Earnings Call Transcript - REAL Q3 2022

Operator, Operator

Good day, and thank you for joining us. Welcome to The RealReal's Third Quarter 2022 Earnings Results Conference Call. I would now like to turn the call over to your host today, Caitlin Howe, Vice President of Investor Relations at The RealReal. Please proceed.

Caitlin Howe, Vice President of Investor Relations

Thank you, operator. Joining me today to discuss our results for the period ended September 30, 2022, are Co-Interim Chief Executive Officer and President, Rati Levesque; and Co-Interim Chief Executive Officer 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 and 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 Rati Levesque, co-interim CEO and President for introductory remarks. Rati?

Rati Levesque, Co-Interim CEO and President

Thanks, Caitlin, and thank you everyone for joining. Robert and I will provide an update on the business and then go into our Q&A. Today, we reported solid financial results for the third quarter of 2022. Both GMV and adjusted EBITDA came in at the midpoint of our guidance. For the third quarter in a row compared to the prior year, we improved both our adjusted EBITDA loss and margin, despite a more challenging business environment. As we continue to focus on profitable growth, our objective is to accelerate our timeline to profitability. Since still in the role of co-CEOs, Robert and I have thoroughly analyzed the business and were able to provide new insights. Through this deep assessment, we determined that there are levers in the business that enable us to reach profitability with lower top line growth compared to what was previously projected. To this end, we are focused on the following strategic initiatives: first, overhauling our seller commission structure, which took effect on November 1; second, further optimizing our pricing algorithm to get the best price for our sellers; third, taking a more aggressive approach on costs; and finally, capitalizing on potential new revenue streams. The first strategic initiative is an adjustment and simplification of our commission structure. We believe the update to rates will incentivize the consignment of higher-value items and limit the consignment of low-value items, which are unprofitable. We are also in the process of deemphasizing certain categories like home, art, and kids. Additionally, we added a dynamic and personalized tool to our website to allow sellers to calculate their expected earnings, which we believe will increase transparency and motivate sellers to consign their luxury goods at The RealReal. In combination, we believe these actions will move the business closer to profitability. The second strategic initiative is to further optimize our dynamic pricing model to maximize value for our sellers and The RealReal. We will continue to refine our dynamic pricing algorithm. The third strategic initiative is taking a more aggressive approach regarding our cost base. Early in the fourth quarter, we implemented a reduction in our workforce and remain highly selective in new hires and backfill. The final strategic initiative is capitalizing on potential new revenue streams, including a warranty program, advertising technology, and other data monetization opportunities. This final initiative is still in the early stages, and we will update you as these opportunities develop. In summary, we believe these four strategic initiatives will improve cash flow, and we are energized about the new strategic direction of our business as we move more aggressively to pursue profitability. I'll now pass it over to Robert to discuss our third quarter results.

Robert Julian, Co-Interim CEO and CFO

Thanks, Rati. I'll open by saying we are pleased with our financial results for the third quarter. Both GMV and total revenue grew 20% compared to the prior year. During the third quarter, gross margin improved to over 60%. This is primarily due to direct revenue as a percentage of total revenue, declining to 24% in Q3. This compares to 33% in Q1 and 28% in Q2. Adjusted EBITDA was a loss of $28.2 million or minus 19.7% of revenue compared to a loss of $31.5 million in the prior year or minus 26.5% of revenue. We ended the third quarter of 2022 with $300 million of cash and cash equivalents on hand. Total use of cash in the third quarter of 2022 was $15 million compared to a $102 million use of cash in the first half of 2022. At the end of Q3, we had $63 million of company-owned inventory on hand, a decrease of $11 million compared to the end of the second quarter of 2022. We expect that our inventory balance will continue to decline through the end of the year. Today, we are providing fourth quarter 2022 guidance against the backdrop of broad economic uncertainty, and many strategic initiatives that Rati mentioned earlier. We are confident that these initiatives will have a meaningful positive impact on our business going forward. However, it may take a quarter or two for these initiatives to be fully reflected in our financial results. We project Q4 GMV to be in the range of $480 million to $510 million. We project Q4 revenue to be in the range of $145 million to $165 million. And we project Q4 adjusted EBITDA to be in the range of a loss of $27 million to $23 million. Turning to longer-term targets, we continue to project that The RealReal will be profitable on an adjusted EBITDA basis in 2024 and that we are on track to achieve our Vision 2025 adjusted EBITDA target. Overall, we are encouraged by our new strategic initiatives and direction. With that, we will now go into our Q&A session.

