The RealReal, Inc. (NASDAQ:REAL) Q3 2023 Earnings Call Transcript

The RealReal, Inc. (NASDAQ:REAL) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good day and thank you for standing by. Welcome to The RealReal’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would like to introduce your host for today’s call Caitlin Howe, SVP of Finance. Please go ahead.

Caitlin Howe: Thank you, operator. Joining me today to discuss our results for the period ended September 30, 2023 are our Chief Executive Officer, John Koryl; President and Chief Operating Officer, Rati Levesque; and Chief Financial Officer, Robert Julian. Before we begin, I would like to remind you that during today’s call, we will make forward-looking statements which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results to the company’s most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Today’s presentation will also include certain non-GAAP financial measures, both historical and forward looking for which historical financial measures, we have provided reconciliations to the most comparable GAAP measures in our earnings press release.

In addition to the earnings press release, we issued a stockholder letter earlier today 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 third quarter of 2023. Today, we reported financial results for the third quarter of 2023. Revenue and adjusted EBITDA exceeded the highend of our Q3 guidance range and GMV exceeded the midpoint of our guidance range. The third quarter of 2023 was our best quarter of adjusted EBITDA since the company’s IPO in 2019. The improvement in our financial performance was largely driven by the consignor commission structure update we made late last year, our strategic decision to reduce direct revenue, and continued improvements in operational efficiency. If you recall, we overhauled our consignor break card in November of 2022.

This change helped us to do a couple of things. First, we were able to limit lower priced items, which in turn reduced our variable costs and improved our contribution margin per item. Second, on the remaining portion of the lower value items and our mid value items, we increased our take rate. You can see the impact of this change flowing through our P&L. The result in Q3 was that we grew consignment revenue by 10% while we purposely limited direct revenue, which over the course of the past few quarters has dramatically shifted the mix of our business and driven significantly higher gross margin. Finally, our operations team and our authentications centers delivered efficiencies through improved processes. In Q3 these actions combined to deliver a higher average order value, higher gross margin rate, higher gross profit dollars, lower variable costs, reduced company owned inventory, and a significantly improved adjusted EBITDA result compared to the prior year.

Over the past few quarters, we have made significant changes to our business strategy and tactics, and we are seeing the benefits of these changes and our operational and financial results. I couldn’t be more proud of this team for the fantastic work they have put together throughout this year. In September, we announced that Robert Julian will step down from his role as CFO at the end of January or when a new CFO assumes the position. As a result, this will likely be Robert’s last earnings call. I want to personally thank Robert for his many contributions to the business and wish him the best in his future endeavors. I am pleased to report that the search for his replacement is well underway. Looking forward, we continue to project that we are on track to deliver positive adjusted EBITDA on a full year basis in 2024.

In summary, our strategic shift to refocus on higher margin portion of the consignment business is delivering significant progress in our results. Overall, I’m excited about the trajectory of our business. We are well positioned to capitalize on our consignment business model as we continue to be the market making leader in luxury resale. With that, let’s open the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Mark Altschwager from Baird. Mark, please unmute your line. If your line is muted, please unmute. Please rejoin using the CallMe feature. Our next question comes from Marvin Fong from BTIG.

Marvin Fong: Good evening. Thanks for taking my questions. So I guess I’d just like to start with, maybe just, drilling a little bit deeper. Maybe you could just give us an update on the new revenue streams. So for example, I believe this past quarter, you tested, advancing some of those initiatives, like increasing traffic and things like that. So maybe you could just kind of give us an update on where things stand in terms of advertising and maybe the partnership, strategy?

John Koryl: Yep. Marvin, thanks for the question. I’ll start with that one. From an advertising perspective in Q3, all we did was really we launched in July, and we did a lot of experience experimentation.It’s still not any material result in Q3 whatsoever and we have yet to launch, warranty return insurance as well. We’re looking more towards Q4 for both of those and then what we’ve referred to in past conversations as virtual inventory that is actually not planned to launch or make any material impact until 2024. So if you really look at it, this is a story that is all 100% about our core business and in getting our core business where we want it to be and building from that position of strength.

Marvin Fong: Terrific and maybe just as a follow-up, I mean, it looks like in reflection of all the improvements you guys made. So ops and tech costs was down quite a bit, even though orders, I think, was up sequentially a little bit. So sounds like you’re processing orders at a lower cost per order. Just could you drill down into that a little bit further? I mean, is there more that you can do there, in terms of automation or whatnot, or should we kind of think about you having to kind of achieve your cost objectives there?

Robert Julian: Hey, Marvin. This is RobertI’ll take that one and you’re right. We have seen very considerable deficiency in productivity, in our operations, including in tech we’ve invested a lot in new technology and automation and so on and you’re seeing it in our results. I don’t know if there’s another huge step function improvement from where we’re at. We’re always looking for productivity and efficiency. We’ve talked about in the past that 3% to 5% of productivity is a reasonable range and we’ll always be driving for that sort of in the spirit of continuous improvement, but you’re right we have seen good efficiency and productivity, and we’ve seen the results of the investments we make we’ve made.

Marvin Fong: Okay, great. Thanks for that Robert and good luck on your next endeavors.

Operator: Our next question comes from Mark Altschwager from Baird.

Mark Altschwager: Good afternoon. Can you hear me alright? Wonderful. Thanks for taking the question and Robert best wishes to you. So I wanted to ask about active buyer growth that did decelerate this quarter, I think, close to flat or up 1% Year-over-Year. I know that’s a metric that has been positive in recent quarters and cited as perhaps evidence that the resale buyer isn’t slowing down. So I guess a couple of things. One, are you surprised, by the trends? And maybe can you elaborate on any changes in buyer behavior that that you’re seeing? And two, any implications regarding how you’re planning 2024 and the level of profitability you expect to achieve expect to achieve given some of the shifts that are happening there?

Rati Levesque: Yes. Hi, Mark. I’m going to take the first part of the answer and I’ll pass it along. So as far as active buyers are concerned, we did see a meaningful deceleration, but it was also expected.So remember the changes we made in the back half of 2022 were purposely decelerating our growth and shrinking kind of those unprofitable categories and those unprofitable units. So a lot of those items under a $100 and some of that volume, and category. So again, it was expected that we would shrink our active buyers and again, driven out of that low value.