The RealReal, Inc. (NASDAQ:REAL) Q1 2024 Earnings Call Transcript

The RealReal, Inc. (NASDAQ:REAL) Q1 2024 Earnings Call Transcript May 7, 2024

The RealReal, Inc. misses on earnings expectations. Reported EPS is $-0.2956 EPS, expectations were $-0.14. REAL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

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Q&A 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.