Q3 2019 Earnings Call

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Ladies and gentlemen, thank you for standby and welcome to the real reels third quarter 2019 financial results Conference call. At this time, all participants' lines Arnold listen only mode. After the speakers presentation. There will be a question and answer session to ask the question. During the session you will need a press star one on your telephone please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the Congress over your speaker today Mr., Paul Bieber head of Investor Relations. Thank you. Please go ahead Sir.

Thank you.

Good afternoon, and welcome to the real rails earnings call for the quarter ended September Thirtyth 2019, I'm, Paul Bieber head of Investor Relations at the real real joining me today to discuss the real real results, our founder and CEO jewelry, Wainwright and Chief Financial Officer Mccoskey.

She will be will provide an update on our business, including progress on a few key initiatives and then Matt will review, our Q3 financial results and provide the financial outlook.

This conference call will be available via webcast on our Investor Relations website at Investor Dot the real real Dot com.

I'd like to take this opportunity to remind you that during this call well be making forward looking statements, including statements relating to they should be expected performance of our business future financial results strategy long term birth, and the overall future prospects.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ from differ materially from those projected our implied during this call in particular those described in our risk factors included in our final prospectus.

For initial public offering filed with the FCC on June 27, 2019, and the risk factors, including our Form 10-Q that was filed in with our second quarter results and the Form 10-Q , it will be filed with our third quarter results you should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call.

Based on assumptions and police as of today, and we undertake no obligation to update them, except as required by applicable law.

Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release and supplemental materials.

Which is furnished with our form 8-K filed today with FCC and May also be found on our Investor Relations website.

I would now like turn the conference call over to the real real founder and CEO Julie Wainwright Julie.

Thanks, Paul and good afternoon. Thank you for a giant outside third quarter earnings call. We're once again excited to see our progress speaking and provide you with details in our third quarter financial performance before I proceed I could take this opportunity to thank our consigners I buyers and our employees for helping make the railway.

Now into the worlds largest online marketplace for consigned actually go ahead.

Q3 was a very solid quarter and speaks to the house and vibrant marketplace.

We generated GMP at $252.8 million.

48% year on year increase and revenue of 80.5 million at 55% year on year increase.

Importantly, GMB growth accelerated approximately 800 basis points quarter on quarter and revenue growth accelerated approximately 400 basis points quarter on quarter.

We're especially pleased that we drove our ground well once again driving significant marketing leverage we also demonstrated meaningful leverage in our operations and technology expense line, which is important as we continue our march toward profitability.

We are proud to be accelerating growth and operating leverage we demonstrated during the quarter, which we believe speaks to several unique aspects of our model, including high buyer repeat rates and our unique flywheel buyers become consigners and consigners become buyers.

Matt will provide more color and the details of our quarterly financial performance later in this call.

During the call today, I will briefly touch on three topics.

Three performance strength.

Automation and sustainability.

First I'd like to spend time on our Q3 performance.

Q3 was a strong quarter across the board with strong financial results and significant progress against our priority.

Our IPO had a positive impact on our top of funnel marketing activities, such as traffic and member growth.

Q3 traffic increased 44% year on year.

And members increased 76% year on year.

As of September Thirtyth, the rail rail has 14 million members.

The strong traffic a member growth translated into strong active buyer addition.

We ended Q3 was 543000 active buyers on a 12.

Month trailing basis that is up 43% year on year, and a 300 basis point increase quarter on quarter.

We added approximately 51000, new buyers quarter on quarter a record for us.

Importantly, we achieved record new active buyer additions, while also driving marketing leverage with only at 25% year on year increase an absolute marketing expense dollars.

Of course, because they were robust revenue growth marketing as a percent of revenue improved significantly to 16.5% compared with 20.4% in the same period last year.

And our buyer acquisition costs or back continued to fall with the Q3 back declining approximately 15% year on year.

So far in Q4, new buyer additions have normalized to our pre IPO level.

In addition to the top of funnel strength Q3, ASV was also very strong and increased 5% or plus $20 year on year.

Ill be benefited from a mix shift in the quarter net favored higher lv categories, such as watches jewelry and handbags.

Matt will elaborate later in the call.

Now, let me shift to my second important topic.

Automation, it accelerates and facilitate our ability to scale efficiently and improve our unit economics.

As we discussed on our second quarter call. The first step and automating our inbound operations was in pricing, we exited the second quarter Onemain pricing up 52% of total unit volume and by the end of Q3 piping automation had increased to 61% of unit volume.

