The RealReal - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered record GMV and revenue, with GMV $519.8M (+20% YoY) and revenue $173.6M (+17% YoY); Adjusted EBITDA margin expanded to 5.4% (+380 bps YoY) as AI-enabled operational initiatives and sales compensation changes drove leverage.
• Revenue and EPS beat consensus: revenue $173.6M vs $170.3M estimate; non-GAAP EPS $(0.04) vs $(0.056) estimate; management raised FY 2025 guidance across GMV, revenue, and Adjusted EBITDA [*S&P Global].
• GAAP net loss widened to $(54.1)M due to a $(43.9)M change in fair value of warrant liability; non-GAAP net loss improved to $(5.2)M, highlighting non-cash items’ impact.
• Catalyst: Raised FY and issued strong Q4 guidance (Adjusted EBITDA $17.5–$18.5M; revenue $188–$191M), pointing to accelerating margin expansion and sustained supply unlock—key potential stock drivers.

What Went Well and What Went Wrong

What Went Well

• Record GMV ($519.8M) and revenue ($173.6M) with strong mix and higher ASP; Adjusted EBITDA rose to $9.3M (5.4% margin), demonstrating operating expense leverage and efficiency gains.
• AI initiatives (Athena intake touching 27% of items, on track for 30–40% by year-end) delivered 370 bps leverage in operations and tech; management targets “multiple dollars per unit” cost reductions medium term.
• Management raised FY guidance and set Q4 guidance implying further margin expansion; CEO emphasized “accelerating growth and expanded margins,” driven by the growth playbook and AI.

Quotes:

• “We delivered another quarter of accelerating growth and expanded margins… Given this continued momentum, we are raising our full-year outlook.” – CEO Rati Levesque.
• “Athena… touched 27% of all items… on track for 30%-40% by year-end.” – CEO Rati Levesque.
• “Fourth-quarter adjusted EBITDA… ~9.5% of total revenue.” – CFO Ajay Gopal.

What Went Wrong

• GAAP net loss widened to $(54.1)M due largely to a non-cash $(43.9)M increase in warrant liability fair value; despite operational improvements, headline GAAP optics are negative.
• Take rate declined 70 bps YoY to 37.9% due to mix shift into higher-value items (beneficial to gross profit dollars but dilutive to percentage metrics).
• Gross margin held at 74.3% (down ~60 bps YoY) on higher direct revenue mix, even as consignment gross margin improved; direct margin volatility by category remains a watch item.

Transcript

Operator (participant)

Hello and welcome to The RealReal Q3 earnings call. We ask that you please hold all questions until the completion of the formal remarks, at which time you'll be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would like to turn the call over to Caitlin Howe, Senior Vice President of Finance.

Caitlin Howe (SVP of Finance)

Thank you, Operator. Joining me today to discuss our results for the period ended September 30th, 2025, are Chief Executive Officer and President 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. We have provided reconciliations for historical non-GAAP financial measures to the most comparable GAAP measures in our earnings press release, which is available on our Investor Relations website.

I would now like to turn the call over to Rati Levesque, Chief Executive Officer of The RealReal.

Rati Levesque (President and CEO)

Thank you, Caitlin. Good afternoon, everyone, and welcome to The RealReal's third quarter earnings conference call. Our strong third-quarter results and our full-year outlook for GMV of over $2 billion are a testament to our long-term strategy, which has solidified our position as the market leader in luxury resale. We are changing the way people shop, making resale a primary option. 58% of shoppers prefer the secondary market outright, and 47% of shoppers now consider resale value before buying something new. Resale is no longer reacting to the fashion industry but driving it. In fact, Vogue used search on The RealReal as a key metric for brand heat in their coverage of the new creative director debuts during the fall fashion shows. Our proprietary data allows us to identify and respond to what buyers want ahead of the cycles.

Insights from our recent resale report, which analyzes shopping and consignment behaviors across our community of over 40 million members, include the following: Fine jewelry has been our fastest-growing category. First-time watch buyers increased 46%, with heritage brands leading the way. Customers are turning to us for major life milestones, evidenced by search volume up 247% for wedding dresses. In handbags, shoppers are embracing the lived-in look, with searches for fair condition handbags up 32%. Finally, rising acceptance of luxury resale is fueling the adoption of secondhand and holiday gifting. Turning to Q3 results, we delivered accelerating growth and expanded margins. We set a new record on quarterly GMV, with third-quarter GMV of $520 million, up 20% versus Q3 of last year. We delivered Adjusted EBITDA of $9.3 million, or 5.4% of total revenue, up 380 basis points year-over-year.

