RealReal Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 13 speakers on the call.

Operator

Welcome to The RealReal Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to Caitlin Howe. You may begin.

Speaker 1

Thank you, operator. Joining me today to discuss our results for the period ended June 30, 2023, Chief Executive Officer, John Correll President and Chief Operating Officer, Raffi 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 ks and subsequent quarterly reports on Form 10 Q.

Speaker 1

Today's presentation will also include certain non GAAP financial measures, both historical and forward looking, with historical financial measures

Speaker 2

we

Speaker 1

have provided reconciliations 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, 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 RealReal.

Speaker 3

Thanks, Caitlin, and welcome to our earnings call. Today, we reported financial results for the Q2 of 2023. GMV and revenue exceeded the midpoint of our Q2 guidance and adjusted EBITDA exceeded the high end of our Q2 guidance range. The improvement in profitability was largely driven by our ability to maintain The higher margin consignment business, while we purposefully limit direct revenue. Additionally, we continue to make progress on minimizing Low value consigned items.

Speaker 3

These actions resulted in higher average order value, a higher gross margin rate, reduced company owned inventory and a smaller adjusted EBITDA loss compared to the prior year. Beyond our financial metrics, we are seeing positive trends in our net promoter score and consignor satisfaction. The consignor concierge team that we implemented over the last 6 to 9 months is enabling us to deliver a truly luxury and personalized experience to our client. In addition, during the Q2, we added more than 1,000,000 new members, taking our total membership base to over 33,000,000 members. Through the first half of the year, we have been working on 3 key initiatives.

Speaker 3

1st, grow profitable supply, which is driven by our revamped consignor commission structure and potentially could be augmented starting next year through new supply partnerships. 2nd, improve efficiency through our pricing algorithms and technology improvements in our operational processes. 3rd, pursuing new revenue streams, including on-site advertising. I'm excited about some of the green shoots we are seeing in the business, especially in relation to our new revenue streams. We have started testing 3rd party ads on our website and the early indications are positive.

Speaker 3

These initiatives continue to drive improved financial and operational results. Today, we are updating our full year 2023 guidance. In addition, we continue to expect to be profitable on an adjusted EBITDA basis for full year 2024. Over the past few quarters, we have made significant changes to our business strategy and tactics, and we believe we are well positioned to capitalize on our consignment business As we continue to be the market making leader in luxury resale. With that, let's open the call for questions.

Operator

And then wait to hear your name announced. Our first question comes from the line of Kunal Madhukar with UBS. Your line is open. Hi, thanks

Speaker 4

a lot. This is Jason on for Kunal from UBS. I have a couple of questions. So the first question is, I was wondering how you guys are thinking about the gross margin in the near term. You guys talked about the changes the company has been making to the business model, Which should then yield gross margin improvement soon.

Speaker 4

So my question is actually like where would roughly the gross margin be exiting this year? And Also, what would be the embedded gross margin target range for you guys to achieve the full year profitability target for EBITDA in 2024? Thanks.

Speaker 2

Sure. Thanks for the question, Jason. This is Robert Schullein. I'll take that one. So we have seen ongoing and continuous Improvement in our gross margins primarily due to the change in mix of our business where we have focused more The very profitable consigned business and we have deemphasized the direct business.

Speaker 2

And as you've seen from our results, the consigned business Generally, it's about an 85% margin business. And traditionally, the direct business is more like a 15% business, This looks in the first half of the year has been more flat

Speaker 5

as we've been

Speaker 2

trying to move the inventory sort of Less favorable than we've had the discount. So what you've seen is this change in mix and a significant improvement Over 900 basis points again this quarter. So for the first half of the year, we ended up at about 65% gross margin. We expect that to continue to improve in the second half of the year. I've said in the past that gross margin could reach high 60s even potentially scare a 7 handle, though we haven't committed to that.

Speaker 2

That's the trend you should expect is continuing improvement and then get into the very high 60s. And that would be sustainable Once we get to that rate because we continue to follow this strategy of really focusing on the high margin consigned business.