While we have made significant progress on pricing automation, we also exercised human oversight over pricing to ensure we capitalize on opportunities in the market.

In addition in Q3, we began on a meeting Copywriting and Fido retouching.

We exited Q3, automating, 17%, copywriting, including product and title and description and 15% Opodo retouching.

We expect to see steady increases and the percent of items with automated copying retouching, which will support improvements in inbound operations unit costs, and importantly significantly increase the scalability of our operations.

A big thanks to our teams executing on our automation initiatives.

Our automation progress contributed to our improving operations and technology expense as a percentage of revenue.

The anniversary of the alloy store also contributed to leverage in our operations and technology expense fine.

I'd like to wrap up today discussing a core value at the rail Ral sustainability.

Our value proposition rapid sense strongly with the millennial and GNC consumers, who are powering the growth of luxury sales globally.

Our survey data indicates that approximately 32% a buyer shop that railway out as a replacement for past fashion.

Also 56% of our Consigner base, and 64% of our millennial Consigner base site environmental impact or extending the life of luxury items as key motivators for Consigning with us.

This is not surprising when you consider approximately 3600 dump trucks goal of textiles will be to positive in the landfills.

Around the globe.

Just during the time.

It takes to conduct this call.

The good news is that building a business that extends the life of luxury goods. The real rail is having a profound positive impact on the environment. We work with shifted advantage as sustainably focus consulting firm to quantify the positive impact of extending the life of consign products on our marketplace.

We are proud to announce that since inception consignment with the rail rail has offset.

1231 metric tons of carbon.

Or said another way, we saved 553 million liters of water.

In addition, we are pleased to partner with luxury brands, who also deeply care about improving the fashion industry impact on the environment, we have a longstanding partnership with Stella Mccartney.

And we recently announced a partnership with Burberry.

We look forward to working with others, who share our goal, making fashion and luxury more sustainable.

Lastly, I'm going to close with a quick update on our retail expansion.

We are excited to finally bring a retail store to our hometown of San Francisco, We signed a lease for store in Union square and we expected to open the first half of 2020.

Now with that.

I'll turn it over to Matt to the Q3 financial review.

Thanks, Julie and good afternoon, everyone. So let's get into and discuss the results for Q3, after which I'll provide an outlook for Q4.

We had a very strong Q3 highlighted by accelerating topline growth, which included a strong tailwind across our top of funnel metrics immediately following our IPO.

And a significant operating leverage in marketing and operations and technology.

Our Q3 results underscore our continued focus on balancing growth with a disciplined approach to driving operating leverage.

Now moving onto our key operating metrics.

Trailing 12 month active buyers in Q3 were 543000 up 43% year over year.

GMB from repeat buyers was 81.8% of total GMB in Q3.

Reflecting strong buyer retention and accelerating new buyer growth in the period.

We generated $252.8 million in GMP, an increase of 48% year over year.

GMB growth accelerated 800 basis points quarter over quarter.

Trailing 12 month GMB per active buyer was approximately $1700 flat year over year.

Q3 orders were approximately 577000 up 41% year over year.

Consistent with expectations that we articulated on last quarter's call ill be increased year over year to $438, a 20 dollar year over year increase.

Or 5% this 5% year over year able the increase was driven primarily by an increase in average selling price per item while units per order were up modestly year over year.

Discounting was flat year over year.

At a category level all of our top level categories experienced growth in excess of 35% year over year with women's watches and jewelry, all experiencing quarter over quarter acceleration.

Mens and handbags, where the fastest growing categories in Q3 with men strength in sneakers and streetwear.

Our Los Angeles store continued to aid men's category growth.

Returns and cancellations were 26.2% of GMP and were down 150 basis points year over year, driven primarily by lower cancellations as a result of strong performance in our fulfillment operations.

Q3, consignment take rate was 36.8% an increase of 40 basis points year over year.

The year over year increase in take rate was up more modestly versus Q2, as we experienced more pronounced strength in watches jewelry in handbags in Q3, which generally carry lower take rates, but also contributed to our strong increase in lv.

We expect year over year take rate to increase in the fourth quarter and a modest year over year increase in full year 2020 as we fully anniversary our February 2019 take rate adjustment.

We also note that take rates can vary from quarter to quarter based on the mix of products sold as well as which Consigners had item sales in a steady state we expect take rates to be highest in the second and third quarters of the year and to decrease in Q4 with a higher mix of high priced products.

Now moving on to the piano.

