Q4 2021 RealReal Inc Earnings Call
Good day, and thank you for standing by welcome to the real real fourth quarter and full year 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and.
The answer session. Please.
Please be advised that today's conference is being recorded to ask a question. During the session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Kaitlyn Howe head of Investor Relations. Please go ahead.
Thank you operator, joining me today to discuss our results for the period ended December 31, 2021, our founder and CEO , Julie Wainwright, President Rocky Labatt, 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 rigs.
And 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 what is historical financial measures. We have provided reconciliations to the most comparable GAAP measures.
Our earnings press release in addition to the earnings release, we issued a stockholder letter earlier today, both of which are available on our Investor Relations website I would now like to turn the call over to Julie Wainwright, and Chief Executive Officer of the real real.
For introductory remarks, and then we will go directly into a question and answer session Julie Thank.
Thank you Caitlin and thank you to everyone for joining our earnings call today.
Pleased to announce solid financial results for the forest fire until year 2021 with continued top line growth and significant operating expense run rate.
We are encouraged by our ability to continue to grow the business at a high rate while also effectively managing right.
Throughout 2021, we continue to expand our Houston.
Technology.
Asia.
[laughter] cleaner than Acacia sweep up operational efficiency and have made good technologies.
Including our proprietary diamond measurement equipment.
And machine learning and AI algorithm.
We continue to increase should drive an increase in our average selling prices to refining our pricing algorithms.
Due to the expanded use of technology in our operations, we are improving unit economics, enabling scaling up our business and driving higher E. S. P.
As the impact of Covid recedes, a business is becoming more predictable and therefore.
Therefore today, we returned to providing forward looking guidance for Q1 and full year 2022 .
Importantly, we are now in a position to report our expected timeline for attaining profitability. We projected that we all will be profitable on a full year adjusted EBITDA basis in 'twenty 'twenty four.
This concludes can't relies on three main assumptions.
And Neil continued annual top line growth and at least 30% operational excellence with improved variable cost productivity and number three controlling our fixed costs and leveraging our prior investments in technology and stores.
At our Investor Day in March we look forward to providing more details regarding our path to profitability and our long term financial targets that we refer to as vision 2025.
We have never been more excited about the long term prospects of our business the rethink routes and heightened interest in luxury resell indicate increased consumer demand and momentum in the space.
We believe the real reality is uniquely positioned to capitalize on these trends.
And with that we'll now open it up for Q&A.
Operator, we're ready for questions. Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question.
Press the pound key.
Please stand by while we compile the Q&A roster one moment.
Yeah.
Our first question comes from Laurence <unk> of Morgan Stanley . Please proceed.
Great. Thanks for taking my question I just had a few questions on the on a timeline to profitability. I'm. You know is is there an assumed G. M. B target within that you know, 30% CAGR that that youre looking towards what's the assumed gross profit per order and that is it still $100 is sort of the the key threshold or does it need to be.
Above that to get there and then lastly, any what do you see them sort of store opening cadence or total number of stores that you're projecting in that 'twenty 'twenty point number. Thank you.
This is Robert I'll take the first part of the questions and I'll also let Julian Rajiv weigh in so in terms of the specific G. M. B targets for 2024, we're not disclosing that at this time, we have an established.
We have established internally, but we're not providing the GMB. The CAGR the assumed topline growth rate is consistent with what Julie said, which is 30 plus percent.
But we're not giving a specific <unk> targeted at the moment, we will at our Investor day in March.
As part of our vision 2025 planned give specific targets for G. M B revenue and adjusted EBITDA as our long term targets for 2025, but at the moment, we're not providing.
The specifics in 2024 other than we will be adjusted EBIT positive in that year.
As far as the gross profit per order.
Again with it's not a specific target, it's an important metric within our business and we continue to monitor and look at it and it has continued to grow.
And I think we ended the year somewhere 92 or or $93 of gross profit per order in 2021, and we do expect that to continue to grow however, I wouldn't refer to it as the most important tour.
Other people talk about it as the Holy Grail to our profitability.
One of them from one of the many reasons as it totally ignores our cost base and so while we're looking at gross profit per order I would <unk>.
For you to really.
Look at some of the other key indicators or metrics or or.
What is required for us to get to profitability and again, Julie mentioned them earlier.
Our continued growth rate at 30 plus percent.