Speaker 4

Got it. Thank you so much. My second question is on your growth outlook beyond Q3. I mean, obviously, things seem to be decelerating in the near term, but Could you please comment on the puts and takes in order to achieve your 2024 guidance at Q3? Like how much of your guidance would you say is related to your assumption around Like macro improvement in 2024 versus like company specific drivers?

Speaker 4

Thanks.

Speaker 3

I think we're taking an entire portfolio approach here. What you've seen is, As we've said before, this is a reset year where we're really minimizing the direct business, growing the consigned business And making sure that the consigned business we operate actually is more profitable or profitable on a per unit basis. We had to walk away from a lot of merchandise under It's $100 And then I've been here almost exactly 6 months now and we're looking at new forms of revenue that we've been discussing, Advertising being another aspect of that portfolio and we're actually looking for other new revenue streams. We've talked to you in the past about things like warranty, Return insurance, thank you. Those and the other thing that we've really started talking about now On this earnings call is other forms of inventory.

Speaker 3

When I got here, I was a little surprised that we took possession of all forms of inventory. What we're building out now in the back half of the year is our ability to put merchandise on the site that we still make sure is authentic, But we don't necessarily have to take possession of those goods before they sell. The example I like to use is somebody who sells watches in a shop. If they have a used watch business, they can't shut down their shop and give all of our inventory to sit in one of our warehouses, but they could maintain that inventory locally and represent that merchandise on our site, ultimately ship it to us for authentication and then have that reach the customer. So it's a complement of our core business Really being focused on consignment, augmenting that with additional supply partnerships via trusted partners And again, adding to that additional forms of revenue, creating a portfolio that leads to profitability in 2024.

Speaker 2

Jason, I'll just add a little bit of color to that as well just for modeling purposes and so on. You've seen in the first half of the year is our direct business has declined by 50%. And we've talked about this that this is a reset year. We are resetting the baseline We are shrinking that direct business very intentionally and that trend will continue in the second half of the year. In addition to that, We have deemphasized items under $100 and we have exited some categories, whether it's home or kids and so on.

Speaker 2

And that will continue throughout this year. This is a reset year. So those trends are going to continue to happen. It is done quite intentionally. And that's why I try to encourage folks to get past the headlines of what is GMV in aggregate doing, what is revenue in aggregate doing.

Speaker 2

And on the surface, it seems quite negative because it's shrinking. But it's important to recognize that we're doing that on purpose and that's why the gross margin It's improved 900 basis points and it is why we are narrowing our adjusted EBITDA loss so significantly year over year. Now at some point, we will reach this new normal in this new baseline after the reset, and we will return Being a growth company, a double digit growth company in the future, but this year is a reset and you really have to get past the headline of these Declining GMV and revenue numbers.

Speaker 4

Got it. A quick follow-up on that one. So As you're moving away from the company owned inventory model, like how can we think about the new run rate of inventory days for like year 2024, for example?

Speaker 2

Jason, the question about the inventory and our inventory being, we own very little inventory, but we've Reduced it significantly year over year and our inventory balance is quite small. We do have some further reduction of inventory to go with what was used to be vendor purchased inventory. We're buying inventory to resell it Sort of in a traditional retail model, but that part of our inventory balance of our total inventory balance of roughly $26,000,000 that portion is about 7,000,000 And so we continued and intend to reduce that to 0 eventually, but then we'll get to some nominal inventory amount that's Represented by auto policy returns and some get paid now, some recovered inventory and so on. And at that point, you should Our inventory balance to more or less grow at the rate that the business grows. But we've gotten down to Pretty close to what I would consider a new normal in our inventory balance, which is significantly less And even a year, I think at the end of Q2 last year was $73,000,000 or $74,000,000 That balance is now 26,000,000 I think we've pretty much gotten to the end of that road in terms of getting to a new normal on owned inventory.

Speaker 4

Got it. Thank you so much. Appreciate it.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Rick Patel, Raymond James. Your line is open.

Speaker 6

Thank you. Good afternoon, everyone. Can you update us on where you are in terms of marketplace monetization? Are you comfortable with the commission structure you have in place? Or do you see room to take it higher?