Operator, Operator

Our first question comes from Marvin Fong with BTIG.

Marvin Fong, Analyst

First question, could you provide an overview of the specific changes made to the commission structure and how this might affect your expectations for the marketplace take rate or consignment take rate? Second question, regarding the consumer environment, it appears that many American buyers are using a strong dollar to purchase first-run luxury goods from Europe. Is any aspect of your GMV outlook influenced by this trend, particularly with consumers taking advantage of discounts and sales in that first-run category?

Rati Levesque, Co-Interim CEO and President

Thank you for the question. I'll begin, and then Robert will discuss the commission structure and the take rate results. From a high-level perspective, we have some flexibility to increase our commission structure due to the service level we provide. We have analyzed various factors, including our seller and buyer cards, VIP programs, loyalty, and contribution margins. The positive aspect is that our new commission structure is receiving feedback for being more transparent and clearer regarding potential earnings. In terms of take rate, we have shifted our focus away from low-value goods where we were not profitable, allowing us to increase our take in those areas. For mid-tier and high-end luxury goods, there has been little to no change. We have also incentivized higher-tier items, which means sellers may benefit a bit more, resulting in greater gross profit for us overall. Essentially, we are taking more from low-value goods that are unprofitable while maintaining stability in the mid to low-value ranges. Now, I'll let you discuss the take rate and its potential developments.

Robert Julian, Co-Interim CEO and CFO

Yes, Marvin. So in terms of the overall impact of the commission changes, we do expect net-net it to be positive to The RealReal financial results. But I would say all other things being equal at constant mix. And so by category, you're seeing us taking more especially at the low-price ranges. As Rati mentioned, we're protecting more or less the mid-price ranges. And there are, even in some cases, at the highest price points in the most desirable types of products and categories, we're allowing the consignor, the seller to earn a little bit more. But net-net, all other things being equal, you should see a not insignificant increase in our overall take rate. Now the thing that I would caution you on, though, is our nominal take rate may not actually go up as much as you would expect all things being equal because we are intentionally deemphasizing lower price point, higher take rate items in favor of higher price point, lower take rate items. So nominally, you might not see the take rate improve as much as you would otherwise expect. But you will see the results on the bottom line in terms of our overall profitability and the improvement to adjusted EBITDA.

Rati Levesque, Co-Interim CEO and President

The second question pertained to the health of the consumer. We are observing that both the buyer and seller sides are quite strong. On the seller side, opportunities for new and repeat sellers are increasing by 20% year-over-year. On the buyer side, the number of active buyers has risen by 23% year-over-year, and both new and repeat buyers are looking robust. The cohorts are performing well, which is positive. However, we are noticing a trade-down effect where consumers might be opting for mid-tier items instead of top-tier luxury items. This trend may lead us to reduce prices by 5% or 10% to facilitate sales. The good news is that our margins are not being compromised in the process. We will keep an eye on this trend, which began in late Q3 and seems to be continuing into Q4.

Robert Julian, Co-Interim CEO and CFO

And Marvin, you had mentioned the strong dollar potentially impacting U.S. consumers participating in the primary market in Europe. And certainly, we've heard plenty of anecdotes about that. Your question was, is it specifically impacting our GMV outlook and so on. I wouldn't say it's specifically reflected in our numbers in the short term. But certainly, that's not bad news for our business to have more U.S. consumers participating in the primary market, whether it's here or in Europe, whether it's being driven by the dollar or other influences.

Operator, Operator

Our next question comes from the line of Kunal Madhukar with UBS.

Kunal Madhukar, Analyst

I have a couple of questions. First, what is the current status of the CEO search? Second, regarding the four strategic initiatives you mentioned, you indicated that it might take a quarter or two for these to be fully reflected in the financials. So, for Part A, what actions will you take in the next couple of quarters that would allow us to see these effects in the financials? For Part B, what impact can we realistically expect? Specifically, by Q1 or possibly Q2 of '23, where should EBITDA be, just as a rough estimate, not necessarily asking for guidance or an outlook, but a rational consideration.

