Q3 2022 RealReal Inc Earnings Call

November 8, 2022

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Okay.

Good day, and thank you for standing by.

Welcome to the real real third quarter 2022 earnings results Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your host today Kaitlyn, Hal Vice President of Investor Relations at a real real. Please go ahead.

Thank you operator, joining me today to discuss our results for the period ended September 30th 2022 our co interim Chief Executive Officer, and President Rockville about.

Co interim Chief Executive Officer, 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.

You can find more information about these risks uncertainties and other factors that could affect our operating results and the company's most recent Form 10-K and subsequent subsequent quarterly reports on Form 10-Q.

<unk> presentation will also include certain non-GAAP financial measures, both historical and forward looking but which historical financial measures. We have provided reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a stockholder letter earlier today.

Both of which are available on our Investor Relations website, I would now like to turn the call over to Rob to go back co interim CEO and everyone else has left the call.

Okay.

For introductory remarks.

Rocky.

Thanks, Caitlin and thank you everyone for joining.

Robert and I will provide an update on the business and then go into our Q&A.

Today, we reported solid financial results for the third quarter of 2022, both GMB and adjusted EBITDA came in at the midpoint of our guidance for.

For the third quarter in a row compared to prior year, we improved both our adjusted EBITDA loss and margin despite more challenging business environment.

We continue to focus on profitable growth our objective is to accelerate our timeline to profitability.

Since assuming the role of co Ceos, Robert and I have thoroughly analyzed the business and we're able to provide new insight.

The deep assessment, we determined that there are levers in the business that enable us to reach profitability with lower top line growth compared to what was previously projected.

This then we are focused on the following strategic initiatives.

First overhauling our seller commission structure, which took effect on November one.

And further optimize our pricing algorithms to get the best price for our sellers.

<unk> take a more aggressive approach on cost.

And finally capitalizing on potential new revenue streams.

The first strategic initiative is an adjustment and simplification of our commission structure. We believe the update to rate will incentivize the confinement of higher value items and limit the consignment of low value items, which are unprofitable we.

We are also in the process of deemphasizing certain categories like home art and Kid.

Additionally, we added a dynamic and personalized tool to our web site to allow sellers to calculate their expected earnings, which we believe will increase transparency and motivate sellers to confine their luxury goods at the real real.

In combination we believe these actions will move the business closer to profitability.

Second strategic initiative is to further optimize our dynamic pricing model to maximize value for our sellers and the real real well.

We will continue to refine our dynamic pricing algorithm.

The third strategic initiative is taking a more aggressive approach with regards to our cost base.

Early in the fourth quarter, we implemented a reduction in our workforce and remain highly selective in new hires and backfill.

The final strategic initiative is capitalizing on potential new revenue streams, including a warranty program advertising technology and other data monetization opportunities.

Our final initiative is still in the early stages and we will update you as these opportunities develop.

In summary, we believe these four strategic initiatives will improve cash flow and we are energized about the new strategic direction of our business as we move more aggressively to pursue profitability.

Now pass it over to Robert to discuss our third quarter results.

Thanks Rafi.

Ill open by saying we were pleased with our financial results for the third quarter.

Both GMB and total revenue grew 20% compared to prior year.

During the third quarter gross margin improved to over 60%.

This was primarily due to direct revenue as a percentage of total revenue declining to 24% in Q3.

This compares to 33% in Q1 and 28% in Q2.

Adjusted EBITDA was a loss of $28 $2 million.

Minus 19, 7% of revenue.

Compared to a loss of $31 $5 million in the prior year or minus 26, 5% of revenue.

We ended the third quarter of 2022 with $300 million cash and cash equivalents on hand.

Total use of cash in the third quarter of 2022 was $15 million.

<unk> $102 million use of cash in the first half of 2022.

At the end of Q3, we had 63 million of company owned inventory on hand.

A decrease of $11 million compared to the.

The second quarter of 2022.

We expect that our inventory balance will continue to decline through the end of the year.

Today, we are providing fourth quarter 2022 guidance against the backdrop of broad economic uncertainty in many strategic initiatives that Roger mentioned earlier.

We are confident that these initiatives will have a meaningful positive impact to our business going forward.

However, it may take a quarter or two for these initiatives to be fully reflected in our financial results.

We project Q4, GMB to be in the range of $480 million to $510 million.

We project Q4 revenue to be in the range of $145 million to $165 million.

And we project Q4, adjusted EBITDA to be in the range of minus 27% to minus $23 million.

Turning to longer term targets, we continue to project that the real real will be profitable on an adjusted EBITDA basis in 2024.

And that we are on track to achieve our vision 2025, adjusted EBITDA target.

Overall, we are encouraged by our new strategic initiatives and direction.

With that we will now go into our Q&A session.

Okay.

If you'd like to ask a question at this time. Please press star one one on your telephone please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Marvin Fong with BTG. Your line is now open.

Good evening, Thanks for taking my questions.

First question just on the commission structure change.

Could you just give us a sense of.

<unk>.

Some of the specific changes you made but also more importantly, just how that might net out.

To your overall.

Expectation for the marketplace take rate.

Or the consignment take rate and a second question just.

On the on the consumer environment, we are.

Obviously, you saw a lot of American buyers looking to purchase.

We leveraged the strong dollar to purchase from first run luxury goods.

From Europe and stuff like that so just curious if any of you have your <unk> outlook is impacted by dynamics like that.

Just the consumer taking advantage of opportunities for discounts and sales in the first one channel. Thank you.

Sure. Thank you for the question.

I'll start and I'll have.

Robert Chime in on the commission structure on the take rate result.

High level.

We believe on the commission structure, let's take a step back for a second we really believe we have some room to take more because of the service level that we offer and we looked at many things we looked at our seller and buyer cards, our VIP, our loyalty contribution margin and so forth.

The good news is our new commission structure and the feedback we're getting is that it's much more transparent and it's much more clear on what the earnings look like.

As far as take rate goes what we did was we deemphasize the low value goods where were unprofitable. So we took more in these areas the mid tier and high end luxury goods is little to no change we did incentivize the top top tier of items and high value.

So that means that the seller may get a little bit more but that means more gross profit dollars for us at the end of the day, so really high level more in low value goods that are unprofitable.

To us and little to no change on the mid to low value and I'll, let you talk about take rate and how that could play out yes, Marvin so in terms of the overall impact of the commission changes, we do expect net net it should be positive to the real wheels financial results.

I would say all other things being equal at constant mix and so by category.

You're seeing us taking more especially at the low price ranges as well.

Roger you mentioned were protecting more or less the mid price ranges and there are even some cases at the highest price points in the most desirable types of products and categories, we're allowing the consignor the seller to earn a little bit more.

But net net all other things being equal you should see a not insignificant increase in our overall take rate now the thing that I would caution you on though is our nominal take rate may not actually go up as much as you would expect all things being equal because we are intentionally D.

Besides a lower price point higher take rate items in favor of higher price point lower take rate. So nominally you might not see the take rate improve as much as you would otherwise expect but you will see the results on the bottom line in terms of our overall profitability and the improvement to adjusted EBITDA.

No.

Okay.

And then great.

Alright, thank you.

<unk> was more about the health of the consumer.

And what we're seeing.

Zooming out for a second we're seeing on both.

Both on the buyer and seller side.

Quite quite healthy as far as opportunities on the seller side, new and repeat sellers opportunities are growing 20% year over year on the buyer side active buyers are quite healthy up 23% year over year, new and repeat buyers looking quite strong.

The cohorts are looking strong and so I will say that's the good news what we are seeing is a trade the trade down effects and I'm sure you've heard this and other portfolios, but we are seeing people, maybe deciding instead of the top tier of luxury item there may be trading one down for like a mid tier item.