It is.
I would say relatively modest productivity on our variable cost base call. It low to single digit productivity on our variable cost base and continuing to manage our fixed cost.
Very responsible way you know modest increases in our fixed cost going forward.
As far as new store openings I'll make one comment and I'll turn it over to Julian ROTC.
We continue to open new stores, we've already opened one new store in 2022 in Brentwood, California, and we're always going to be opportunistic about looking for good locations and places where you know our store model works.
So I'll pause there that was a lot [laughter].
I agree with that on the store openings and I would say that we have nine stores that are open now for less than a year and the metrics.
We continue to be healthy, 30% of our new consignor still continue to come from a retail location. We continue to see a halo effect that happens regionally they are driving new traffic as well higher average selling price. So again those metrics continued to be healthy and we are oh.
Are we looking at new locations.
Sellers and buyers are and what locations that make sense Brian .
Hum.
Very helpful. Thank you.
Yeah.
Thank you.
Our next question comes from Erinn Murphy of Piper Sandler. Please proceed.
Great. Thank you. Good afternoon, two questions for me personally to be think about the inflationary environment and particularly the price increases that we're seeing in the handbag category can you talk about the opportunity that you see for your business over time, just from a gross profit per order perspective, I'm, given the pricing umbrella and the primary mark.
And then the second question I have is around the sources of supply and it sounds like it's still pretty healthy can you talk about how that looks from doors versus in home appointments and is there still a need to utilize them virtual appointments as we think about the new normal going forward. Thank you so much.
Sure.
Talk about the specific patient Allen.
You may now announced fairly hefty increases in their handbag, well that absolutely benefited 3000, certainly benefits from that.
And our consignor, it's on two levels, while allowing us to rate.
And in those bags, and but still offer a better value for the consumer so the consignor wins, a consumer win versus buying all retail and it makes retail even more attractive so that all day.
You know we have backed here, what's the impact on the average order size, we have been absolutely unit economics are at.
Average selling price on a unit basis has been increasing steadily for the last two years as has our average order size due to what's going from about 193 now over two units per order.
And so what that says to us in general and we're getting a bigger share of wallet.
And people are embracing reach out what that will stay for the forthcoming and change in the price in the REIT and the retail market, we wouldn't make that prediction all I can tell you is that.
And the combination of our pricing algorithms and are getting more and more sophisticated with human oversight means that won't be outlook to adjust prices as quickly as we see consumer demand change so.
But overall, our Ami Ami and average unit selling price has been going so well.
Now I turn it over Nebraska to talk about I sure. So as far as sources of supply like you said had a very healthy and it continues to be healthy in home our concierge services, what we call. It continues to be the most valuable channel for US followed by our retail locations.
It was also part of the mix and we launched that during Covid and two years ago. When Covid first fit and that also is very lucrative for us and also helped to make our sales team more productive because now they're able to take more appointments per day. So again, it's the in home.
And then retail as well as virtual helping with the productivity, but overall, we're feeling really good about the supply coming in.
Both in units and dollars.
Thank you so much.
Thank you.
Our next question comes from Andrea <unk> of Needham. Please proceed.
Oh, great. Thank so much and good afternoon guys.
We had two questions I wanted to follow up on the gross margin decline in the fourth quarter and I think our mix shift Iraq wasn't a big part of that and you mentioned real will be eliminate that owned inventory going forward, but curious how should we think about gross margins implied in our <unk> and the full year.
And then secondly, just wanted to follow up on the processing delays are you called out in late December and January did you quantify what that meant on sales and EBITDA just trying to gauge how much that's affecting one queue. Thank you so much.
Well.
I'll take the last part and now switching over.
Yeah.
To explain the dynamics of our marketplace, because we have such a high repeat rate in such engagement with the site. It is dependent on us getting more and more product on the site to satisfy that demand.
So we actually went into Q January with both.
Behind in hiring slightly and then we had up to 40% callouts in our op centers pretty significant.
For perspective January was growing at 40% versus year ago prior to the call out.
And then it dropped not because we didn't have people engage with decided because new products weapon on the site.
The only area.
We are now back to normal with our Athens, and our commitment to get the units once we receive them up in the site.
We're back to normal about the second week in February except for fine jewelry and watch it slipped about return to normal very shortly most importantly that didn't impact product coming in so we had a backlog of product coming out which we're now working at working through so it's always hard to prove the next to them, but if you were in <unk>.
