Earnings Call Transcript - REAL Q1 2022

Operator, Operator

Thank you for joining us for the RealReal's First Quarter 2022 Earnings Results Conference Call. All participants are currently in listen-only mode. Following the presentations, we will have a question-and-answer session. I will now turn the call over to Caitlin Howe, Vice President of Investor Relations. Please proceed.

Caitlin Howe, Vice President of Investor Relations

Thank you, operator. Joining me today to discuss our results for the period ended March 31st, 2022, are our Founder and CEO, Julie Wainwright; President, Rati 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-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 stockholder letter earlier today, both of which are available on our Investor Relations website. I would now like to turn the call over to Julie Wainwright, Chief Executive Officer of the RealReal for introductory remarks and then we will go directly into a question-and-answer session.

Julie Wainwright, CEO

Thank you, Caitlin, and thank you to everyone joining our earnings call today. Before we get into the quarter's results, I want to take a moment to acknowledge the ongoing humanitarian crisis in Ukraine. Our thoughts are with those impacted by this devastating war, and we wish for a resolution to this conflict and a return to peace in the region. Today, we are pleased to announce better-than-anticipated financial results for the first quarter of 2022. During the quarter, we delivered solid topline growth despite COVID-related staff call-outs and our authentication centers early in the first quarter. Since supply drives demand, our return to normal staffing levels resulted in strong demand on our platform due to increased inventory. GMV was driven by fine jewelry and watches, high-value handbags, and strong growth rates in women's apparel and shoes. Of note, the RealReal sales in apparel are contrary to e-commerce reported retail trends. Importantly, during the first quarter, we also continued to generate significant operating expense leverage on both fixed and variable costs. After better-than-anticipated financial results in the first quarter, we are pleased to confirm our full year guidance and provide guidance for the second quarter of 2022. Notably, we continue to project the RealReal will be profitable on an adjusted EBITDA basis in 2024, and we are on track to achieve our Vision 2025 targets. These targets and projections rely on a number of assumptions: continued topline growth of at least 30%; operational excellence with improved variable cost productivity; and laser-focused discipline on fixed costs. We note that the RealReal delivered on all three of these points in the first quarter 2022 results. The near-term risk to the business continued to be inflationary pressures on our transportation costs and attracting and retaining sales and operational talent. For transportation costs, we are taking immediate steps to offset these increases. For sales and ops hiring, we exited the quarter in good shape. However, we are actively recruiting to fill positions as we grow. Looking forward, we continue to see strong demand in our business. As inflation has ramped up and prices have increased in the primary luxury market, we believe the RealReal is a demonstrated value option offering unique and highly coveted items within the luxury goods space. Therefore, we believe we are positioned for a strong 2022. And with that, we will now go into our Q&A session.

Operator, Operator

Thank you. Your first question comes from the line of Anna Andreeva with Needham. Your line is open.

Anna Andreeva, Analyst

Great. Thank you so much, and congrats on operating great in a tough environment. We had a couple of questions. The number of new buyers accelerated this quarter. Can you talk about the behavior of these buyers compared to the previous cohorts? And I'm curious if you're seeing a bigger trade down from the primary market, and just a follow-up on guidance for 2Q, you're guiding for roughly similar run-rate in GMV, despite lapping a much tougher compare. Just curious what you are seeing in the business quarter-to-date, given we’ve been hearing a lot of negative sentiment in the consumer space. Thank you so much.

Julie Wainwright, CEO

We’ll let Robert answer the second part. You should also recognize that when we give the guidance for Q2, we are now five weeks into Q2. So we wouldn’t give guidance if we didn't have strong faith in our quarterly estimate. To your first question about new buyers and cohorts, look we measure our cohorts over time. The new buyers are acting in the first quarter of buying just the same as the other buyers. The biggest shift in our business has been more apparel, which is actually growing at an incredibly fast rate, and up to where it was pre-COVID. So apparel as a shift, but the new buyers are actually like our previous cohorts. So there’s no change there. The trade down from the primary market is hard to measure. Our premise has always been that when inflation hit or a recession, we would be beneficiaries of both because we are a value player. So our demand is strong, and it's really tied to us having inventory on the site. But again, we have no way of tracking our people switching their purchasing power to purchase from primary to secondary. I can tell you in the past, people have moved away from fast fashion, and we'll monitor that and we do it every year. So that survey will go out sometime in May. Now, let's go to guidance for Q2. Robert?