Or in order for the item to sell Youll see us reduce an item by five or 10%. The good news with that is that we're not squeezing our margins when we have to do that and when we have to kind of take down pricing by a bit. So we'll continue to watch that so I would say that we saw that.

Kind of trend happened in late Q3, and then into Q4.

Marvin you had mentioned the strong dollar potentially impacting U S consumers participating in the primary market in Europe , and certainly we've heard plenty of anecdotes about that.

Your question was specifically impacting our GMB outlook and so on I wanted to say its specifically reflected in our numbers in the short term, but certainly.

That's not bad news.

For our business to have more U S consumers participating in the primary market.

Whether it's here or in Europe , whether it's from dollar other influences.

Yes that makes total sense of the future concise, okay I appreciate it.

The color.

Robert.

Thanks Marvin.

Our next question comes from the line of Kunal <unk> with UBS. Your line is now open.

Hi, Terry.

One would be on.

Undersea you search.

Where do we stand on the CEO search and.

Second on the four strategic initiatives that you've kind of mentioned.

Also mentioned it could take a quarter or two for these initiatives to be fully reflected in the financials. So Ben.

<unk> been a part of it would be.

What are you going to do in the next couple of quarters for us to kind of see those effects in the financials.

Part B would be so what effect or are we going to see so realistically Q1, maybe Q2 of 'twenty three.

Thanks would EBITDA be.

Just ballpark I mean, Dr.

Looking for a guy who doesn't outlook, but just thinking about internationally.

Okay great.

Yes, so I'll start and again I'll, let Robert add here. So first question on the CEO search I think we mentioned last time, we have hired Spencer Stuart to lead the search.

The good news is were all in line on what this profile looks like.

And the other piece of good news is that there are there is a strong pipeline so more to come there probably early next year.

As far as the <unk>.

<unk> strategic initiatives and when Youre going to see that play out.

<unk> talked about really seeing it in the back half of next year. So Q4, Q3 Q4, they're transitional quarters for us.

To be totally honest and why I say that is a lot of these strategic initiatives.

<unk> taken place in early Q4 to to mid Q4 like the lay off like the commission changes like the deemphasize.

Low value and categories. So we are really see any see any meaningful impact we will have to wait a couple of quarters and really see it in the back half of next year, Yeah, and I would say, it's an all in.

A order of magnitude what has the biggest impact on our business.

The Commission change certainly is the most impactful in terms of how it will impact our bottom line.

That commission change became effective with items that we receive on November one and later.

So there is a timeframe in which it takes us two to receive those goods to get them up on the site to eventually sell them and so on and so that there is a.

A natural lag time for that to eventually show up in our financials. So there's nothing to be done per se in order to get that benefit other than.

The time that it takes for items to move through our system. The second most impactful one would be the pricing optimization.

<unk>.

It may have or immediate impact because it has less of a of a natural lag time to get through the system. Obviously the cost changes, we've made will have more or less.

Immediate impact and the longer term strategic monetization things again are in early stages.

So theres a number of things that need to be done for you to see all of that.

To answer to your question about.

EBITDA in Q1 and Q2.

We're not going to provide.

2023 guidance at this time, we will update on 2023, and we'll give Q1 on our earnings call in February .

Yeah.

Thank you.

Our next question comes from the line of Oliver Chen with Cowen. Your line is now open.

Thank you. This is John on for Oliver could you just provide more color on which categories performed well during the quarter and what's working quarter to date and would love some more additional color on monthly trends, what you saw throughout <unk> and what the exit rate was thank you so much.

Sure.

From a demand perspective, we see a continuation of trends.

At the same very similar to Q2, which was ready to wear going back to pre COVID-19 numbers handbags high value fine jewelry and watches still really strong.

So nothing new there except for the trade down effect that we talked about again on the seller side same information opportunities looking really strong engagement, there and the cohort.

As well.

And there is a volume decline and a lot of these reasons.

Our strategic initiatives that we talked about at the beginning of this call, which is cutting out some of that volume that was unprofitable. So youll start to see that in the guidance for next year as we as we.

Give you real numbers.

Our next question comes from the line of Simeon Siegel with BMO. Your line is now open.

Yeah.

Your line is now open.

Hey, sorry, I didn't hear my name Hey, everyone Hope, you're all doing well.

This isn't over.

No. This is nowhere generalization, but just can you speak to the profit delta between that high and low value items and I guess, if they're structurally unprofitable at this point is there any thoughts around just putting a minimum price threshold on consumable goods.

Yes, so it really depends I mean, when you talk about the different items and I know, sometimes we get questions about unit economics.

My answer is always well it depends on the unit.

And our offering is so broad whether it's it's fine jewelry or watches or fashion, our footwear and so each category is unique and the economics is unique at <unk>.

Different price points and the different commission rate so it's hard to generalize.

But it is true that the actions we have taken put us in a much better place and do we eliminate or really distance.

The lower priced and lower profit items, some of which were frankly negative contribution margin.

So I do think that with the actions we've taken both with the commission structure and in some of the brands, we talked about deemphasizing some categories, but there are some brands that we've taken up our list as well, we really expect to do.

Those items to the point, where maybe you won't see very much of it on our site and it's really not the way our business was designed our business was designed to be high value luxury items that benefit from authentication, both for sellers and buyers and so the actions. We are taking are really trying to.

Encourage that which is half the business started really right.

And you may see some of some of those items in the low value still come through.

When they are discounted, but that's really at the end of the day, what you'll see now is paramount knows that and sell it 300, maybe get discount into a $100, but at the end of the day the brands that that come in at that price point have been removed from the list and the combination like Robert said of that and the commission structure, but we believe will be emphasis.

Size of the business overall and it does have a meaningful impact on our P&L. So I mean, I will say that while I can't give you a specific.

Change in the profitability because it's complex.

It is true that this strategic change has a meaningful impact on our overall profitability. It has a meaningful impact on our growth rate.

Which you see reflected in our Q4 projections and you will see reflected going forward and we've talked about being able to achieve our bottom line adjusted EBIT and cash flow targets at a much lower growth rate.

It's quite intentional.

But we do think that it has a meaningful impact on our path.

Path to profitability.

Gotcha.

Got it that's really helpful. Thank you and then just at this point however, easiest way to go through this what percent of the expenses would you characterize this fixed versus variable.

The last time, we did this and again we talked about.

Bifurcated our expenses into support.

And.

Sort of sales and ops I would say that.

Roughly.

50, 50, more or less it's changing because we've really limited the growth of our fixed costs. Why we continue to grow so there's a natural mechanical sort of equation that has variable becoming a larger portion is fixed days.

Fixed.

So it might be trending a little bit more towards 60% variable and 40% fixed but only because the fixed costs arent growing.

Okay.

Alright, perfect alright, Thanks, a lot best of luck for holiday.

Thank you.

Our next question comes from the line of Lauren Schenk with Morgan Stanley . Your line is now open.

Great. Thanks, maybe just following up on sort of glass conversation, giving up some of the lower quality revenue growth for the sake of profitability.

Do you think the more normalized GMB growth rate of the business should look like going forward and then just one follow up on the commission rate changes how.

How do you think these changes could impact customer growth and potentially retention at more broadly. If you are successful in lowering the amount to this lower value inventory on the platform. Thank you.

So Lauren.

First part of your question I do think that there is.

What's being totally honest theres somewhat of an unknown.

In terms of what the normalized growth rate might be with this new approach in this new commission structure and taking things off our list in terms of different brands and you can see it in our actual results in Q3, both <unk> and revenue grew 20% compare that to the first half.

Half of the year in which GMB grew 30% in revenue grew almost 50% so you're already seeing some impact in Q3, not because of commissions, but because of things that we did with brands.

