The RealReal, Inc.

Good day. Thank you for standing by. Welcome to the RealReal Third Quarter 2024 Financial Results Conference Call. At this time, all participants are on a 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 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host. Kathleen Hall, Senior Vice President of Finance. Please go ahead.

Thank you, Operator. Joining me today to discuss our results for the period ended September 30th, 2024, our Chief Executive Officer and President, Ratsi Levesque, 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. We have provided reconciliations for historical non-GAAP financial measures to the most comparable GAAP measures in our earnings press release, which is available on our investor relations website. I would now like to turn the call over to Rati Levesque, Chief Executive Officer of The RealReal.

Thank you, Caitlin. Good afternoon, everyone, and welcome to The RealReal's third quarter earnings conference call. I'm honored to speak with you today as the new CEO of The RealReal. I've spent the last 13 years at this company working with some of the best, most talented people in the industry. We built the world's largest online marketplace for authenticated resale luxury goods on a foundation of trust, expertise, and unmatched customer service. Our teams are executing well against the company's vision to change the way people shop for the better. We are creating a unique circular shopping experience built on technical expertise and high-touch human service. I've been deeply involved with the foundational changes we've made to the business, and I'm looking forward to continuing to champion our strategies, obsessing over service, operational excellence, and scaling the business through our growth playbook. I'm proud of the progress we've made, and I'm pleased to report strong third quarter results. GMV, revenue, and adjusted EBITDA exceeded our expectations for the third quarter, increasing confidence in the momentum of our business and enabling us to raise our full-year guidance. Third quarter GMV grew 6% versus last year, an acceleration from the second quarter. Revenue of $148 million increased 11% driven by strength in consignment revenue, up 14% versus last year, and an increase of more than 20% on a two-year basis. We also achieved solid progress on our path to profitability. Third quarter adjusted EBITDA of positive $2.3 million marks our second quarter of positive adjusted EBITDA. And importantly, we delivered positive free cash flow for the quarter. Supply metrics are strong, with both units and value increasing versus last year. As we've highlighted before, we believe there's $200 billion in untapped value for luxury resale items in the US alone. Our growth is driven by unlocking that supply for our platform. Over the years, we built a unique multi-channel approach that includes luxury managers, stores, and the power of our marketing to unlock the profitable supply. We refer to this approach as our growth playbook. We often mention that we are a supply-constrained business. Essentially, what this means is that if we can procure the supply, we can sell it. Our lifetime sell-through rate is over 90%. Success in executing against our growth playbook relies on driving supply through three key areas, sales, marketing, and our retail stores. The first of these key areas is our sales team, comprised primarily of our luxury managers. This team is responsible for building and maintaining relationships with our consignors and providing education about selling with the real real. Our luxury managers also serve as trusted consultants, helping to assess the value of their clients' current assets and advising on purchases of luxury goods in the primary market. Our top luxury managers generate up to $10 million in supply annually through their client relationships. We've been working on providing them with the tools to do their jobs efficiently, and we've created an incentive structure to drive profitable supply. Recently, we launched our Smart Sales tool, which leverages consumer, macro, and other data points. The tool enables our sales team to understand which clients are most likely to consign at a given time and helps our luxury managers direct their efforts efficiently. Our sales and merchandising teams are able to curate our platform's assortment through tech capabilities. We are enhancing the ways we leverage trend information and historical purchase and consignment data. We identify which brands and categories are in high demand and mobilize our sales team to proactively pursue these items. We are seeing continued success with our sales team composition and incentive structure update. As we've previously discussed, we've shifted