The RealReal, Inc. (NASDAQ:REAL) Q1 2024 Earnings Conference Call May 7, 2024 5:00 PM ET

Company Participants

Caitlin Howe - SVP of IR
John Koryl - CEO
Rati Levesque - President and COO
Ajay Gopal - CFO

Conference Call Participants

Marvin Fong - BTIG
Ike Boruchow - Wells Fargo
Chandana Madaka - KeyBanc Capital Markets
Anna Andreeva - Needham
Mark Altschwager - Baird
Jay Sole - UBS
Tom Nikic - Wedbush

Operator

Good day, and thank you for standing by. Welcome to the RealReal First Quarter 2024 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Caitlin Howe, Senior Vice President of Finance at the RealReal. Go ahead, Caitlin.

Caitlin Howe

Thank you, operator. Joining me today to discuss our results for the period ended March 31, 2024, our Chief Executive Officer; John Koryl, President and Chief Operating Officer; Rati Levesque; and Chief Financial Officer, Ajay Gopal.

Before we begin, I would like to remind you that during today's call, we will make forward-looking statements, which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q.

Today's presentation will also include certain non-GAAP financial measures both historical and forward-looking for which historical financial measures, we have provided reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a shareholder letter earlier today, both of which are available on our Investor Relations website.

I would now like to turn the call over to John Koryl, Chief Executive Officer of the RealReal.

John Koryl

Thanks, Caitlin, and welcome to our earnings call. Today, we reported financial results for the first quarter of 2024. Our continued strategic focus on the core consignment business and driving efficiencies is delivering results. In Q1, healthy supply, combined with strong demand, resulted in a return to overall top line growth for the first time in three quarters. These results were fueled by double-digit growth in consignment revenue our most profitable segment. Growth wasn't the only story.

In Q1, we also reported our highest ever gross margin rate, which resulted in significantly improved bottom line results, compared to the prior year. Adjusted EBITDA improved by $25 million year-over-year. For Q1, GMV and adjusted EBITDA came in above the high end of our guidance range, and revenue came in at the high end of our guidance range. The RealReal is starting 2024 with strong momentum in the core business.

We continue to refine our approach to sales and marketing, to drive profitable supply. We reoriented our sales team's compensation, to better align incentives with our strategic focus on profitable supply, and we use more targeted marketing spend to attract higher lifetime value consigners. We are focused here for Q2 and the back half of the year.

As we transition back into overall growth mode, we are beginning to strategically test new initiatives that we believe are key to growing our core business. We are in the early stages of realizing further efficiencies across our unique marketplace, which encompasses our functional areas of sales, marketing, authentication and operations.

We see opportunities to invest in automation and AI, as we leverage our data to improve client experience and to work profitably - and to profitably scale the business. We project that we are on track to deliver positive adjusted EBITDA, for the full year 2024. Today, we provided Q2, 2024, guidance and updated our full year guidance, with an increase in the midpoint of our full year adjusted EBITDA range.

We believe our continued focus on the core consignment business is working. We are growing our consignment revenue, expanding margins delivering exceptional experiences to our consignors, and providing outstanding luxury goods to our buyers. I am very excited about the momentum in our business and believe we will continue to capitalize on our position as a leader in luxury presale.

With that, let's open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question will come from Marvin Fong of BTIG. Go ahead Marvin.

Marvin Fong

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

Rati Levesque

Yes. No problem. Hi Marvin, this is Rati. Yes, I think your kind of observations are correct. We saw our average order value go up about 8%. We saw average selling price also go up as well as UPT. So you saw that our consigned revenue is growing about 13% year-over-year. The buyer, I would say, is quite healthy overall and looking at the top of the funnel, we look at both the buyer and seller being a marketplace.

I'm seeing the funnel being healthy in that I'm talking about marketing-generated opportunities, to leave to eventually becoming a buyer or a seller. So, we feel pretty optimistic. One of the things that we also look at during this time is average selling price. So if the consumer is being a little more cautious in what they're buying, then we'll see average selling price go down a bit.

So something that we're watching, do you see that too much in Q1, but we're continuing to watch that. But I will say we're cautiously optimistic right now. We feel really - we feel pretty good about the trends there.

Marvin Fong

Okay. That's terrific. Thanks, Rati. And my follow-up question, I just - just to kind of expand on what John was saying about integrating automation and AI. And I know - you've been doing that for quite some time in your authentication centers. But just wondering, as you work more on introducing AI and automation into specifically like pricing and the sales effort, is that - is that a measurable improvement you're seeing, or think you will see from integrating AI into sort of setting prices, and how dynamic you can adjust that?

