The RealReal - Q2 2024

Transcript

Operator (participant)

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. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. 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 VP 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, 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 (CEO)

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 -$1.8 million, an improvement of $21 million in 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 (participant)

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question today is from Rick Patel from Raymond James. Your line is open.

Josh Reiss (Analyst)

Hey, this is Josh Reiss, 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, like, decline on GMV, but bottom line's improving, so I was hoping to just get a bit more clarity on the moving pieces there.

Ajay Gopal (CFO)

Hi, 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 ASP, average selling price, was down 3%. This was offset by a comparable increase in items per order, which resulted in AOV being flat versus prior year.

So our guidance for the rest of the year reflects a balanced view on how this dynamic is gonna play out in the second half of 2024. Moving to the bottom line, your question on Adjusted EBITDA. I would say our guidance reflects an increased confidence in our ability to deliver a year with positive Adjusted EBITDA, so that's EBITDA above breakeven in 2024. This confidence stems from our strong performance in the first half. It also stems from the resilience of our business model and its ability to mitigate small shifts in consumer spending. It's worth expanding on this theme of resilience. I call out three factors that contribute to this strength. Firstly, our consignment model.

This means 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. So that 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. And in doing that, we serve a more resilient customer, and we offer 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.

Josh Reiss (Analyst)

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

Ajay Gopal (CFO)

Thanks you. Thanks for the question.

Operator (participant)

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

Chandana Madaka (Analyst)

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

Rati Levesque (President and COO)

Yes, thank you for the question. This is Rati. So a couple of different things, and, you know, I mentioned this last quarter as well. Saw a little bit more price sensitivity with our consumer, or the health of our consumer, but I will say that we were able to make up for it in volume. So what I mean by that is, we're a supply-constrained business. We brought in more supply, and we're able to sell through that supply, so again, able to make up for it in volume. I will also say that our buyers are up 9% year-over-year. Active buyers. Fine jewelry is one of our top growing categories in Q2, when I look at year-over-year, driven out of higher value consignors.

So there's a lot of optimism there as well, even when we're seeing kind of this price sensitivity. And like Ajay mentioned, you know, we don't squeeze our margin, so we can kind of look at our ASP price to sell, and you know, we share that with the seller, in most ways. So again, feeling mostly okay there and healthy when we look at the consumer because of these kind of green shoots that we're seeing. We're really pushing the value play of our business, making sure people understand that, what they're getting and how much it is priced in the primary market, so educating them on, you know, what the value is and what the price was in the primary market.

So we'll continue to do that and really continuing to focus on supply and making sure that that is available for our consumer.

Chandana Madaka (Analyst)

Awesome. Thank you.

Operator (participant)

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

Marvin Fong (Analyst)

Great. Good evening. Thanks for taking my questions. Excuse me. Just maybe to start with on the guidance. You know, obviously, we can draw an inference on what the implied fourth quarter GMV guidance is, and you know, it looks like you're guiding at the midpoint to something around 17% up quarter-over-quarter. And if I just kind of look at the past couple of years, you know, it wasn't as large of a sequential increase. But certainly, if you go back further in time, you were able to kind of deliver that kind of sequential growth. So could you just kind of clue us in on your thought as you kind of constructed your fourth quarter guidance as well?

You know, do you expect it to be kind of a normal seasonal pattern, or are you baking in any incremental weakness of the consumer? Any, any additional color would be great.

Ajay Gopal (CFO)

Thanks for the question, Marvin. Let me start, and then, you know, I'll invite Rati to weigh in with what she's seeing. So we are expecting the usual seasonal pattern on how our business going into Q4. Q3 to Q4, we do see a significant increase. If you look at our growth rate, the midpoint of our guidance would imply that we expect Q4 to grow 9% year-on-year. We see that as, you know, good acceleration versus where we are today and versus where we expect to be in Q3. You know, I think I will add, I'd invite Rati to add more color to what gives us confidence in that call.

Rati Levesque (President and COO)

Right. I mean, 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. You know, we're a Q4 story or H2, half—back half of the story in many ways, and then, like many other retailers. What gives us confidence and some more confidence is the amount of supply that has been coming in that top of the funnel. And when we look at that by price point, by consignor growth, by category, again, we're seeing that quite healthy. 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, pretty nice step up quarter-over-quarter. You know, is this, is this kind of the right level to expect in the, in the coming quarters, or, should we expect it to kind of fall back more to where it was in, in the first quarter? Thanks.

Ajay Gopal (CFO)

Yeah, I can take that question. So our direct revenue, you know, we see that staying within the 9%-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 there is, you know, we have went through a period where we were defocusing on that revenue stream. We think now it's in a healthy place, and it's where you would expect it to be. I would also draw your attention to the margins, which were a notable improvement versus what we've seen in the past. The margin rate on a go-forward basis, we would expect it to be in the mid-teens.

We think Q2 was a good sort of starting point for us and really gives us the right foundation for how this business, how this revenue stream is going to perform going forward.

Marvin Fong (Analyst)

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

Rati Levesque (President and COO)

Thank you.

Ajay Gopal (CFO)

Thank you.

Operator (participant)

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 (CEO)

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 (participant)

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

Rati Levesque (President and COO)

Everyone else has left the call.