our luxury manager profile towards individuals with luxury experience and deeper existing connections with consignor targets. In addition, we focused our sales team's incentive structure on GMV dollars versus units, which has contributed to our gross margin expansion. The benefit is showing up in our strong supply trends, top-line growth, and historically high retention rates for our sales team. The second key for growth is marketing. As the first mover in our space, we have spent 13 years creating the ultimate intersection of luxury and value, approaching fashion from a position of real authority and real expertise. During the turnaround, we may have been a bit quiet in asserting our role in the space. In 2024, we started leveraging social media platforms like TikTok and Instagram, to engage customers and potential consignors. We've recently doubled down on social content that makes complicated topics like authentication and sustainability feel relatable. Through these efforts, we've realized some of our highest engagement rates on posts. Furthermore, we recently published our annual resale report, which uses data to educate both the press and customers about industry trends. The resale report had seven times the engagement that we've seen previously, helping to showcase the brand's leadership in the luxury resale space. While perception and awareness are up, there's still more work we can do. We view this as an exciting opportunity to talk to customers about what differentiates the RealReal. The third key area to growth is retail. Our stores offer a curated experience and provide consignors with access to experts for on-the-spot valuations for fine jewelry and watches. We are pleased with the performance of our fleet of 16 retail locations, affirming that the neighborhood store strategy is working. We position stores in areas where our consignors live versus being solely focused on traditional prime retail areas. A unique aspect of our retail strategy is that the store's primary intent is to generate supply and drive awareness. We continue on the path of opening one to three stores per year in key markets and are looking forward to welcoming stores in Miami and Houston to our fleet later this year. So to recap, as a supply-driven business, our growth playbook is centered on generating supply, and we are driving results through our sales team, marketing, and retail stores. Moving to operational excellence. We continue to improve our operational efficiency, leveraging our robust proprietary data assets and AI capabilities to build trust and improve the customer experience. In 2023, through increased automation, we reduced processing time by over 10% while keeping headcount steady and supporting top-line growth. Cost savings from this important work have expanded our margins and funded current-year investments that drive operational efficiencies. For years, The RealReal has been a leader in authentication, with proprietary tools like Vision and Shield helping build customer trust. The work we've undertaken in 2024 is reshaping how we process items. We are leveraging AI and technology to improve speed and reduce human intervention. We use our robust data sets to help route items for authentication based on risk level, to automate attribution and copywriting, and to determine optimal pricing levels. The majority of our items are now priced using our proprietary algorithms. Through incorporating historical sales data along with current fashion and pricing trends, we instill confidence that items will sell quickly and for the highest, fairest price. The combination of human expertise and our wealth of data is an important differentiator. By pivoting our focus back to our core consignment business, improving our fixed cost structure, and lowering operational costs, we've enabled our return to growth and improved our unit economics. GMB and revenue growth accelerated as we moved through Q3 and were headed into the important fourth quarter with ample supply. As we enter the final quarter of the year, We're encouraged by the momentum we're seeing in the business. We're planning for strong Q4 sales and positive adjusted EBITDA for the year. It's clear that our growth playbook is working with proof points in both top and bottom line. The RealReal is positioned as a leader in the market with lots of room to scale. I'm excited about the future but right now we are heads down focused on execution to close out 2024. I'd like to thank our team for their hard work throughout the quarter. I'm looking forward to delivering on our 2024 commitments and starting our next chapter of growth. With that, I'll turn over the call to Ajay to discuss our financial results and outlook for the remainder of 2024.