Rati Levesque

Yes, Marvin. So when I zoom out for a second, I think about where do we enable AI, and we always kind of focus on our mode being supply-constrained business, authentication is a big one for us. So around supply and operations mostly. So I will say pricing is a big one. We're definitely seeing the impact like-for-like items getting smarter about how we price there.

On the sales side, getting smarter about who we're calling and when so targeting the right seller at the right time. We're testing our way into that. Those are a little bit earlier stages, authentication and pricing. We have been - that has been impacting our business directly, and we're farther along in that area.

You're going to hear us talk about accelerated inbound over the next few quarters. We think there's a lot of opportunity in inbound and efficiencies there, and really leveraging AI there as well. So I don't know, Koryl I missed anything?

John Koryl

No, I think you nailed it. We've been known for doing it for authentication and pricing, as you talked about, from a sales perspective instead of saying, here's your laundry list of people to call in any given day. Now what we're giving is our sales folks, rank order list based on web activity, historical trends. People who have can sign Miu Miu with us before. Miu Miu is really hot right now.

We would like them to go back to those consignors as a for instance, the other area is a real way of reducing costs. From a customer support perspective, what we're trying to do is make sure we more intelligently route the customers as we can. Consignors, especially need to be high touch. That's why we invested in the concierge bonds before. But there's a lot of opportunity is where, is my order.

We don't necessarily need to have a human spend a lot of time on that kind of thing. That sounds obvious. But we're getting more and more intelligent as we try to reduce cost in the customer service area, for what I would call route questions and answers.

Marvin Fong

Got it. Thanks so much, Rati and John. Appreciate it. Thanks, everyone.

John Koryl

Thanks, Marvin.

Operator

Thank you. Please stand by for our next question. Our next question will come from Ike with Wells Fargo. Go ahead, Ike.

Ike Boruchow

Hi, how you guys doing? Congrats on the quarter. Just two from me. I would love if there's any color you guys can offer either for the year, remainder of the year on the gross margin line. Is this kind of in some way like the new normal that you guys are putting up in Q1? Or is this a seasonality we should think about. And then just when I look seasonally at the business from an EBITDA perspective, it kind of feels like 2Q, to be better than the guide you guys are giving? And maybe it's, just conservatism just looking at it just historically that it usually I think the losses are better sequentially. So I guess I'm just trying to understand, is there anything funky in the second quarter versus what you guys have put up? Or is this just conservatism, which is great. Those are my two questions.

Ajay Gopal

Hi, Ike. This is Ajay. Thanks for the question. Gross margin, what I would say there is Q1 was really strong. We reported 74.6% gross margin in that, as we pointed out, is the highest ever we've seen in the business. That was - that benefited from the percentage of direct GMV, which, as you know, has an impact on our reported gross margin rates. So the mix was favorable in Q1.

We also saw a benefit from continued expansion of consignment margins, which were also up pretty noticeably versus prior years. I'd say you should expect us to be in somewhere close to this range, very plus or minus a couple of points, depending on things like the mix, as I pointed out, and business dynamics through the course of the year.

Your second question was on Q2 and how we're thinking about it. So going from Q1 to Q2, there's a couple of things that are reflected as you look at our guidance. There is a - we always see Q2 being seasonally slightly smaller than Q1, and you'll see that reflected in our volumes. So our GMV shows that small sort of seasonal reduction that tends to happen in Q2. On the EBITDA side, we are looking at a couple of things that put some pressure on us.

Most notably, these are not unique to us, like we have - we have salary increases like most other companies. We do that every year at this time. So that puts a little bit of pressure on Q2 versus Q1. More importantly, and I think this was discussed in the past, we have some operational investments that, we are planning on investing in. These are things that will drive efficiencies in our operations and help us expand margin in the longer term. So some of that is reflected in our Q2 guidance as well.

Ike Boruchow

Thanks so much.

Operator

Thank you. Please stand by for our next question. And our next question comes from Ashley Owens, KeyBanc Capital Markets. Go ahead, Ashley.

Chandana Madaka

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

Rati Levesque

Yes. Thanks Chandana, I can take that question. Yes, we're always looking at new channels for supply. So I think that's the important part here, drop shipping an example of that. Continuing to bring trust to our consumers and focus there, whether that's drop ship or watches, whether it's international, part looking at other partnerships as well. I'd say we're super early days with drop-ship.

