Earnings Call Transcript - REAL Q2 2024

Operator, Operator

Good day and thank you for standing by. Welcome to the RealReal Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. 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. Please go ahead.

Caitlin Howe, Senior Vice President of Finance

Thank you, Operator. Joining me today to discuss our results for the period ended June 30, 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, from 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.

John Koryl, Chief Executive Officer

Thanks, Caitlin, and welcome to our earnings call. Today we reported financial results for Q2 and the first half of 2024. We delivered another strong quarter with accelerated year-over-year GMV growth and double-digit revenue growth. Our focus on the consignment business resulted in a 17% year-over-year increase in consignment revenue in the second quarter. Active buyers on a trailing three-month basis grew 9% compared to the same period in 2023. In addition to growth, we significantly improved our bottom-line results. In the second quarter, adjusted EBITDA was negative $1.8 million, an improvement of $21 million, marking the 11th consecutive quarter of year-over-year improvement in adjusted EBITDA. In 2024, we returned to top-line growth, and the incremental revenue dollars flowed to our bottom line at a high rate. In the first half of 2024, we grew revenue by $16 million and improved adjusted EBITDA by $46 million compared to the prior year. We believe this demonstrates the success of our strategic initiatives, highlights the resilience of our business model, and positions us to capitalize on the expanding market for luxury resale. As I look ahead, we are focused on delivering sustained growth and expanding our margins. We believe sales, marketing, and stores are the engine powering the next chapter of our profitable growth. When these three areas work together, our sellers encounter a frictionless multi-channel experience. We will continue to refine our approach and identify attractive markets for new stores. We also see opportunities to drive incremental growth from new supply channels. In addition to growth, we are realizing operational efficiencies to drive profitability. We can leverage recent advancements in AI thanks to 13 years' worth of data on 40 million luxury items. Our approach to continuous improvement and measured investments is paying off. Today, we provided Q3 2024 guidance and updated our full-year guidance. We increased the midpoint of our full-year adjusted EBITDA range, and we are now guiding to positive adjusted EBITDA for full year 2024. I am truly excited about the momentum in our business. As the leading marketplace for authenticated luxury goods, we are playing to our strengths. We remain focused on core business growth, operational excellence, and exceptional service to drive profitability. With that, let's open the call for questions.

Operator, Operator

Thank you. Our first question today is from Rick Patel from Raymond James. Your line is open.

Unidentified Analyst, Analyst

This is Josh Reese filling in for Rick. Thanks for taking my question. I was hoping to get just a bit more color on the guidance. I understand that quarter over quarter, we're looking at a bit of a decline on GMV, but the bottom line is improving, so I was hoping to just get a bit more clarity on the moving pieces there.

Ajay Gopal, Chief Financial Officer

Thanks for the question. This is Ajay. There are a couple of things worth highlighting as additional context behind our guidance. First, let's talk about GMV. We expect our GMV growth in the second half to accelerate versus our first half, and this is as we head into the seasonal peak of our business volume in Q4. To your question, I would characterize our outlook on the second half as being prudent about a potential slowdown in consumer spending. To be clear, we're only seeing modest pressure today. We saw some compression in prices driven by a preference towards more discounted products. This started late in Q2 and has continued into July. In Q2, our average selling price was down 3%. This was offset by a comparable increase in items per order, which resulted in the average order earnings being flat versus the prior year. So, our guidance for the rest of the year reflects a balanced view on how this dynamic is going to play out in the second half of 2024. Moving to the bottom line, your question on adjusted EBITDA, I would say our guidance reflects increased confidence in our ability to deliver a year with positive adjusted EBITDA, so that EBITDA above break-even in 2024. This confidence stems from our strong performance in the first half and also from the resilience of our business model and its ability to mitigate small shifts in consumer spending. It's worth spending some time expanding on this theme of resilience. I call out three factors that contribute to this strength. Firstly, our consignment model. This means that we share any upside or downside in prices with our sellers. Unlike a retailer, we do not feel the full impact of a change in price, which gives us more confidence in the bottom line. The second thing I would point to is our take-rate architecture. This gives us a built-in buffer when prices go down. It really helps cover any costs that are independent of price and helps protect our margins. Finally, I would highlight how we are a full-category luxury marketplace. Doing that allows us to serve a more resilient customer, offering them a full assortment of products that span a wide range of prices, categories, and brands. This breadth helps us meet any shifts in consumer demand. Hopefully, that gives you context for what's behind our guidance in the second half of the year.

Unidentified Analyst, Analyst

Yeah, I really appreciate the color. Best of luck in the second half.

Ajay Gopal, Chief Financial Officer

Thanks for the question.