Total revenue in Q3 was $80.5 million, an increase of 55% year over year revenue growth outpaced GMP by 700 percentage points, primarily due to higher take rates and accelerated 400 basis points as compared to Q2 s year over year growth.

Q3, consignment and service revenue was 69.8 million up 53% year over year, and accelerated approximately 900 basis points quarter over quarter.

Consignment and services revenue includes approximately $5 million of revenue from shipping fees and our subscription program first look.

Direct revenue was $10.7 million up 75% year over year as a reminder, we primarily generate direct revenue when we accept returns from buyers. After we have already paid the consigner in such instances, we recognize the gross proceeds as revenue when the goods subsequently resell.

Q3, gross profit was 52.2 million, an increase of 57% year over year.

Gross profit per order increased by 11% year over year to more than $90.

Our consignment gross margin was 72.1% up 90 basis points year over year, driven by a higher take rate.

Our direct gross margin was 17.6% up 540 basis points year over year.

Direct gross margin is lower than consignment gross margin because direct revenue is recognized on a gross basis with corresponding cost of sales.

Moving on to operating expenses.

Please note that I will speak about opex on a non-GAAP basis, excluding equity based compensation and related taxes for a reconciliation to GAAP. Please refer to our earnings release.

Marketing expense was $13.2 million in Q3, an increase of 25% year over year.

Marketing as a percentage of revenue improved to 16.5% compared to 20.4% in the same period a year ago.

Importantly, we demonstrated approximately 400 basis points of year over year marketing leverage driven by an approximately 15% year over year decline in buyer acquisition costs, while also delivering accelerating GMB and revenue growth.

We believe there is continuing opportunity to improve marketing leverage going forward driven by one buyer retention.

81.8% of GMP came from repeat buyers in Q3.

To network effects within our marketplace, including our flywheel, where buyers become consigners and consigners become buyers.

Three continued media mix optimization, and finally conversion to buyers from our long tail of members.

We note that marketing leverage will vary from quarter to quarter based on the timing of our advertising spend.

In Q4, we expect a year over year decline in absolute marketing dollars as we executed on our plan to front load higher ROI marketing spend early or in 2019 and invest less in lower ROI marketing in Q4.

Operations and technology expense, which includes costs relating to our stores luxury consignment offices fulfillment centers merchandising engineering and product management was $36.3 million in Q3, an increase of 30% year over year.

Operations and technology as a percent of revenue was 45.1% improvement compared to 54% in the same period a year ago.

This improvement was driven by productivity in our inbound operations from the automation investments that Julie discussed and the anniversary of our allies store opening.

We drove approximately 900 basis points of option tech leverage on a reported basis.

Excluding the impact of $2 million related to a settlement payment in connection with the early termination of a vendor services agreement that was backed out of our EBITDA reconciliation in Q3 2018, we drove approximately 500 basis points of option tech leverage in Q3.

We believe there's continuing opportunity to improve operations and technology leverage going forward driven by automation and occupancy leverage.

Selling general and administrative or SGN, a expense was $27.2 million up 81% year over year.

Yesterday as a percentage of revenue increased to 33.7% compared to 29% in the same period, a year ago, driven primarily by investments in our administrative function headcount to support being a public company as well as growing our sales team in advance of an expected significant ramp in Q4 supply volume.

Our adjusted EBITDA loss for Q3 was $20.9 million are 26.0% of revenue importantly, we demonstrated 470 basis points of year over year, EBITDA margin leverage while driving accelerating topline growth.

At the end of the third quarter cash cash equivalents in short term investments totaled $370.3 million.

Now moving onto guidance.

We expect Q4 GMB of $292 million to $300 million, representing a year over year growth rate of 34% to 37%.

This guidance reflects quarter to date trends in demand and supply a return of top of funnel metric growth to pre IPO levels and a year over year decrease in marketing expense that is consistent with our previously articulated plans.

We expect our Q4 EBITDA margin loss percent in the range of 14% to 15%, which represents a 15 to 16 percentage point year over year EBITDA margin improvements.

We expect the following factors to drive significant Q4 operating leverage.

First gross profit per order, we expect gross profit per order to increase year over year and quarter over quarter.

Marketing, we expect a year over year decline in absolute marketing dollars to result in a year over year and quarter over quarter improvement in marketing as a percent of revenue.

Option Tech, we expect our automation and occupancy leverage to drive a significant year over year improvement in ops in tech as a percent of revenue consistent with Q3 as a percentage of revenue on a reported basis.

And as DNA, we expect the deleveraging we experienced in Q3 to moderate in Q4.