Robert Julian, CFO

Yes. Thanks for the question, Anna. We feel comfortable with our guidance for Q2 on the top line. The projection is about 33.5% growth in GMV for Q2 versus last year. We feel that's very achievable. It's in the range of what we talked about with 30-plus percent growth. So we feel good about what we're projecting. As Julie mentioned, we're a month into the quarter at this point. So we actually have one of the three months in the books, and we feel good about the trends and the projections that we see.

Anna Andreeva, Analyst

Great. Can I just squeeze another one? Just a follow-up on direct sales. I think that it was the highest as a percent of GMV it's ever been. How should we think about the mix just for the balance of the year, especially as looking at inventory that's growing in line with sales now this quarter?

Robert Julian, CFO

Yes. So direct revenue as a percent of total revenue was in fact higher than normal. In Q1, it was about 34% of our total revenue. Last year in Q1, it was 25%. That's really a function of sell-through. So the inventory that we had on hand sold through at a higher rate than we expected, which did drive that percentage up in terms of the proportion of our total revenue coming from direct. We do anticipate as the year progresses for that percentage to come down. The absolute amount of direct revenue stays relatively constant throughout the year. It becomes a little bit of a different comparison because direct revenue started to grow in the second half of last year. And so the growth rate will decline as the comparison changes. And we do anticipate over time that direct revenue as a percent of total revenue will go down. We do have initiatives that we mentioned before that we are deemphasizing the direct business in favor of our consigned business model, and we do have initiatives to reduce that over time. There will always be some portion of our business that will be direct. There is direct revenue that comes from out-of-policy returns. There is direct revenue that comes from things like get paid now. That will continue and will probably grow in proportion of our top line as time goes on. The part of our business that direct business is driven by purchases from vendors and wholesale or so on, we will deemphasize. But in general overall that percentage should come down over time, which we project for the second half of the year as well.

Anna Andreeva, Analyst

Okay. That’s super helpful. Thank you so much, guys.

Operator, Operator

Our next question comes from the line of Michael Binetti with Crédit Suisse. Your line is open.

Michael Binetti, Analyst

Hey, guys. Thanks for taking our questions here. So I think you sound confident in where 2Q is headed. But as we try to look at it on a three-year basis to think about what the growth rates have been here quarter-to-quarter relative to the pre-COVID world, it looks like you're baking in a bit of an acceleration in 2Q and then a little more in the second half on that basis. Maybe just a little help because there's obviously been a lot of noise in the retail marketplace in the US at least and that a couple of the other analysts have mentioned as well. But maybe just a little up in 2Q and what you're seeing in the top line dynamics unfolding since the end of the quarter in March that boosts your confidence in 2Q?

Julie Wainwright, CEO

Before we start, I want to clarify that we operate in a sector that is often confused with e-commerce, but we are not an e-commerce business. We are a marketplace business focused on the high-end market, offering unique products that are not mass-produced. Therefore, traditional retail credit card metrics don't really apply to us, and we have been responding to this distinction. While we monitor the general e-commerce landscape and follow earnings reports, they don't directly correlate to our business model, given our position as a marketplace and our focus on luxury items. Additionally, we don't necessarily align with peer-to-peer marketplaces, which face greater margin pressures and different price points. Now, I will hand it over to Robert.