Let's discuss how our three strategic pillars, growth playbook, operational efficiency, and obsess over service, are fueling these strong results. Diving into the growth playbook, our sales team is unlocking high-quality supply through data and deep consignor relationships. Q3 2025 was the first full quarter with our new compensation plan rolled out to the entire sales team. The plan's design focuses on value over unit volume. In addition, tools like Smart Sales are enabling our sales team to unlock supply using AI and data. Productivity increased with supply value per existing luxury manager up 12% year-over-year. Sales team tenure reached an all-time high in Q3, with more than half of the sales team in place for over two years. We added top talent to the ranks of our sales team, laying the foundation for deeper relationships with our sellers.

With a total addressable market of over $200 billion of untapped supply in U.S. closets, we see a long runway ahead to drive top-line growth. Through sales, Real Partners, our affiliate program, Real Friends, which is our referral program, and the continued expansion of dropship, we will continue to unlock supply in the coming years. Turning to marketing, our efforts are focused on scaling our active consignor base and reinforcing our brand authority. In Q3, we grew new and repeat consignors double digits year-over-year, trailing 12-month active buyers increased to reach an all-time high of over 1 million. New buyer LTV is trending higher, with average order value and 12-month lifetime value expanding. From a strategic perspective, we're focused on attracting flywheelers, or customers who participate in both sides of our marketplace.

These flywheelers are two to three times more valuable and transact with us more frequently, accelerating the network effects of our platform. Looking forward to 2026, we are seeing green shoots in our marketing efforts. Our focus is on pursuing an AI-fueled smart engine to increase our LTV. Our smart prospecting engine aims to enhance targeting of new consignors. Building on our success in social, we are developing a 360-degree presence that combines organic and paid social media to propel brand relevance and digital performance. Early test results are positive. Our retail stores and high-value events work in concert with our marketing and sales team, generating desirable supply and new consignors. In fact, 25% of new consignors come from our stores. Consignors can interact with our in-store experts: gemologists, horologists, and handbag experts, who provide specialized valuations that build trust with prospective sellers.

We are seeing success with introducing high-value, experiential events in our retail stores. Q3 set new records. Newport Beach and Tysons Corner unlocked $2.6 million of supply over just a couple of days. We currently have 18 brick-and-mortar locations, and we plan to add one to three stores per year, giving us a 10-year runway of growth from new stores. Moving to our next strategic pillar, driving operational efficiencies. Athena, our proprietary AI-enabled product intake process, is delivering efficiency and reducing costs while improving speed and accuracy. As of the end of Q3, the Athena intake process touched 27% of all items, and we are on track for 30%-40% by year-end. Our future vision is to achieve full listing automation and reduce our processing time from 14 days to our goal of 7 days.

In the next phase of Athena, we plan to expand into mid and high-value items, with the opportunity to save millions of dollars while delivering superior service and speed for our sellers. Turning to our third strategic pillar, obsessing over service is the secret sauce that reinforces our deep customer loyalty. In Q3, our customer trust metric increased 8 points year-over-year. The customer is evolving rapidly, and we are listening. When I think about our strategic vision, I think of us as an advisor to our customers, a real partnership built on trust, transparency, and personalized communication. By helping our customer manage the luxury assets in their closet, this partnership is not just transactional, but is defined by a deep understanding of our customer's financial motivations, fashion sense, and individual style. We look to accompany them on their journey through the primary and secondary market.

Last quarter, we introduced the concept of My Closet through Reconsign, which allows our consignors to resell items they've purchased on The RealReal in one click. Looking to the future, My Closet is creating additional customer tools to help catalog closet inventory, enhance access to product insights, and provide personalized advising. We see flywheel behavior becoming the norm as our service moves past simply buying and selling, offering ways to optimize and manage the contents of the fashion portfolio. In closing, Q3 was a strong quarter. Our performance across all key metrics and the trends we are seeing in the business gives us confidence to raise our full-year guidance. As I reflect on the last year, four quarters of progress since I stepped into the CEO role, I am incredibly proud of The RealReal team and the significant transformation we've achieved.

We believe we have proven that our growth playbook works, our model is scalable, and the superior service drives our powerful flywheel. I want to thank the entire RealReal team for their unwavering commitment to our customers and for executing with excellence this quarter. I couldn't be more excited about where The RealReal is headed. We've built a strong foundation, we're seeing great momentum, and I believe the best is yet to come. I will now turn the call over to Ajay for a more detailed review of our financial performance.