And what's implied in.

Our forecast for Q4 at the midpoint is growth rate in the low to mid teens.

And even a little bit less in terms of the revenue growth rate, mostly because of the change in mix to have less direct revenue.

So we're assessing that we're going to see what the impact of the changes that we have.

Made we will give you some projections in February when we give our.

Full year guidance, our Q1 and full year guidance for 2023.

The most truthful answer is that it's.

To be seen.

What the new normalized growth rate will be it certainly will not be the 35%.

CAGR growth rate that was built into the original vision 2025 planes, it's going to be much less than that but it's also going to be more profitable right I.

I agree with that and then I would say on the customer and seller side as far as growth is concerned.

We do believe we will see a slight slowdown.

There as well, but if we are successful what we're doing here is just cutting out that low value, but that mid tier and high value stays consistent and those items continue to come in because we didn't change the <unk>.

Commission structure in that area. So again, we looked at many things when we made these changes including.

Our cohorts our VIP.

Our basket size for both our seller and buyer both on a brand and item level.

I do believe that there may be some slowdown, but youre still getting the value coming in from the seller and the buyer so it might be less units, but higher value of items.

Great. Thank you.

Thank you Ryan.

Yes.

Our next question comes from the line of Ike <unk> with Wells Fargo. Your line is now open.

Hey, everyone.

So all of these unproductive categories of things at home. Our kids can you say what percent of GMB. These categories contribute today and by the end of next year are you expecting that you will have kind of fully work down those categories.

It's a really small percentage of GMB these categories, but I will say it is.

Not meaningful in the amount of units.

So what I mean by that is it's a lot of operational expense for some of these areas for not a lot of revenue.

And I will say that we'll work through selling through these items in the first half of the year again.

Hearing the status, but youll see meaningful impacts from our changes in the back half of next year.

And then if I can just ask I mean.

Maybe this is overly simplistic, but if these were unprofitable categories why are you guys.

Yes.

Good yes.

I think we always talk about how it was a little bit of growth at all costs.

And we're really looking at everything with fresh eyes.

And really taking a look at the unprofitable categories in general So it's not just category, but the direct business was another piece of it.

Items under a certain price point werent profitable as well so it was really to bring in the product and to grow.

One of our one of our core initiatives early on was own the home and we're already in the house why not pick up everything we can because we've already got the luxury manager there but to be honest with you it's quite expensive to ship. These large items like home and art.

And these and items like kids are still low value that our business is not set up our high touch business model is not set up to take these items like Robert mentioned earlier and I'll add a couple things to that as well I do think that it is not uncommon.

For startup companies Tech companies to feel like the answer really is just scale and that there is a desire to grow as fast as possible with as.

Many categories Thats possible and try to get the topline and enough scale of <unk> and revenue to cover your cost and as Rafi mentioned, we are a little bit of a different approach now as we think about the path forward and the path to profitability.

There is one other thing Bill I will add as well I do think that there are many times for companies that are making decisions about incremental volume or the next unit and whether to take that unit or not.

It's a little bit technical from a cost accounting point of view and I think you guys know that my background and it was.

Operations financing cost accounting and industrial manufacturing environment, and my approach to looking at our P&L and our contribution margin on a fully loaded of why maybe a little bit different than how it was looked at before and there are some folks that really think of the next unit is as what is the truly incremental various.

Cost of a unit as opposed to looking in aggregate, what what does it cost us to process, an item and move it through our system and what revenue are receiving are we receiving court and so I would say that the analysis that I did was a little less incremental ism as it relates to our cost and.

A little more holistic and so it gives a little bit of a different answer.

In terms of at what point does the next incremental unit become profitable.

And so based on that analysis and that different approach.

We found that there are items that we really would like to disinfect it.

And that's what informed this commission change.

Got it thank you.

Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.

Hey, guys. Thanks for the.

For taking my question here it seems like the direct revenues, you're finally, starting to work some of that inventory down to you in a few places here in the financials would you mind, giving us just a rough thought on how you see that going in fourth quarter as.

As we build to your revenue in the fourth quarter.

And then I guess second question is with the commission changes how do you contemplate what the competitive response might be too big big participant like yourself.

Trying to compete for those high value goods have you seen any competitive response yet.

You should be aware of.

And then as you finally as you think through the categories that are on economical. It's been a question for some time, but as I look right now at the website. There is and if I just go into one of the basic apparel categories. There are hundreds and hundreds of items under the $20 price point in here and men's apparel and women's apparel I have to thank those or show some <unk>.

Cannot make dynamics close to categories like kids that you just told US don't make sense to put that many units through the system. Once once you're done with doing the work that you want to do on the categories. You highlighted today are there other categories that you have to rethink on gmg or is it is it what.

You spoke to that these build the ecosystem they bring people back like how do you think about whether there is other parts of the GMP that don't make sense in the way you see the model going forward.

Okay. So Michael.

A three part question.

Yes.

Thanks.

We have them all recorded.

Regarding inventory to give you a sense of what you might expect let me give you a profile of the owned inventory that we have currently.

So of the inventory on hand about half of it is.

From vendor purchased inventory.

And we have described before that are open to buy for vendor purchasing inventory is essentially zero.

And a lot of the reduction we've seen so far has come from that category and we will continue to come from that category and so about half of what we have on hand.

As in that bucket.

30% of the inventory from auto policy returns and we've talked about getting a little tighter in terms of how we enforce our rules and what we will or will not accept.

A lot of policy and about 20% of the total inventory is from this get paid now category.

And so we expect to continue to see the owned inventory declined maybe roughly in the same order of magnitude you saw in Q3, we do hope to limit the auto policy and the pig now is probably at a decent level of equilibrium in terms of what we want to focus on and very.

Strategically and in <unk>.

Surgically identifying things that we want to continue to.

To purchase.

That category so.

That's the context of inventory and Thats.

What we're expecting in terms of going forward.

On the commission changes in kind of the competitive response there.

We are still competitive in the mid to high value structure. So you still earn more with us from a competitor standpoint, because of our $30 million luxury members, it's because of our pricing optimization and so forth. We made no change there if anything for the top top tier items like watch.

Birkin bag, they earn a little bit more so we're not worried about that the items the low value items Youre right were not competitive anymore and we're okay with that.

We do deemphasize.

Deemphasizing that business.

Because they are not profitable.

And that goes back to that goes to your third question.

Yes.

The competitive response is going to be interesting, Michael because as Roger mentioned at the very highest debt, but the highest price point watches and handbags, and if Europe VIP with the real real and you get an incremental.

Her to the commission to learn we are going to clearly be the best game in town.

Now it is a very small part of our business. It's a small percentage of T&D, but it looks quite interesting, let's see what sort of response might be from competitors or what sort of response or might be from consignment. Because we have a clear advantage in the very very highest price point item in those categories now.

And then your last question around <unk>.

Category kind.

Kind of looking at the site and seeing many items.

$20 first of all I want to say.

When you have millions of items on the site. So it's still a very small percentage is just going to put that in context.

And we'll continue to look and optimize our brand list and.

Price point and.

In categories in all of those things, but for now this is as far as we're going to take over the next couple of quarters.

Okay I appreciate it thank you very much.

Okay.

Our next question comes from the line of Noah is that Kim with Keybanc. Your line is now open.

Hi, Thanks for taking my questions.

A couple from me first how should we be thinking about gross margin for the remainder of the year and maybe structurally longer term given you're emphasizing home and some of the lower priced less profitable items and then second.

Marketing rate came down quite a bit during the quarter.

Was there a decision to pullback on spend there or is that a reflection of improved efficiency any color on rate during the quarter and how we should think about it going forward would be helpful. As well. Thank you.