For the full year, we're raising our GMB outlook and now expect 2019, GMB of 997 million to $1.005 billion, representing a year over year growth rate of 40% to 41%.

We are also revising our 2019 EBITDA margin range to a loss of 23% to 24% compared to previous guidance of 24% to 25%.

A few final notes for those building models.

We expect approximately $3 million to $4 million and stock based compensation expense in Q4, and our fully diluted share count, including Unvested options as of September Thirtyth 2019 was $95.2 million.

In closing we are pleased to report strong Q3 results highlighted by accelerating topline growth and strong operating leverage.

We continue to focus on topline growth and more broadly driving the growth and development of the authenticated luxury consignment market.

And we will do so we'll striking a balance with delivering strong operating leverage as we drive toward profitability.

With that we will open the lines for questions operator.

Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound Keith.

Our first question comes the line of Scott from Stifel. Your question. Please.

Hi, Thanks, I had two first there's going to a few articles recently just about the authentication process potential for inauthentic items.

To make it into inventory purchased energy Wonder if you could just talk about all the process more broadly in terms of the percentage of items that you think actually do make it through that that may be an authentic and and in the in the few cases, if that happens how you actually handle that from a customer service standpoint, and then secondly.

The interest in your views competitively.

In terms of all stock X, which is a business it's been.

Focused more on sneaker category initially basmati application crosses as well.

The company's expanded into categories that are somewhat similar to what you have and how you think of that business.

Our competitor or thoughts thank you.

Hi, Scott its Julie obviously, the only woman and the Ram here now that I'm going to take both questions and we're going to start with said the stack ex question there or is there a still a south posting site.

So they really do differ quite a bit and the way we deferred they take possession of the item post sale.

And more importantly, we're in a really large tam and our containers or not so posters our biggest competition is inertia.

And that inertia is Adam overcome we do everything we can to encourage people that understand there like almost $300 billion untapped value in our class and get them to consigned both from an environmental.

App reason and also most importantly, it's just trapped resources in their house, so we actually down and really worry about the competition coming up given our unique model and our mouth and we certainly welcome anyone authenticating dead in this huge Tam that's out there so with that.

That said, it's probably time to move into how we authenticate.

This this actually gives me an opportunity to horn, a little bit we have a 70 point.

And actually NPS score, which compares favorably with best in class companies like Apple Our Cosco Pascal is at 74 apples at 68, you don't get a 70 score on MPS without doing many many things right and we're counting authentication as one of that in fact authentication.

Core in central to our brand, we're the only marketplace that indicates as wide range of consumer products and I would say without hasn't C.. We are practices are best in class and most importantly, they continue to evolve they have to involve evolve because counterfeiters evolve.

Let me just walk to how things work.

We take physical possession of every single guide the first step once they arrive at one of our centers are processing centers is the receivers actually look at the item Dan Specter print condition and to make sure. It's one of our accepted brands receivers are trained on base level for authentication they use.

That knowledge to spot obvious fakes poor construction inferior material, but they also separate the items considered high risk based on brand style values source things that are on trend and they escalate them to one of our high risk authentication team members, we have over 100.

East and which include brand experts GA certified mileages, our Alan just handbag experts and art curated.

Personally authenticate high risk items, a bell that at the indication guides and materials.

The training and they work every single day to ensure that we have absolutely the best in class practices, the gym Mileages Center, Lcs, which our luxury consignment offices have on every seven years.

Of industry experience and it's important to note that GE. Most are GA certified and yet a certification requires six months of full time training on campus.

Other items are at authenticated by our copywriters. These.

This team, which is very large are trained in specific categories and specific brands. Some only focus on women's contemporary fashion. For example, they received daily weekly and monthly training to stay on top of the latest trends.

We also audits and recheck items, we havent, we havent audit team.

To make sure that we're doing what we say, we're doing which is that were and we are the authenticated luxury consignment business, our quality control team pulls items secondary and sometimes tertiary reviews to see how we're doing and uses the results to constantly retrain.

So.

Originally when I said up the business my goal was to be the safest place to shop on the Internet for previously owned goods I still stand by that statement and we certainly are deeply committed to keeping counterfeit goods opt to marketplace.

And our business is really driven by amazing people are dedicated to the mission of authenticity and we're really really good at it but our processes are not static they couldn't be statics have we continue to invest in automation training and technology to stay ahead of counterfeiting.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Eric.

So your question please.

Thanks, so much for taking the question of two we want to till we get diving a little bit to the backstory of how the Burberry announcement came about how we should be thinking about what that means for the platform broadly not only just via belts that ended of itself, but whether it's a roadmap for additional partnerships with brands, how we should think about it or.