Robert Julian, CFO

We've talked before about really not liking the two-year and three-year stack view of our revenue given the very unusual result that we had in 2020 due to COVID. If you look at our growth rate in Q2 of 2020 versus 2019, it was minus 20%. And then in 2021, it was plus 92%. Now we're seeing in Q2 of 2022, it's plus 33.5% as I mentioned before. I think that's a return to normal. I don't think it's an unusual growth rate or a change in what we would expect long-term and going forward. Also, I would say that, the calendarization of our GMV over the year and by quarter is very consistent with what you would see in a typical year. Even in the strange years in 2020, the proportion of our revenue that comes in each of the quarters we’re projecting now is very consistent with that. For those reasons, I feel confident that we have a good and accurate forecast for Q2 top line.

Michael Binetti, Analyst

Following up on your comments about trade down, are you noticing any signs of trade down in your business as you examine various classifications and categories? In a way, this could be beneficial for your ecosystem as it may lead to increased visibility among potential customers if budgets begin to shrink.

Julie Wainwright, CEO

No. What we've observed, however, is that while we're selling more apparel—which typically has a lower price point compared to fine jewelry or handbags—it also provides a higher take rate for us. Our apparel sales began to return to normal in the last quarter, Q4, and continued to trend positively in Q1 and into April. Therefore, it's more about a shift in category mix rather than a decrease in spending.

Michael Binetti, Analyst

Okay. Thanks a lot for the help.

Operator, Operator

Your next question comes from the line of Lauren Schenk with Morgan Stanley. Your line is open.

Lauren Schenk, Analyst

Could you discuss the supply trends you observed in the first quarter compared to the fourth quarter? Also, can you provide an update on the supply mix you are seeing? Lastly, regarding the ending inventory balance, you mentioned that you would continue to work through that in the coming quarters. Could you break down how much of that inventory is from vendors versus direct purchases and returns? Thank you.

Rati Levesque, President

Yes, I'm going to have Robert address the second part of your question, but I'll handle the first part. Regarding supply trends, they were similar to last year and remain quite healthy. We've discussed this previously. We did face some challenges in getting products listed on the site due to labor shortages, but that is now resolved. In terms of supply mix, we are observing the same trend. As Julie mentioned, we are seeing an increase in ready-to-wear offerings from sellers. 30% of our sellers still come from stores, which is a healthy statistic. Additionally, in-home sales have returned to pre-COVID levels or are even stronger. All the metrics we monitor related to supply, such as average unit pickup, conversion rates, supply mix, and value, are all quite healthy for the first quarter.

Robert Julian, CFO

And Lauren, in response to your question about the composition of our inventory across different categories, approximately 60% of our total owned inventory comes from vendor purchases or wholesale activities. About 25% of our inventory is associated with upfront or throw-in recovered inventory, which is mainly an operational matter. Lastly, around 15% of the total inventory is related to various policies. This is reflected in the balance sheet indicating a range of $70 million to $73 million, broken down by category.

Lauren Schenk, Analyst

Okay, great. And just one follow-up. Where do you see that vendor mix going over the next couple of quarters?

Robert Julian, CFO

We see it declining fairly significantly.

Lauren Schenk, Analyst

Great. Thanks.

Operator, Operator

Your next question comes from the line of Kunal Madhukar with UBS. Your line is open.

Kunal Madhukar, Analyst

Hi. Thanks for taking my questions. I have a couple of follow-ups regarding inventory. You sold through more of your inventory than expected, but the overall inventory only increased by about $2 million to $2.5 million. Was the unexpected inventory primarily due to immediate payments, or was it more related to returns outside of policy? Looking ahead over the next few years, there's an expectation for over 30% growth in GMV year after year. Considering the deteriorating macroeconomic outlook that many are discussing, including Julie's comments about more value-conscious consumers, how might this affect the spending habits of those consumers? Will they be more affected by inflation and an economic downturn, potentially leading them to exit the market altogether?