Speaker 6

And also, I think you touched on augmenting the commission Structure in 2024, hoping you can expand on those comments.

Speaker 7

Yes. Thank you for the question. So I can take that one. I'll Start there and John and Robert add as needed. The commission structure, I think is what you're referring to there.

Speaker 7

And we made that change just to remind everyone, we made that change back in November of last year and the objective was Get more high value, reduce the low value inventory items under 100 and continue in the mid value area. So We continue to optimize and tweak, I would say, the commission structure and kind of test or iterate our way into it. The high value doing what we want to, really good news there, items under $100,000,000 We are again Getting rid or declining that inventory, the commission structure did that. We do need to tweak the mid value, and I think that I mentioned that on the last call as well, and we Continue to do that, and we're just becoming more sophisticated and smarter in how we're doing that and the tools and levers that we Can you so getting more personalized in our promotion cadence, you'll see some win back campaigns going on to continue to retain those sellers in the mid value area.

Speaker 2

And I guess I would add to that, Razzi, this is Robert, Rick. There's no finish line. There is no final commission structure that we're trying to achieve. It will be dynamic. And we will continue to test and iterate and find the right balance and react and be nimble.

Speaker 2

I think we got it pretty Done pretty well in the first change that we made, the mass change that we did on November 1. Maybe we got at 80% or 90% there. But I don't think we'll ever be 100% there per se. It will be dynamic and we will test and iterate in the market changes.

Speaker 7

And a more personalized approach, Right. More precise. People have different reasons that they can sign with us. And so getting more in tune to what those are and And hitting them with a different cadence or promotion structure.

Speaker 2

Can you repeat the first part of your question? You had a question I don't know if it's the market or data monetization. Would you could you clarify your original question?

Speaker 6

Yes. The original was just around marketplace monetization and how comfortable you were with the updated commission You have in place and whether you saw room to take the commission structure even higher versus what you have right now?

Speaker 3

Yes. I think we covered that one.

Speaker 6

Great. And then can you also touch on Product acquisition in the markets where you've closed retail locations, have you been able to pick up supplies through other means? And what's Your comfort level with product availability going into the back half?

Speaker 7

Yes, for sure. So we to remind everyone again, we closed a few locations, 2 flagship stores, 2 neighborhood Stores and a couple of luxury consignment offices. Again, another dynamic strategy based on what stores are doing Well and what maybe have opportunity and not as much EBITDA when we look at the P and L that are store specific. We're still quite bullish on stores. I'll say that firstly.

Speaker 7

We're seeing continue to see the halo effect, new consignors coming through the store, average Item value coming through the store is quite high, and we find that the sellers are quite sticky when they're working with retail and when they're working with our sales So we're continuing to look at new locations, like expect to 1 to 2 stores a year, and we'll continue to look at that. As far as the Stores that we closed, I'd say it's a market it's a by market decision and kind of results. So The flagship store's right decision based on the rent that we were paying in some of those locations and when we look at those P and L Neighborhoods the same. We were able to move most of that business into our in home channels. And then we're kind of taking a look at some of the other Luxury consignment offices and seeing if there's opportunity in some of the other markets.

Speaker 7

We want to get back into Miami, for example, Chicago, San Francisco, so the neighborhood store is definitely the winning recipe and we have a playbook here on this and you Expect to see more of these in the future, but we'll be quite prudent in how we operate and the operating expenses involved as well as the lease negotiation.

Speaker 6

Thank you. All the best.

Operator

Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

Speaker 8

Hey, everyone. Two questions. First, just at the high level, can you talk a little bit more about the consumer Buckets that you guys are dealing with, are you seeing any additional pressure on the higher tier consumer? There's Definitely been some data points on U. S.

Speaker 8

Luxury trends in the U. S. Kind of softening over the prior couple of months. I'm kind of curious if you've seen anything of that nature inside your business?