Being sort of utility to drive more supply onto the platform and maybe even improve.

Some of the philosophy, we've seen of both shopping.

Conversion on the platform as you see those types of items get listed more thanks, so much for all the color.

Sure. So first of all we've been and now I personally have been talking to the Grand groups for about five years and as you all may be aware of the loss or changing in Europe , and certainly in the UK about what they need to be in terms of sustainability and they're also paper conscious that as produced.

Seeing luxury brands that are sustainable is the future. It's demanded by their customers at mostly millennials and Gensix, which are driving the primary market. So with that in mind Burberry became the second large brand to join us in leading the charge in the circular economy.

We do have good relationship with many brands, we are particularly happy to see Burberry come along and we I said, we started talking to him about six months ago and their goal was to launch when we add national Consignment day was was early I think it's the second first Tuesday in October so we'd have about three weeks of results. Then we are CESC.

Piling those results and sending them to burberry today, and it did drive incremental consigners for us, but I prefer to talk to them about the results before I announce it in the call. It was a really good first start. So we're excited about that we do operate in the marketplace. I think it's good to keep in mind that we really are dependent on.

Any brand for success.

Having said that we would love to see more brands come along and work with us.

It's really important for the environmental impact as a luxury marketplace and.

We'll see I would say that if.

They are really get the brands and on the whole are getting more enlightened and certainly the new loss in place in Europe .

We are going to foresee issue. So I expect good things in the future.

Thanks, so much.

Thank you. Our next question comes from a line of Oliver Chen from Cowen and company. Your question. Please.

Hi, Thank you regarding the environment that you're seeing now as we approach the holiday season, what are your thoughts for how the promotions look in the marketplace and also.

Are you are you changing the marketing in terms of the timing of the marketing spend on a year over year basis, I thought I heard that and what do you think going to happen because some of the inventory and the department store channel are met.

And there there are some recent bankruptcies so would love your thoughts on how that May play out and also how you're positioned differently on a year over year basis.

As this important season comes thanks.

So on the started out and that May jump in.

As we mentioned before we do at our product mix is really diversified and it helps us Medicaid any impact of discounting our marketplace. You certainly saw add TMB in Q3, accelerating our ASV increased by $20 year on year.

Our Q3 results really our harbinger of things take time that we can god healthy rates, despite noise in the marketplace and discounting and competition and again the promotional environment isn't new to us over the years, we learned to navigate in this environment.

And the other thing I want to say is most of our DMV comes from our hi, Consigner repeat rate so our off well off to a good start we tend to have we do have a little seasonal impact net Marina. We certainly don't have some of the big boom or bust periods, but we have a seasonal impact and we're off to Q.

Before we don't expect.

The sad demised Barneys impact us on the Grand scheme of luxury Department stores, they were certainly important and trendsetters, but still relatively small.

So I'm going to turn it over to Matt. If he has any other further comment yes may just address the question around marketing timing in the fourth quarter. So it's really not a change in our strategy versus where we were last quarter at the time of the IPO. It's been our plan all along coming into the year to emphasize our spend.

In advance of peak seasons for us so in the first quarter in the third quarter to spend in a positive ROI relatively positive ROI environment and to deemphasize our spend in the fourth quarter. So thats what you see.

Implicit in our guidance for the fourth quarter.

And going forward, we're going to just react to what we're seeing in the marketplace in terms of our ROI trends and make sure that we're investing smartly.

And optimizing our spend as we drive toward profitability.

Okay, and lastly regarding customer acquisition cost and buyer acquisition cost.

What have you been seeing lately with the trends that you expect than it sounds like you're you're pretty pleased with TV as a media format, but would love your thoughts on on what's been trending within the field and.

Thoughts on what we should pay attention to as you as you leverage marketing and grow revenues.

Yes, sure I'll start.

So the drivers of our marketing leverage are more or less consistent with what they were a quarter ago and going back even further than that.

Topped the list is really having strong repeat rates from both buyers and consigners.

That make us less and less dependent progressively on acquisition to fuel our growth and then within that having a high overlap between buyers and consigners, what we call the flywheel effect sort of further perpetuates that trend.

But no doubt our marketing investments have become increasingly efficient with our back going down about 15% year over year in the third quarter as we continue to lean into TV and I don't think into the specific tactical details.

That core enough for competitive reasons, but.

More or less TV continues to be a very strong medium for us and we've been emphasizing not only traditional sort of cable and nationwide programming, but also increasingly LTT like Hulu and broke through that weve found pockets of success.