Growing 20% and now you have our guidance you can see that at least the first thanks.
Six and a half weeks of the quarter, we were depressed due to alcohol at Amazon had a knock on effect, but that is as I said as we speak now and mostly mostly behind us and I'm going to turn it over to Rajiv to Robert Sorry, Robert M D.
Gross margin yes.
In reconciling the decline in gross margin in Q4 versus prior year. It's a it's about a 550 basis point decline and I would say, it's primarily due to two different areas. One you've already mentioned, which was the mix impact of the increase in the direct business.
As a percent of our total revenue and that did increase it was about 31, 5% of.
Of our total revenue came from the direct business versus last year. It was just under 19% and so on that mix impact alone was.
A negative impact of around 900 basis points.
And as you mentioned in the future, we intend to deemphasize the part that part of our business, where we are purchasing inventory and we did that for very specific reasons.
During COVID-19 and when we are a challenge to get supply and to be in People's homes for these concierge type appointments that Roger you had mentioned, but it is our intention to deemphasize that aspect of our business and for direct revenue to decline as a percent of our total revenue in the future.
Now as I mentioned, the total decline was 550 basis points and mix was 900. So there was a positive offset in that positive offset was really insight credits as a percent of revenue, it's actually improved quite a bit year over year and again. The site credits were utilized for very specific reasons last year that werent just.
<unk> this year and so we saw about a 350 basis point improvement overall in our gross margin due to cypress is becoming a much smaller percentage of our total revenue until the net between those two is the 550 basis point decline in gross margin year over year.
<unk>.
Okay.
Okay. That's really helpful. Appreciate it.
Thank you. Our next question comes from Ike <unk> of Wells Fargo. Please proceed.
Hey.
Thanks, So much Robert two questions one should we continue to expect.
<unk> relationship between take rate and an <unk> persist.
At least into the first half that you just kind of curious if the take rate should continue.
Being on a downward trajectory, whether it'll be kind of it kind of flips up and then the second question is kind of what <unk> is asking about.
Understanding that the mix should come down I think in <unk>. It was about <unk>.
14% of NMD or I think you said a third of revenue.
Maybe just help us.
Based on your guidance or is that expected to land for the for this fiscal year, maybe where should that be.
In terms of fiscal 'twenty, four and your target just because it's just it's become much more insulated than it has in the past at least I don't really understand where exactly you guys are planning that to shake out so any help there would be.
Would be great.
Sure. So on your first question certainly there will be a continued inverse relationship between average selling price of our higher value items and the take rate, we'd take a smaller percentage of those items and that's really determined competitively by the market in terms of what the take rate is by category.
When you see changes in take rate in our results is primarily due to changes in mix and so it's just a question of are we selling higher value items at lower take rates or lower value items and higher take rates. So I wouldn't necessarily associate that with good news or bad news necessarily because on a.
On a gross profit basis or a gross profit per order basis, which we like to focus on in the past.
These lower take rate higher value items are very important to our business and our path to profitability, but.
Primarily the changes in take rate or mix.
And it's not necessarily a good thing or a bad thing as they fluctuate up and down is just a reflection of the mix of the products that were taken and we're selling.
There are some cases actually by the way, where we have increased our take rate on some items items less than $100 and so on and so there is small movements in our take rate on item basis.
Where we have increased our take rate, where it seemed appropriate or it makes sense. So.
That's the take rate question and did that answer your question before I move on to the.
Yeah, I guess it was or I guess that was a long winded way for me to say it shouldn't take rates start to stabilize and maybe even improve from where it is.
I understand the mixed I understand what's driving it I guess I'm asking is that mixed dynamics likely to continue in the near term or could be starting to see the inverse happens that makes sense I see it as fairly stable in my model I would see this fairly stable it might fluctuate up and down a little bit, but more or less I see at this stage.
At the level it is okay.
Our average order value has gone up and stayed up consistently now and so we are and we do believe we're getting a bigger share of wallet and then that would be talking to values and Kevin might more high value lower take rate items.
Great and the directors so the direct piece and we talked about Q4 and I gave a figure that direct was 31, 5% of total revenue in Q4, which was a bit inflated on a full year basis.