Speaker 7

Sure. I can start. So as far as macro is concerned, and I think I mentioned this On every earnings, I'm always looking at the top of the funnel. I'm looking at traffic, I'm looking at leads, the sellers, conversion is flat to the page. When I look at conversion on high value, also flat.

Speaker 7

So that said, new members are up 16% year on year, active buyers are up. So all of our leading indicators are not showing a sign of slowdown on the buyer side. That said, we're always supply constrained. I have confidence that if we get the supply, we can sell it, and we're seeing the health of the consumer being quite strong. So our really our focus is making sure we get the right supply in.

Speaker 8

Got it. And then maybe a follow-up maybe for Rob. Just when you look at the balance sheet, can you maybe walk us through, I'm sure you can't give us Specifics, but your high level views on cash burn the rest of this year, cash flow or cash burn next year. And As you start to look at the 2025 notes that are coming due, I mean, how are you have you started to have internal conversations about how to address that? I'm just kind of curious if you can Sorry to talk about that.

Speaker 8

I know that's still a little bit a ways away, but I'm curious if you guys are having conversations about how to deal with inevitably deal with that.

Speaker 2

Sure. Yes, happy to Ike. So the first part of your question about the cash and the cash burn, It will certainly be a tale of 2 halves for us. And we've talked about that in the past and you can see it reflected in the difference in projected actual adjusted EBITDA in the first half of the year and projected adjusted EBITDA in the Second half of the year, if you take the midpoint of our guidance, adjusted EBITDA is about a $49,000,000 loss and 1st half and at the midpoint of our guidance closer to 2020. So you'll see a change just naturally from the improvement in the profitability of the business.

Speaker 2

There was also some things on a cash burn basis in the first half of the year that was a little unusual. There was some restructuring expense As we were closing some retail stores, as we exited some office space and did some other restructuring layoffs and so on, we did have Some cash burn associated with that also will not feed in the second half of the year. And then finally, I would look to our CapEx Timing in the first half versus the second half, we were a little heavy on CapEx and timing in the first half of the year where we put in a Pretty significant pick module in our authentication center in Phoenix. We added some conveyance to the warehouse and we've added an idle packaging Machine some other things that's going to produce more efficiency going forward, but was heavy from a cash point of view in the first half of the year. So We expect the cash burn to be significantly lower in the second half of this year and then we expect it to be even better next year as we have committed to being adjusted EBITDA positive in 2024 and beyond.

Speaker 2

So I think you're going to see very positive trends in that regard and I'm not overly concerned about the cash position or cash burn per se At the moment, now the second part of your question is about our capital structure, and we have talked about that. And we have said it was our intention To address the capital structure in the convertible notes and as you know the 2025 notes have a date that they come due Sort of mid-twenty 25 and the 28th or early 28th. And so we continue to work on that quite actively. The management team in conjunction with our Board looking at our options in different ways to find an ideal capital structure and to give us additional runway and to prevent anything from coming current. And so we continue to be committed to addressing that in the short term.

Speaker 2

In the past, we've talked about by the end of the year, and I'm so hopeful That we could address that by the end of the year. If it's some for some reason, it's not the end of the year, it would be very soon after that. So I would say within the next 3 to 6 months, we will certainly have a solution for that and we'll share that with you at the time, but I'm actually very, very optimistic We have very good options for addressing our capital structure and our convertible notes, and you'll hear more from us on that soon.

Speaker 1

Very helpful. Thanks. Thank you.

Operator

Please standby for our next question. Our next question comes from the line of Anna Andreeva with Needham. Your line is open.

Speaker 9

Great. Thanks. Good afternoon, guys. Two questions from us. On marketing spend, it's been coming down the last couple of quarters.

Speaker 9

And I know you talked about reducing some of the TV spend, but can you talk about where you're finding efficiencies? And how are you thinking about marketing as a percent of sales as implied in the guide this year? And should it keep coming down as percent of sales within reaching profitability goals for next year? And then secondly, the number of buyers declined slightly sequentially. Is that the result of the low value reduction?

Speaker 9

And how are the gross adds performing on the business? Thank you.