So that's what we're doing right now going forward, we're going to continue to stay ahead of the curve and emerging trends to continue attracting millennial gensix customers that performed very well for us.

And that said, we still do have very low brand awareness. So there's still lots of runway for us to to amplify that aspect of the business, but we'll do that do sell all meaning disciplined about our overall level of spend in the leverage that it's driving.

Great Congrats on Burberry best regards.

Thank you.

Thank you. Our next question comes from a line of Michael Binetti from Credit Suisse. Your question. Please.

Hey, guys. Thanks for taking my questions. Congrats on nice quarter, just one more question to think about for a model and I had a couple of bigger picture ones, but.

On discounting I think you said it was about flat year over year I would've thought there would have been lower given some of the better analytics you guys put in place to do things like remove the full site offers like 20% of any any view there.

Any chance at that.

That the level of discounting can reaccelerate lower from here and then.

Matt on the on the take rate I, just wanted to straighten out a few comments you made it sounds like you expected to be up in a year over year basis in the fourth quarter and we already noted take rate is generally lower in the fourth quarter versus Two Q3 q every year.

That concludes Benson.

Yes, bigger and smaller increases over the last few quarters, maybe you could just help us.

And just also come from the.

Consensus, which looks like it's.

Well over 150 basis points in the fourth quarter again.

And then I guess Julio just one last one if I could sneak it in.

As we look out to next year, you've got some big comparisons to anniversary now with all the progress you've made.

As a percent of revenues and very important lines like marketing and ops in Tech maybe you could just give us some initial thoughts on.

And the today.

Much progress you think you can make next year and what some of your big ideas on initiatives for next year.

Thanks.

I'm going to take the last one and then I'll, let nacco, but one of the thing you should understand over time, our average selling prices than going up. So we're always looking for pockets to move the ASP shop, and part of that Dan on an absolute basis, meaning is compared the same category versus the same.

Are the same item versus the same item.

Obviously, our lvs gone up and Thats, a combination of mix, but and diversity of product, but on a line item because we do a lot of analysis trying to raise the price and because we share in the rest with the Consigner, we're always looking to sell at the highest possible price within a given timeframe now for next year looking forward.

Pretty excited about next year, even though we've got to bring in this year. So we want to keep focus.

On bringing in this year, but next year, we know we're going to have the San Francisco store opening in the first half whenever you get a store. It's always nice have one way or headquarters in the same place like this you makers Sheldon finally get their shoes and add that always has been positive impact on on the marketplace. So that store is six.

Siding.

As we mentioned before we're going to have a couple stores a year. So we're working on other leases. We don't have an announcement yet on the next city or cities, but we're excited about San Francisco automation and our machine learning team is on fire. So you can expect us to automate quite a bit more the value is not jess.

Consistency in the way we described things in saving money is also speeds up things.

In terms of time to site sell for example, most of our but a retention is done off shore that adds three days to our cycles and the more we can automate photo retail chain. The shorter period time to get an item on the site. So we're really excited about that the other thing.

Thats been call for me to see is the development of our Perth Amboy at the facility I was just there a couple weeks it out that's our largest 500000 square foot place in New Jersey that gives us the ability to make even more automation pushes especially on all sides of the business and found that because.

Theres room to work and that requires us to think differently and thats pushing that forward.

So I would say overall next years on one level is going to be more in the same another level. It's also fine tuning.

Our business more rolling out Perth Amboy, getting at one store already more another store and lined up.

And then we'll continue I'll continue to knock on the door the luxury brands and hopefully we can actually bring in.

Another brand partnership by the before the years over I think our goals are aligned with the luxury brands for sure and that is actually reducing the carbon footprint. So I feel really good about that it's going to be a five year, but like we still have.

More than six weeks left in this said this year and it's been exciting year, we've got to focus on bringing in the quarter. So thats really where our focus is right now.

Okay. So let me let me tackle the discounting question and I think the final unless it was the take rate.

Trends, so with respect to discount I know they don't want to add a ton more to the question of than to say, we saw no unexpected trends in the quarter.

Very much in line with what we anticipated as of the prior earnings call in terms of the overall environment and its impact on our in our business, which was negligible with respect to I think there was an element of your question around kind of the our optimization efforts that in theory could impact discounting in part that's true, but actually a lot.

Of our optimization on pricing happens upstream of that in terms of shutting the optimal initial price.