Thank you, Rathi. Our strong third quarter results are an important step as we focus on scaling our business profitably and strengthening our balance sheet. We were encouraged by the acceleration in top line growth throughout the third quarter. As you heard Rathi mention earlier, our growth playbook, which is centered on unlocking supply, is working. This growth, along with higher gross margins, and our focus on driving operational efficiencies resulted in positive adjusted EBITDA for the quarter. Now, turning to our detailed Q3 results, beginning with the top line. GMV of $433 million increased 6% versus last year. This was an acceleration from Q2, led by strength in the consignment business, as strong supply trends helped to fuel increased orders and larger average basket sizes compared to the prior year period. Revenue of 148 million increased 11% in the quarter due to higher volume, lower returns, and a healthy take rate of 38.6% up 50 basis points versus last year. Consignment and shipping revenues grew 14% and 17% respectively in the quarter. Direct revenue was down 10% as we established a good baseline for our direct business. Active buyers, as measured on a trailing three-month basis, increased versus last year for the second consecutive quarter, growing 7% to $389,000. On a trailing 12-month basis, active buyers at $958,000 were stable versus last year. As a reminder, we modified our take rate percentages in late 2022. Some of those changes were designed to limit the number of lower priced, lower profit items on our platform. We expected to see an impact to our active buyer count as we reduced the number of items available for sale under $100. As we anniversary these updates, we are beginning to see a positive inflection in the 12-month active buyer data while retaining the gross margin benefits that these changes yielded. Third quarter gross profit of $111 million improved $17 million year over year. Gross margin of 74.9% increased 430 basis points versus the third quarter last year. Driven by an increase in our higher margin consignment business as a percentage of total revenue, and the improvement in take rate. Third quarter operating expenses of $125 million increased $9 million year over year. As a percent of total revenue, operating expense leveraged 270 basis points as our work to drive efficiency resulted in cost leverage across our business. Adjusted EBITDA of $2.3 million increased to $9.3 million versus last year for the third quarter. On a year-to-date basis, we have delivered a $55 million improvement in adjusted EBITDA versus last year. We ended the quarter with $168 million in cash, cash equivalents, and restricted cash, $2 million above our Q2 balance. This is a notable milestone as Q3 marked the second time we've achieved positive free cash flow in a quarter. These results demonstrate the power of our business model. You've heard us talk about our focus on growing consignment revenues. This means that we don't tie up our cash acquiring inventory ahead of a season. In fact, we pay our consignors after an item sells on our platform. The resulting favorable cash conversion cycle creates a positive working capital benefit to our cash flows when we grow. Turning now to our outlook for the remainder of the year. As a result of our strong third quarter performance, we are raising our full year GMV, revenue, and adjusted EBITDA guidance range. We expect Q4 GMV in the range of $484 million to $500 million, which represents 9% growth versus prior year at the midpoint of our guidance, resulting in a full year GMV range of $1.81 to $1.826 billion. Fourth quarter revenue is expected to be in the range of $158 million to $165 million. driven by GMV growth and continued take rate favorability. Our full year revenue is now expected to be between 595 million and 602 million, growing in the high single digit range year over year. Fourth quarter adjusted EBITDA is expected to be between positive 6.5 million and 9.5 million. and would mark our most profitable quarter ever by a significant margin, solidifying the path to a positive, fully adjusted EBITDA, currently expected to be in the range of $4.7 million to $7.7 million. In closing, I share Rathi's enthusiasm about our current performance and operational excellence. Across the organization, we are executing on our growth playbook, obsessing over service and reducing friction in the consignment process while using technology as an accelerator to our flywheel. I would also like to extend my thanks to the teams across our business for their dedication and work in driving our Q3 financial results. We expect to close out this year on a strong footing with accelerating sales growth and positive adjusted EBITDA. With that, I will turn the call back over to the operator to begin Q&A. Operator?