Direct revenue was about 20 little over 26% of total revenue and I am projecting and expecting that to decline in 2022 and to further decline as we get out to the 2025.
Vision numbers now there is a part of direct business that will continue to grow the part that's associated with auto policy returns and get paid now so there will always be some percentage of our business that is direct it well we will own the inventory.
But we will certainly deemphasize the part of our direct business, where we are purchasing items to resell.
Where that ends up over the long term as I mentioned as you know was 26% in 2021 I see it declining.
20% or less and maybe in the long run it could end up at 15% to 20% of our total revenue and then stabilize.
But we should see an improvement and of course the improvement.
Our gross margins just due to mix alone.
We are projecting and as part of our 2020 or 2022 E. L. P forecast and what we're gonna shares our vision 2025 numbers.
Very helpful. Thank you.
Thank you. Our next question comes from Marvin Fong of D. T. I T. Please proceed.
Thanks, Good evening, Thanks for taking my questions. Most have been asked so just one for me you know the guidance on the adjusted EBITDA line implies you know pretty good improvement after the first quarter.
Maybe you could just expand a little more on on the call.
Cost efficiencies and operating leverage you expect to realize.
So it looks like in the last three quarters of the year, but also maybe just comment on what might be some of the EBITDA pressures for for the first quarter since it looks like.
A bit a bit more than what the street was expecting.
So.
I'll start with the you know it is not exactly perfectly balanced as you look at our full year guidance and what we're projecting for Q1 and it does suggest a little bit of bumping us in Q1, which we saw on the supply if not actually supply actually on the throughput side, where the omicron sort of varian.
Impact of our our labor.
And we sort of got a little bit behind on the S. L as in getting product through the system and ultimately up on the website.
The good news is that that is sort of correct in an IV and ROTC you could talk about I think we're more or less back to Sal as we commit to in terms of that throughput, but it did start a little bit slow for us and that's reflected in the Q1 results. So another way that a lot.
The loss in EBIT that is also a reflection of a.
Topline that we didn't expect to be at that level. We expect it to continue the growth rate and we saw that continuing right now.
We're basically still leveraging.
So in way down.
And hiring in the fixed cost area and.
This is the first corner, where we didn't get variable lap range.
Because of the AMA Congress, we had so many call outs and then we hired attempts but that we expect that to pick up going forward to get back to normal right in sort of the pattern of adjusted EBITDA as you go through the year to our full year guidance is.
We continue to project growth every quarter throughout the year and we will continue to see the productivity that we've generated in the past and so that will continue and then frankly the fixed cost leverage just gets more pronounced as you go through the year as we grow every quarter at this rate to the fourth quarter, which is <unk>.
Usually our highest gms and revenue quarter in <unk>.
We continue to maintain this fixed cost base, you'll see an acceleration of the leverage on the fixed cost and the improvement on productivity and that's why each quarter frankly, it gets a little bit better as we go out through the end of the year and corresponds to our full year adjusted EBIT forecast.
That's great color thanks, everyone.
Thank you. Our next question comes from Michael Mcgovern of Bank of America. Please proceed.
Yes.
Hey, Thanks for taking my question I have two first off I just wanted to ask about underlying the 2022 EBITDA guidance could you speak to some of the bigger investment areas for 2022.
What will you expect to be spending on and then secondly, I wanted to ask about shipping expense in Q4, I think last quarter. You noted it was a pretty big headwind. So I just wanted to ask where that stood in Q4 and what are some of the initiatives to improve on that shipping expense over time.
Yeah I can start.
<unk> I can start and let Robert you really chime in.
And what are our big investment in 2022, Q pulled the lever on EBITDA I mean, it really is all the technology that Julie spoke about.
At the beginning and optimizing our pricing and automating pricing is automation of coffee automation of authentication and really just scaling a lot of our labor, especially in our facilities our authentication centers.
And like Robert said that will continue we'll continue to see leverage on both the variable and fixed side because of those big investments. So we've mapped that all out over the next few years, we feel confident about it not really tied back to our technology and product roadmap as well.
As far as the shipping expenses go.
We did see headwinds last year in shipping and that was really driven out of Covid and surcharges that we were getting and we did do some things to mitigate that risk. This year and late last year. Some of that was passing some of that inflation cost to our customers. The good news is we didn't see conversion drop in our card. So we left that there. We obviously have died.