Discounting as a percent of that remains relatively consistent but what we've actually seen increases in our average selling price over time and in the third quarter is about 4% year over year increase was due to being smarter about how we price things initially and we watch things like a hawk as in terms of the sell through rate of a product categories. So.

You're right. The those investments are paying off in terms of yielding higher average selling prices and ultimately average order values are ASV.

With respect to great.

I don't want to get overly precise about take rate because as as you've seen over the past couple of quarters Theres, an inverse relationship between average selling prices are ASV and take rate take rate tends to bounce around a little bit based on what selling but and so today will be that said, we've got enough visibility to now.

We will see a substantial year over year increase.

Take rate such all things equal in less the mix of product selling changes from here towards the end of the corner.

She is more or less inline with our previous expectations and inline with what you're suggesting.

Okay. Thanks, a lot probably helpful. Congrats again guys.

Thank you. Our next question comes on line of Edward Kelly from Keybanc capital markets. Your question. Please.

Hey, guys. Thanks for taking the questions I guess first you guys highlighted some of the top of funnel benefits from the IPO.

No. It's still early days, but any sense as to how these new customers are both behaving on the buy side as well as a container side and then second as a follow up given how strong GMT was in the quarter I guess, what's your comfort level that you have enough inventory to kind of support continued growth and then maybe as it relates Perth Amboy any kind of initial learnings from that facility.

Thank you.

I'm going to take the Perth, Amboy and turn it over to Matt So here.

Here's what we had hoped and when we when we took that space. It's a little further from the New York City. We always now we get incredible talent when we pull from New York and advantage, we are a little nervous about putting to committing to a space. It was quite a bit of waste from New York City, we are getting phenomenal talent.

And we're pulling from.

Other warehouses that have located from there I know one of names, but other luxury online businesses.

There are have downsize or stop hiring or we offer more competitive package. So.

We've had nothing but positive surprises from Perth Amboy, meaning good quality workers hard workers I think we're way we're up to about three to 400 employees, there and Tam and it's a beautiful facility. It's all going as planned a little bit better than planned. So thats then a net positive surprise is also we are test.

Now some I'm still fairly lightweight automation there on the fulfillment side, but thats going really well, which will then roll out to our facility here in California, so with them and our turnover to Matt.

Yes, So I guess for the question is really around kind of the Q4 guide and how we feel relative to the supply required to deliver the GMB growth. Obviously, we feel good it's embedded in our guidance and the good news as you think back to Q3 and some of the strength we saw around the time of the IPO that happens on both sides. The top of funnel metrics, which were of course.

As traffic, but that led to strong member growth, which then further drive strong not only buyer, but consigner growth, so where we saw the tide rise for on both sides of the marketplace. So we feel good about where we're positioned going into the quarter and as of this moment in the quarter.

And it's embedded in the guidance that we provided.

Great. Thank you.

Thank you. Our next question comes on line of Ike Boruchow from Wells Fargo. Your question. Please.

Hey, good afternoon. My congrats two questions first question to met or Julie the movie increase that you saw in the quarter year over year, it's something you're doing tactically or is it just the consumer opting more for these higher ticket categories. You mentioned like watches and jewelry is kind of curious maybe there.

Yes, I think we'll probably both chime in here I'll start so what we saw in in the third quarter as we referred to in our prepared comments is particularly well strength across the business every one of our categories saw strong growth in excess of 35% year over year, we saw relative strength in our higher price.

Categories watches jewelry for example, we're always focused on trying to.

To drive sales across the spectrum of price points. So instead, there was a particularly strong effort to drive high price point goods, because there's always going to be a balance between it will be and driving that up and.

Maintaining strong customer growth and Consigner growth, which are often times categories. A first purse purchase on the lower end of the price spectrum. So we need to maintain healthy balance I would call consider it.

More or less random in the quarter that we saw such a significant bump on a year over year basis, but certainly as inline with our objective to have a healthy mix of high priced and low price product selling and justice of but now to that there was a slight impact now as having three stores, where our average selling price.

Higher sell and last year and the same quarter, we had only a little bit have they might well story now lay we had we actually had the Soho store and we did not have the Madison Star. So this time you had a full quarter of three stores still a small impact on our overall business, but stores do add to the.

The average order size is larger in the stores.

Got it Super helpful. And then just one follow up I think this one's for Matt.

So looking at the margin just there's clearly growing scale on the outspend line as well as second ops.

Automation and other initiatives, you're still de leveraging on the other restaurant in line, but in Threeq you and your Fourq you guide seems to point to improvements there as well I guess, what I, what I want to ask is at this point is it too early to talk about that other question airline, becoming an opportunity as well just how do we think about the costs that are in there and the ability to scale those over time.