Ajay Gopal (CFO)

Thank you, Rati. Good afternoon, everyone. I am pleased to review our financial results for the third quarter, which highlight a period of decisive acceleration and strong execution against our strategic priorities. We delivered robust top-line growth, with GMV increasing 20% and revenue up 17% year-over-year. Our approach to unlocking supply and driving efficiency is paying off, with Adjusted EBITDA of $9.3 million, or 5.4% of total revenue, expanding 380 basis points and free cash flow of $14 million for the quarter. Now, turning to our detailed third-quarter results, beginning with the top line. Q3 GMV of $520 million increased 20% compared to last year. Growth was driven roughly evenly by unit volume and higher average selling prices. Q3 revenue of $174 million increased 17%, with consignment revenue up 15% year-over-year. Direct revenue increased 47% compared to Q3 of 2024 and represented 13% of total revenue in the quarter.

Average order value of $584 increased 12% versus last year. Q3 take rate of 37.9% declined 70 basis points year-over-year due to a mix into higher value items and categories. Our active buyer base accelerated sequentially. On a trailing 12-month basis, it increased 7% year-over-year to more than a million active buyers, marking a new all-time high. Continuing with our third-quarter results, third-quarter gross profit of $129 million increased 16% year-over-year. Gross margin was 74.3% in Q3, which was consistent with Q2 of this year and down 60 basis points compared to the prior year period due to a higher mix of direct revenue this year. In the third quarter, consignment gross margin was 89.3%, an improvement of 70 basis points year-over-year, and direct gross margin was 20.9%, an increase of 370 basis points versus prior year.

Third-quarter operating expenses of $136 million leveraged 620 basis points year-over-year as a percent of revenue. Excluding stock-based compensation, operating expenses leveraged by 470 basis points, driven by our focus on operating efficiencies, continued gains from AI and automation, and leverage on fixed costs. Third-quarter Adjusted EBITDA of $9.3 million, or 5.4% of total revenue, increased $7 million versus prior year. Adjusted EBITDA margins increased 380 basis points year-over-year. We ended the quarter with $123 million in cash, cash equivalents, and restricted cash. Our operating cash flow in the third quarter was $19 million, a $10 million improvement year-over-year. Free cash flow was $14 million in the third quarter, a $12 million improvement year-over-year, demonstrating our business model's favorable cash dynamics as we grow. As a reminder, we reduced our debt by $6 million through the strategic debt exchange transaction we announced in August.

Since the beginning of 2024, we've reduced our total indebtedness by over $86 million while extending our debt maturity profile, reinforcing our commitment to delevering and strengthening our balance sheet. Capital expenditures on property, plant, and equipment for the third quarter were $6 million, and we continue to anticipate full-year CapEx, PP&E, to remain within 2%-3% of total revenue. Turning to our P&L outlook for the fourth quarter and full year, we sustained healthy supply trends throughout the third quarter and into the fourth, and are raising our outlook for 2025. Fourth-quarter GMV is expected in the range of $585 million-$595 million, which represents 17% growth compared to the prior year period at the midpoint of our guidance range. Fourth-quarter revenue is expected in the range of $188 million-$191 million.

This reflects 16% growth compared to last year at the midpoint of our guidance range. Fourth-quarter Adjusted EBITDA is expected to be between $17.5 million and $18.5 million, approximately 9.5% of total revenue, and over 275 basis points of margin expansion year-over-year at the midpoint of our range. Moving to our outlook for the full year, we now expect full-year GMV in the range of $2.10 billion-$2.11 billion, up 15% at the midpoint of our guidance range. We expect revenue in the range of $687 million-$690 million, up 15% at the midpoint of our guidance. We now expect Adjusted EBITDA in the range of $37.7 million-$38.7 million, with an Adjusted EBITDA margin of 5.5%, reflecting 400 basis points of improvement versus 2024.

In closing, we believe our third-quarter performance provides compelling evidence that our growth playbook is working to unlock high-quality supply, and our progress on AI initiatives and automation is driving strong unit economics. The momentum we are building is clear. As the premier authority in luxury resale, we believe we are poised for sustained profitable growth and consistent cash flow generation. Thank you to the entire RealReal team for your dedication and for driving strong third-quarter results. With that, I will now turn the call back over to the operator for Q&A. Operator.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. When it is your turn to talk, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. We'll wait a moment for the queue to form. Our first question will come from Ike Boruchow with Wells Fargo. Your line is open. Please ask your question.