I'll take the first question related to gross margin, we have seen a nice improvement in gross margin sequentially.

<unk> and.

Q1, our gross margin was roughly 53, 5%.

In Q2 with nearly 57%.

For Q3 was 6%.

Glad you asked the question about sequentially what to expect.

In all circumstances I would expect that trend continued in Q4, but I think what youre going to see in Q4 as a flattish.

Maybe a very slight improvement in gross margin in Q4 versus Q3.

Because we continue to discount some of its owned inventory that we're trying to clear out of it.

We're trying to remove.

Our overall inventory balance.

Could you see some discounting urban projected in Q4 as it is.

Further continuation of that sequential improvement in gross margin.

Could you go down, but I don't want to expect expected sort of improvement in this quarter.

Does have that reason now if you project into next year 2023 2024.

We would expect to participate.

Of this brand and a return to where this company's gross margin was before.

The COVID-19.

Which was low to mid <unk>.

And so I think overtime youre.

I'm going to sneak that trend continue.

Continue and being just referring to that level.

Margin in a long run.

Noah Your second your question relating your percentage of revenue.

He has to come down.

Marketing is a good story for us in general.

We don't share the specific back numbers acquisition hospital.

80% year over year.

And there's a few reasons for that first of all our product market mix.

Quite strong.

Our five year look back.

It is worrying RVP, both sellers and buyers are quite strong and the team have gotten smarter and better at what they do we.

We now use multi touch attribution model and at the end of the day that you mean, Richard data optimize our spend what has the best ROI and so forth. So.

Again, a really good story, there and we'll continue to work on.

Optimization.

Thank you.

Thanks Noah.

Our next question comes from the line of Tom <unk> with Wedbush. Your line is now open.

Hey.

Thanks for taking my question.

If I could.

Follow up on some of the questions earlier about the commission structure.

And the take rate.

I'm a little confused about all the puts and takes there so.

I mean, if you're incentivizing high end products and Disincentivize, a low ASP products.

There is a mix shift headwind that you talked about.

Presumably to incentivize people to sell.

Higher end goods your.

Going to improve the payout on those goods, which would be detrimental to your take rate. I think you also said you are not.

Changing the middle here.

So I'm not sure like kind of where.

The offsets are that.

Robert I think you kind of mentioned that you would expect like a little bit of improvement in the take rate.

I'm, a little confused as to where that country.

Yes.

Thanks for the question Tom.

The way I describe it as in the past we've talked about.

There was no change structurally to our take rate our termination rates by category, sometimes you would see our take rate move.

Hi, Andre.

There are a couple of hundred basis points from one period to the next and we would say that's not changing right.

Our kicking per category, it's just the change in mix.

As I've said before the higher price point items, where you have a less less rate take rate, but maybe more gross profit dollars.

Lower price items, we have a higher take rate, but we're earning less gross profit dollars.

So in the past.

I look at it.

Take rate is just a mix question, because we're not changing the actual rate what we've done with this strategic changes.

We changed the racing Commission.

Okay.

All things being equal at constant mix.

See a significant change.

Our overall take rate increase in our overall take rate all other things being equal which means sort of across the board, we're earning more we're keeping our.

Our overall revenue per ton.

Just going up and we're going to be more profitable.

And what I would caution on is this mix question. So.

True at constant mix all of us hitting us.

<unk> may change and now we're back at this new risks, which net net is higher just because you may get a different nominal take rates strictly because of rain and just like before.

A decline in take rate does not.

Equivalent is bad news for our business.

At this time.

Our take rate is good news for our business, because we're selling more high priced items in which we earned more gross profit dollars for that item.

So I know thats a lot to unpack.

But net net what we'd expect to see improvement in our profitability due to the change in rate by category.

Nominal take rate is a little less predictable, but it will be more profitable.

<unk> for the company.

We're happy to walk you through that separately there are a couple of different puts and takes on that one.

Got it that.

That was helpful. Thanks, very much and best of luck this holiday season.

Okay.

Our next question comes from the line of Edward <unk> with Piper Sandler. Your line is now open hey, guys.

Thanks for taking the question I wont beat the commission.

Just any more sense of what else it before and on the call.

Yes.

Thoroughly confused everybody out of that so far so that's going to probably take a little bit of a follow up in there for a little more time.

Significant.

Perfect.

Happy to spend more time with folks at the different ways to help right.

Got it.

Yes.

We began we could look at that offline and we're happy to walk you.

No most of them I think I think we've gotten that piece done pretty Pat but I. Just wanted to ask you asked about the change the consignor operating model and kind of what the objectives are right with splitting up the consignment specialist and I think there <unk> and then as a follow up I think there are some that would argue that there is some counter cyclicality of the business on the supply side is maybe macro softens like.

Are you seeing any increase in <unk>.

Consignment, maybe that you expect it could be macro driven thank you.

Thank you Edward.

Oddly consignor car of the year survey, what we eat.

Currently.

It's about the end of the day, you are getting better service to our sellers.

I'm sure that they get.

The information they need right away I think we all thought that we had some operational challenges.

During the date resignation part two earlier this year. The good news is we're all hired up for training.

Continue the optimum optimize.

I really look at operational excellence and one of the last piece of that was making sure we're getting back par seller on time.

And any time there.

Call us that we're hitting our SLA and really that who they know who to go down at the end of the day so their service providers.

And not changing.

So we're really excited about the service and we really do believe that it's going to increase NPS entities that the customer satisfaction on the seller side, yes.

I agree with everything that Brian you said the other thing that I would add is I do think it's a benefit to our sales organization.

And the amount of time dealing with these issues.

Maybe if you weren't best equipped to handle over to somebody else, who is dedicated to managing these sort of issues could could do a better job and it does a lot of our sales organization to focus on what they do best.

Scott.

It also is on a par.

Partially our productivity.

Initiative for our sales organization to allow them to focus on.

They should be focused on as well.

And then the supply side and many macro trends that we're seeing.

I think I mentioned earlier.

On the on the cellular be opportunity.

Opportunities are strong repeat are strong.

Not.

Any decline there.

The more supply.

And monetize our closet.

Got it.

Sure Yes.

Come on that on the demand side, we are seeing a trade down.

That earlier as far as the macro is concerned not seeing anything on the supply.

<unk> side yet.

We want to monetize their crop.

Okay.

Some of them that we're seeing on the demand side.

Yeah.

Thank you David.

Thank you Edward.

Our next question comes from the line of Ana <unk> with Needham. Your line is now open.

Great. Thank you and thanks for all the color.

Couple of questions for Us I wanted to follow up on the lower value being de emphasized just curious what percentage of the buyer base a low value buyers only may.

It makes sense that you guys lose money on some of those price points, but just curious if we should expect the buyer numbers can be lower in the next few quarters as a result, and then secondly, just on the guidance.

Sales range is wider than what you guys typically use an appreciating the volatility out there, but just curious what kind of assumptions are you, making at the high end versus low end.

Of the Gms, our sales guide and what are you guys seeing in the business quarter to date. Thank you.

Sure.

Okay.

Yes.

I understand.

Yes.

Okay.

Is it the right way.

Yeah.

We made the right commission structure changes.

And they decided that.

Okay.

But again the value.

Yes.

Roni.

And so you'll.

And you'll see.

Does that come out of the growth rate.

The guidance.

<unk>.

Okay.

I would say just a little.

Yes.

They were over rub three today.

Yes.

And much less so.

GSV and revenue.

I do.

Okay.

Thats our business.

The two.

Cost structure to have further units going through our system.

Okay.

<unk>.

That drives left.

Does that mean.

The units would be.

Chip.

On the guidance side.

Okay.

I'm just wondering if somebody held closely for people paying attention you already assuming conversion, but you're absolutely right.