Julie Wainwright, CEO

I'm going to address the last question. We always monitor the luxury sector, which has proven to be very resilient. Unlike low-cost businesses affected by various external factors, the luxury market remains strong. Our business model, where buyers become sellers and vice versa, gives us confidence in our position. Additionally, the early stages of our consignment process are performing very well, and we do not anticipate any changes there. While some individuals may choose to sell items for financial reasons, others will do so to acquire new ones. However, I believe our segment remains unaffected by current market declines, unlike some businesses that struggle when the market dips. The luxury sector showcases remarkable resilience. We are optimistic about our growth prospects due to our low market penetration; less than 2% of potential consignors in the US are currently on board with us, and over 40% of our consignors are new to the process. This has been the case for a long time, which means we are still educating the market about the value of consigning items they own. Once people start consigning, they often continue. Our consignors also tend to make frequent purchases on our platform, and we are successfully converting more buyers into consignors. Therefore, we are very confident about our future growth and our market standing. Now I’ll pass it over to Robert to discuss another topic.

Robert Julian, CFO

Yes. The question was about the increase in inventory despite higher sales. Referring to the categories of our owned direct revenue, I would say that approximately 60% of the inventory growth from the end of the year to the end of Q1 originated from the upfront recovered category. The remaining 40% was evenly divided between out-of-policy returns and wholesale vendor purchases.

Kunal Madhukar, Analyst

Got it. Thank you so much.

Operator, Operator

Your next question comes from the line of Simeon Siegel with BMO Capital Markets. Your line is open.

Simeon Siegel, Analyst

Thanks. Hi everyone. Just the AOV, did you say how like-for-like ASP is to normalize for mix? And then, I don't know if we're still talking about GP per order, but just any thoughts on how to think about that going forward? Thanks a lot.

Robert Julian, CFO

I guess I'll start on the gross profit per order because you guys know that's not my favorite metric. I think that gross profit per order in Q1 was about $95, that was I believe it was an increase year-over-year but...

Julie Wainwright, CEO

It was a $90. Yes $90.

Robert Julian, CFO

I think it was $85 last year. So about a $5 increase year-over-year.

Julie Wainwright, CEO

Yes.

Robert Julian, CFO

And again, it's not my favorite metric because it sort of ignores our entire cost base when you're talking about our path to profitability, but it was up year-over-year. I think it might have been down slightly sequentially.

Julie Wainwright, CEO

And then I can take the first question around AOV and ASP. AOV is up year-over-year since 2019. And there really is just an inverse relationship between units per transaction and ASP. So we did see that go up, driven out of units per transaction. And then, ASP as for like-for-like items, we are getting smarter. We have often technology which I heard about at Investor Day around testing higher prices around average selling prices. It's all machine learning driven, and we feel really good about that. And when we control for mix, we do see average selling price up.

Simeon Siegel, Analyst

Thank you, that's great. I'm curious about how we are considering any changes or opportunities regarding the take rate, as it seems to be related to the average order value.

Julie Wainwright, CEO

Yes. We do think there's some opportunities there, and we're looking at it now, because we do have some areas where we don't have a lot of competition, but we haven't completely finalized, but we do think there's some opportunities on the take rate side, mostly on the low end of the product spectrum.

Robert Julian, CFO

We did take that from.

Julie Wainwright, CEO

Yes, take rate now is up, yes, driven out of more ready-to-wear, but it's also driven by the change we made last year in taking more commission on low-priced goods, as well as unbranded jewelry.

Rati Levesque, President

And we think on low-priced goods, there's still an opportunity. When I say low-priced, I mean very low-priced.

Simeon Siegel, Analyst

Perfect. Thanks a lot everyone. Good luck for the rest of the year.

Julie Wainwright, CEO

Thank you.

Operator, Operator

Your next question comes from the line of Susan Anderson with B. Riley. Your line is open.

Alec Legg, Analyst

Hi. Good afternoon. Alec Legg on for Susan. My first question is regarding the direct revenue. Is there a significant difference between the vendor, the paid now option and the out-of-policy return margins?

Robert Julian, CFO

There are certainly different margins by category in the owned inventory. The margin is influenced by the competitive market regarding purchase prices and expected gross margins. While I can't pinpoint the differences between Get Paid Now or vendor and wholesale, there are definitely varying gross margins by product category.