Speaker 3

Yes. I'll start on the marketing side, Anna. Thank you for the question. I think what we're doing is really narrowing Target down to knowing exactly who our customer is. As we've always talked about, we're a supply constrained business.

Speaker 3

So the demand happens, Right. It doesn't we don't take it for granted. But in terms of where we really need our dollars to work hardest, it's actually finding the consignors and actually getting the supply on to the website And into the stores. So what you've seen is us probably moved away from mass and moved much towards more personalized Advertising at the top. So there's a lot of targeting capabilities out there from the land of Internet marketing.

Speaker 3

We're getting a lot better from a television perspective With over the top and advertising, things of that nature. So I think we're doing a much more effective job targeting Supply and the buyers that can become consignors at the mid and upper part of the funnel. The other thing that I would say we were doing is really Looking very closely at how our marketing dollars change behavior. Rafi talked a minute ago about Adjusting the commission structure in a more personalized manner. What we're always trying to do is see how our marketing dollars work harder to drive More velocity or more units or higher value units, what are the promotions that we can add?

Speaker 3

And you spend those marketing dollars most effectively To elicit a new behavior or a behavior that we'd like to see from the customer. And what you're seeing is the results of a lot of We had to take a lot of money out of the broader spend to fund a lot of testing. I think right now I looked at the sheet and there's probably 20 to 30 concurrent tests happening in Q3, and we're seeing a lot of good results from those. And if we keep seeing results, Then we can lower our marketing spend as a percentage of revenue, more proportionate with a company that's growing Low double digits versus one that was in the past growing 30%, 40%. Those are totally different investment profiles.

Speaker 3

And I think what you're starting to see is the marketing spend adjust to the profile of what we want to be, a smaller growing but much more profitable company going forward. Ratha, anything to add to that?

Speaker 7

No, I think that's great. I think that our attribution model, to your point, is getting much more sophisticated and personalized to your point. To your second question, Anna, number of buyers, yes, that we expected that to happen based on what we talked about, which really was You emphasize items under 100, but it was quite minimal when you look at it. Look at the declining numbers and you'll see that play out for the back half of the year. I think you had a third Jen, was it ad?

Speaker 7

Oh, the ads piece.

Speaker 2

How

Speaker 7

is that looking, I think, was your question. Is that right, Anna?

Speaker 9

Yes. Just any initial color on advertising and sales for this year and for next year? Thank you, Todd.

Speaker 3

Yes. It's not a material part of 2023, as we've said many times. I'm going to sound like a broken record with lots of testing. What we don't want to do is negatively impact the core experience, right, of our buyers and consignors. So what we've honestly done is In early July, we launched advertising on 1 page, 1 page type total, and we launched it to only about 5% of the population.

Speaker 3

We didn't see any negative results, so we went to 25%. Now we've gone to 50%. What you're going to see is us continue to evolve ad placements on the site To more page types, potentially into email and definitely into the app itself. So we have a lot of traffic that comes to us in a lot of various ways, be it mobile web or the app or actually desktop, tablet. So as long as we're comfortable that the ad Is it negatively impacting the core experience and we can find new ways to monetize that traffic, we're going to continue to do so.

Speaker 3

I would say a lot of the indications are just early days that we haven't negatively impacted the experience and we're going to continue to test from there.

Operator

All right, perfect. Thank you so much. Thank you. Please stand by for our next question. Our next question comes from the line of Tom Nikic with Wedbush Securities.

Operator

Your line is open.

Speaker 10

Hi, there. Austin Verena on for Tom. I just had a quick question about your plans for the convertible shares I was going to say that, sorry. Do you guys plan on taking advantage of the discount from trading currently or anytime within the near future? And if so, like do you plan on doing that by the end of the year?

Speaker 10

Or is that something like you're just going to wait to, Sorry, refinance those at 2025. What's the deal and where you guys are thinking about how are you guys thinking about that? Sorry.