There is a larger change in revenue.

No.

The range I provided in GMP.

Yes.

Partially impacted.

Jeff This is at the high end versus the low end of it.

Only because of what I was attempting.

Attempting.

Earlier about the mix impact on our bottom line.

And so there is more uncertainty in terms of where you would see.

Back to the base.

Right.

Conversion from <unk> to revenue.

Should we expect.

This wider range the other thing thats reflected in a wider range.

On the direct benefits.

Full recognition.

Yes.

Jim.

Portion from PTSD to revenues.

Direct revenue management efforts.

Thank you for joining.

Well it was kind of a spine business only converged at our take rate.

35 separate or whether it is pushed out.

So they have a settlement.

Well, David occurred probably shouldn't that be addressed.

And a little bit of a wide range of embedded.

Normally expect to see from us.

All right very helpful. Thank you.

That concludes today's question and answer session I would like to turn the call back to Rob <unk> for closing remarks.

Alright, Thank you for joining us today before we close the call I just want to take a moment to express our gratitude to the real real team.

<unk> dedication to bring our vision and values to life every single day.

Our team is comprised of one of the most passionate patron im curious people I have encountered.

Youre willing to take risks Colby color accountable and debate align and commit to do what's right for the business.

Their dedication to our plan strategy vision and values and honorable.

Our people at the real real thank you.

Finally, I would like to thank our more than $30 million of members who are joining us on our mission to extend the lifecycle of luxury goods and make fashion more sustainable. Thank you.

This.

Today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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Good day, and thank you for standing by.

Welcome to the real real third quarter 2022 earnings results Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your host today Kaitlyn, Hal Vice President of Investor Relations at the real real. Please go ahead.

Thank you operator, joining me today to discuss our results for the period ended September 32022, our co interim Chief Executive Officer, and President ROTC Lavage.

Co interim Chief Executive Officer, and Chief Financial Officer, Robert Julian.

You can find more information about these risks uncertainties and other factors that could affect our operating results and the Companys. Most recent Form 10-K and subsequently subsequent quarterly reports on Form 10-Q.

Today's presentation will also include certain non-GAAP financial measures, both historical and forward looking but which historical financial measures. We have provided reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a stockholder letter earlier today.

Both of which are available on our Investor Relations website, I would now like to turn the call over to Rodrigo Belloc co interim CEO and for everyone else has left the call.

Okay.

For introductory remarks.

Rossi.

Thanks, Caitlin and thank you everyone for joining.

Robert and I will provide an update on the business and then go into our Q&A today, we reported solid financial results for the third quarter of 2022.

Both GMB and adjusted EBITDA came in at the midpoint of our guidance.

For the third quarter in a row compared to prior year, we improved both our adjusted EBITDA loss and margin despite more challenging business environment as.

As we continue to focus on profitable growth our objective is to accelerate our timeline to profitability.

Since assuming the role of co Ceos, Robert and I have thoroughly analyzed the business and we're able to provide new insights.

Through the deep assessment, we determined that there are levers in the business that enable us to reach profitability with lower top line growth compared to what was previously projected.

To this end we are focused on the following strategic initiatives.

First overhauling our seller commission structure, which took effect on November one.

Second further optimize our pricing algorithms to get the best price for our sellers.

Third take a more aggressive approach on cost and.

And finally capitalizing on potential new revenue streams.

The first strategic initiative is an adjustment and simplification of our commission structure. We believe the update to rates will incentivize the consignment of higher value items and limit the consignment of low value items, which are unprofitable we.

We are also in the process of deemphasizing certain categories like home art and Kid.

In combination we believe these actions will move the business closer to profitability.

Second strategic initiative is to further optimize our dynamic pricing model to maximize value for our sellers and the real real.

We will continue to refine our dynamic pricing algorithm.

The third strategic initiative is taking a more aggressive approach with regards to our cost base.

Early in the fourth quarter, we implemented a reduction in our workforce and remain highly selective in new hires and backfill.

The final strategic initiative is capitalizing on potential new revenue streams, including a warranty program advertising technology and other data monetization opportunities.

The final initiative is still in the early stages and we will update you as these opportunities develop.

I'll now pass it over to Robert to discuss our third quarter results.

Thanks Rafi.

Ill open by saying we were pleased with our financial results for the third quarter.

Both GMB and total revenue grew 20% compared to the prior year.

During the third quarter gross margin improved to over 60%.

This was primarily due to direct revenue as a percentage of total revenues declining to 24% in Q3.

This compares to 33% in Q1 and 28% in Q2.

Adjusted EBITDA was a loss of $28 $2 million or minus 19, 7% of revenue.

Compared to a loss of $31 $5 million in the prior year or minus 26, 5% of revenue.

We ended the third quarter of 2022, with 300 million of cash and cash equivalents on hand.

Total use of cash in the third quarter of 2022 was $15 million.

<unk> to a $102 million use of cash in the first half of 2022.

At the end of Q3, we had $63 million of company owned inventory on hand.

A decrease of $11 million compared to the end of the.

The second quarter of 2022.

We expect that our inventory balance will continue to decline through the end of the year.

Today, we are providing fourth quarter 2022 guidance against the backdrop of broad economic uncertainty in many strategic initiatives that Roger mentioned earlier.

We are confident that these initiatives will have a meaningful positive impact to our business going forward.

However, it may take a quarter or two for these initiatives to be fully reflected in our financial results.

We project Q4, GMB to be in the range of $480 million to $510 million.

We project Q4 revenue to be in the range of $145 million to $165 million.

And we project Q4, adjusted EBITDA to be in the range of minus 27 to minus $23 million.

Turning to longer term targets, we continue to project that the real real will be profitable on an adjusted EBITDA basis in 2024.

We are on track to achieve our vision 2025, adjusted EBITDA target.

Overall, we are encouraged by our new strategic initiatives and direction.

With that we will now go into our Q&A session.

Okay.

If you'd like to ask a question at this time. Please press star one one on your telephone please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Marvin Fong with <unk>. Your line is now open.

Okay.

Good evening, Thanks for taking my questions.

First question just on the commission structure change.

Could you just give us a sense of.

Sure.

Some of the specific changes you made but also more importantly, just how that might net out.

To your overall.

Expectation.

The marketplace take rate.

Or the consignment take rate and a second question.

On the on the consumer environment, we are.

Obviously, you saw a lot of American buyers looking to purchase.

We leveraged the strong dollars purchased from first run luxury goods.

From Europe and stuff like that.

Curious if any of your <unk>.

<unk> outlook is impacted by dynamics like that perhaps.

Just the consumer taking advantage of opportunities for <unk>.

Sales in the first one channel. Thank you.

Sure. Thank you for the question.

I'll start.

Robert Chime in on the commission structure on the take rate result.

High level.

We believe on the commission structure, let's take a step back for a second we really believe we have some room to take more because of the service level that we offer.

And we looked at many things we looked at our seller and buyer cards, our VIP, our loyalty contribution margin and so forth.

The good news is our new commission structure and the feedback we're getting is that it's much more transparent and it's much more clear on what the earnings look like.

That means that the seller may get a little bit more but that means more gross profit dollars for us at the end of the day, so really high level more in low value goods that are unprofitable.

But I would say all other things being equal at constant mix and so by category.

You're seeing us taking more especially at the low price ranges as Rajeev mentioned, we are protecting more or less the mid price range and there are even some cases at the highest price points in the most desirable types of products and categories, we're allowing the consignor the seller to earn a little bit more.

Deemphasizing lower price point higher take rate items in favor of higher price point lower take rate. So nominally you might not see the take rate improve as much as you would otherwise expect but you will see the results on the bottom line in terms of our overall profitability and the improvement to adjust.