Alec Legg, Analyst

Okay. And then this quarter, like you mentioned a lot of operating leverage, how much of that was driven by mix leverage versus say improving your variable cost productivity?

Robert Julian, CFO

Yes. So we saw very nice fixed cost leverage in the quarter versus prior year in round numbers, roughly 1,600 basis points on that part of our cost base. We saw very nice productivity on our variable cost base, another 250 basis points which stated in terms of variable cost productivity, it was almost 7% productivity on our variable cost base. Between the two of them, we saw 1,870, almost 1,900 basis points of leverage on our operating expenses in the quarter versus a prior year.

Alec Legg, Analyst

Perfect. Very helpful. And then my last question just on the neighborhood store strategy. How many stores do you have now and thoughts for the future? And then any metrics around the stores you can share this quarter?

Rati Levesque, President

Sure. We have 16 stores right now that are shoppable. We also have three luxury consignment offices; that’s a place where you can just go in and drop off your goods or meet with an expert. They're supply-driven. Our strategy on stores is the same as last quarter. We're opportunistic as far as locations go. If we find real estate that looks enticing, we’ll definitely take them up on it. 30% of our sellers continue to come from the stores, and both on the supply and demand side, it's quite healthy there.

Julie Wainwright, CEO

But our goal is two. We estimate this year may be done because unless we have an extraordinary lease that falls our way but in two stores per year going forward of new openings.

Alec Legg, Analyst

Perfect. Thank you. Best of luck for the rest of the year.

Julie Wainwright, CEO

Thanks.

Operator, Operator

Your next question comes from the line of Michael McGovern with Bank of America. Your line is open.

Michael McGovern, Analyst

Hey, thanks for taking my question. I have two. The first one, I think the consignment take rate was up pretty significantly year-on-year, but the consignment gross margin was still down slightly. I was just wondering if there's anything to call out for either of those on the consignment side. And then, just for your full year EBITDA guidance obviously, it implies some margin improvement. So can you just remind us of the fixed cost leverage versus variable cost productivity gains that are underpinning that kind of margin improvement through the end of the year? I guess, what kind of change should we put into our model? Thank you.

Robert Julian, CFO

The take rate on consignment is primarily influenced by the mix of categories. When our take rate fluctuates, it usually reflects the balance between high take rate items and low take rate items. On an individual item basis, we have remained flat or increased slightly. Hence, it all comes down to the mix. The same applies to margins. In our quarterly reporting, we incorporate the net shipping expenses related to consignment, which is distinct from direct services. Any changes in gross margin linked to consignment may be influenced by this mix but are mostly affected by the presence of services and shipping costs, with shipping posing a challenge. Regarding the second question about leverage, it's variable leverage.

Michael McGovern, Analyst

In the context of the full year guidance, my calculations indicate that we experienced approximately $65 million in losses during the first half of the year. To reach the lower end of the full year guidance range, we would need to show an improvement of about $35 million in losses. Can you provide insight into this kind of margin improvement?

Robert Julian, CFO

Yes. I do think you're going to continue to see the fixed cost leverage that we have seen in the past and you're going to continue to see support OpEx as a percent of revenue decline. Largely that part of our cost base I've described as primarily fixed. With the seasonality of our business, and with increased top line growth in both GMV and revenue for Q3 and Q4 and the second half of the year, just mathematically you're going to continue to see really nice leverage on that part of our cost base. I think you should expect to continue to see the type of productivity. We talked about at Investor Day that our variable cost productivity needed to be 3% to 5% sort of low- to mid-single digits. We did better than that in Q1. But I think our current projections include that type of productivity on the variable cost base. Again, with the seasonality and the increased revenue in the second half of the year, that's what's falling through in the improved profitability in the second half.

Michael McGovern, Analyst

Got it. Thank you.