Speaker 2

So Austin, this is Robert. I would say there are multiple options and ways of addressing Our convertible notes and certainly taking some out and taking advantage of the discount is one of the options. I'm not going to Commit to any specific strategy that we are going to pursue at this time, and we are looking at everything, And we will find the best solution for the company and the shareholders and to put us into best position going forward in terms of our capital structure and our liquidity. But I'm not going to commit to any one of those specific strategies at the moment. And as I said earlier, ideally, We hope to come up with our solution and by the end of the year.

Speaker 2

That has been what we have committed to before, what we've indicated Before would be our preferred timing. And I think that there's a decent likelihood of that. But as I said, if not by the end of the year, it would be Very soon after that. So given the range of sort of in the next 3 to 6 months is most likely.

Speaker 10

Sounds good. Thank you.

Speaker 2

Thanks.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Marvin Fong with BTIG. Your line is open.

Speaker 5

Great. Good evening. Thanks for taking my questions. So first question on the guidance, if I kind of Break it down between Q3 and Q4, it looks like if I use the midpoint, the 4th quarter guidance is for GMV something around $480,000,000 or so, which would be like much better on a year over year basis compared to the Q3. So it just seems like the Q4 you have a little more optimism about.

Speaker 5

Could you just kind of Speak to that, is my math right? And if so, what's kind of driving your Q4 view? And second question, just I think you mentioned

Speaker 6

you had 33,000,000

Speaker 5

members against less than 1,000,000 active buyers. So Just kind of a higher level question, what sort of the key to unlocking all of these members who aren't currently transacting? Just any view on that would be great. Thank you.

Speaker 2

Hey Marvin, this is Robert. I'll just start by Confirming your math, I guess, to make it easier. The implied Q4 GMV that you referenced is correct. What I would say is that normal sequence of our GMV and revenue is that Q4 is always the highest quarter. You will see if you looked at Q3 to Q4 Results last year or most other years, there is a fairly significant improvement in GMV from Q3 to Q4.

Speaker 2

I will say that on a year over year basis, it still represents a decline, maybe not quite as severe of a decline that we saw In Q2 or what's implied in the midpoint of our guidance in Q3, but still a decline year over year is I mentioned before that we're still deemphasizing direct business and items under $100,000,000 and so on. So your math is right. In terms of the implied Q4, I would sort of reference previous seasonality of our business. And then I'll turn it over to Razzi and Coral to talk about other things that we're seeing in the business and what we're seeing at Top of the funnel and so on, that gives us confidence in the Q4 numbers as presented.

Speaker 7

Yes. And again, it's all about Supply, so as far as our supply initiatives, it's Karl talked about marketing, more personalized approach finding efficiencies, targeting the right items, the right sellers, that's really our focus right now, and we're testing our way into that. On the supply side, we're working again, same idea, targeting the right sellers, creating more of an outbound sales organization, Personalized promotions and then our retail is also a piece of that puzzle and making sure that we bring in the right Value and the high value that needs to come in and mix as well. So that's kind of a low cost, low risk, High reward kind of channel as well. So continue to be focused there.

Speaker 7

The forecast that we gave and guidance We gave takes into consideration what's working and what's not right now, and kind of deemphasizing the lower value business. So we feel good about that. And then your second question was on members. I think it was I think your question was buyers not consignors, Right. And kind of how can we unlock that from a supplier perspective and unlocking more.

Speaker 7

And to be honest, that's gone up. So it was closer to 10% a few years ago. I think now it's closer to 15% as far as buyers and consignors are concerned in that ratio. And it's really again targeting them, coming back with a specific promotion. We'll continue to optimize that.

Speaker 7

Reconcine is another lever that

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Loren Shnek with Morgan Stanley. Your line is open.

Speaker 11

Hey, this is Nathan Feather on for Loren. So really encouraging results on the bottom line. Understand that this year is a recent year with the pullback of 100 items, vendor purchases, If we strip out some of those one time impacts, how should we think about what GMV would be growing? Any way to quantify that would be helpful. And then on the advertising side, any way you think about the take rate you're aiming to achieve as you roll that out?

Speaker 11

Any reason why you couldn't get to kind of industry rate there? Thank you.