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question coming from the lineup, Mark Alsweger with Baird, your line is now open.

Thank you. Good afternoon. So guidance implies continued acceleration in GMB Q4. Can you give us some additional context on supply trends or other factors you're seeing quarter to date that give you confidence in that outlook? And then separately, Rati, just any thoughts you can share on any new strategic initiatives on the agenda or any changes you're planning now that you're in the CEO seat? Thank you.

Thank you, Mark. Thanks for the questions. So I heard two questions there. What gives us confidence in our Q4 guidance and some of the supply trends we're seeing? So I'll start with that one. I will say supply is quite healthy right now. We're feeling really good about supply and where we're at. And, you know, we're a supply-driven business, so that's really important when looking at the following quarters. It's driven out of three main strategies, which we've talked about in the past and which we talked about in the growth playbook. You heard that in the script. And it's really the sales, marketing, and retail coming together, working together really nicely. And so the sales side, we're seeing, you know, all-time lows or highs on retention. We're seeing the compensation structure really work for them, the referral program that we launched. really working there as well, we're expanding to other key markets, on the marketing front, personalization, really targeting that mid and high value consignor. And on the retail side, you know, we talked about this in the past, we're seeing this halo effect, you know, some of these stores bring in up to $40 million a year. And so we're also seeing that high average selling price even up to five times higher. So we have a lot of confidence in supply right now. We're seeing people want to monetize their closet. We know the TAM's really big, 200 million in people's closets. And these three things really coming together that we're calling our growth playbook, as we operationalize that and scale that, seeing some really good momentum there in our business. And then as far as our strategic, my strategic initiatives, You know, the strategy is working. So I'd say two years ago when, you know, I came in as co-interim CEO, I made some changes. We looked at our take rates and we, you know, right-sized our take rates, making sure that everything is now profitable. We moved out the direct business. That's the product that we're buying. Got rid of unprofitable categories. I see that sticky and not changing, right? So feeling really good about that strategy. You're seeing it work. You're seeing it in Q3. You're seeing it in Q4 of an implied guidance of 9% in Q4. So all of those things are great working. Return to growth is a big kind of, you know, talking point for us internally. And we'll continue to change the way people shop. And then, you know, as far as innovation goes, you know, we'll expand on that with the idea that we'll continue to be supply-driven when we think about new ways to also acquire supply.

That's all super helpful. Thank you. Maybe a quick follow-up for Ajay. Just on gross margin, continue to see some nice gains in consignment gross margin. Is there further opportunity there as we look beyond 2024?

Thanks for the question, Mark. You know, we feel really good about our results in Q3 on gross margin. I know you pointed out consignment margins coming in at 86.6%. A couple of things I would say that really drove our gross margin performance as a business in Q3, 74.9%, nearly 75. That was the highest we've reported as a business. One big driver there really is the mix of consignment revenues. When you look sequentially, we had We have a strong quarter with a lot more of our revenues coming from consignment revenues, and that drove the aggregate gross margin of our business higher. To your point on what you should expect going forward, I think we're sort of in the right place right now. Mix may have a small impact on our margins on a go-forward basis, but be really good about where we stand today and expect that to be in that same range.

Great. Thanks for taking my questions.

Thank you. And our next question, coming from the line up, Ashley Owens with KeyBank Capital Markets. Your line is now open.

Great. Good afternoon, and thanks for taking our questions. I just wanted to start on the price sensitivity within the consumer circle back on this last quarter, just given it was called out as a make-up in volume to offset some of this. We saw slight improvement in the AOV year-over-year growth from 2Q, so maybe just an update there, and if you could help us on how we should be thinking about growth in volume versus AOV in the fourth quarter.

Yes, so I'll start, and now Jay, please add on as necessary. So, you know, as far as macro and price sensitivity, I will say that our business has been quite resilient. I think that's the most important thing. We talked about supply being strong, but demand is also strong. This intersection of value and luxury is really resonating with our consumer. And, you know, as we continue to focus on trust and our three pillars around our growth playbook, operational excellence and obsessing over service, really giving that seller and that buyer what they want. So we're going in heavy on making sure people understand that we are a value play and And that goes, I can give you some tactics on that, but that's making sure that every item shows the primary list price. So you can really see that value come in on the product listing detail.

Okay, great.

And then just one follow up with marketing leveraging a little bit more in the quarter. Wanted to click down a bit on the strategy there heading into holiday, just how we should be thinking about that as a percent of sales on a go forward basis and what the right level should be.

Yeah, so the marketing piece, you know, this goes back to the three-legged stool with marketing. We'll continue to see efficiencies. You should expect some seasonality there. Q3 is a lower spend quarter based on the summer months, Q4 being the holiday. You'll see a higher spend quarter. That said, we're continue, feel confident continuing to drive efficiencies. We've invested in talent there. You know, our acquisition costs going down, SEO, better attribution, really understanding, you know, where that dollar is going and is it incremental to our P&L. They're also launching some lookalike campaigns and personalization and marketing. So we're excited about the opportunities there over the next year or so.

And maybe just to add to that, I would say that what you're seeing in our Q3 results in marketing is a combination of the investments that Rathi just highlighted and them being funded by our ability to find efficiencies and productivity and how we've been spending our money compared to the past. You might remember we brought in a new CMO fairly recently, and we were just Our investments in improving the technology behind it and how we think about approaching marketing is really helping pay for some of the investments that are driving the total volume.

