performing, but we'll definitely keep you posted. But again, really the focus is new channels, new supply channels in general as we get back to growth here.

Awesome, thank you. And I might have just missed this also, but could you kind of talk us through where the upside came in for this quarter within EBITDA and just to refresh on anything that we should be considering there? I know in the past you've mentioned like shipping margins, other efficiencies potentially with an inventory or transport. So just kind of a refresh on all of that.

Sorry, this is Kayla. The question is on operational efficiencies and where we're investing. Was that the question?

Yes, and also kind of just what happened with EBITDA this quarter to kind of bring it in a little bit higher than expected.

I can talk to that. This is Ajay here. So when you look at our reported results in Q1 and compared to where our guidance was, there's a couple of things I would draw your attention to. First off, volume. We had a really strong start to the year, and you can see that reflected in the fact that our GMV came in higher than our anticipated range on guidance. So that was a source of strength for us. We had strong supply coming into the year, and we saw that supply sell through very nicely through the quarter. The other thing that led to upside for us is our gross margin. As I pointed out earlier, we came in at a record high gross margin percentage, and that was driven by the mix of direct versus consigned, which was also another source of strength for us in the quarter. The last thing I would point to is there's great operating discipline around how we manage our operating expenses. I'm new here, and I see the teams doing a phenomenal job and sort of being very thoughtful about where we invest and what returns we're getting for those investments. So the cumulative effect of that operating rigor really came through in our Q1 results as well.

Awesome. Thank you.

Please stand by for our next question.

And our next question will be with Anna from Needham. Please go ahead, Anna.

Great. Thanks so much. And congrats. Nice results. Two quick ones from us. First, you're guiding for GMV acceleration at the high end for the second quarter. So can you talk about what's driving that? Compare is easier. So that's probably a part of that. But what are you seeing in the business quarter to date as well? And secondly, in the past, you mentioned mid-value was pressured a bit. How did that perform in the first quarter, and how do you think about that as we go through the year? Thanks so much.

Yeah. Hi, Ana. This is Rati. So your first question on GMV acceleration in Q2, just how we're thinking about demand in general. As you know, it's all about supply, and supply is quite healthy right now, and I just talked a little bit about that. really targeting the sellers that matter, that have the right mix, that have the right value, and bringing them into our ecosystem, and then keeping them via retention strategies. So, you know, we feel really good about kind of the input that came in or the supply that came in in Q1, and that helps us kind of lead into Q2, like it takes a couple of weeks to get that item processed, get it on the site. And so we have some indicators there of what Q2 will look like. And then on the mid-value supply, yes, you heard us talk about mid-value. And back in the day when we made all those commission changes, Really kind of make sure that we tweet the commission changes based on mid-value because in the past we've seen that dropping. I will say that that's in a much better position. We continue to kind of optimize and personalize our promotional strategy to go after that mid-value supply. So yeah, overall, I mean, you know, at the end of the day, it's kind of a three-legged stool between retail marketing and sales. And we, you know, kind of have to get all of these things firing at the same time. and the tactics kind of in line to focus on quality and, again, the right seller to bring in the right mix of product, which we're seeing in Q1. All right, terrific. Thanks so much.

Thank you for your questions. Please stand by for our next question.

And our next question comes from Mark with Baird. Go ahead, Mark.

Good afternoon. Thank you. First, I wanted to follow up on the supply topic just to understand it a little bit better. With the GMV returning to growth, is this a function of mix with higher value items? Are you seeing more volume from existing sellers? Are you seeing an acceleration of new sellers on the platform? Maybe it's a function of each of those things, but just any help to sort of unpack that a little bit more so we can understand really the key drivers there would be great.

Yeah, sure, Mark. So, you know, just kind of following up on what I was saying earlier about retail marketing and sales kind of all working together. It is a function of both. It's about retention and acquisition as we're thinking about growth. So not only are we seeing better volumes um or a better retail value coming from each of our sellers but we're also onboarding the right sellers with more value and more mix so you know in the past i think we've talked about you've heard us talk about um focusing the sales team not only on units but retail value as well so making sure that we have the right volume in and the right product to sell. So that's one of the things we're doing. On the marketing side, they're also looking at the same thing. They're being much more effective here. They know when to target the sellers, at what time. High value is a good example of that. If we need more fine jewelry or watches, we know who to target and when at the right time. So just continuing down that path. The stores are also about meeting the seller where they are. and making sure that the stores are doing their jobs as well as far as drop-in goes. And we're seeing more high value come in through the stores. And there's other things and other factors going in. I think in the past, you've heard us talk about retention. The retention numbers on the sales side look better than they ever have, honestly. So we're getting some upside there. We've launched referral and affiliate programs that are also working really well And we're feeling good about that. We test our way into these things. And now you're starting to see some of that work. And then on the tech side, it's about enabling the sales team and getting smarter and more efficient there as well. So there's a few different things working together here. And we know the TAM is there. We know it's big. We know resale is growing faster. And so we're going to kind of continue to kind of optimize that.