Ike Boruchow (Analyst)

Hey, everyone. Can you hear me?

Rati Levesque (President and CEO)

Yeah, we can hear you, Ike.

Ike Boruchow (Analyst)

Cool. Great. I have one question and one follow-up, I guess. You know, solid quarter. I guess I'm more impressed by the Q4 GMV growth guide. You know, pretty impressive growth rates you're guiding to. Maybe just could you speak to the confidence you have in that plan, and maybe what are you seeing quarter to date that helps inform your targets?

Rati Levesque (President and CEO)

Yes. Hi, Ike. Thank you for the question. As far as, you know, our Q4 guide and the confidence in the business, a couple of different things. We're seeing 17. I think we guided to about 17% in the mid-range on growth rates. As you know, we're a supply-focused business, and we're seeing our growth playbook work. We're seeing sales, marketing, retail really coming together. The compensation structure that we launched in Q3 is now accelerated to our entire sales organization. Smart Sales is driving conversion. Our team is really focused on relationships, that art and science coming together. Then we're seeing some early signs of the referral and affiliate programs. Early results are good as we test our way into that. The AI smart scoring and prospecting to drive new sellers, we're seeing double-digit new seller growth there.

I talked a little bit about the high-value pop-up events in my prepared remarks. That is strengthening our relationship with sellers. You know, as the market leaders, definitely seeing great momentum. The market's shifting. It's great to see more attention to resale as we change the way people shop.

Ike Boruchow (Analyst)

Great. And then just one more question about, you know, the growth rates you guys have put up this year are pretty phenomenal. You have the lapdown, which is a good problem to have. Are there any guardrails you can maybe put around next year? I mean, not looking for anything specific, but, you know, how should we think about your algo, maybe flow-through rates of Ajay, as you typically will give us? Just some guardrails on how to think about next year and how you plan to lap these robust results.

Ajay Gopal (CFO)

Yeah. Ike, thanks for the question. We, you know, we're really pleased with the results we're seeing right now. Q3 was up 20%, we're guiding to 17%. For Q4, the midpoint, you've heard us talk about how we see a growth rate in between high single digits to low double digits as being the right balance, the optimal balance between growing our top line and expanding our EBITDA margins. We continue to think that is the right range for us in the medium term. That said, I would say, given the momentum we're experiencing today, we think that in the short term, so let's say the first half of 2026, we're probably indexing closer to the high end of that range, so closer to low double-digit growth rates.

Ike Boruchow (Analyst)

Thanks. Thanks, guys.

Rati Levesque (President and CEO)

Thanks, Ike.

Operator (participant)

Your next question will come from Robert Brooks with Northland Securities. Your line is open. Please ask your question.

Robert Brooks (Analyst)

Hey, guys. Thanks for taking my questions. Looking back at my notes, I believe you guys began to expand the dropship initiatives last quarter into fine jewelry. I was curious to hear how that went and maybe looking forward, what are sort of the next milestones to be watching for as dropship is further tested and validated before a more full-scale rollout?

Rati Levesque (President and CEO)

Yeah. Hi, Bobby. Thanks for the question. On dropship, this year was really about testing and learning. I've mentioned that in the past and building the capabilities, starting with watches, handbags, and more recently, jewelry. At the end of the day, you know, it's really one tactic to bring on incremental supply. I also see it as a way to onboard international partners in the future. We do think, you know, after testing, learning, kind of tweaking the models, we think it can be a meaningful contribution, but I'd say in the medium term.

Robert Brooks (Analyst)

Got it. That's helpful. Maybe just stepping back to the revenue growth, it was great this quarter, and as Ike said earlier, it's been great this year. I just wanted to get a sense of, like, obviously you guys are a supply-constrained business, but how much of the supply, how much of the revenue growth maybe is product, is your ability to process the supply you have coming in quicker and therefore getting those items on the site quicker versus how much of it is just overall more supply coming through the door?

Rati Levesque (President and CEO)

Yeah. Thanks, Bobby. I mean, it's really around how much supply is coming through the door. That's really where we're focused. That's why we talk about the growth playbook. Again, that sales, marketing, retail coming together. We're also seeing some success in social and seeing some green shoots there and kind of strengthening that relationship with the seller. Really focused on the supply side of things. You know, at the end of the day, the cool thing is, like I mentioned, 58% of shoppers now prefer the secondary market. We're seeing it in the consignor growth numbers, now double-digit consignor growth numbers. Seeing that strong willingness to spend because of the trust we built and because of the, you know, strategic moats that we built along the way.