Great. I'll pass it along. Thank you. Thanks, Ashley. Thanks, Ashley.

Thank you. And our next question coming from the lineup, Bobby Brooks with Northland Capital Markets. Your line is now open.

Hey, good afternoon, everyone. Thanks for taking the call. So first question is, some luxury houses whose products fill your shelves have seen weaker results recently. And that's really in strong contrast to your great 3T results and the guidance raised for the year. So obviously a big difference between those brands. They have a large exposure to Chinese consumer, which RealReal does not. But outside of that, could you talk, could you maybe just remind us all how real can still grow despite headwinds being faced in the first hand?

Yeah, thanks. Thank you, Bobby. Thanks for the question. You know, I will just double down on we really do have a resilient business model. We're very different from the primary market. And you heard me say this, and I'm going to say it again. The intersection between value and luxury and even sustainability is really resonating with our consumer. We're in a really great place with supply. The supply growth book is working. We've grown the business in the past. We know what this playbook looks like. And then the demand piece we talked about, that value play, the consumer is really, you look at our average order value, you look at our average selling price, quite strong conversion, all of these metrics and KPIs from top to bottom. So we have a lot of momentum in the business and we're feeling excited about that. And I think that's what you're hearing. What we're really focused on to continue to drive that is those three pillars, right? It's the growth playbook that you heard me talk about, sales, marketing, retail all coming together. It's operational excellence. And it's assessing over service and really delivering products that resonates with our consumer base. making the service fast, easy, where they can earn more. We're doubling down there as well. And, you know, the idea that we have a diversified product mix also really works in our favor as well.

Thank you.

And our next question, coming from the lineup, Marvin Fung with BTIT. Your line is now open.

All right, good evening. Thanks for taking my questions, and congratulations, Rati, on the new role. Yeah, most of my questions have been asked here, but we get a lot of questions from investors, kind of more looking kind of long-term, so perhaps a question for Ajay, but throw this out to anyone. Just about sort of the, you know, the algorithm we should think about in terms of sort of like flow through or you might want to call it incremental margin as we sort of think about 2026 or beyond. You know, so it looks like, for instance, incremental margins in the third quarter were over 60%, but dropping off a bit here in the fourth quarter based on your guidance, but just what's a good incremental margin to kind of use, you know, once we sort of hit like 2026 and beyond.

Thanks for the question, Marvin. You know, here's how I think about margins over the long term. I think it's helpful to frame where we are today. You know, we made a number of business changes starting back in late 2022. These changes were primarily directed as a first step of getting the business to being EBITDA break even, adjusted EBITDA break even. And I'm really pleased with how that has played out. You know, you've seen the proof points in our results so far. and that positions us really well looking forward. I think going forward, we have a clear path to growing both dollars and margins at the real, real. We're going to see strong flow through on growth. Our gross margin is at 74.9 for the total business, and in particular, 88.6% for consignment revenues, that being the focus areas of our growth, combined with unit economics are going to give us strong flow throughs on incremental growth from here. Bharati highlighted our focus on operational excellence. We believe there's opportunities to further improve on our unit economics, and we continue to work on those areas. We continue to work on finding efficiencies in sales and marketing, in logistics, in authentication. And we think our rich data set really gives us a comparative advantage in how we can drive efficiencies across our business. So we expect that to further improve the flow through going forward. And the last thing I would say, Marvin, in terms of where we get leverage from, it's our operating expenses. We feel like we've got the right investments in product and technology in our fixed cost facilities, footprints, and we expect to see strong operating leverage from incremental growth on that line as well.

Great. And my follow-up question, I think I think it was called out that the return rate was improved, and by my math, it seems like it was a lot better in the third quarter. What kind of drove that, and is that sustainable? And then as a corollary to that, I believe you're now allowing people to pay a fee to return items that are like final sale. Could you maybe comment on uptake of that and some of your other monetization initiatives? Thanks.