Operator, Operator

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

Ike Boruchow, Analyst

Hi, guys. Robert, two questions for you. First on the gross margin line. I know this direct revenue question has been asked that, but I'll ask it more from a margin perspective. Can you kind of be more explicit about your gross margin expectations for the upcoming quarter and for the year? There's just such a meaningful mix dynamics that are taking place. I think it might be helpful for us to understand exactly how to think about the gross margin line.

Robert Julian, CFO

Yes. So, a couple of comments in answer to that question. You should see gross margin improve, as the proportion of our revenue coming from the direct business declines, that is projected in our Q2 results and the guidance we projected for Q2. You can extrapolate. You have Q1 actuals we’ve given Q2, you can extrapolate second half. So you will see that there’s a pretty significant increase in gross margin in second half versus first half. It's primarily due to this declining proportion of our revenue coming from direct in the second half of the year versus the first half of the year, all very much consistent with how we projected the year and what we communicated in terms of our initiatives going forward and deemphasizing direct. But there is a pretty significant improvement in margin in the second half versus first half due to that mix change.

Ike Boruchow, Analyst

But we should expect in 2Q to see another quarter of pressure maybe not as much as Q1, but year-over-year pressure in gross margin below the 60.4% from last year correct?

Robert Julian, CFO

That's correct. I would say that you should see sequential improvement from Q1, but you're going to continue to see pressure on a year-over-year basis in Q2 itself. Then you'll see a lessening of that pressure in the second half versus prior year.

Ike Boruchow, Analyst

Got it. And when we get to the end of the year does that kind of lead us to a flattish kind of gross margin versus the 55% last year?

Robert Julian, CFO

Leads us to maybe a little down, but not significant; however, I won't provide a specific number.

Julie Wainwright, CEO

Well also because it sets out to itself.

Robert Julian, CFO

Yes. So maybe a little bit down, but flattish is probably within the realm of what we’re projecting. Yes.

Ike Boruchow, Analyst

Yes. That's all I wanted. That's so helpful. And then just the last one on marketing. So you've got some pretty good leverage on the marketing line in the past couple of quarters. I think those compares get a little bit more challenging as we move forward in Q2 and beyond. Can you just kind of help us how are you guys thinking about the marketing spend going forward for the rest of the year?

Julie Wainwright, CEO

We have mentioned our marketing spend, although it wasn't extensively covered during our Investor Day. We are experiencing a positive flywheel effect, which we anticipate will make our marketing efforts gradually more efficient, though not dramatically so. The variable components of marketing can achieve significant efficiency, and we are effectively driving these efficiencies thanks to the flywheel effect. Our reliance on digital marketing is not as high as others, which has been beneficial for our business.

Robert Julian, CFO

And I would say for all the reasons that Julie just gave you, we're looking at our support OpEx and we're looking at our productivity by each functional area. Actually, marketing is one of the areas where we are getting the most productivity, the most leverage, and it's for the reasons that Julie mentioned earlier, but it's actually really a success part of our story in terms of the efficiency and productivity and leverage is in the marketing group.

Julie Wainwright, CEO

We've been supported by the stores, as 30% of new consignors are coming from them. We also experienced a strong influx of new buyers, and supply remains robust as a result. The stores have significantly contributed to this growth.

Ike Boruchow, Analyst

Got it. Okay. Thanks so much.

Operator, Operator

Your next question comes from the line of Tom Nikic with Wedbush Securities. Nikic, your line is open.

Unidentified Analyst, Analyst

Andrew Weiner here on for Tom. Thanks for taking our question. Just a quick one. So you had a COVID disruption going into Q1 which at this point seems to be mostly behind us. It implied GMV growth rate for Q2 is about the same at about 31%. Is there anything that's preventing any sequential improvement here in Q2? What really gives us confidence that there's going to be that acceleration in the second half?