Robert Brooks (Analyst)

Got it. And then just last question for me is just a year in the seat. You mentioned it in the prepared remarks, right. I was just curious if you could, you know, speak to the lessons maybe learned so far or stuff that maybe has exceeded expectations. Just curious to get kind of a high-level thought there.

Rati Levesque (President and CEO)

Yeah, sure. You know, definitely been an exciting year, and we're definitely seeing, you know, the market shift. Like I said, it's great to see more attention to resale. I think, you know, one year ago, we laid out our foundation for our three strategic pillars: profitable growth, operational efficiencies, and obsessing over service. We are really seeing that work. I'm proud of the progress that we're making, right? The 20% growth, the EBITDA margin at 5% now and expanding. I'd say trust is up eight points year-over-year. Our active, both sellers and buyers, are accelerating. We also, less than a year ago now, talked about Athena and launched Athena. Now, by the end of the year, it's going to be about 30%-40% of our inventory.

Really, you know, at the end of the day, continuing to become the trusted advisors to our sellers, enriching that data for the seller experience, and, you know, closing $2 billion in GMV in our history. Building that strong foundation, seeing the momentum. You know, we really do believe the best is yet to come.

Operator (participant)

Our next question will come from Ashley Owens with KeyBanc. Your line is open. Please ask your question.

Ashley Owens (Analyst)

Hi, Aik. Great. Thanks so much for taking our question, and congrats as well. Maybe broadly, just to start, I want to ask about the competitive dynamics. You know, I know you've provided some good metrics around your flywheel and acquisition. Just curious, with secondary and retail becoming a bigger choice among consumers, how are you seeing the competitive environment evolve, particularly around new entrants, supply acquisition, and then pricing? Additionally, have you observed any change in competitive or discounting intensity from peers? Thanks.

Rati Levesque (President and CEO)

Yes. Thanks, Ashley, for the question. A couple of different things. You know, first, again, the market shift has been great to see. All attention to resale is helpful. The $200 billion TAM is great, and we're able to capitalize on it because we are the market leader. Really focused on our moat and our strategic moats at the end of the day around expertise, data, our sales team, all the insights that we have, the diverse product offering is really important. That's how we built trust, right, with our community of now over 40 million members. The sales piece, you know, relationships to unlock supply driven by insights that, again, art and science, the infrastructure and data we built to process one-of-one items, single SKU items is hard to replicate. At this point, 14, 15 years ahead of the curve.

Resale is no longer, you know, reacting to the fashion industry, but driving it. I think, you know, at the end of the day, we're able to capitalize on that, being the leaders here.

Ashley Owens (Analyst)

Okay. Got it. Just to follow up, for the fourth quarter EBITDA, could you help us unpack what's embedded in the bridge, particularly within, you know, G&A and other OpEx buckets and what dynamics you expect to carry through fourth quarter? I know Ops and Tech have been leveraging at a really strong rate for the past several quarters and accelerated with some of the further automation initiatives you've been working on. Just any color there would be helpful. Thanks.

Ajay Gopal (CFO)

Hi, Ashley. Thanks for the question. Yeah. So on Q4, as it relates to EBITDA, I would say, you know, we expect a continuation of our focus on operating efficiencies. You've seen this translate into strong operating expense leverage in Q3. We leveraged, we saw leverage in our operations and tech line of 370 basis points, as well as on SG&A of 150 basis points. Going forward, Ops and Tech will continue to be where we see most OpEx leverage coming from, and this is where we bring the power of our AI-driven initiatives like Athena to bear on improving margins. We will also continue to see similar levels in SG&A. You know, we're investing in helping our sales team be more efficient. You heard Rati talk about how the value of supply increased by 12% for existing luxury manager.

We think trends like that will continue as we build on these investments, and will be a source of leverage for us going forward as well.

Ashley Owens (Analyst)

Okay. Super helpful color. Thanks. I'll pass it along.

Operator (participant)

Our next question will come from Marvin Fong with BTIG. Your line is open. Please ask your question. Marvin, your line is unmuted. Please unmute and ask your question.

Marvin Fong (Analyst)

Hi. Can you hear me?

Rati Levesque (President and CEO)

Hi, Marvin. Yes.

