TheRealReal, Inc. (REAL) Q1 2024 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to The RealReal First Quarter 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Caitlin Howe, Senior Vice President of Finance at The RealReal. Go ahead, Caitlin.

Thank you, operator. Joining me today to discuss our results for the period ended March 31, 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 uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties, and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Today's presentation will also include certain non-GAAP financial measures, both historical and forward-looking for which historical financial measures, we have provided reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a shareholder letter earlier today, both of which are available on our Investor Relations website. I would now like to turn the call over to John Koryl, Chief Executive Officer of The RealReal.

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, combined with strong demand, resulted in a return to overall top-line growth for the first time in three quarters. These results were fueled by double-digit growth in consignment revenue, our most profitable segment. Growth wasn't the only story. In Q1, we also reported our highest ever gross margin rate, which resulted in significantly improved bottom-line results compared to the prior year. Adjusted EBITDA improved by $25 million year-over-year. For Q1, GMV and adjusted EBITDA came in above the high end of our guidance range and revenue came in at the high end of our guidance range. The RealReal is starting 2024 with strong momentum in the core business. We continue to refine our approach to sales and marketing to drive profitable supply. We reoriented our sales team's compensation to better align incentives with our strategic focus on profitable supply, and we used more targeted marketing spend to attract higher lifetime value consigners. 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 profitably scale the business. We project that we are on track to deliver positive adjusted EBITDA for the full year 2024. Today, we provided Q2 2024 guidance and updated our full-year guidance, with an increase in the midpoint of our full-year adjusted EBITDA range. We believe our continued focus on the core consignment business is working. We are growing our consignment revenue, expanding margins, delivering exceptional experiences to our consignors and providing outstanding luxury goods to our buyers. I am very excited about the momentum in our business and believe we will continue to capitalize on our position as a leader in luxury presale. With that, let's open the call for questions.

Our first question will come from Marvin Fong of BTIG.

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

Yes. No problem. Marvin, this is Rati. Yes, I think your 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 13% year-over-year. 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 as a marketplace. I am seeing the funnel being healthy in that I’m talking about marketing-generated opportunities, which lead to eventually becoming a buyer or a seller. So we feel pretty optimistic. One of the things that we also look at during this time is average selling price. If the consumer is being a little more cautious in what they're buying, then we'll see average selling price go down a bit. So that's something that we're watching. We didn’t see that too much in Q1, but we're continuing to watch that. I will say we're cautiously optimistic right now. We feel really good about the trends there.

Okay. That's terrific. And my follow-up question, just to kind of expand on what John was saying about integrating automation and AI. I know you’ve been doing that for quite some time in your authentication centers. But just wondering, as you work more on introducing AI and automation into specifically like pricing and the sales effort, 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?

Yes, Marvin. So when I think about where we enable AI, we always kind of focus on our model being a supply-constrained business and authentication is a big one for us. So I would say pricing is a big one. We're definitely seeing the impact; like-for-like items are getting smarter about how we price there. On the sales side, we're getting more strategic 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, but authentication and pricing have been impacting our business directly, and we're farther along in that area. You're going to hear us talk about accelerated inbound over the next few quarters. We think there's a lot of opportunity in inbound and efficiencies there and really leveraging AI as well. Koryl, did I miss anything?

No, I think you nailed it. We've been known for our work in authentication and pricing, as you talked about. From a sales perspective, instead of just giving our sales team a laundry list of people to call at any given day, we provide a rank order list based on web activity and historical trends. People who have consigned with us before, like Miu Miu, which is really hot right now. We would like them to go back to those consignors as a for instance. Another area is a real way of reducing costs. From a customer support perspective, we're trying to intelligently route customers. Consignors especially need to be high touch. That's why we invested in the concierge bonds before. There's a lot of opportunity to answer simple questions. We want to make sure we don't require a human to spend a lot of time answering those types of inquiries. That might seem obvious, but we're getting smarter as we try to reduce costs in the customer service area.

Our next question will come from Ike with Wells Fargo.

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 of the 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 seasonality we should think about? When I look seasonally at the business from an EBITDA perspective, it kind of feels like 2Q could be better than the guide you guys are giving? Maybe it's just conservatism just looking at it historically that it usually, I think, the losses are better sequentially. I guess I'm just trying to understand if there’s anything odd in the second quarter versus what you guys have put up or if this is just conservatism, which is great. Those are my two questions.

This is Ajay. Gross margin, what I would say there is, Q1 was really strong. We reported a 74.6% gross margin, which, as we pointed out, is the highest we've seen in the business. That benefited from the percentage of direct GMV, which, as you know, impacts our reported gross margin rates. So the mix was favorable in Q1. We also saw a benefit from continued expansion of consignment margins, which were up pretty noticeably compared to prior years. I'd say you should expect us to be in somewhere close to this range, very plus or minus a couple of points, depending on things like the mix and business dynamics through the course of the year. Your second question was on Q2 and how we're thinking about it. So going from Q1 to Q2, there are a couple of things reflected in our guidance. We always see Q2 being seasonally slightly smaller than Q1, and you'll see that reflected in our volumes. Our GMV shows that small seasonal reduction.

And our next question comes from Ashley Owens, KeyBanc Capital Markets.