Julie Wainwright, CEO

We are excited about it. There are several factors to consider, and I’ll let Rati elaborate further. Generally, once we have supply in place and return to full staffing, our product availability has led to strong sell-through. We wrapped up the month and quarter positively in Q1, and we anticipate meeting our targets for April. Our growth in gross merchandise volume is closely linked to the number of leads we receive and our capacity to hire and retain salespeople, as I mentioned earlier. We feel optimistic about this, as it’s something we have been focusing on for some time. Would you like to add anything?

Rati Levesque, President

Yes. I think on the supply side there are leads and opportunities like Julie mentioned are there at the top of the funnel very healthy. For us, it's all about hiring, and like Julie said retention, which ebbs and flows as we all know, especially, during COVID, but we have many things in place to mitigate that risk and keep attrition in a good spot.

Caitlin Howe, Vice President of Investor Relations

Hey, Tom, this is Caitlin. The only other thing I would add is Q2 of last year we grew 92%.

Julie Wainwright, CEO

Well, that not from base. Well, that's a company that was shut down. The company was shut down in 2020.

Robert Julian, CFO

Just in terms of the actual data. So our GMV growth rate in Q1 was 30.8%. Projected GMV growth in Q2 is 33.6%. But I would also encourage you to look at the revenue growth rate. So the revenue growth rate in Q1 of this year was 48.5%, and the revenue growth rate projected for Q2 is 52.3%. So we're talking about more than 50% growth of revenue in Q2 versus prior year, and it doesn't exactly match the same percentages of GMV because of this proportion that comes from direct, which has a higher impact on revenue than it does on GMV in terms of the growth rates. But it's a pretty healthy amount of growth built into the Q2 projections.

Unidentified Analyst, Analyst

Got it. Thank you very much.

Operator, Operator

Your next question comes from the line of Ashley Helgans with Jefferies. Your line is open.

Ashley Helgans, Analyst

Hi. Good afternoon and thanks for taking our question. You've talked about the price increases in the primary market driving up refill values. We're just wondering how are consumers responding to higher prices on your platform? And then is there any way you can quantify the pricing benefit to your GMV growth? Thanks.

Julie Wainwright, CEO

So I'll let Rati add more color to this. But one of the things we do is we don't try to evolve, the way we set up in price is we try to get the optimal price, not the highest price. What that means is we take the velocity of sale into consideration. That's really important for our consigners to know that our cadence of sell-through can be anticipated and expected and it's consistent. It also allows us to pretty accurately forecast when we need new op centers due to running out of space. So the velocity of sale is one of the measurements for the sell-through; our velocity of sale has not dropped. In fact, if it did drop, we would lower the price. It really is finding that balance between the highest price possible without losing velocity of sales. Do you want to add more?

Rati Levesque, President

No, that's right. We can quantify exactly how much like-for-like items are moving at, but that's something we're constantly testing. We're constantly moving that bar, right? So if we price something at $5 and it's sold really quickly, we're going to test $10 next time. So we're constantly optimizing.

Julie Wainwright, CEO

Overall, over time, our items have increased in price by $10 to $15 in the last five years. However, this situation is not static; it is dynamic.

Ashley Helgans, Analyst

Okay. Great. And if I could just throw in one more. Would you expect a weaker macro backdrop to actually drive supply higher as consumers maybe look to monetize their items?

Julie Wainwright, CEO

I do. But I mean that's just making a sort of a wild forecast. Our business started in 2011, the tail end of a recession. Once people found they could monetize product in their home that was sort of just free money sitting around, they really jumped on it. I personally believe we are going to see, if we go into a recession or if people are feeling the impact of inflation, they'll be looking around to see what they can monetize. Clearly, there are other points in view out there, and no one knows but we weren't sort of born out of a recession as a company.

Ashley Helgans, Analyst

Okay. Great. Thanks so much.

Operator, Operator

Your next question comes from the line of Marvin Fong with BTIG. Your line is open.

Marvin Fong, Analyst

Great. Thanks for taking my questions. Pretty much all of them were asked. I'll just ask this one on take rate. As we think about it just going forward, I know that apparel and ready-to-wear is take rate accretive. So just as we stand in the first quarter, what's your thought about mix today versus sort of the normalized rate? Do you think that there's more room for apparel and ready wear and higher take rate items to grow as a portion of the mix, or are we just about where we should be?