First advisory Upi carrier sharp motion that small packages. That's also helping us and then utilizing our bands in house or in House network.
Mitigate some of that shipping charges for this year.
Yeah, and Michael just said.
Two what lots he said if.
If you look at Q4 shipping in expense compared to prior year, it was actually more or less a wash in terms of the impact on our total gross profit and gross margin. We did see increased shipping cost, but we saw an increase in shipping revenue that lower unless offset it.
Got it very helpful. Thank you.
Thank you.
Next question comes from Oliver Chen of Cowen. Please proceed.
Hi, the G. M D momentum has been really solid and you mentioned in your letter you'll be profitable on an adjusted EBITDA basis in 2024, what.
What are your thoughts on profitability sooner.
Sure.
By by quarter, just thinking about the momentum you're seeing and also if you could add any comments or thoughts on variable and fixed cost leverage.
Second question it sounds like you're quite encouraged by supply.
Would love your thoughts on regionally, if you're happy and categories. How that's proceeding in the past you know New York and L. A were quite sensitive markets and.
And then finally, just a modeling question on U P teams versus Asps.
And would you expect U P T growth to be double digit or outsized relative to asps going forward. Thank you.
Oliver This is Robert I'll take the first one and the multi part question.
In terms of our path to profitability in 2024.
As the year I feel highly confident.
We will be able to achieve that.
I'm not going to commit to a number sooner than that and frankly I'm not.
It really going to box ourselves into a specific quarter. So I think we feel very comfortable and very confident in 2024, I wanted I'm not thinking about it as a sooner.
<unk> timeframe and I'm not going to give the quarter, but we feel very confident in that.
We aren't going to give more details as I said at our Investor day.
In terms of our our path to profitability what success looks like and what we're shooting for in terms of the major metrics in 2025, and I will give a much greater.
Detailed explanation about our cost structure, and our fixed and variable expenses at that time.
Yeah, and I can take number in your second part of your question was when do we see on the supply side regionally and you're right New York and L. A has been larger markets for us, but I would say with our stores that are virtually all virtual operating we have diversified our regional mix a bit more than you've seen in the past.
And then categories are pretty consistent as well as far as what's coming through value.
Ready to wear fine jewelry and watches that looks quite healthy and that's another way for us to monitor the health of supply regionally.
But new York and L. A are back to normal in China heightened route. So that's been there for a while but the important part is we have a couple more legs to the stool there actually fairly significant.
So that's really important.
And then your third question was units Protract transaction versus average selling price.
And what we'll see going forward in ESP I mean, when you see our average selling price increase.
<unk> mentioned as well as our units per transaction and we believe that this is a new trend based on the supply coming in and based on our customer.
Gaining more share of that wallet like Julie Julie mentioned.
Far as marketing does it got better and better optimizing and personalizing that experience in connecting the buyers and consignors to the right product.
So when you believe this is a new trend here and it's gone up significantly and if you go back to 2019 and how we're now.
Over two units per hour and we felt that in going forward for transaction and the a M. D. I think we have a reasonable ALG assumption, we're still seeing that had a higher ANZ that's at quarter to date and I think our boundaries.
There is very reasonable based app.
Past trends.
It's a modeling question already I don't think you have to build in extraordinary improvement in units per transaction beyond the two or is it.
Where we've seen some improvement.
And I don't think we are.
At least for me I'm not modeling in extraordinary increases in average order value I think both of those continue to trend up but from a modeling point of view doesn't require sort of extraordinary increases in units per transaction, our average selling price or average order value to get it right exactly.
Terms of modeling right.
Okay, Great very helpful. Thanks Best regards.
Thanks Oliver.
Thank you. Our next question comes from Tom <unk> of Wedbush Securities. Please proceed.
Hey, everybody. Thank you for taking my question.
I wanted to follow up on some of that.
Questions earlier about the stores.
I know you've mentioned that it's a.
Yes.
Highly highly effective source of supply and I think you mentioned.
High number of your new containers are.
Driven by the store channel is it safe to say that.
From a I guess from an ROI perspective that.
The.
The store initiative to drive higher <unk>.
Higher ROI.
Supply acquisition vehicle than maybe some of your traditional.
Yeah.
Hi.
Gains or or are there any other efficiencies from a saar perspective that we should think about.