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 drop ship consignment as a side business there and maybe from expanding supply as well from that perspective?

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

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

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

And our next question will be Anna from Needham.

Congrats. Nice results. Two quick ones from us. First, you're guiding for GMV acceleration at the high end for the second quarter. Can you talk about what's driving that? It's easier, so that's probably a part of that. But what are you seeing in the business quarter-to-date as well? Secondly, you've mentioned mid-value was pressured a bit in the past. How did that perform in the first quarter? How do you think about that as we go through the year?

This is Rati. So your first question on GMV acceleration in Q2 regarding demand in general. As you know, it's all about supply, and supply is quite healthy right now. I've spoken about that earlier, targeting the sellers that matter, who have the right mix and value, and bringing them into our ecosystem while retaining them via retention strategies. We feel good about the supply that came in Q1, which helps us lead into Q2; it takes a couple of weeks to process items and get them on the site. So we have indicators of what Q2 will look like. Regarding mid-value supply, yes, you heard us discuss mid-value before. Back in the day when we made those commission changes, we had to ensure we tweaked the changes based on mid-value as we had seen drops previously. That's in a much better position now. We continue to optimize and personalize our promotional strategy to target mid-value supply. Overall, we must get our retail, marketing, and sales working in unison, with tactics aligning to focus on quality and the right seller to bring in the right mix of product, which we're seeing in Q1.

Our next question comes from Mark with Baird.

First, I wanted to follow up on the supply topic. With 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? Perhaps it's a function of each of those things. Any help unpacking this would be great.

Yes, sure, Mark. Just following up on what I said earlier about retail marketing and sales working together, it is a function of both. It's about retention and acquisition as we think about growth. We're not only seeing better volume or retail value from each of our sellers, but we're also onboarding the right sellers with more value and mix. In the past, we’ve focused the sales team not only on units but also on retail value, ensuring we have the right volume and product to sell. The marketing side is looking at the same thing, being much more effective. They know when to target sellers at the right time; high value is an example of that. If we need more fine jewelry or watches, we know who to target. The stores are also about meeting the seller where they are and ensuring they are doing their jobs as far as bringing in high value. We’re seeing more high value coming through stores. Other factors are at play as well. We've talked about retention before, and we’re seeing our sales-side retention numbers looking better than ever. We've launched referral and affiliate programs that are working well, and we feel good about that. We test our way into these things, and you’re starting to see some of that work. Tech side is about enabling the sales team to be smarter and more efficient as well. So a few different elements are contributing here, and we know the market opportunity is vast.

Just a follow-up then. Active buyers are down 9% year-over-year. I understand that’s a trailing metric, but as we think about overall GMV and 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 as you drive the acceleration in GMV growth?

Mark, I think you said it best. It is a trailing 12-month metric. It's probably reflecting a lot of the business changes we've made over the last 12 months. We look at orders, which we think is a really good forward-looking metric. Orders growth accelerated quite significantly from where it was in Q4, and we would expect to see that trend slowly reflect in our active buyer numbers as we sort of lap over the trailing 12-month nature of that metric.

And our next question comes from Jay Sole, UBS.

I'm just curious how you saw the competitive landscape evolve over the last quarter. Have you seen your position improve? Have you seen new competitors come in or exit? Any thoughts on that?

Yes. Thanks, Jay. We're always watching, trying not to be insular in general, and we're looking to see what others are doing and how we can improve. Our brand and marketing teams do awareness studies and competitive analysis regularly. Our takeaway from our most recent study was that we need to double down on our core business and focus on the trust we've built with consumers. You've heard Koryl talk about things like concierge pods and listening to the consumer, ensuring that we are offering the pricing transparency they need, for example, relationships, and the full-service experience we offer, being the leader in the marketplace around pricing. So that's our approach as we solidify our long-term strategy over the next three years.

And our next question comes from Tom with Wedbush.

I'm sorry if this has been asked already. I want to ask about the gross margin and your consignment gross margin, which was extremely strong. I think it was in the high 80s. Is that kind of the best it can be? Could we possibly see a consignment gross margin of 90-plus percent? Or are we kind of at the upper bound for gross margin at this time?

Tom, this is Ajay here. Your question is timely. We believe there is still room to improve our consignment gross margin. We're looking at a lot of operational efficiencies within our margin structure, which will help us continue to expand our gross margins for the consignment business. However, to your point, we do believe that future gains will be more incremental. We still feel good about where we are today and the gains we've seen over the last 1.5 years.

All right, great. If I could follow up on Jay's question about the competitive landscape. Looking at the primary market for luxury goods, it seems far more volatile recently. Are you sensing that you might benefit from some trade down as higher-end shoppers become a little more price-conscious and may pivot toward The RealReal?

Yes. Tom, same answer as before. We always see puts and takes. Higher-end brands are doing well, like Hermès, Brunello, and Miu Miu right now have strong momentum. Others are losing a bit of market share. That's something that we always take into consideration when pricing items based on current market conditions. One interesting point is that we are diversified in our mix of categories and brands, which helps us. We have flexibility in pricing. While we continue to monitor consumer behavior regarding pricing and caution, I haven’t seen that trend yet in Q1.

This will conclude our question-and-answer session. Now I'd like to turn it over to CEO John Koryl for closing remarks.

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

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