Sure. So I guess I should start by defining what's in there. So the bulk of the spend in SGN. A is what we consider DNA administrative headcount and related related costs.

Which is semi fixed and once the initial buildup happens, which is particularly heavy this year, we'd expected to grow significantly slower than GMV and revenue growth going forward as soon as next year. The other components a significant is our sales organization, which will grow.

Along with the business and we're not expecting particularly significant leverage there as expressed.

Dollars per per unit that we bring in but thats, obviously critically important for us to continue scaling our topline.

So I'm not calling for leverage in Q4, and I think as specifically call out just less deleveraging in Q4, but as we get into next year I think thats appropriate time to start having the conversations about whether we think there's going to be leverage in 2020 , we'll know more as we we get closer to it.

Got it thanks, everyone.

Thank you. Our next question comes from the line of Aaron Kessler from Raymond James Your question. Please.

Hi, Thanks, guys. A couple of questions maybe just a follow up to that question, maybe you could talk little about the product sourcing mix and maybe how thats been change over the last.

A few quarters.

Maybe the retail stores.

Actually if you just talked about maybe other big milestones for automation that we should look out for over the next few quarters or is it just more gradual changes there. Thank you.

And so look as the Sealy, obviously on the mix and.

The biggest change was the stores I. It we're still primarily in home pickup. So it's still skews heavily add between 60, 365% of all the product we get is humming in home hiccup stores again, we only have three small part of our business, but the stories are proving to be a nice stores.

Hi value product coming in with a nice repeat rate.

Still too small to call it out as a large section the balance of it tends to come from our inside sales people where people just get it. So we haven't seen that big of a shift yet, but I would expect there is.

And the more stores, we opened we'll see some one of a shift but with only three stories, one which has only been opened since.

May it's still too hard to tell on the automation fat really it's mark we're going to be keep doing more of what we've talked about automating photo editing happy riding and those are the two big initiatives along with pricing some things won't get automated so photography every time we've had.

And automated solution on photography, and it's lower than our own people doing the work some photo editing will never a small portion will never get.

Our automated because it's fine jewelry and watches which actually need a human to do it but I would say, we're moving along our path of as much automation as possible. The biggest change next year is a bigger investment and automating our dedication and that also will help accelerate right now it has a small portion.

Automated cell everything still going to have a human attached to it but over time or you're going to see when you walk and you're going to see a change in processes and more being automated and more experts being applied as the business grows. So it's a cool transformation program voice, our 500000 square foot.

Warehouse, which required a different level of automation on the fulfillment and our 250000 square foot warehouse here in California. So we're at a nascent stage of that and as we sell up that warehouse and use of the capacity that will also be an area for innovation and automation.

Great. Thank you.

Thank you. Our next question comes on line of Justin Post from Bank of America Merrill Lynch. Your question. Please.

Hey, this is Sean on for Justin first question US Your returns champion mix kind of came down sequentially in its lowest level I'm looking back in history ought to think on what drove that and whether we can think of the sort of like lower 20 625 mix.

Returns as a normal.

On the second question as I, just want check in on supply acquisition, it sounds like you're ramping up head count.

For your field Consigners staff.

Any puts and takes there how things go on like the commission only sort of Consigner stuff.

I want to check on that.

Sure so.

With first with return rate the decrease year over year and return it was primarily driven by lower cancellation order cancellations I was really had nothing to do with inherent product return rates, but just.

Steadily and very strong execution, our fulfillment operations in the quarter compared to the same quarter a year ago. So I wouldn't trend that decrease forward in terms of the return rate, but I think were return rates do tend to be relatively steady, but bounce around a bit from from quarter to quarter to core.

Peter.

Second with supply growth I don't think we really want to add any anymore than we might have talked about we're happy with the trends the mix between channels is more or less consistent stores have been nice healthy addition.

The commission only sales program and you're referring to continues to grow like all of our sales channels do all of them are doing nicely and we're we're satisfied with where we sit in the midst of our most important quarter of the year.

Thanks, a lot.

Thank you and this does conclude be question and answer session of today's program I'd like to have the program back to Julie Wainwright for any further remarks.

I just want to say, thank you very much for dialing in and I'm going to wish you all have wonderful Thanksgiving because we won't be talking on a happy holiday period, we won't be talking till after.

The ended this year and let's hope for a great today today and I Hope you all have a safe and wonderful holiday. Thank you again.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.