Robert Brooks (Analyst)

Hi. Sorry about that. Yes. Good evening. Thanks for taking the questions. Congratulations on the strong results. Maybe could start, you mentioned half the benefit in AOV coming from units as well as the other half from ASP. I think that's, you know, six and six and both improved versus last quarter. Just maybe a finer point on each of those. With ASP, I think there was a mixed benefit there. Was there anything beneficial coming from the tariff side that you call out as well? On the units, we'd just kind of love to unpack, you know, what you think is kind of driving that other than just the fact that it looks like buyers are enjoying the site. Anything you're doing there to drive that or, you know, category-wise that people might be purchasing more of and adding to their baskets?

Ajay Gopal (CFO)

Thanks, Marvin. I'll take this question. You know, we're seeing a healthy balance in how our growth is split into price and unit volume. If you unpack our growth rate in Q3 of 20%, we see a pretty even split. So roughly half of it came from growth in ASP and half of it came from growth in volume. Going deeper into ASP, this is largely driven by the things we've been focused on and a few that I would highlight. You heard us talk about our new sales compensation plan. That plan rewards our luxury managers for bringing in value over volume, and we're seeing that translate into our mix shifting into high-value items. The other thing that's helping on the ASP side is our pricing algorithm.

Our AI-driven pricing algorithm has been in place for a while, but we've been steadily expanding coverage and expanding it to cover more and more items. Every time we do that, we see how the model, given its precision, is able to capture, you know, incremental price on behalf of our sellers. The last thing I would point to on that aspect is just how our investments in authentication and building customer trust have allowed us to capitalize on the growing interest in fine jewelry. We've been able to bring in more supply, and we've been able to move that supply very effectively, which gives us, which obviously changes the mix of our business into higher-priced items. At the end of the day, you know, trends are going to come and go.

The beauty of our marketplace is just how quickly we can respond to them and capitalize on the way consumer preferences are shifting.

Marvin Fong (Analyst)

That's great. And my follow-up question, you know, direct revenue, very strong growth, north of 46% growth. Could you just kind of unpack that a little bit, you know, in this environment? Is the Get Paid Now product gaining a lot of traction, or was it, you know, mostly out of policy or vendor contracts, or was it all kind of across the board?

Ajay Gopal (CFO)

Yeah. Thanks for that question. Direct revenues were up 47% year-on-year, but as we've indicated in the past, we expect this to be between 10%-15% of our total revenues, and it came in at 13%. Right in that range of where we expect it to be. The outsized growth is really explained by what happened last year as we calmed a quarter last year where it was a much smaller proportion of our business. Going forward, we would expect this to stay within that range. We feel really good about that revenue stream, to your point on what's behind it. You know, gross margins have expanded nicely. They were up 370 basis points at 21% in Q3. We feel good about what's moving through that channel and our ability to drive strong profitable growth through that channel.

Marvin Fong (Analyst)

Great. Thanks so much, Ajay. Appreciate it.

Operator (participant)

Your next question will come from Matt Koranda with Roth Capital Partners. Your line is open. Please ask your question.

Matt Koranda (Analyst)

Hey, guys. Thanks. It sounds like the luxury managers are getting more efficient at procuring supply, and it sounds like maybe the incentive changes were a big part of helping them with that. Maybe just wanted to hear about the next unlocks ahead for helping the sales team procure more supply as we head into 2026. Should we think about that as sort of the main channel of supply growth into 2026, or are there other levers to pull on the retail or marketing side?

Rati Levesque (President and CEO)

Yeah, sure. Hi, Matt. Thanks for the question. I want to be really clear. You know, the growth playbook was a supply-focused business, like I said, but the growth playbook and the unlock in supply was not just sales, right? It was sales, marketing, and retail coming together, deepening and strengthening our relationship with sellers. The compensation structure was one tactic. We have also really been focused on flywheelers in marketing, and they are two to three times more valuable for us, and that is starting to work. We are getting early days, but I talked a little bit about the referral and affiliate programs, and there is much supply to unlock there. That is sales and marketing working together, AI smart scoring and prospecting to bring on new sellers. Again, really early days there, and we are testing our way into that, but seeing some green shoots, success in social or influencer campaigns.