Robert Julian, CFO

Yeah. So Marvin, this is Robert. I will tell you on our current projections as we look at Q2 and second half of the year. We do show an increasing take rate trend for the take rate to increase throughout the year. Again, it's a matter of mix as you said as we sell more higher take rate items, that's reflected in the overall average take rate of the company. Without getting into specifics, I can tell you that our current projection is an increasing trend for the take rate to slightly increase as the year progresses. Not very large changes, a few hundred basis points something like that but we do see an increasing trend based on mix.

Marvin Fong, Analyst

Okay. Great. That's it. Thanks, Robert.

Operator, Operator

Your next question comes from the line of Oliver Chen with Cowen. Your line is operating.

Oliver Chen, Analyst

Hi everybody. One of our surveys at Cowen speaks to processing times as an opportunity as customers love speed. What's ahead there? Second, you made lots of great progress on automation and pricing. Would love some highlights on the lower hanging fruit that's left there. And then finally, Julie, at Colombia we had a lot of great topics. We just love your views on blockchain as it intersects with authentication, digital IDs then also the metaverse given your experience in the industry? Thanks.

Rati Levesque, President

So the processing time we did have some delays in early Q1 like we mentioned because of COVID-related impact. I'm happy to report that processing times are back in SLA for all categories. That's great and our processing is about two weeks is our SLA. Over time, we see that even decreasing some more, as we add more automation there as well. We have a vision to bring that all categories down pretty significantly over the next three years. So, excited about that plan. And then on the automation front like we mentioned in Investor Day, there are a few areas that we targeted, handbags being one of them. By the end of the year, we continue to be on track with the idea that we will be automating about 40% of all handbags. Fine jewelry, diamond specifically, will also be mostly automated over the next 12 to 18 months, and pricing 80% of our items will be auto priced as well. So we're making really great traction there. We continue to be on target. I'll let Julie take the metaverse.

Julie Wainwright, CEO

We don't need to be a leader in the metaverse. Right now, the metaverse is similar to Second Life; it has some appeal, but it's not a space where the average person will spend time. We can take a more passive approach in that area. Personally, I have concerns about the time people may dedicate to the metaverse, but that's just my personal view. As for blockchain regarding authentication, we've seen numerous incidents of counterfeiting and the related statistics. It seems too early to fully grasp the potential impact. Ultimately, if people choose to engage with it and purchase products, they will need to comply with whatever cloud-related actions are required. This could help brands connect more closely with their customers, but there is a risk that for brands that don't buy into it or resell, it could backfire on customers and raise privacy concerns. The effectiveness of this technology is still uncertain. While there's a lot of enthusiasm around it, I think the technology is still developing and can be easily counterfeited, raising privacy issues. For us, most of our products, especially in apparel and shoes, are around five years old, and anything older than that has been in the market longer. It might be quite some time before the metaverse becomes relevant to our industry. We are monitoring it and have thought about incorporating it into our offerings, but honestly, the cost-benefit analysis doesn't favor us right now. Brands are testing it out and enjoy connecting with consumers, but consumers also need to be mindful of the implications.

Oliver Chen, Analyst

Very helpful. Thank you. Best regards.

Operator, Operator

And there are no further questions over the phone line at this time. I would now like to turn the call back to Julie for any additional closing comments.

Julie Wainwright, CEO

Thank you all for joining us today on our earnings call. In closing, I want to thank the RealReal team, at all levels, for their continued dedication and express my appreciation for a strong start to 2022. We are looking forward to sharing other results with you on further progress on our path to profitability during our next earnings call. Finally, I'd like to thank our more than 27 million members who are joining us on our mission to extend the life of luxury and make fashion more sustainable. It's really important. We believe that's one of our key pillars. So thank you very much. And with that, we're going to end the call.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may now disconnect.