We're happy with the launch, but - and we're continuing to be optimistic on where we're going. We're really thinking about this as a new channel strategy. So for watches, for example, and how do we expand that market into men's watches. So again, super early stages. I don't want to share too much on what - how that's been performing, but we'll definitely keep you posted. But again, really the focus is new channels, new supply channels in general, as we get back to growth here.

Chandana Madaka

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

Caitlin Howe

The question is on operational efficiencies and where we're investing. Was that the question?

Chandana Madaka

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

Ajay Gopal

I can talk to that, Chandana. This is Ajay here. So when you look at our reported results in Q1 and compared to where our guidance was, there's a couple of things I would draw your attention to. First off, volume, we had a really strong start to the year. And you can see that reflected in the fact that our GMV came in higher than our sort of anticipated range on guidance. So that was a source of strength for us.

We had strong supply coming into the year, and we had - and we saw that supply sell through very nicely through the quarter. The other thing that led to upside for us is our gross margin. As I pointed out earlier, we came in at a record high gross margin percentage, and that was driven by the mix of direct versus consigned, which was also another source of strength for us in the quarter.

The last - the last thing I would point to - is there's great operating discipline around how we manage our operating expenses. I'm new here, and I see the team is doing a phenomenal job, and sort of being very thoughtful about where we invest and what returns we're getting for those investments. So the cumulative effect of those sort of - that operating rigor really came through in our Q1 results as well.

Chandana Madaka

Awesome. Thank you.

Operator

Please stand by for our next question. And our next question will be Anna with Needham. Please go ahead, Anna.

Anna Andreeva

Great. Thanks so much, and congrats. Nice results. Two quick ones from us. First, you're guiding for GMV acceleration at the high end for the second quarter. So can you talk about what's driving that compare is easier, so that's probably a part of that. But what are you seeing in the business quarter-to-date as well? And secondly, in the past, you mentioned a mid-value was pressured a bit. How did that perform in the first quarter? And how do you think about that as we go through the year? Thanks so much.

Rati Levesque

Yes. Hi, Anna. This is Rati. So your first question on GMV acceleration in Q2, just how we're thinking about demand in general. As you know, it's all about supply, and supply is quite healthy right now, and I just talked a little bit about that, really targeting the sellers that matter that have the right mix, that have the right value and bringing them into our ecosystem, and then keeping them via retention strategies.

So, we feel really good about kind of the input that came in or the supply that came in Q1, and that helps us kind of lead into Q2 like it takes a couple of weeks, to get that items process, get it on the site. And so, we have some indicators there of what Q2 will look like. And then on the mid value supply, yes, you heard us talk about mid-value. And back in the day, when we made all those commission changes.

We had - to really kind of make sure that we tweak the commission changes based on mid value, because in the past, we have seen that dropping. I will say that, that's in a much better position. We continue to kind of optimize and personalize our promotional strategy, to go after that mid-value supply. So yes, overall, I mean, at the end of the day, it's kind of a three-legged stool between retail marketing and sales.

And we kind of have to get all of these things firing at the same time, and the tactics kind of in line to focus on quality and again, the right seller to bring in the right mix of product, which we're seeing in Q1.

Anna Andreeva

All right, terrific. Thanks so much.

Operator

Thank you for your questions. Please stand by for our next question. And our next question comes from Mark with Baird. Go ahead, Mark.

Mark Altschwager

Good afternoon. Thank you. First, I wanted to follow-up on the supply topic. Just to understand it a little bit better. With the GMV returning to growth, I mean, is this a function of mix with higher-value items? Are you seeing more volume from existing sellers? Are you seeing an acceleration of new sellers on the platform? Maybe it's a function of each of those things. But just any help to sort of unpack that a little bit more so we can understand really the key drivers there would be great?

Rati Levesque

Yes, sure, Mark. So just kind of following up on what I was saying earlier about retail marketing and sales kind of all working together, it is a function of both. It's about retention and acquisition, as we're thinking about growth, so not only are we seeing better volume, or better retail value coming from each of our sellers, but we're also onboarding the right sellers with more value and more mix.

So in the past, I think we talked about - you've heard us talk about focusing the sales team not only on units, but retail value as well. So making sure that we have the right volume and the right product to sell. So that's one of the things we're doing. On the marketing side, they're also looking at the same thing. They're being much more effective here. They know when to target the sellers at what time, high value is a good example of that.

If we need more fine jewelry or watches we know who to target and when at the right time. So just continuing down that path. The stores are also about meeting the seller where they are. And making sure that the stores are doing their jobs as well, as far as drop in those and we're seeing more high value coming through the stores. And there's other things and other factors going in.