Rati Levesque, Co-Interim CEO and President

I’ll start and then let Robert contribute. Regarding the CEO search, we previously mentioned that we've hired Spencer Stuart to assist in the process. The positive aspect is that we have a clear agreement on the candidate profile. Additionally, there's a robust pipeline of potential candidates. We expect to share more details early next year. As for our overall strategic initiatives and their timing, we anticipate seeing significant developments in the latter half of next year. The third and fourth quarters will be transitional periods for us. The reason I say this is that many of these strategic initiatives, such as layoffs, changes in commission structures, and the reduction of low-value categories, will be implemented in early to mid-fourth quarter. To see meaningful results, we will need to wait a few quarters and should start observing them in the latter half of next year.

Robert Julian, Co-Interim CEO and CFO

Yes. And I would say, Kunal, in terms of order of magnitude, what has the biggest impact on our business, the commission change certainly is the most impactful in terms of how it will impact our bottom line. That commission change became effective with items that we received on November 1 and later. And so there is a time frame in which it takes us to receive those goods to get them up on the site to eventually sell them and so on. And so there is a natural lag time for that to eventually show up in our financials. So there's nothing to be done per se in order to get that benefit other than the time that it takes for items to move through our system. The second most impactful one would be the pricing optimization. And that may have a more immediate impact because it has less of a natural lag time to get through the system. Obviously, the cost changes we've made will have more or less immediate impact and the longer-term strategic monetization things, again, are in early stages. So there's a number of things that need to be done for you to see all of that. To answer your question about EBITDA in Q1 and Q2. We're not going to provide 2023 guidance at this time. We will update on 2023, and we'll give Q1 on our earnings call in February.

Operator, Operator

Our next question comes from the line of Oliver Chen with Cowen.

Jonna Kim, Analyst

This is Jonna on for Oliver. Could you just provide more color on which categories performed well during the quarter and what's working quarter-to-date and would love some more additional color on monthly trends. What you saw throughout Q3? And what the exit rate was?

Rati Levesque, Co-Interim CEO and President

Sure. From a demand perspective, we see a continuation of trends very similar to Q2, which was ready-to-wear going back to pre-COVID numbers, handbags, high-value fine jewelry, and watches still really strong. So nothing new there, except for the trade down effect that we talked about. Again, on the seller side, same information, opportunities looking really strong engagement there and the cohorts as well. And there is a volume decline and a lot of these reasons are strategic initiatives that we talked about at the beginning of this call, which is cutting out some of that volume that was unprofitable to us. So you'll start to see that in the guidance for next year as we give you real numbers.

Operator, Operator

Our next question comes from the line of Simeon Siegel with BMO.

Simeon Siegel, Analyst

I know this is overgeneralization, but just can you speak to the profit delta between high and low value items? And I guess, if they're structurally unprofitable at this point, is there any thoughts around just putting a minimum price threshold on goods?

Robert Julian, Co-Interim CEO and CFO

Yes. So it really depends, Simeon, when you talk about the different items, and I know sometimes we get questions about unit economics. And my answer is always, well, it depends on the unit. And our offering is so broad, whether it's fine jewelry or watches, our fashion, our footwear. And so each category is unique in the economics is unique at the different price points and the different commission rates. So it's hard to generalize. But it is true that the actions that we have taken put us in a much better place and do we eliminate or really disincentivize the lower-priced and lower-profit items, some of which were, frankly, negative contribution margin. And so I do think that with the actions we've taken, both with the commission structure and in some of the brands, we talked about deemphasizing some categories, but there are some brands that we've taken off our list as well. We really expect to disincentivize those items to the point where maybe you won't see very much of it on our site. And it's really not the way our business was designed. Our business was designed to be high-value luxury items that benefit from authentication, both for sellers and buyers. And so the actions we are taking are really trying to encourage that, which is how the business started really.

Rati Levesque, Co-Interim CEO and President

Right. And you may see some of those items in the low value still come through when they're discounted. But that's really, at the end of the day, what you'll see now is a pair of Manolos that didn't sell at $300, maybe get discounted to $100. But at the end of the day, the brands that come in at that price point have been removed from the list and the combination, like Robert said, of that and the commission structure, we believe will deemphasize the business.