Well, yeah, I'll take that you're getting now the ROI is still highest at the in home visits and that's purely because we get more units picked up and then therefore, we get more value for pickup.
That's really important.
Now we did still our units are now second in terms of Saar drops.
The other just for perspective prior to us having the stores, we got and how and I.
Our sources are in home people with.
Send it to us in a box direct place and they can get a free shipping label.
Mike.
Reconsignment offices, which didn't have a retail facing store and then vendor sort of in that order. So what we've seen is the and how we'll pick up still impacting units per pickup continued to increase.
Virtual is part of that we don't get as many units and pick up a few slides that them, but still very important for that consignor and this strong second is retail REIT.
Especially the neighborhood stores, which have a smaller footprint.
<unk> really performing significantly well, the only and I would say the ROI on those are clear.
Wanted to give it more time cause as Rajeev said, we still have nine that haven't been open a year.
And as the stores that were opened prior to Covid like ourself, our store and our wheelhouse door in West Hollywood are also back and back to normal performing significantly wow, but otherwise the stores look like they will be.
Accretive on all levels.
But again, it's still early days, but it looks very very good neighborhood stores.
Some of them got to profitability very very quickly.
Thanks Julie.
And if I could squeeze one more in so you've talked about.
The 30% plus top line growth to get them to be.
Profitability target for 2024.
How do we think about the investment in marketing that's going to require to drive.
Still high level of topline growth you know I think historically the year over year increase in dollars, it's been kind of between five and $10 million range.
Do you think youll have to step on the gas pedal a little bit as far as marketing expense goes or.
How does how do we think about that.
So this is one of the beauty of our business our repeat rate for the customers. It's 84% the same customers and kind of finery just show the ground. We've consistently let's just put 118 months of whacking that's in Covid aside.
<unk> been consistently be able to drive them to.
To actually drive down our variable cost of marketing to acquire new customers without them.
Sorting out the new customer growth, we see that continuing meaning said another way the variable part of marketing will continue to get more efficient. We had we ended the year with a really good track number I don't think we'd put it in there and that and the piece, but we ended the year with a much lower back here, then we hadn't even before too.
<unk> thousand 19.
So marketing will get increasingly efficient over time and that's it.
Fixed cost part of marketing hasn't grown really at all we don't expect to see.
Can crowd that it really becomes apparent ballgame and it looks like it will continue.
Got it thanks Julien.
Fair enough for you to understand.
Okay. Okay.
Thank you. Our next question comes from Michael Binetti of Credit Suisse. Please proceed.
Hey, guys. Thanks for all the all the help here.
You've answered a lot of our questions, but I wanted to ask one at a higher level.
Previewed for us a little bit that you see the path to EBITDA breakeven in 2024, that's sort of the starting point. This year are down $80 million to $100 million. We'd go back walk back in time, a little bit to the IPO, we were targeting breakeven in 2022. So we pushed it out about two years with a two year pandemic in the middle in 2020, you had about I think you had.
A negative $70 million of EBITDA.
So the climb to breakeven is a little bit of a steeper climb from the down 80 to 100. This year, but you do have GMP headed to $2 billion.
This year is right about where you thought you'd need to be in the path to be EBITDA breakeven I think you said I think at the time you saw take rates at about 36 and for a number of reasons are lower now most of it probably the mix is good but I think you said Robert you see stability here. So can you help us just understand at least a few of the big swing factors that you see as you've dug in and done some of them.
Work here that can lead to.
A bit of a steeper climb towards that EBIT profitability map than what you did previously.
Sure I can certainly tell you the inputs and assumptions in how we.
Improved to a profitable beer in 2024, I'm not going to be able to talk too much about the previous modeling than what was projected and a lot has changed between now and then including the pandemic and seller, but I would say that the past the main elements of the path to where we are now to the profitability in 2012.
For us.
Some modest improvement in gross margin and I think that that is primarily due to mix as a percentage of direct revenue becomes a smaller percent of our total revenue.
We should get a few two or 300 basis points of improvement in gross margin during that time.
On the operating expense side, and I've taken a little bit of a different view of operating expense and I noted in our SEC.
SEC filings, we only break it into three categories marketing and in operations and technology and SG&A I actually look at them in an almost 20 different categories and I put them in sort of two main buckets, what I would call supports opex, which is more or less fixed.
About HR and finance and it and so on.