Good EBITDA.

Okay.

Great.

Alright.

My question was more about the health of the consumer.

And what we're seeing.

Zooming out for a second we're seeing on both both on the buyer and seller side.

Or in order for the items, so you'll see us reduce an item by five or 10%. The good news with that is that we're not squeezing our margins when we have to do that.

When we have to kind of take down pricing by a bit. So we'll continue to watch that so I'd say that we saw that.

Kind of trend happened in late Q3, and then into Q4 and Marvin you had mentioned the strong dollar potentially impacting U S consumers participating in the primary market in Europe , and certainly we've heard plenty of anecdotes about that.

Your question was.

Specifically impacting our <unk> outlook, and so I wouldnt say, its specifically reflected in our numbers in the short term, but certainly.

That's not bad news for our business to have more U S consumers participating in the primary market.

Whether it's here, whether it's strong dollar other influences.

Yes that makes total sense of the future scientists okay I appreciate it.

The color Rusty.

Robert Thanks.

Thanks Marvin.

Our next question comes from the line of Kunal, Matt <unk> with UBS. Your line is now open.

Hi, Thanks.

The first one would be on the.

Understood.

Where do we stand on the CEO search.

Second on the four strategic initiatives that you kind of mentioned.

Also mentioned it could take a quarter or two for these initiatives to be fully reflected in the financials. So.

It would be.

What are you going to do in the next couple of quarters for us to kind of see those effects in the financials.

And part B would be so what effect are we going to see so realistically Q1, maybe Q2.

23.

Thanks would EBITDA be.

Just ballpark I mean like.

Look.

Looking for a guy who doesn't outlook, but just thinking about internationally.

Okay great.

Yes, so I'll start and again I'll, let Robert add here. So first question on the CEO search I think we mentioned last time, we have hired Spencer Stuart to lead the search.

The good news is were all in line on what this profile looks like and the other piece of good news is that there are there is a strong pipeline so more to come there probably early next year.

As far as the.

<unk> strategic initiatives and when Youre going to see that play out.

We talk about really seeing it in the back half of next year. So Q4, Q3 Q4, they're transitional quarters for us.

To be totally honest and why I say that is a lot of these strategic initiatives.

We have taken place in early Q4 to to mid Q4 like the lay off like the commission changes like the deemphasize.

Low value and categories. So we are really seem to see any meaningful impact we will have to wait a couple of quarters and really see it in the back half of next year, Yeah, and I would say.

In terms of order of magnitude what has the biggest impact on our business.

The Commission change certainly is the most impactful in terms of how it will impact our bottom line.

That commission change became effective with items that we receive on November 1st and later.

So there is a timeframe in which it takes us two to receive those goods to get them up on the site to eventually sell them and so on and so that there is a.

A natural lag time for that to eventually show up in our financials. So there's nothing to be done per se in order to get that benefit other than.

The time that it takes for items to move through our system. The second most impactful one would be the pricing optimization.

And.

That may have or immediate impact because it has less of a of a natural lag time to get through the system. Obviously the cost changes, we've made will have more or less.

Immediate impact and the longer term strategic monetization things again are in early stages.

So theres a number of things that need to be done for you to see all of that.

To answer your question for Bob.

EBITDA in Q1, and Q2, we're not going to provide.

2023 guidance at this time, we will update on 2023, and we'll give Q1 on our earnings call in February .

Yes.

Thank you.

Our next question comes from the line of Oliver Chen with Cowen. Your line is now open.

Thank you. This is John on for Oliver could you just provide more color on which categories performed well during the quarter and whats working quarter to date and would love some more additional color on monthly trends, what you saw throughout <unk> and what the exit rate was thank you so much.

Sure.

From a demand perspective, we see a continuation of trends.

The same very similar to Q2, which was ready to wear going back to pre COVID-19 numbers handbags high value fine jewelry and watches still really strong.

So nothing new there except for the trade down effect that we talked about again on the seller side same information opportunities looking really strong engagement, there and the cohort.

As well.

And there is a volume decline and a lot of these reasons.

Our strategic initiatives that we talked about at the at the beginning of this call, which is cutting out some of that volume that was unprofitable. So youll start to see that in the guidance for next year as we as we.

Give you a real number.

Our next.

Question comes from the line of Simeon Siegel with BMO. Your line is now open.

Yeah.

Simeon Your line is now open.

Yes.

Hey, sorry, I Didnt hear my name Hey, everyone Hope, you're all doing well.

And over I know this is an over generalization, but just can you speak to the profit delta between that high and low value items and I guess, if they're structurally unprofitable at this point is there any thoughts around just putting a minimum price threshold on definable goods.

Yes, so it really depends when you talk about the different items and I know, sometimes we get questions about unit economics.

And my answer is always well it depends on the unit.

And our offering is so broad whether it's it's fine jewelry or watches or fashion, our footwear and so each category is unique.

The economics is is unique at different price points and the different commission.

Right, So it's hard to generalize.

But it is true that the actions we have taken put us in a much better place and do a eliminate or really distance.

The lower priced and lower profit items, some of which were frankly negative contribution margin.

And so I do think that with the actions we've taken both with the commission structure and then some of the brands we talked about deemphasizing some categories, but there are some brands that we've taken up our list as well, we really expect to dis incent those items to the point, where maybe you won't see very much of it on our <unk>.

And it's really not the way our business was designed our business was designed to be high value luxury items that benefit from authentication, both for sellers and buyers and so the actions. We are taking are really trying to encourage that which is half the business started really right.

And you may see some of some of those items and the low value still come through.

When they are discounted, but thats really at the end of the day, what you'll see now is Paramount NOLA that didn't sell at 300, maybe get discount into a $100, but at the end of the day the brands that that come in at that price point have been removed from the lift in the combination like Robert said of that and the commission structure, we believe will be emphasized.

Business overall, it does have a meaningful impact on our P&L. So I mean, I will say that while I can't give you a specific change in the profitability because it's complex.

It is true that.

This strategic change has a meaningful impact on our overall profitability. It has a meaningful impact on our growth rate.

It's quite intentional.

But we do think that it has a meaningful impact on our path.

Path to profitability.

Got it.

Got it that's really helpful. Thank you and then just at this point. However, you just waiting to go through this what percent of the expenses would you characterize as fixed versus variable.

The last time, we did this and again we talked about.

Bifurcated our expenses into support.

And.

Sort of sales and ops I would say that it's roughly.

Fixed.

And so it might be trending a little bit more towards 60% variable, 40% fixed but only because the fixed costs arent growing.

Okay.

Alright, perfect alright, Thanks, a lot best of luck for holiday.

Thank you.

Our next question comes from the line of Lauren Schenk with Morgan Stanley . Your line is now open.

Great. Thanks, maybe just following up on sort of glass conversation, giving up some of the lower quality revenue growth for the sake of profitability.

Do you think the more normalized GMB growth rate of the business should look like going forward and then just one follow up on the commission rate changes. How do you think these changes could impact customer growth and potentially retention at more broadly. If you are successful in lowering the amount of this lower value inventory on the platform. Thank you.

So Lauren.

First part of your question I do think that there is some water being totally honest theres somewhat of an unknown.

Half of the year in which GMB grew 30% in revenue grew almost 50%.

So you're already seeing some impact in Q3, not because of commissions, but because of things that we did with brands.

And what's implied.

Our forecast for Q4 at the midpoint is growth rate in the low to mid teens.

And even a little bit less in terms of the revenue growth rate, mostly because of the change in mix to have less direct revenue.

So we're assessing that we're going to see what the impact of the changes.

Made we will give you some projections in February when we give our.

Full year guidance, our Q1 and full year guidance for 2023.

The most truthful answer is that it's.

To be seen.