Thank you, Marvin. So return rates are lower. It really is driven out of mix. That's the primary reason that they're lower. Operational efficiencies is also a factor. So that's the assessing over service, making sure that the attributions that are driven by AI faster, not only does it make it faster, but it makes the listing more efficient. So we're happy about that. But, you know, again, it's driven out of mix, so it depends on what the mix looks like within the quarter. As far as return insurance goes, that is something that we are testing our way into. Super early days. We'll definitely have a read over the next couple of quarters. And it's mostly on final sale items as well as handbags. So happy to give you more information as we continue to test this initiative.

Got it. Thanks so much. Appreciate it.

Thanks, Marvin. Thank you.

Thank you. And our next question coming from the line-off, Ike Borja with Wells Fargo. Your line is now open.

Hey, this is Robert. I'm for Ike. Thanks for taking my question. Most of mine have been asked already. Just maybe you can talk a little bit about the consumer trends you saw through the quarter, because I think last quarter you were talking about, you know, it was slowing a little bit. You were having to be a little bit more promotional, but you kind of blew it out of the park this quarter. So any color you can give on that and how it looks existing?

Yes, sure, Robert. I can answer that. You know, I take this back to the consumer health and our business model being quite resilient. So I'm going to double down on that message there. We are seeing, you know, we've said this before, we're a supply-driven company, and it's all about supply. Supply is in a very good place because of the initiatives that we've been running over the last couple of years. Sales, the retention numbers of the sales team, the referral program is really working, you know, around marketing and our personalized promotion strategy, as well as retail, meeting the seller where they are. We're offering now van pickups for supply. So if supply is in a good place, you will see the demands follow. And, you know, even in a harder environment, we found that to be true. And because people are looking for that value play. So, you know, for us, it's really about doubling down on our core business, our moat, building trust with our consumer, focusing on the growth playbook, operational excellence, and obsessing over service and meeting the seller where they are. So we're going to continue down that path.

Robert, thanks for the question. Let me add a couple of points to Rathi's answer. We did see acceleration through Q3. I think the very beginning was a little soft, and then we saw gradual improvements from there, and we feel really good about how that momentum has continued into Q4. We look at average order values as an indication of consumer preference to your question, and our average order values in Q3 at 522 were strong. They were resilient. They've stayed above $500 for us on a consistent basis, and they were actually up when you compared versus prior by about 2%. So I think all in, we feel really good about how the quarter played out and what that means for us going forward.

Thanks. We appreciate it.

Thanks, Robert.

Thank you. And our next question, coming from the lineup, Jaisal with UBS. Your line is now open.

Great. Thank you so much. My question is if you could just really clarify what's driven the upside to the guidance of all the different growth initiatives that you've talked about. What is it that's really changed from not just last quarter to this quarter, but really from the beginning of the year until now? Thank you.

Thanks for the question, Jay. I think on Q3 in particular, the story versus expectations for us was driven by a few things. First and foremost, I would point out to volume. Rathi mentioned our growth playbook. We've always described our business as being driven by supply. And we're really feeling good about how that combination of sales and marketing and stores is unlocking supply. And once we find the supply in our business, our sell-through rate is really strong. We have over 90% lifetime supply. So volume, driven by our growth playbook, unlocking supply was one big factor in expectations in Q3. The other point I would make on Q3 is gross margin. You'll notice that sequentially we were up on gross margins, and at 74.9%, this was our highest ever gross margin as a company. That was driven by a favorable shift in mixed towards consignment revenues. When that happens, it lists the overall gross margin for our business, and that was another source of upside for us in Q3. And the last thing I would say is our focus on operational excellence. you know, we continue to look at opportunities where we can drive efficiencies in the business. And that resulted in strong bottom line performance. We reported positive $2.3 million in EBITDA, which was also the second time we've done that. And more notably, I think in Q3, it's, you know, particularly pleased because it's not a seasonal high quarter for us. We managed to do that, you know, at a point which is, which, you know, we would previously, I would say we were probably not quite there yet.

Got it. Okay. Very helpful. Thank you so much.

Thanks, Jay. Thank you. Ladies and gentlemen, at this time, we have no further questions in the queue. This will conclude today's conference call. Thank you all for your participation, and you may now disconnect.