I think in the past, you've heard us talk about retention. The retention numbers on the sales side looks better than they ever have, honestly. So that - we're getting some upside there. We've launched referral and affiliate programs that are also working really well, and we're feeling good about that. We test our way into these things, and now you're seeing - starting to see some of that work.

And then on the tech side, it's about enabling the sales team and getting smarter, and more efficient there as well. So there's a few different things working together here, and we know the TAM is there. We know it's big. We know retailers growing faster. And so, we're going to kind of continue to kind of optimize that.

Mark Altschwager

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

Ajay Gopal

Hi Mark, I think you said it best. It is a trailing 12-month metric. And as such, it is probably bearing a lot of -- it's bearing some weight from the business changes that we've made over the last 12 months. We look at - I would point you to orders, which we think is a really good sort of forward-looking metric.

And that orders growth accelerated quite significantly from where it was in Q4, and we would expect to see that trend slowly make its way into our active buyer numbers as we sort of lap over the trailing 12-month nature of that metric.

Mark Altschwager

Thank you.

Operator

Thank you. And please stand by for our next question. And our next question comes from Jay Sole, UBS. Go ahead, Jay.

Jay Sole

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

Rati Levesque

Yes. Thanks, Jay. We're always watching, trying not to be so insular in general, and we're always looking to see what others are doing, and how we can always improve at the end of the day. We do awareness studies and competitive analysis regularly by our brand and marketing teams. I'll say our takeaway in our last one and most recent one that we had done, was that we kind of really need to double down on our core business.

And we really need to focus on the trust that we've built with the consumers. So, you've heard Koryl talk about things like the concierge pods, and really listening to the consumer and making sure that we are offering pricing transparency that they need, for example, relationships. The full service experience that we offer, being the leader in the marketplace around pricing.

So that's what I mean by pricing transparency. So just continuing down our path is kind of really, what we're talking about as our team, as we're starting to like kind of really solidify our LRP over the next three years.

Jay Sole

Got it. Thank you so much.

Operator

Thank you for your question. Please stand by for our next question. And our next question comes from Tom with Wedbush. Go ahead, Tom.

Tom Nikic

Hi, everyone. Thanks for taking my question. I have started the call late. I'm sorry if this has been asked already. I want to ask about the gross margin and your consignment gross margin was extremely, extremely strong. I mean I think it was in the high 80s. Is that kind of like as good as it could possibly get? Like is there like a chance that, like we could eventually see like a consignment gross margin of 90-plus percent? Or like are we kind of - with all the changes that you made, is that sort of what we should think of as the upper bound for gross margin?

Ajay Gopal

Hi, Tom, this is Ajay here. We didn't talk about this. So your question is very timely, thanks. We - I think there is still room in our consignment gross margin. We're looking at a lot of operational efficiencies that, we're looking to drive through our margin structure. And those will make their way into continuing to expand our gross margins, for the consignment business going forward.

But to your point, we do believe that the game going forward, it will be more incremental, right? There'll be. So there's more that we can go after. But we feel really good about where we are today and the gains we've seen over the last 1.5 years.

Tom Nikic

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

Rati Levesque

Yes. Tom, same answer as before. We always see kind of puts and takes, like higher-end brands doing really well, like Hermes and [Grinnell] and Miu Miu right now has some strong momentum. And then you see some brands kind of losing a little less kind of market share. But I would say that, that is something that we always see, and we take that into consideration when we're pricing items, depending on what's happening. I think the kind of interesting thing for us or our advantage is that we are pretty diversified in our mix category, and brands that helps us there.

And then we have that flexibility, right, in pricing. So yes, we are continuing to look the last time we saw a little more pressure, how it came out was around pricing. And the consumer being a little more cautious in their price target. And so, we'll continue to watch that. But at this moment and in Q1, I haven't seen that yet.

Tom Nikic

Understood. All right. Thanks, Rati. Thanks, Ajay. Thanks, Koryl. And best of luck the rest of the year.

John Koryl

Thank you.

Operator

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

John Koryl

Thank you for joining us today. Before closing the call, we'd like to thank our entire team for delivering a strong start to 2024 to the RealReal team simply, thank you. Your relentless effort in delivering world-class service to our consignors and buyers is truly inspiring. We are playing to our strengths, and we are uniquely positioned to capitalize on the growing luxury resale space.

We also want to thank our more than 36 million members, as they join us on our mission to extend the life of luxury, and make fashion more sustainable. Thank you all. Have a great day.

Operator

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