Robert Julian, Co-Interim CEO and CFO

It does have a meaningful impact on our P&L, Simeon. I will say that, but I can't give you a specific change in the profitability because it's complex. It is true that this strategic change has a meaningful impact on our overall profitability. It has a meaningful impact on our growth rate, which you see reflected in our Q4 projections, and you will see reflected going forward. And we talked about being able to achieve our bottom line adjusted EBITDA and cash flow targets at a much lower growth rate, and it's quite intentional. But we do think that it has a meaningful impact on our path to profitability.

Simeon Siegel, Analyst

Got you. Got it. That's really helpful. And then just at this point, however, the easiest way to go through this, what percent of the expenses would you characterize as fixed versus variable?

Robert Julian, Co-Interim CEO and CFO

The last time we did this, and again, we talked about bifurcating our expenses into support and sort of sales and apps I would say that it's roughly 50-50 more or less, it's changing because we've really limited the growth of our fixed cost while we continue to grow. So there's a natural mechanical sort of equation that has variable becoming a larger portion as fixed stays fixed. And so it might be trending a little bit more towards 60% variable and 40% fixed, but only because the fixed costs aren't growing.

Operator, Operator

Our next question comes from the line of Lauren Schenk with Morgan Stanley.

Lauren Schenk, Analyst

Maybe just following up on sort of the last conversation, giving up some of the lower quality revenue growth for the sake of profitability. What do you think the more normalized GMV growth rate of the business should look like going forward? And then just one follow-up on the commission rate changes. How do you think these changes could impact customer growth and potentially retention more broadly if you are successful in lowering the amount of this lower value inventory on the platform?

Robert Julian, Co-Interim CEO and CFO

So Lauren, regarding the first part of your question, I believe there are quite a few uncertainties regarding what the normalized growth rate might be with this new approach in our commission structure and the removal of certain brands from our list. You can observe this in our Q3 results, where both GMV and revenue increased by 20%. In contrast, during the first half of the year, GMV grew by 30% and revenue saw a nearly 50% increase. This indicates that there is already some impact in Q3, not specifically due to commissions but due to our brand-related decisions. Our forecast for Q4, at the midpoint, suggests growth rates in the low to mid-teens, and even slightly lower for revenue growth, primarily because of the change in mix resulting in less direct revenue. We are currently evaluating this and will provide projections in February when we share our guidance for Q1 and the full year for 2023. The honest answer is that it remains to be seen what the new normalized growth rate will be. It will certainly be less than the original expected CAGR growth rate of 35% outlined in the 2025 vision plan, but it should also lead to improved profitability.

Rati Levesque, Co-Interim CEO and President

Right. I agree with that. And then I would say on the customer and seller side as far as growth is concerned, we do believe we'll see a slight slowdown as there as well. But if we are successful, what we're doing here is just cutting out that low value, but that mid-tier and high value stays consistent. And those items continue to come in because we didn't change the commission structure in that area. So again, we looked at many things when we made these changes, including our cohorts, our VIP, our basket size for both our seller and buyer, both on a brand and item level. So I do believe that there may be some slowdown, but you're still getting the value coming in from the seller and the buyer. So it might be fewer units but higher value of items.

Operator, Operator

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

Irwin Boruchow, Analyst

So on these unproductive categories, I think that's home, art, kids, can you just say what percent of GMV these categories contribute today? And by the end of next year, are you expecting that you will have kind of fully worked down those categories?

Rati Levesque, Co-Interim CEO and President

It's a really small percentage of GMV these categories contribute, but I will say it's not unmeaningful in the number of units. So what I mean by that is it's a lot of operational expense for some of these areas for not a lot of revenue. And I will say that we'll work through selling these items in the first half of the year. Again, you keep hearing us say this, but you'll see meaningful impact from our changes in the back half of next year.

Irwin Boruchow, Analyst

And then if I can just ask, I mean, maybe this is overly simplistic, but if these were unprofitable categories, why were you guys selling them?

Rati Levesque, Co-Interim CEO and President

Good question. We've previously focused on growth at all costs, but now we're reassessing everything, particularly the unprofitable categories. It's not just about certain categories; the direct business also played a role. Items priced below a certain point were not profitable either. Our goal was to expand product offerings, especially in home goods, since we already have a presence there with our luxury manager. However, shipping large items like home and art is quite costly, and items in categories like kids are of such low value that our current high-touch business model isn't equipped to handle them, as Robert mentioned earlier.