What the new normalized growth rate will be it certainly will not be the 35%.

CAGR growth rate that was built into the original vision 2025 planes, it's going to be much less than that but it's also going to be more profitable right I.

I agree with that and then I would say on the customer and seller side as far as growth is concerned.

We do believe we will see a slight slowdown.

Commission structure in that area. So again, we looked at many things when we made these changes including.

Our cohorts our VIP.

Our basket size for both our seller and buyer both on a brand and item level.

I do believe that there may be some slowdown, but youre still getting the value coming in from the seller and the buyer so it might be less units, but higher value of items.

Great. Thank you.

Thank you Ryan.

Okay.

Our next question comes from the line of Ike <unk> with Wells Fargo. Your line is now open.

Hey, everyone.

It's a really small percentage of GMB these categories, but I will say is it.

Not a meaningful and the amount of units.

So what I mean by that is it's a lot of operational expense for some of these areas for not a lot of revenue.

And I will say that we will work through selling through these items in the first half of the year again.

Hearing the status, but youll see meaningful impacts from our changes in the back half of next year.

And then if I can just ask I mean.

Maybe this is overly simplistic, but if these were unprofitable categories why are we going to sell it.

Okay.

Good yes.

I think we always talk about how it was a little bit of growth at all costs.

And we're really looking at everything with fresh eyes.

And really taking a look at the unprofitable categories in general So it's not just category, but the direct business was another piece of it.

Items under a certain price point werent profitable as well so it was really to bring in the product and to grow.

One of our one of our core initiatives early on with own the home and we're already in the house why not pick up everything we can because we've already got the luxury manager there but to be honest with you it's quite expensive to ship. These large items like home and art.

And these and items like kids are still low value that our business is not set up our high touch business model is not set up to take these items like Robert mentioned earlier, yes, and I'll add a couple things to that as well I do think that it is not uncommon.

For startup companies Tech companies to feel like the answer really is.

Scale and.

That there is a desire to grow as fast as possible with as.

Many categories Thats possible and try to get the top line.

The scale of <unk> and revenue to cover your cost and as Rafi mentioned, we are a little bit of a different approach now as we think about the path forward and the path to profitability.

There's one other thing Bill I will add as well I do think that there are many times for companies that are making decisions about incremental volume or the next unit and whether to take that unit or not.

It's a little bit technical from a cost accounting point of view and I think you guys know that my background as it was.

Cost of a unit as opposed to looking in aggregate, what what does it cost us to process an item that move it through our system and what revenue are receiving are we receiving for it and so I would say that the analysis that I did was a little less incremental ism as it relates to two large cost in.

A little more holistic and so it gives a little bit of a different answer.

In terms of at what point does the next incremental unit become profitable.

And so based on that analysis and that different approach.

We found that there are items that we really would like to disinfect it.

And that's what informed this commission change.

Got it thank you.

Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.

Hey, guys. Thanks for the.

For taking my question here it seems like the direct revenues you're finally, starting to work some of that inventory down you can see in a few places here in the financials would you mind, giving us just a rough thought on how you see that going into fourth quarter as.

As we build to your revenue in the fourth quarter.

And then I guess second question is with the commission changes how do you contemplate what the competitive response might be too big big participant like yourself.

Trying to compete for those high value goods have you seen any competitive response yet.

You should be aware of I guess and then as you finally as you think through the categories that are on economical. It's been a question for some time, but as I look right now at the website. There is and if I just go into one of the basic apparel categories. There are hundreds and hundreds of items under the $20 price point in here and men's apparel and women's apparel I have to think those are.

Show, some economic dynamics close to categories like kids that you just told US don't make sense to put that many units through the system. Once once you are done with doing the work that you want to do on the categories. You highlighted today are there other categories that you have to rethink on gmg or is it is it what.

What you spoke to that these build the ecosystem. They bring people back how do you think about whether there is other parts of the <unk> that don't make sense in the way you see the model going forward.

Okay, So Michael Dillon.

A three part question.

Thanks.

Yes.

As you have them all recorded.

Regarding inventory to give you a sense of what you might expect let me give you a profile of the owned inventory that we have currently.

So of the inventory on hand about half of it is.

From vendor purchased inventory.

And we have described before that are open to buy for vendor purchasing inventory is essentially zero.

And a lot of the reduction we've seen so far has come from that category and we will continue to come from that category and so about half of what we have on hand.

Bucket about 30% of the inventory is from auto policy returns and we've talked about getting a little tighter in terms of how we enforce our rules and what we will or will not accept.

A lot of policy and about 20% of the total inventory is from this get paid now category.

And so we expect to continue to see the owned inventory declined maybe roughly in the same order of magnitude you saw in Q3, we do hope to limit the auto policy and they get paid now is probably at a D.

Decent level of equilibrium in terms of what we want to focus on and very strategically.

Surgically identifying things that we want to continue to.

To purchase it.

That category so.

That's the context of inventory and Thats.

What we're expecting in terms of going forward.

On the commission changes in kind of the competitive response there.

Birkin bag.

We're in a little bit more so we're not worried about that the items the low value items Youre right were not competitive anymore and we're okay with that.

Because we do deemphasize.

Emphasizing that business.

Because they're not profitable.

And that goes back to that goes to your third question.

Yes.

The competitive response is going to be interesting, Michael because as ROTC mentioned at the very highest debt, but the highest price point watches and handbags and if Europe VIP with the real real and you get an incremental.

For the commission to learn we are going to clearly be the best game in town.

Now it is a very small part of our business. It's a small percentage of T&D, but it wasn't quite interesting, let's see what sort of response from IP from competitors or what sort of response or might be from consumers. Because we have a clear advantage in that very very highest price point item in those categories now.

And then your last question around the category.

Kind of looking at the site and seeing many items.

$20 first of all I want to say.

We have millions of items on the site. So it's still a very small percentage is just going to put that in context.

And we'll continue to look and optimize our brand list and price point.

Categories in all of those things, but for now this is as far as we're going to take over the next couple of quarters.

Okay I appreciate it thank you very much.

Joe.

Our next question comes from the line of Noah is that Kim with Keybanc. Your line is now open.

Hi, Thanks for taking my questions.

A couple from me first how should we be thinking about gross margin for the remainder of the year and maybe structurally longer term given deemphasizing home and some.

Some of the lower price less profitable items and then second.

Marketing rate came down quite a bit during the quarter.

I'll take the first question related to gross margin, we have seen a nice improvement in gross margin sequentially.

<unk> in Q1, our gross margin was roughly 53, 5%.

In Q2 with nearly 57%.

For Q3 was 6%.

Glad you asked the question about sequentially what to expect.

In all circumstances that I would expect that trend will continue in Q4, but I think what youre going to see in Q4 as a flattish.

Maybe if there is a slight improvement in gross margin in Q4 versus Q3.

Because we continue to discount some of its owned inventory that we're trying to clear out of it.

I'm trying to say.

And lower our overall inventory balance.

Did you see some discounting urban projected in Q4.

Beth.

Further continuation of that sequential improvement in gross margin.

Could you go down, but I don't want to expect expected sort of improvement in this quarter problem because of that reason now if you project into next year $2023 2024.

We would expect.

Of this brand and a return to where this company's gross margin was before.

The COVID-19.

Which was low to mid <unk>.

And so I think overtime youre.

I'm going to sneak that trend continue.

Continue and being just refer back to that level of gross margin in the long run.

Noah Your second question is relating your percentage of revenue.

As to come down.

Marketing is a good story for us in general.

We don't share the specific back numbers acquisition cost, 20% year over year.

And there's a few reasons for that first of all our product market mix okay.

Quite strong.

Five year look back.

It is worrying RVP, both sellers and buyers are quite strong and the team have gotten smarter and better at what they do.