And what I would call sort of sales and operations Opex.
Opex, which is primarily variable and I would say that the assumptions and how we get to where we're at now to profitability. In 2024 is three things. It's the continued growth of 30 plus percent. It is relatively modest productivity in the variable part of our call.
Cost base call it.
Low to mid single digit productivity there.
A real control of the fixed our support part of our App works that may grow at the rates of inflation.
Our.
Sort of it get low to mid single digits in terms of inflation on our fixed cost base and if you project that through your model like I projected through my model.
No I feel very confident that we get to profitability and we.
Bridge that gap from where were at now minus 1% and $26 27 in 2021 to something positive.
In 2024.
Hey, Michael.
Maybe I.
And answer a question that wasn't asked but I think it is.
Cavendish can between 2020 , one and then.
And then a little bit more in 'twenty, two we really we get a couple of things that actually during COVID-19 .
Harmonic has been stronger than they were big investments, but you're gonna pay are already paying out.
Single biggest investment was the retail move into neighborhood stores from providing easier ways for that kind of signers to interact with us and consumers and that as I said neighborhood stores are a big win and we already had a really positive one in the Madison Street store.
And then once we saw the result that that store really didn't slow down as much and even on the ARPA slowed their activity at that store. It was very high and then we started slowly open then we got opportunistic due to various.
Keith key market rent opportunity so that that we made a big investment in the future investments will be much smaller and not as great. Because we opened I think about 16 in about 18 months, so that that won't happen at that pace again that was the number one investment and the other one we get which.
If you look at from 19 to add 20 to the end of 2021 and we doubled our technology investment and we really invested heavily in data science and data scientists who have actually accelerated.
Sure.
The operation of our authentication operations and streamlined it and are actually allowing us to scale now and deliver these results. So those are the two big investments that we made and we're seeing pay offs and both of them, but going forward those as Robert said, it's more like Okay. We know what our basis now.
Now, we fine tune on productivity keep fixed cost fixed and keep growing the top line.
We exited and COVID-19 stronger than we went into it because my feeling is that we probably will.
I have gotten to profitability as we stated when we went public we might've just out again to reinvest in technology. So you might have seen this go in and out but we feel like we're really set up now to continue quotes from strength to strength.
Hey, Mike can I add one other thing too and is this maybe just a question of semantics, but I want to be careful about the words that we use are attributed to me.
I didn't say that we would be breakeven in 2024, I said that we would be positive adjusted EBITDA. That's a little unfair because your next question is gonna be well, how profitable and I'm not giving you that number.
But.
Our projection for 2024 is actually positive adjusted EBIT not breakeven.
Interesting can I kind of thought.
All of that I guess, maybe maybe better for Chile due to the history here, but coming into 2020.
Yeah, I think it's easily forgotten because COVID-19 hit right. After you guys reported fourth quarter and 2019, but you guys are on a path to a very big year in 2020 before the pandemic hit and there was a there was a point in time, where you said gross margins would be up 500 basis points taken us to 69%, there's going to be all kinds of leverage through the model do you still.
See some of the elements that got you're confident in that kind of potential in lines like the gross margin at that time.
Yes, I mean remember just I hate to revisit I'll get TTS state, but.
For me, our first said January and February .
And even the first 10 days of March we were up over 40% versus year ago.
In 2020, and then then very quickly we were down 45% versus year ago with the shutdown and we had an 85 point swing so and.
So we went through a lot of gyrations and in order to keep again, if you just look at our business Holistically given historically, we've had a huge repeat number that drives the base and the predictability of the number.
In order to once things start opening up in order to keep the business.
All it and keep the cohort somewhat.
That was why we purchased inventory when we started people engaged at the site, but our shelves were empty.
So now taking all of that away, we're not in that situation things are returning to normal and but our normal is a higher and units per transaction and higher E. L. D. Now.
And our supply acquisition channels have been diversified significantly.
And our fixed costs.
Need to continue to invest heavily in technology are extraordinarily and technology.
Or reach out now we're going to we're going to open things in a more normal pace. When we open a store sell everything sort of moving in a really good direction. All the key indicators are there and oddly enough even though we went through a lot of turmoil in the middle of ended up in a better place.
Okay.
Question.
[laughter].
Our next question comes from Ed Ya Rona of Keybanc.