Robert Julian, Co-Interim CEO and CFO

Yes. I'll add a couple of things to that. It's common for start-up tech companies to think that rapid scaling is the solution. There's often a push to expand quickly across many categories to achieve sufficient GMV and revenue to cover costs. As Rati mentioned, we have a different approach now regarding our future direction and path to profitability. Additionally, companies often face decisions about whether to accept incremental volume or the next unit. This can be somewhat technical from a cost accounting perspective. My background in operations, finance, and cost accounting in industrial manufacturing influences my view on our P&L and contribution margin, which may differ from previous assessments. Some may focus solely on the incremental variable cost of a unit instead of the total cost of processing and moving an item through our system and the revenue generated from it. My analysis was less about incremental costs and more holistic, hence providing a different perspective on when the next incremental unit becomes profitable. Based on this analysis and our new approach, we've identified certain items that we want to discourage, which informed this commission change.

Operator, Operator

Our next question comes from the line of Michael Binetti with Credit Suisse.

Michael Binetti, Analyst

It seems like you're starting to reduce some of that inventory, which is reflected in your financials. Can you share your thoughts on how you anticipate this will evolve in the fourth quarter as it relates to your revenue? Additionally, regarding the changes in commission, how do you expect your competition to respond, particularly from significant players like yourself competing for high-value goods? Have you noticed any competitive responses yet that we should be aware of? Lastly, when considering the uneconomical categories, it’s been a lingering question. Currently, looking at your website, there seem to be numerous items under the $20 price point in both men's and women's apparel. It raises concerns about the economic viability of maintaining that many units, similar to categories like kids' apparel that you mentioned are unsustainable. After addressing the categories highlighted today, will you need to reconsider other categories in terms of GMV? Or do you believe these categories will continue to build the ecosystem and attract customers back? How do you evaluate whether other parts of the GMV fit into your model going forward?

Robert Julian, Co-Interim CEO and CFO

Okay. So Michael, that was the three-part question. Regarding inventory, to give you a sense of what you might expect, let me give you a profile of the owned inventory that we have currently. So of the inventory on hand, about half of it is from vendor purchased inventory. And we have described before that our open to buy for vendor purchased inventory is essentially zero. And a lot of the reduction we've seen so far has come from that category and will continue to come from that category. And so about half of what we have on hand is in that bucket. About 30% of the inventory is from out-of-policy returns. And we've talked about getting a little tighter in terms of how we enforce our rules and what we will or will not accept about a policy and about 20% of the total inventory is from this get paid now category. And so we expect to continue to see the owned inventory decline, maybe roughly in the same order of magnitude you saw in Q3. We do hope to limit the out of policy. And the kids was probably at a decent level of equilibrium in terms of what we want to focus on and very strategically and surgically identifying things that we want to continue to purchase in that category. So that's the context of inventory, and that's what we're expecting in terms of going forward.

Rati Levesque, Co-Interim CEO and President

Regarding the commission changes and the competitive landscape, we remain competitive in the mid- to high-value segment. Customers continue to earn more with us compared to competitors due to our 30 million luxury members and our effective pricing strategy. We haven’t made any changes in that area. In fact, for high-end items like watches and Birkin bags, earnings are slightly higher. We're not concerned about this. However, for low-value items, you are correct that we are no longer competitive, and we are fine with that as we are shifting our focus away from that business since it is not profitable.

Robert Julian, Co-Interim CEO and CFO

One last thing regarding the competitive response. It is going to be interesting, Michael, because as Rati mentioned, at the very high end of the market, particularly for watches and handbags, if you are a VIP with The RealReal and you receive an additional commission on your sales, we will clearly be the best option available for those items. Although this segment is a very small part of our overall business and accounts for a small percentage of GMV, it will be intriguing to see how competitors respond or what feedback we receive from consignors, as we hold a clear advantage in that very high-end category.

Rati Levesque, Co-Interim CEO and President

And then your last question around categories and kind of looking at the site and seeing many items at $20. First of all, I want to say we have millions of items on the site. So it's still a very small percentage. It's just good to put that in context. And we'll continue to look and optimize our brand list and price point in categories and all of those things. But for now, this is as far as we're going to take over the next couple of quarters.