We now use a multi touch attribution model and at the end of the day that he does mean Richard data optimize our spend what has the best ROI and so forth. So.

And again, a really good story, there and we will continue to work on.

Optimization.

Thank you.

Thanks Noah.

Our next question comes from the line of Tom <unk> with Wedbush. Your line is now open.

Hey.

Thanks for taking my question.

If I could.

Follow up on some of the questions earlier about the commission structure.

And the take rate.

I'm a little confused about all the puts and takes there so.

I mean, if you're incentivizing high end products and Disincentivize, a low ASP products.

There is a mix shift headwind that you talked about.

Presumably to incentivize people to sell.

The higher end goods your.

Going to improve the payout on those goods, which would be detrimental to your take rate. I think you also said you are not.

<unk> the middle here.

So I'm not sure like kind of where.

The offsets are.

Robert I think you've kind of mentioned that you would expect like a little bit of improvement in the take rate I don't know.

I'm, a little confused as to where that comes from.

Yes, yes.

Thanks for the question Tom.

The way I describe it as in the past we've talked about when there was no other changes structurally to our take rate our conversation rates by category, sometimes you would see our take rate move by.

There are a couple of hundred basis points from one period to the next and we would say that's not a change right.

Our kicking per category, it's just a change in mix.

As I said before the higher price point items, we have a less less rate take rate, but maybe more gross profit dollars.

Lower price items.

Higher take rate, but we're earning less gross profit dollars.

In the past.

But the take rate is just a mix question because we're not changing the actual rate what we've done with this strategic changes actually changed the racing Commission.

Okay.

All things being equal at constant mix, you would see a significant change.

Our overall take rate increase in our overall take rate all other things being equal.

Which means sort of across the board, we're earning more we're keeping.

Our overall revenue per ton opportunity, just going up and we're going to be more profitable.

What I would caution on is this mix question.

That is true at constant mix all of us sitting in our mix may change and now we're backing at this new risks, which net net is higher just because you may get a different nominal take rates strictly because of Brexit and just like before.

Decline in take rate is not the equivalent.

Suraj.

At this time.

A lower take rate is good news for our business, because we're selling more high priced items, which we earned more gross profit dollars for that item and so I know thats a lot to unpack.

But net net what we.

Expenses and improvement in our profitability due to the change in rate by category.

Nominal take rate is a little less predictable.

But it will be more profitable.

Profit for the company.

And we're happy to walk you through that separately. There are a couple of different puts and takes on that one.

Got it okay that was helpful. Thanks, very much and best of luck this policy.

Our next question comes from the line of Edward <unk> with Piper Sandler. Your line is now open Hey, guys. Thanks for taking the question I wont beat the commission.

Of course, then you want to see what else it before and on the call.

Okay.

Only produced everybody out of that so far so that's going to probably take a little bit of follow up a little more time.

Tom.

Perfect.

Happy to spend more time with folks at the different ways to help right.

Yes.

We began we could take that offline and we're happy to walk you know most of them I think I think we've gotten that piece done pretty Pat but I just wanted to ask to ask you about the change the consignor operating model and the kind of what the objectives are right with splitting up the consignment specialist and I think their peers is and then as a follow up I think there are some that would argue that.

There are some counter cyclicality of the business on the supply side is maybe macro softens like are you seeing any increase in.

Consignment, maybe that you expect it could be macro driven thank you.

Thank you Edward.

And please confine our car of the year survey.

Internally.

It's about at the end of the day, you are getting better service to our sellers and making sure that they get.

The information they need right away.

We all thought that we had some operational challenges.

During the presentation part two earlier this year. The good news is we're all hired up for training.

Continue the optimum optimize and.

Really look at operational excellence and one of the key part of that was making sure we're getting back to our seller on China.

And any time there.

All of that we're hitting our <unk>.

And really that who they know who to go down at the end of the day so their service providers.

And not changing.

So we're really excited about the service and we really do believe that it has been.

Increase NPS entities that customer satisfaction on the sellers.

I agree with everything that Brian you said the other thing that I would add is I do think as to the benefits to our sales organization.

You bet.

Amount of time dealing with these issues.

Scott.

It also is.

Partially our productivity.

Initiative for our sales organization to allow them to focus on the.

They should be focused on as well.

And on the supply side and many macro trends that we're seeing.

I think I mentioned earlier.

On the on the cell therapy.

Opportunities are strong repeat are strong.

Not.

Any decline there will be even.

More supply.

And monetize our closet.

We're not sure yet more to come on that on the demand side, we are seeing a trade down.

I think that.

That earlier as far as the macro is concerned not seeing anything on the supply side yet.

We want to monetize their crop.

Okay.

It's something that we're seeing on the demand side, it's all small but.

Sure.

Thank you David.

Thank you Edward.

Our next question comes from the line of Ana <unk> with Needham. Your line is now open.

Great. Thank you and thanks for all the color.

A couple of questions for us I wanted to follow up on the lower value being de emphasized just curious what percentage of the buyer base a low value buyers only.

Makes sense that you guys lose money on some of those price points, but just curious if we should expect the buyer numbers can be lower in the next few quarters as a result, and then secondly, just on the guidance.

Our range is wider than what you guys are typically used in appreciating the volatility out there, but just curious what kind of assumptions are you, making at the high end versus low end.

The Gms our sales guide and what are you guys seeing in the business quarter to date. Thank you.

Sure.

Okay.

Yes.

Is that a question.

Okay.

Alright.

Is it the right way.

Which will.

We made the right commission structure changes.

And they decided that.

Okay.

But again the value increase.

Okay.

Thank you.

And so you'll.

And you'll see.

Does that come out of the growth rate.

Yes.

Okay.

I would say just a little.

Yes.

They were over the referees.

Good morning.

And much less so.

Jim Vena and rapidly so.

I did.

Okay.

Thats our business.

Two.

Okay.

Cost structure.

But further units going through our system.

Okay.

Indeed.

Drive lapsed the GMO.

The units would.

Chip.

On the guidance side.

Sure.

I'm wondering.

Somebody held closely.

Youre already does that mean conversions with your app.

With regard to.

There was a larger change in revenue.

The range I provided in GMP.

Yes.

Partially impacted.

Jeff This is at the high end versus the low end of it all.

But because of what Amazon.

<unk> contributed <unk> <unk>.

Earlier.

The mix impact on our bottom line okay.

Great.

So there is more uncertainty in terms of what we have.

<unk> vacancy rate.

Conversion from <unk> to revenue.

Should we expect.

It was wider range the other thing thats reflected in a wider range.

On the direct side.

Okay.

Full recognition.

Sure.

Jim.

Dorothy <unk> from GMP to revenue.

Direct revenue.

Thank you for joining.

It was kind of signed business only converged.

Our take rate.

35%.

So for them separately or whether it is pushed out.

They have some lumpy.

Hey that occurred probably shouldn't that be addressed.

<unk> seen a little bit of a wide range of embedded.

We normally expect to see from us.

Very helpful. Thank you.

That concludes today's question and answer session I would like to turn the call back to Raj <unk> for closing remarks.

Okay.

Alright, Thank you for joining us today before we close the call I just want to take a moment to express our gratitude to the real real team. Thank you for your dedication to bringing our vision and values to life every single day. Our team is comprised of one of the most passionate patron.

People I have encountered youre willing to take risks Colby accountable and debate align and commit to do what's right for the business.

Their dedication to our plan strategy vision and values is admirable.

Our people at the real real thank you.

Finally, I would like to thank our more than $30 million of members who are joining us on our mission to extend the lifecycle of <unk>.

Very good and make fashion more sustainable.

Bill.

Yeah.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2022 RealReal Inc Earnings Call

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