Speaker 2

Nathan, again, I'll start and I'm going to maybe I'll reframe the question a little bit. I won't speculate on what Our growth rate would have been in 2023 had we not changed our strategy or gotten out of direct or items under 100 or different categories. But maybe the better way to frame the question is, what do we think our ongoing growth rate might be the new normal once We have reset and we have this new baseline of good business and the proper proportion of consigned business to direct business and so on. And I think we still feel confident that this could be a double digit growth business, a 10% growth business, give or take, Whatever you want to give us a range for that. But we still believe that once The reset is complete that we can grow this business double digits, 10%.

Speaker 3

Yes. And I think it's a combination of our traditional consignment Business that we've talked about and now what we're also calling the supply partnerships. So the good news about the supply partnerships, if we wait and don't Actually authenticate the good until after it's sold, that has a different cost profile to it as well. And I think that's incredibly important in a supply constrained business To say, what are these other forms of supply that we can bring to bear to our marketplace that is basically Has an abundance of demand that is constantly looking for supply. So if we can monetize that the right way and monetize that traffic Accordingly, I think we're in a really good situation.

Speaker 3

We just had to find those right partners with the right authentic goods that we can bring to the customer in a timely manner and meet their high expectations for a really high touch, high service marketplace like we have. And in terms of your advertising question, we fully expect to deploy advertising in a brand Complimentary way throughout the site. So what are the brands that we want advertising on our site? Can we find those right type of partners, Via travel, finance, all those types of things that our customers are used to seeing that, again, complement what they're doing on our own site. So if we can find that, we have 1,000,000,000 and 1,000,000,000 and 1,000,000,000 of page views on the site, on the app, Etcetera, how do we monetize that in the right way?

Speaker 3

And again, the last thing I want to do is destroy our core business or damage our core business in any way. But if we can put complementary advertising in there, there is a nice monetization strategy in there. What you don't see us doing Is sprinting to make 7 digits this quarter and just helping the number and in the short term, But doing damage in the long term, what we're trying to do is be very judicious and really figure out where we can do it in a way that our the people who want to advertise to our customers Can do it. And again, we don't hurt our own core business.

Speaker 11

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Edward Yruma with Piper Sandler. Your line is open.

Speaker 1

Hey, good afternoon. Thanks for taking the questions, guys. I guess first, I know you said you've had certainly no dearth of buyers, but just kind of curious, Have you changed pricing or has your outlook changed pricing given some of the weakness in some of the entry level pricing as well as maybe some of the softness in the gray market? And then just as a follow-up, I know historically, you guys have clearly done a good job managing inventory down. You seem to have a lot of returns in the Q4 that kind of fall in the Q1.

Speaker 1

So do we Should we

Speaker 4

assume that inventory levels will kind

Speaker 1

of tick back up at least seasonally? Thank you.

Speaker 7

I'll take the first question on pricing. No, we're not taking down pricing. If anything, like for like items have gone up, and super dynamic based On the market based on the item, based on the number of sessions to the views and all the information. So, we'll continue to optimize pricing and tweak it according to the market. We always say we don't set the price, the market sets the price.

Speaker 7

But again, like for like items has gone up.

Speaker 2

And I'll take the second question on the returns and seasonality Q4 to Q1. Generally speaking, returns does not impact our owned inventory. The only time returns impacts our owned inventory if it is out of policy And we agreed to take it back after the consignor has been paid and then it impacts our owned inventory. But most of our Inventory, I'm saying that in sort of air quotes, is consigned items and therefore not on our balance sheet It's just our own inventory. Maybe there's a correlation if you get More returns, maybe there's more out of policy returns, but generally speaking, I'm not concerned about that moving our owned inventory balance.

Speaker 3

And that would be based on the percent.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Mark Auchtwager with Baird. Your line is open.

Speaker 12

Thank you for taking my question. A couple of follow ups regarding some of these new revenue streams you're targeting. First with kind of the B2B opportunity you outlined previously. Any high level aspirations you can share on where you think that can get in terms of the percentage of your GMV over time, if some of those Supply relationships where you're not taking consignment. And then I apologize if you touched on this, but how should we think about the overall margin profile of That business considering both take rate and the fact that the cost structure is a bit different.

