USA News Hub

Participants

Caitlin Howe; Senior Vice President, Finance; RealReal Inc

John Koryl; Chief Executive Officer, Director; RealReal Inc

Rati Levesque; President, Chief Operating Officer; RealReal Inc

Ajay Gopal; Chief Financial Officer; RealReal Inc

Marvin Fong; Analyst; BTIG

Ike Boruchow; Analyst; Wells Fargo

Anna Andreeva; Analyst; Neeham & Co.

Mark Altschwager; Analyst; Baird

Jay Sole; Analyst; UBS

Tom Nikic; Analyst; Wedbush

Presentation

Operator

Good day, and thank you for standing by, and welcome to the RealReal First Quarter 2024 financial results conference call. (Operator Instructions)ṣ 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.

Caitlin Howe

Thank you, operator. Joining me today to discuss our results for the period ended March 31st, 2024 are Chief Executive Officer, John Koryl; President and Chief Operating Officer, Rati 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 are 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 forms.
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 Koryl, Chief Executive Officer of The RealReal.

Story continues

John Koryl

Thanks, Caitlin, and welcome to our earnings call. Today, we 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 somewhat 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 Q. one and 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. Real real 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 teams compensation to better align incentives with our strategic focus on profitable supply, and we use 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 work profitably and to profitably scale the business. We project that we are on track to deliver positive adjusted EBITDA for the full year 2024 today, and 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 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 the leader in luxury presale.
With that, let’s open the call for questions.
Thank you.

Question and Answer Session

Operator

(Operator Instructions) Marvin Fong, BTIG.

Marvin Fong

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

Rati Levesque

Yes, no problem. Hi, Marvin. This is Rati. And yes, 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 you saw that our consigned revenue is growing about 30% year over year. And you know, the buyer, I would say is quite healthy overall. And looking at the top of the funnel, we look at both the buyer and seller being a marketplace and see 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 is what they’re buying terms. We’ll see average selling price goes down. So something that we’re watching, you know, to 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 really we feel pretty good about the trends.

Marvin Fong

Okay.
That’s terrific. Thanks, Rati. And my follow-up question, I just I know just kind of expand on what John was saying about, you know, integrating automation in a I know you’ve you’ve been doing that for quite some time in your authentication centers. I just have wondering, you know, as you work more on introducing AI and automation and tools, 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 setting prices and how dynamic you can adjust that?

Rati Levesque

Yes, Marvin. So when you zoom out for a second and think about where do we enable AI? And we always kind of focused on our low being supply-constrained business. Authentication is a big one for us on around supply and operations, mostly. So we’ll say pricing is a big one. We’re definitely seeing the impact like for like 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 of education and pricing. We have been and that had been impacting our business directly and were more were farther along in that area. You’re going to hear us talk about accelerated inbound over the next few quarters. We think there’s a lot of opportunity in inbound inefficiencies there and really leveraging AI there as well. So I don’t know if I missed anything.

John Koryl

No, I think you nailed it with the loan portfolio growth and additional pricing, as you talked about from a sales perspective, instead of saying, here’s your laundry list of people to call in any given day. Now what we’re giving is our sales folks, but rank order less based on web activity, historical trends, people who have consigned Mimio with us before. I mean, it is really hot right now. We would like them to go back to those consignors as a for instance, the other there 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. The consignors, especially need to be high touch. That’s why we invested in the concierge bots before. But there’s a lot of opportunity is where’s my order. We don’t necessarily need to have a human to spend a lot of time on that kind of thing. That sounds obvious, but we’re getting more and more intelligent as we tried to reduce costs in the customer service area for what I would call road questions and answers.

Operator

Ike, Wells Fargo.

Ike Boruchow

Go ahead, Harry, I guess, Doug, congrats on the quarter. Just 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 there some seasonality we should we should think about?
And then just when I look seasonally at the business from an EBITDA perspective, kind of feels like a 2Q should be doing better than the guide you guys are giving and maybe it’s just conservatism, just looking at it just historically that usually 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 have put up? Or is this just conservatism, which is great? And just those two. Those are my three questions I can take that.

Ajay Gopal

Hi, this is Jay. Thanks for the question of gross margin. What I would say there is a Q1 was very strong. We reported 74.6% gross margin. That, as you pointed out, is the highest ever we’ve seen in the business that was that benefited from the percentage of direct direct GMV, which as you know, has an impact on our reported gross margin rate and the mix was favorable in Q1. We also saw a benefit from continued expansion of consignment margins, which were also up pretty noticeably versus service prices, I would say I’d say you should expect us to be in somewhere close to this range where, you know, plus or minus a couple of points depending on things like the mix, as I pointed out, our business dynamics through the course of the year.
Your Your second question was on was on Q2 and how we’re thinking about it from going from Q1 to Q2?
There’s a couple of things that we are there are reflected as you look at our guidance there is a we always see Q2 being seasonally slightly smaller than Q1, and you’ll see that reflected in our volumes. So our GMV a show that shows that small sort of seasonal reduction that tends to happen in Q2.
On the EBITDA side, we are we are looking at a couple of things that have put some pressure on us, most notably a seasonality to us like we have we have salary increases like most other companies. We do that every every every year at this time. So that puts a little bit of pressure on Q2 versus Q1. But more importantly, and I think this was discussed in the past, we have some operational investments that we have or that we are planning on investing in these are things that will drive efficiencies in our operations and help us help us expand margins longer term. So some of that is reflected in our Q2 guidance.

Operator

Ashley Owens, KeyBanc Capital Markets.

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

Rati Levesque

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

Yes.
Also, 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 and like shipping margins, other efficiencies potentially with inventory or transport. So just kind of a refresh on all of that.