Operator, Operator

Our next question comes from the line of Noah Zatzkin with KeyBanc.

Noah Zatzkin, Analyst

A couple from me. First, how should we be thinking about gross margin for the remainder of the year and maybe structurally longer term given deemphasizing home and some of the lower-priced, less profitable items? And then second, the marketing rate came down quite a bit during the quarter. Was there a decision to pull back on spend there? Or is that a reflection of improved efficiency? Any color on rate during the quarter and how we should think about it going forward would be helpful as well.

Robert Julian, Co-Interim CEO and CFO

I'll take the first question related to gross margin. We've seen a nice improvement in gross margins sequentially throughout this year. And in Q1, our gross margin was roughly 53.5%. In Q2, it was nearly 57%, and then in Q3 was now 60%. I'm glad you asked the question about sequentially what to expect. In normal circumstances, I would expect that trend to continue in Q4, but I think what you're going to see in Q4 is a flattish maybe a very slight improvement in gross margin in Q4 versus Q3, only because we continue to discount some of this owned inventory. They were trying to clear out of the we're trying to remove and lower our overall inventory balance. And so we do see some discounting that has been projected in Q4, it is preventing a further continuation of that sequential improvement in gross margin. I haven't expected to go down but I don't expect it sort of improve in the short run because of that reason. Now if you project into next year 2023, I expect the continuation of this trend and a return to where this company's gross margin was before the COVID, which was low to mid 60s. And so I think over time, you're going to see that trend continue and being just return to that level of gross margin in the long run.

Rati Levesque, Co-Interim CEO and President

Noah, your second question on the marketing as a percentage of revenue. You do see it come down. I'll say that marketing is a good story for us in general. Back, I don't share the specific back numbers, but acquisition cost has grown 20% year-over-year. And there's a few reasons for that. First of all, our product market mix is quite strong. Our marketing is working. Our repeats, both sellers and buyers are quite strong. And the team has gotten smarter and better at what we do. We now use high-touch attribution models. And at the end of the day, that means richer data optimized for what's had the best ROI and so forth. So again, a really good story there, and we'll continue to work on optimization.

Operator, Operator

Our next question comes from the line of Tom Nikic with Wedbush.

Tom Nikic, Analyst

I'm looking to clarify some earlier questions regarding the commission structure and the take rate. I'm a bit confused about the dynamics at play. If you're encouraging sales of high-end products while discouraging low ASP products, there's a shift in the mix that you mentioned. To encourage the sale of higher-end items, it seems you would increase the payout on those products, which might negatively affect your take rate. You also mentioned that there wouldn't be any changes to the middle tier, so I'm uncertain about where the offsets are. Robert, you mentioned that you expect some improvement in the take rate, but I am confused about how that would happen.

Robert Julian, Co-Interim CEO and CFO

Yes. Thanks for the question, Tom. The way I describe it is in the past, we've talked about when there were no changes structurally to our take rate or commission rate by category, sometimes you would see our take rate move by a couple of hundred basis points from one period to the next. And we would say that's not a change in rate or what we are picking per category, it's just a change in mix. And as I said before, the higher price point items, we have a lower rate, but maybe more gross profit dollars over lower priced items, we have a higher take rate, but we're earning less gross profit dollars. So in the past, we would say, look, the take rate is just a mix question because we're not changing the actual rate. What we've done with this strategic change is actually change take rate assumption. All of things being equal at constant mix, you would see a significant change in our overall take rate and increasing our overall take with all other things being equal, which means sort of across the board, we're earning more, we're keeping more or our overall revenue per GMV dollar is going up and we're going to be more profitable. And what I've cautioned on is this mix question. So that is important to keep in perspective. I would expect a net-net increase in profitability due to the change in rate but the nominal take rate is a little less predictable, but it will be more profit for the company.

Rati Levesque, Co-Interim CEO and President

And we're happy to walk you through that separately because there are a couple of different puts and takes on that one.

Operator, Operator

Our next question comes from the line of Edward Yruma with Piper Sandler.

Edward Yruma, Analyst

I won't beat the commission horse anymore since you went over it before on the call.

Robert Julian, Co-Interim CEO and CFO

That's why we told only confused everybody at that so far. So that's probably take a little bit of a follow-up and then a little more time, significant conversation spend more time with folks and additionally to help.