Thank you for that detail. Just to follow up then, active buyers down 9% year over year, understand that that's a trailing metric. But as we think about just the overall GMV and the platform accelerating, how should we be thinking about that active buyer piece? Should that be trending back into positive territory, you know, mid single digit, high single digit territory? If as you drive the acceleration in GMV growth? I know it's a supply-constrained marketplace, but just maybe help us think through that metric and how you're engaging new buyers to the platform.

Hi, Mark. I think you said it best. It is a trailing 12-month metric, and as such, it is probably bearing a lot of – it's bearing some weight from the business changes that were made over the last 12 months. We look at, I would point you to orders, which we think is a really good sort of forward-looking metric, and that orders growth accelerated quite significantly from where it was in Q4, and we would expect to see that trend slowly make its way into our active buyer numbers as we sort of lap over the trading 12-month nature of that metric.

Thank you. Thank you, and please stand by for our next question. And our next question comes from Jay Sol, UBS.

Go ahead, Jay. Great. Thank you so much. I'm just curious how you saw the competitive landscape evolve over the last quarter. You know, have you seen your position improve? Have you seen new competitors come in, exit? Love any thoughts you have about it. Thank you.

Yeah. Thanks, Jay. You know, we're always watching. You know, we try not to be so insular in general. And we're always looking to see what others are doing and how we can always improve at the end of the day. We do awareness studies and competitive analysis regularly by our brand and marketing teams. I'll say our takeaway in our last one and most recent one that we had done was that we kind of really need to double down on our core business. And we really need to focus on the trust that we've built with the consumers. So, you know, you've heard Coral talk about things like the concierge pods and really listening to the consumer and making sure that we are offering pricing transparency that they need. For example, relationships, the full service experience that we offer, being the leaders in the marketplace around pricing. So that's what I mean by pricing transparency. So just continuing down our path is kind of really what we're talking about as a team as we're starting to kind of really solidify our LRP over the next three years.

Got it.

Thank you so much. Thank you for your question.

Please stand by for our next question. And our next question comes from Tom with Wedbush.

Go ahead, Tom.

Hey, everyone. Thanks for taking my question. I hopped on the call late. I'm sorry if this has been asked already. I want to ask about the gross margin. Your consignment gross margin was extremely, extremely strong. I think it was in the high 80s. Is that as good as it could possibly get? Is there a chance that we could eventually see a consignment gross margin of

90 plus percent or like are we are we kind of uh you know with all the changes you've made is that sort of you know what we should think of as the upper bound for for gross margin hi hi tom this is a jay here um we we didn't talk about this so your question is very timely uh thanks uh we i think there's still room in our consignment uh gross margin you know we are we're looking at a lot of operational efficiencies that we're looking to drive through our margin structure. And those will make their way into continuing to expand our gross margins for the consignment business going forward. But to your point, we do believe that the gains going forward will be more incremental. So there's more that we can go after. But we feel really good about where we are today and the gains we've seen over the last year and a half.

All right, great. And if I could follow up on Jay's question about the competitive landscape. You know, when you look at the primary market, you know, for luxury goods, I mean, it seems like it's become far more volatile recently. Are you getting any sense that, like, you know, you're starting to maybe benefit from some trade down and, you know, the higher-end shoppers becoming a little more price conscious and maybe – pivoting towards the real-real as a result?

Yeah, Tom, you know, same answer as before. You know, we always see kind of puts and takes, like higher-end brands doing really well, like Hermes and Brunello and Miu Miu right now has some strong momentum. And then you see some brands, you know, kind of losing a little less kind of market share. But I would say that that is something that we always see, and we take that into consideration when we're pricing items, depending on what's happening. I think the kind of interesting thing for us, or our advantage, is that we were pretty diversified in our mix, category and brand, so that helps us there. And then we have that flexibility, right, in pricing. So, you know, yes, we are continuing to look. The last time we saw a little more pressure, how it came out was around pricing and the consumer being a little more cautious in their price target. And so we'll continue to watch that. But at this moment and in Q1, you know, hadn't seen that yet.

Understood. All right. Thanks, Rati. Thanks, Ajay. Thanks, Coral. And best of luck the rest of the year. Thank you.

Thank you, everyone. This will conclude our question and answer session. Now I'd like to turn it over to CEO John Corral for closing remarks.

Thank you for joining us today. Before closing the call, we'd like to thank our entire team for delivering a strong start to 2024. To the RealReal team, simply thank you. Your relentless effort in delivering world-class service to our consignors and buyers is truly inspiring. We are playing to our strengths, and we are uniquely positioned to capitalize on the growing luxury resale space. We also want to thank our more than 36 million members as they join us on our mission to extend the life of luxury and make fashion more sustainable. Thank you all. Have a great day.

And thank you, everyone. Thank you for participation in today's conference call. This does conclude the program. You may now disconnect.