Operator, Operator

Thank you. Our next call is from Ashley Owens from KeyBank Capital Markets. Your line is open.

Chandana Madaka, Analyst

Thanks for taking the question. It's Chandana Madaka on for Ashley today. So, my question was just about the luxury landscape. There's just a lot of chatter around maybe open space. I was curious what trends you're noting. I know you mentioned your thoughts about the customer and maybe a little bit of a spending slowdown, but I'd like to gather any more thoughts around the aspirational customer and what's emerging and working on the platform. Thank you.

Rati Levesque, President and Chief Operating Officer

Yeah, thank you for the question. This is Rati. A couple of different things. I mentioned this last quarter as well, we saw a little bit more price sensitivity with our consumer regarding their health. But I will say that we were able to make up for it in volume. What I mean by that is we're a supply-constrained business, and we've brought in more supply, allowing us to sell through that supply. So, we were able to make up for it in volume. I will also say that our buyers are up 9% year-over-year in active buyers. Fine jewelry is one of our top growing categories in Q2. I see higher value consumers driven by year-over-year growth. There's a lot of optimism there even when we're seeing some price sensitivity. Like Ajay mentioned, we don't squeeze our margin, so we can look at our average selling price. We share that with the seller in most cases. Therefore, we feel mostly okay and healthy when we look at the consumer because of these green shoots that we're seeing. We're really pushing the value aspect of our business, ensuring people understand what they're getting and how much it is priced in the primary market. We'll continue to do that and really focus on supply to ensure that it's available for our consumer.

Ashley Owens, Analyst

Awesome. Thank you.

Operator, Operator

Thank you. Our next question comes from Marvin Fong with BTIG. Your line is open.

Marvin Fong, Analyst

Good evening. Thanks for taking my questions. Just maybe to start with the guidance. Obviously, we can draw inference on what the implied fourth-quarter GMV guidance is, and it looks like you're guiding at the midpoint to something around 17% up quarter over quarter. If I look at the past couple of years, it wasn't as large of a sequential increase. However, if you go back further in time, you were able to deliver that kind of sequential growth. Could you just clue us in on your thought process when constructing your fourth-quarter guidance as well? Do you expect it to be a normal seasonal pattern, or are you factoring in any incremental weakness of the consumer? Any additional color would be great.

Ajay Gopal, Chief Financial Officer

Thanks for the question, Marvin. Let me start and then I'll invite Rati to add in her insights. We are expecting the usual seasonal pattern of our business going into Q4. From Q3 to Q4, we do see a significant increase. If you look at our growth rate, the midpoint of our guidance implies that we expect Q4 to grow 9% year on year. We see that as good acceleration versus where we are today and where we expect to be in Q3. I'd invite Rati to add more color to what gives us confidence.

Rati Levesque, President and Chief Operating Officer

To double down on that, like you mentioned, Ajay, we do see the same seasonal trends in the summer. We saw it last year and then we saw Q4 pick up. Our Q4 story or the second half of the year is quite strong, like many other retailers. What gives us confidence is the amount of supply that has been coming into the top of the funnel. When we look at that by price point, consignor growth, and category, we're seeing quite healthy trends. So, we're in a good place to win in the back half of the year.

Marvin Fong, Analyst

Got it. Great. And on direct revenue, there was a nice step up quarter over quarter. Is this kind of the right level to expect in the coming quarters, or should we expect it to fall back more to where it was in the first quarter? Thanks.

Rati Levesque, President and Chief Operating Officer

I can take that question. Our direct revenue we see staying within the 9% to 10% of total revenue on a go-forward basis. Q2 was at the high end of that, but still within the range that we would expect it to be. The point I would make is we've been through a period of defocusing on that revenue stream. We think now it's in a healthy place and at the level you would expect it to be. I would also draw your attention to the margins, which showed notable improvement versus what we've seen in the past. The margin rate on a go-forward basis we expect to be in the mid-teens. We think Q2 was a good starting point for us and really provides the right foundation for how this business revenue stream is going to perform going forward.

Marvin Fong, Analyst

Got it. Thanks so much, Ajay. Thanks, everyone.

Operator, Operator

Thank you. We are showing no further questions at this time. So, I would like to turn it back to John Koryl for closing remarks.

John Koryl, Chief Executive Officer

Thank you for joining us today. Before closing the call, I want to give a sincere thank you to all of our employees for their exceptional execution in 2024 so far. We also want to thank our more than 37 million members as they join us on our mission to extend the life of luxury and make fashion more sustainable. Thank you.

Operator, Operator

Thank you, everyone, for participating in today's conference. This does conclude the program and you may now disconnect.