Rati Levesque

So that’s why the scale of the question is on operational efficiencies and where we’re investing without the question.

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

Ajay Gopal

I can I can talk touch on and I had this is this is Ajay here. So when you look at our reported results in Q1 and compared to compared to where our guidance was.
A couple of things. I would draw your attention to first half 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 sort of anticipated range on guidance. And so that was a source of strength for us. We had strong supply coming into the year. And we had and we saw that supply sell through very, very nicely through the quarter. And the other thing that that lead to upside for us is our gross margin. As I pointed out earlier, we came in at a 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. So that’s the last thing I would point to is up, you know, I does it does. This does create operating discipline around how we manage our operating expenses. I’m new here and I see actually the team’s 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 those sort of that operating rigor really came to a point Q1 results.

Operator

Anna, Needham.

Anna Andreeva

Great. Thanks so much and congrats on 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 compares 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 a 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.

Rati Levesque

Yes, 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. And that matter that have the right mix that have the right value in bringing them into our ecosystem and then keeping them via retention strategies so 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 bleed into Q2 like it takes a couple of weeks to get that items process, 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, as you’ve heard us talk about mid value. And back in the day, when we made all those commission changes, we had to really kind of make sure that we tweak the commission changes based on the value because in the past we’ve seen that dropping, I will say, but that’s in a much better position. We continue to kind of optimize and personalize our promotional strategy to go after that new valued supplier. And so yes, 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 kind of have to get all of these things firing at the same time and the tactics kind of in line and focus on quality and getting the right seller to bring in the right mix of product which we’re seeing in Q1.

Operator

Mark, Baird.

Mark Altschwager

Good afternoon. Thank you. First, I wanted to follow up on the supply topic just to understand that 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 that would be great.

Rati Levesque

Yes. Sure, Mark. So just kind of following up on what I was saying earlier earlier about retail marketing and sales kind of all working together is a function of both. It’s about retention and acquisition as we’re thinking about growth. So not only are we seeing better volume or better retail value coming from each of our sellers, but we’re also onboarding the right sellers and with more value and more mix. So, you know, in the past, I think we talked about you’ve heard us talk about focusing the sales team, not only on units but retail value as well. So making sure that we have the right volume in the right product to sell. So that’s one of the things we’re doing on the marketing side are also looking at the same things are being much more effective here. And they know when you target the sellers at what time high values is an example that if we need more fine jewelry or watches, we know who to target and win 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 job as well as far as drop in both and we’re seeing more high value coming through the stores. And you know, 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 that we’re getting some upside there. And we’ve launched referral and affiliate programs that are also working really well, and we’re feeling good about that, which we test our way into these things. And now you’re seeing starting to see some of that work.
And then on the tech side, it’s about a doubling of the sales team and getting smarter and more efficient there as well. So there looks a few different things working together here and we know the TAM is there. We know it’s big. We know retail is growing faster, and so we’re going to kind of continue to kind of Optimiz.

Mark Altschwager

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

Ajay Gopal

I think you I think you said it best. It is a trailing 12 month metric and as such is probably bearing a lot of it’s very some weight from the business changes that were made over the last 12, 12 months. And 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 trailing 12 month major factor of that measurement.

Operator

Jay Sole, UBS.

Jay Sole

Thank you so much. I’m just curious how you saw the competitive landscape evolve over the last quarter on have you seen your position improve? Have you seen new competitors come in exit.
Love. Any any thoughts you have about it? Thank you.

Rati Levesque

Yes, thanks, Jay. We’re always watching, you know, turned out to be so installer of 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. And we do awareness studies and compact competitive analysis regularly by our branded marketing team. And I’ll say, you know, our takeaway in our last one and most recent one that we had done was that we kind of need really need to double down on our core business, and we really need to focus on the trust that we built with the consumer. And so you’ve heard Carl talk about things like the concierge pause 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 leader in the marketplace around pricing. So that’s what I mean by pricing transparency. And so just continuing down our path is kind of really what we’re talking about as a team as we started telling pain to really solidify our LRP over the next three years.

Operator

Tom, Wedbush.

Tom Nikic

Hi, everyone, and 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 and your consignment gross margin was extremely, extremely strong. I mean, I think it was in the high 80s. It is that kind of like as good as it could possibly get to like is there like a chance that like we could eventually see like a consignment gross margin of 90% plus or like a week. Are we kind of with all the changes that you’ve made? Is that sort of what we should think of as the upper bound for gross margin?

Ajay Gopal

I tell this is a J. here, um, we didn’t talk about this, so your question is very timely. I think we I think there’s still room in our consignment gross margin. We are looking at a lot of operational efficiencies, Africa that we’re looking to drive through them through our margin structure and those all make their way into 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, right? There will be a day. 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.

Tom Nikic

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

Rati Levesque

Yeah come in oh six, same same answers before, you know, we always see kind of puts and takes, like higher end brands doing really well, like are mad Brunello new-new right now has strong momentum and then you see some brands, you know, kind of losing losing a little less and the market share. But I would say that that is something that we always see, and we take that into consideration when we’re pricing item, depending on what’s happening. I think the kind of interesting thing for us are our advantages that we are pretty diversified in our mix of categories and brands. So that helps us there. And then we have that flexibility right in price. 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, our target. And so we’ll continue to watch that. But at this moment and in Q1, it hadn’t understood.

Operator

Thank you, everyone. This will conclude our question and answer session. And now I’d like to turn it over to CEO, John Koryl, for closing remarks.

John Koryl

Thank you for joining us today. And before closing the call we’d like to thank our entire team for delivering a strong start to 2024 the real real team. Simply Thank you our 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.

Operator

Thank you for your participation in today’s conference call. This does conclude the program. You may now disconnect.