I talked about these high-value events again, and we're seeing, you know, just over, you know, these events are two to three days and bringing in sometimes $1 million, over $1 million over just a couple of days. It is another way to kind of, like I said, strengthen our relationship with sellers. You know, that along with resale becoming more mainstream or the market shifting and the great momentum that we're seeing around, you know, like I mentioned before, 58% of shoppers prefer the secondary market out right now, and almost 50% look to resale pricing before they even buy in the primary market. All of this gives us, you know, a lot of confidence going forward.

Matt Koranda (Analyst)

Okay. Very helpful, Rati. Thank you. Curious on Athena, just wondering if you're willing to quantify any of the cost savings that flowed through. I would assume most of the cost savings are flowing through O&T in the third quarter. Maybe just what's built into the fourth quarter outlook in terms of cost savings on the O&T line?

Ajay Gopal (CFO)

Hey, Matt. Thanks for the question. You're right. Athena is a key driver behind the efficiencies that we're seeing in operations and tech. We got about 370 basis points of leverage on that line, and most of that is coming from efficiencies in our operations center. When we think about Athena, at the end of Q3, it was processing about 27% of the items, and we started with introducing the model to primarily lower-value items. We are going to continue to expand on that number. We expect to end the year with Athena touching 30%-40% of total items as it scales. Also, as we expanded towards touching mid-value and high-value items, we see it as continuing to be a source of productivity for us going forward.

We think that Athena can save us, you know, a couple of dollars per item as we continue rolling it out, and it will take time, but it's a source of leverage going forward.

Matt Koranda (Analyst)

Okay. Very helpful. I'll leave it there. Thank you.

Operator (participant)

Your next question will come from Anna Glaessgen with B. Riley Securities. Your line is open. Please ask your question.

Anna Glaessgen (Analyst)

Hey, good afternoon. Thanks for taking my questions. Really nice to see the GMV growth, you know, notably ahead of the longer-term range you give of high single digit to low double digit. Just curious if you could maybe share some perspective on the degree to which this is being driven by, you know, wider consumer acceptance of resale and overall market growth versus relative share gains with the concept. Thanks.

Rati Levesque (President and CEO)

Yeah. Thanks, Anna, for the question. When we look and piece apart our growth rate, we can map all of it back to our growth playbook. This is, like I said, sales, marketing, and retail, and some of the tactics that we're working through there. That's a nice shift. Of course, we have some of the tailwinds around the market shift, right, around shoppers preferring the secondary market. We do feel like it's both things there.

As we obsess over service in our growth playbook and really up-leveling the experience for the consumer, listening to what they need, really thinking about how to create less friction in the experience, making sure that we're being very transparent on pricing and building that trust with the consumer, that's, you know, we're also seeing that directly tie back to our GMV growth as far as more value coming out of each consignor.

Anna Glaessgen (Analyst)

Got it. Thanks. One follow-up on the events or the high-value events you talked about. Maybe you could share what inning are we in enrolling this out to the fleet and maybe how many events do you think could be supported per store, just anything there. Thanks.

Rati Levesque (President and CEO)

Yeah. So these high-value events, they're a nice way to test a market as well. We're seeing, you know, a quarter of our new sellers coming from our retail strategy. And of course, they build the Halo trust, seeing much more high value coming through there. Really early there as far as, you know, how many events that we're having right now. We kind of are testing our way into that as well this year. Given the progress that we're seeing and the results there, we'll kind of launch that every month to, you know, every major market. This is a low-cost kind of way for us to bring in incremental supply.

Anna Glaessgen (Analyst)

Got it. Thanks, guys.

Rati Levesque (President and CEO)

Thanks, Anna.

Operator (participant)

Your next question will come from Jay Sole with UBS. Your line is open. Please ask your question.

Jay Sole (Analyst)

Super. Thanks so much. Can you hear me okay?

Ajay Gopal (CFO)

Yes.

Rati Levesque (President and CEO)

Yes.

Jay Sole (Analyst)

Great. I want to follow up on your comments about the operations and technology line. I know you touched on this before, but can you just talk about what the right rate of growth, just in terms of total dollars off that line, because it's been pretty steady, 6% growth now for about a year. Is that the right way to think about growth in this line going forward?

Ajay Gopal (CFO)

Yeah. Thanks for the question. It has been a pretty consistent source of leverage for us, right? In Q2, we got about 310 basis points of leverage. In Q3, 370 basis points of leverage. The bulk of that is coming from the efficiencies we're driving in the op center. I think we've got a long runway of opportunities there. Athena is just touching 27% of our items. As we continue to scale it, it will continue to be a source of leverage for us. I would say when I go back to the comment we made earlier on focusing the business on getting to 15%-20% adjusted dividend in the medium term, our ops and tech line is going to be a pretty major contributor to that margin expansion.