Rati Levesque, Co-Interim CEO and President

We're happy to walk you through it offline.

Edward Yruma, Analyst

Yes. No, most certainly, I think we've gotten that piece done pretty pat. I did want to ask actually about the change on the consignor operating model and the kind of what the objectives are, right, with splitting up the consignment specialist, and I think their concierge is. And then as a follow-up, I think there's some that would argue that there's some countercyclicality of the business on the supply side is maybe macro softens. Like are you seeing any increase in consignment maybe that you expect late could be macro driven?

Rati Levesque, Co-Interim CEO and President

Regarding the consigner concierge service, our main focus has been to enhance the support we provide to our sellers, ensuring they receive the necessary information promptly. We faced some operational difficulties earlier this year during the resignation phase, but the positive news is that we've completed our hiring for training. We are committed to optimizing our performance and improving our service quality. A key aspect of this is ensuring that we respond to our sellers in a timely manner and meet our service level agreements whenever they reach out to us. Additionally, our sellers will have consistent points of contact. We are genuinely enthusiastic about this service improvement and believe it will enhance our Net Promoter Score and overall seller satisfaction.

Robert Julian, Co-Interim CEO and CFO

Yes, I agree with everything that Rati said. The other thing that I would add is I do think it's a benefit to our sales organization, we're spending a significant amount of time dealing with these issues, maybe they weren't best equipped to handle versus somebody else who's dedicated to managing these sort of issues could do a better job. And it does allow our sales organization to focus on what they do best.

Rati Levesque, Co-Interim CEO and President

On the supply side, regarding any macro trends we're observing, I previously mentioned opportunities among sellers are strong and repeat business is robust, with no signs of decline. We anticipate more supply as people look to optimize and monetize their closets, although we haven't seen that materialize yet. On the demand side, we are noticing a shift in consumer behavior towards trade-downs. As far as macro conditions go, there are currently no noteworthy issues on the supply side, though I will provide more insights later regarding the trade-downs we're observing in demand.

Operator, Operator

Our next question comes from the line of Anna Andreeva with Needham.

Anna Andreeva, Analyst

A couple of questions for us. I wanted to follow up on the lower value being emphasized just curious, what percentage of the buyer base are low-value buyers only makes sense that you guys lose money on some of those price points, but just curious if we should expect the buyer numbers to be lower in the next few quarters as a result? And then secondly, just on the guidance. The sales range is wider than what you guys typically use and appreciating the volatility out there. But just curious what kind of assumptions are you making at the high end versus low end of the GMV or sales guidance? And what are you guys seeing in the business quarter to date?

Rati Levesque, Co-Interim CEO and President

Sure. We believe we made the right changes to our commission structure to focus more on value. Overall, you will see that reflected in our growth rate. Regarding your concern, I think it is worth noting.

Robert Julian, Co-Interim CEO and CFO

I believe they were disproportionately represented in terms of later GMV and revenue. I think this is beneficial for our business as we are managing our cost structure to process more units through our system, which affects GMV and revenue of the units. Regarding guidance, there's an awareness among some individuals about conversion rates, but if there's a larger revenue range, that’s standard based on the GMV range we've provided. This is influenced by the difference between the high end and low end impacts, particularly related to the mixed effects on the nominal rate. There is additional uncertainty in what we anticipate for market conversion rates from GMV to revenue, hence the broader range. Another factor contributing to this wider range is the effect on direct revenue as total revenue, which includes a portion from the conversion between GMV and revenue due to the direct revenue conversion. The same applies to our sign business, where conversion occurred at our take rate. There are some instances where we've seen later numbers that typically wouldn't be expected from us.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Rati Levesque for closing remarks.

Rati Levesque, Co-Interim CEO and President

All right. Thank you for joining us today. Before we close the call, I just want to take a moment to express our gratitude to The RealReal team. Thank you for your dedication, bringing our vision and values to light every single day. Our team is comprised of the most passionate, curious people I have encountered. They're willing to take risks, hold each other accountable, and debate align and commit to do what's right for the business. Their dedication to our plan, strategy, vision, and values is honorable, to our people at The RealReal, thank you. Finally, I'd like to thank our more than 30 million members who are joining us on our mission to extend the life cycle of luxury goods and make fashion more sustainable. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.