Speaker 12

So that's number 1. And then just 2, Understanding very early days, but as we think about the plan for breakeven EBITDA 2024, Are you assuming material contribution from things like advertising and some of these newer supply relationships? Thank you.

Speaker 3

I'm going to start with the advertising. It's early days. It is part of our Plan to get to EBITDA positive in 2024. That's why we're testing as much as we can in 2023. The Actual amount, obviously, we can't disclose that, but that is part of the plan.

Speaker 3

And then in terms of the margin profile of what we're calling these supplying partnerships, The goal is to make it so that the net margin is as close as possible to our consignment business, which ends up in a really good spot. If we can avoid the cost Of photography, of writing the copy, of shipping the goods multiple times, anything that we can do, Those are things that we could actually share in terms of the cost structure with the partner themselves. So the last thing we want to do is get into a deleveraging margin business and have it grow to be a large percentage of our business. But at the same time, we've shown if we have supply, we can sell it. So what we had to do is find that right balance of where is the supply And where is it accretive and non cannibalistic of our other product?

Speaker 3

If we can find all that merchandise, then that too becomes A material part of our 2024 earnings profile.

Speaker 2

Yes, Mark, it's a really good question. It's an interesting question about these Partnerships

Speaker 1

and how it

Speaker 2

affects our P and L and how it runs through our P and L. And I would say net net on an adjusted EBITDA basis, it should actually be Beneficial to us that it could be very, very good business. It has a different cost profile as you said, But it would also have a different take rate profile. So I don't think that you should expect it to dilute our gross margin. It could actually dilute our take rate.

Speaker 2

And so that would be just a mix of a different Type of take rate and partnership that reflects a different cost structure. And I would caution people that if we go down that road and you see A degradation in take rate, but that's not necessarily a bad thing. On a bottom line basis, on an adjusted EBITDA basis, This business would be very, very profitable, but it would have a different take rate profile, a different cost structure profile And technically, not a different gross margin profile. We can talk about the nuances of our P and L and how it works and why that would be true. But I think that that's what you would expect from these partnerships, maybe a little different take rate, similar gross margin, Very accretive in terms of adjusted EBITDA.

Speaker 12

Very helpful. Thank you.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John Koff for closing remarks.

Speaker 3

Thank you for joining us today. In closing, I want to thank our team at The RealReal for their efforts to fulfill our mission, Live out our values and move our business forward. Your daily contributions to making our business run smoothly and deliver exceptional service to our clients are not only remarkable, but also inspiring. Finally, I'd like to thank our more than 33,000,000 members that are joining us on our mission to extend the life of luxury and make fashion more sustainable. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker 7

Everyone else has

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Key Takeaways

  • In Q2, GMV and revenue exceeded guidance midpoints, and adjusted EBITDA topped the high end of guidance as the company prioritized its higher-margin consignment business while curbing lower-value direct sales, driving a 900-basis-point gross margin improvement to 65% in H1.
  • The RealReal added over 1 million new members in Q2 for a total of 33 million, with net promoter scores and consignor satisfaction rising thanks to the new personalized luxury concierge service.
  • As part of a “reset year,” the company reduced direct business by about 50%, eliminated items under $100 and exited low-margin categories, establishing a leaner baseline aimed at sustainable double-digit growth once the reset completes.
  • Management is advancing three strategic initiatives—growing profitable supply via commission changes and supply partnerships, improving efficiency with pricing algorithms and operational tech, and launching new revenue streams such as on-site advertising, warranties and return insurance—where initial ad tests have shown positive results.
  • Inventory was trimmed from $73 million to $26 million with plans to eliminate vendor-purchased holdings, and the company reaffirmed FY2023 guidance and its goal to be adjusted EBITDA profitable in 2024, while working on refinancing its 2025 convertible notes within the next several months.
AI Generated. May Contain Errors.
Earnings Conference Call
RealReal Q2 2023
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