Jay Sole (Analyst)

I guess maybe if I ask it a different way, like, what drives growth in that line? I mean, because the dollars went up sequentially this quarter, I guess based on the guidance for fourth quarter, the dollars went up sequentially again. What are you investing there? Can you just tell us about what drives dollar growth in that line?

Ajay Gopal (CFO)

Yeah. Yeah. Thanks for that clarification. About two-thirds of that line is tied to our operations, and really that is driven by unit volume. While we get more efficient on a per-unit basis at processing items, as the business grows, you would expect to see an absolute increase in the dollars going through that particular line.

Jay Sole (Analyst)

Understood. I guess just remind us at this point, Athena can touch what percentage of the assortment of things sold once you scale it to where you envision it to be?

Ajay Gopal (CFO)

Oh, I don't know if we've put an upper limit on it as we think about it. Today, it's touching 27% of the items. We think we will exit the year at 30%-40%. Theoretically, there's no reason why it couldn't touch all the items as we continue to get better at running it through our models.

Rati Levesque (President and CEO)

At the end of the day, Jay, we're on track for taking out multiple dollars in cost per unit in the medium term, and that's really where we're focused.

Jay Sole (Analyst)

Understood. I guess, can you just update us, you know, based on the guidance again for Q4, it looks like the cash flow for Q4 will be pretty solid. What are your plans for cash uses in the balance sheet going forward?

Ajay Gopal (CFO)

Yeah. Thanks for the question. You know, we are a very cash-efficient business. Unlike a traditional retailer, we do not trap any of our cash purchasing inventory in ahead of a season. The primary use of our cash really goes into investments that we make in our fulfillment center. So it is automation tech or it is, you know, implementing technology like Athena where we can get efficiencies out of it. Q3 was a strong cash performance quarter for us. We generated $19 million in operating cash flows and $14 million in free cash flow. We expect Q4 to be stronger, just like you saw last year, and it really showcases how our business model has positive working capital benefits when we grow.

Jay Sole (Analyst)

Got it. Thank you so much.

Operator (participant)

Your next question will come from Mark Altschwager with Baird. Your line is open. Please ask your question.

Mark Altschwager (Analyst)

Great. Thank you for taking my question. I wanted to follow up on marketing. Looks like it was a bigger investment this quarter. I was hoping you could just give us more color on what you're seeing there in terms of efficiencies and then just how we should think about marketing as a percentage of sales, both in Q4 and in the medium term.

Rati Levesque (President and CEO)

Yes. Hi, Mark. I'll start with that question there. Yes. Definitely made a little bit more of an investment in marketing to drive some of the growth numbers. It's a key lever for us in our growth playbook. Drives new sellers, obviously, brand affinity. You are seeing a couple of one-time costs in that number for Q3. At the end of the day, you know, if we see investment opportunities, we take them. We do have a high confidence in the ROI of our spend, and we're seeing validation of that, obviously, in Q3 and in our Q4 guide, but we make sure to always balance, you know, growth and profitability.

Mark Altschwager (Analyst)

Excellent. Thank you. Separately, any color you can share on customer behavior by age cohort?

Rati Levesque (President and CEO)

We have not shared customer cohort by age. We are seeing, you know, strong willingness to spend, like I said, built by, you know, the trust that we have built over the last 15 years, seeing more fine jewelry, watches, handbags, more higher value come through. We are seeing this newer cohort has a higher LTV. We do see we tend to skew younger, more Millennials and Gen Z, over half of our customer demographic. The other way that we cut the data, and I think I have shared this in the past, is looking at, you know, our higher value consignors because we are supply constrained. We are always looking at the supply and the seller side of things, seeing more value come in from our higher value and mid-value consignors. Those tiers are on the higher end of our loyalty program.

Obviously, you know, like I mentioned, focused on the flywheeler, which is two to three times more valuable for us.

Ajay Gopal (CFO)

Maybe one thing I would add there, you know, as a platform, I think one of the compelling things about The RealReal is how we have cross-generational appeal. We have customers, younger customers that are entering sort of the early years of their life, and they look at us as an excellent platform for acquiring items, and then that relationship continues to grow and evolve as they age.

Mark Altschwager (Analyst)

Thank you.

Operator (participant)

That concludes the Q&A session and the call. Thank you for joining. You may now disconnect.