Hey, guys. Thanks for taking the questions I guess first Julie you mentioned a couple of times, how you were opportunistic with the store strategy as it relates to real estate I guess, just with the world improving.
Are you seeing kind of help us understand the duration of the leases did the economics change like we do short term kind of pop ups and then as a follow up you know Robert I know, you'll probably give us more to analyst day, but just given your background are there any easy wins that you see in a post COVID-19 environment on getting a late on some of those variable costs. Thank you.
On the store strategy, we didn't get pop ups, and we signed leases.
And in case, you know retail stores.
Still a depressed there so as an opportunity cattle SAP in a neighborhood that makes sense for us for instance, we just opened breathless about a couple of weeks ago and California.
You know it.
That store.
Our first story this year and we're always looking for that so they're they're short term leases, meaning they're less than 10 years, but theyre not pop up.
So those look.
Pretty good I mean, what's really good about it do you want to answer sure. So on the cost basis said and Youre right I come from a background that was heavily influenced by lean manufacturing and six Sigma and continuous improvement and I would say on the variable part of our cost base, we've actually seen.
Good productivity and we will continue to work on that and there's really no easy wins and that's just a continual focus.
What's built into our model is what I would call modest productivity gains as I mentioned before low to.
Mid single digits, which is typical in any environment, where youre running factories are warehouses or distribution centers.
Probably the I don't know if it's easy or.
Wins or low hanging fruit is really controlling the fixed cost I think that's an area, where we have made investments and they were good investments and they made sense, but the real leverage that comes in our business and our path to profitability is more related to that which by the way is a large reported it yet we will give more information on that.
But that part of our operating expenses about two thirds of all of our operating expenses, what I would refer to as the support functions.
And that's the area as we continue to grow 30 plus percent on the top line and we slowly grow that supported our fixed costs at the rate of inflation or a little more than that that's where the leverage is that that's the big one.
Got it thanks, so much.
Thank you. Our next question comes from Susan Anderson of B Riley.
Hi, Good evening. Thanks for taking my question I'm curious just on the take rate how youre thinking about that as you look over the next couple of years are you seeing any competitive pressures there at all.
Yeah, I'll answer that in Nebraska chime in.
And cool thing about our business as we span across multiple categories.
And because we do all the work we have a little bit I mean, do you have a take rate premium but.
We've seen the ability to take our take rate in our favour.
Good last year on non branded fine jewelry and products under $100, we don't see pressure to bring that take rates down but pardon perspective.
I'm uncertain watches our take rate is 15% and it always has been so having a blended part and a blended inventory mix allows us to actually compete in categories, we want to be in but not degrade our overall take rate and then when it does change it's us it's Tim.
Because of what people put on the card not on what we're actually doing it on input it's more that the sell through.
Yeah, I'll just add one thing to that I mean, you know we have almost 26 million luxury shoppers and what we always look at is are we paying a premium to our sellers are we pricing the highest so that's where we both get as far as less on take rate and commission structure, but at the end of the day will the seller earn more with us.
And we're always doing a competitive analysis there to make sure that is consistently the case.
Great and then just a follow up I'm just curious it seems like theres been some pretty big industry tailwind and luxury items, such as handbags and watches, but youre seeing pretty big resale values for like certain brands and styles. So I'm just curious your thoughts around the sustainability of that do you think we're kind of in a.
Higher growth mode for those items right now that maybe could come back a little bit.
We actually handbags have been strong all through Covid and they continue to be strong.
Graham Fine jewelry is the same also unbranded fine jewelry. So we expect to see continued growth in that area.
And I do think we will see some people shifting out of the primary retail market to resell as the price differential continues.
As the luxury brands raised their prices.
Great. Thanks, so much good luck this year.
And I think that is our last question. So thank you for that so I'll just go on with the closing remarks. So thank you all for joining us and we want to thank our entire team at the rail route for their hard work and dedication throughout 2021, and it's gonna be a fun 2022 we're excited to continue on.
Our path of growth and progress towards profitability as we move through 2022 .
Importantly, we have now have 25 million members, who are joining us on our mission to extend the life of luxury and make fashion more sustainable so a big thank you to all of you.
And we'll be talking in the small groups. Some thanks. This concludes our conference.
Thank you. This today. This concludes today's conference call and thank you for participating and you may now disconnect.
[music].