Q1 2023 The RealReal Inc Earnings Call
Okay.
One.
Good day and welcome to the real real Q1 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising.
Hand is raised to withdraw your question Press Star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Caitlin, how senior Vice President of Investor Relations. Your line is open.
Thank you operator, joining me today to discuss our results for the period ended March 31st 2023, our Chief Executive Officer, John Coral, President and Chief Operating Officer, Roger Goodbye, 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.
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 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.
Now I'd like to turn the call over to John Coral Chief Executive Officer of the rail rail.
Thanks, Kaitlin and welcome to our Q1 2023 earnings call today, we reported financial results for the first quarter with revenues exceeding the midpoint of our guidance and adjusted EBITDA.
Beating the high end of our guidance range.
The improvement in profitability was largely driven by our ability to continue to grow higher margin consignment business. During the first quarter consignment revenue grew 22% and direct revenue declined 49% year over year. This resulted in our gross margin improving 980 basis points compared to the prior year.
In addition, during the quarter, we increased take rate reduced our company owned inventory balance and narrowed our adjusted EBITDA loss in both dollars and percentage compared to the prior year.
We also took steps to reduce our cost base during the quarter.
Beyond our financial metrics, we saw positive trends with total active buyers, reaching over $1 million for the first time in a real real history.
We are also making progress on our customer satisfaction and consignor experience, which is critical to the long term health of the business.
Let me provide more details on our key initiatives first we made updates to our commission structure late last year, which are now starting to deliver results. If you remember the goals of the updating our commission structure works you optimize our take rate limit consignment of lower value items and increase consignment of higher value items.
We believe the updates are mostly working exactly as we planned our Q1 take rate increased to 170 basis points lower value supply has decreased and higher value supply has increased year over year.
Therefore, the commission structure changes are doing well overall.
One area, we have more work to do is in the mid value support. We are currently testing commission rates for different Consignor court cohorts at various price points and optimize our mid value supply.
In addition to supply customer satisfaction and consignor experience continue to be a major focus area for the company. We have been busy rolling out our new consignor concierge team, which pairs each consignor with a small dedicated team of consignment customer service experts.
With the rollout now complete the initial feedback from our new approach has been overwhelmingly positive our customer service ratings have increased and it has helped us improve our net promoter score.
Going forward, we will continue to look for ways to improve.
Diner and buyer experience.
Okay.
It's critical that we continue to improve our consignor experience and manage our costs effectively over the past few months, we have assessed our cost base and believe there is further opportunity to reduce our operating expenses, our companywide focus on managing costs, particularly those that do not directly impact our consignors and buyers will be one of our keys to achieving.
Profitability the other key initiatives of optimizing product pricing and pursuing new revenue streams are making progress and we look forward to discussing them more in depth in the coming quarters with all these in mind. We are confident these key initiatives will help move the business to profitability and we believe they will be particularly impactful in the.
Back half of this year.
<unk>.
Overall, the business is headed in a positive direction.
Growing our consignment revenue, we're expanding both our gross margin and gross profit dollars.
Our customer satisfaction and the consignor experience.
Also managing costs as we drive forward.
Given our strong Q1 results and our progress on engineered.
Reaffirm that.
And profitability on that adjusted EBITDA basis, and full year 2024.
With that let's open the call for questions.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
And our first question will come from the line of Kunal Mod Hygge with UBS. Your line is open.
Hi, Thanks for taking my question.
One on the order so the order volumes increased one 5% year over year.
And then.
In conjunction with that can you talk about what you're seeing in the market.
Our perspective, and what are you seeing in the market from a container perspective. Thank you.
Okay.
I'm, sorry, Kunal, you're asking about the order and the number of orders.
No I was I was.
Initially within the context of like order volume, increasing one 1% year over year.
One 5% year over ear wanted to understand what you are seeing in the market.
As far as demand.
And as far as supply is concerned.
Got it yeah. So a couple of different things with fire as buyers are concerned.
As well as salary I say that we are seeing you know we always look I always talk about the top of the funnel and the engagement to the site whether that the opportunities are leaves on the diner side and on the buyer side that sell through that with average selling price average order value and then units per transaction them both.
Those.
Are pretty healthy on the buyer side, we are seeing sell through stay pretty consistent average selling price going up active buyers have gone up year over year pretty significantly.
On the seller side same thing, we're really focused you know I know that you Allison.
We're talking about many times before really focused on value and quality versus quantity. So that's what we're seeing on the consignor side as well so pretty.
Good and healthy engagement across the board.
Thank you and as a quick follow up.
Our trends any.
Any different from the trends that you saw in <unk>.
Yes.
And all this is Robert.
We're not really going to interact.
Intra quarter results.
For Q2, but our full Q2 guidance certainly incorporates anything that we've seen.
In April already which is which is actuals at this point.
But I would say the trend has been pretty consistent on the bike on engagement.
Yeah.
Got it thank you so much.
Thank you cannot.
One moment for our next question.
And that will come from the line of Ike <unk> with Wells Fargo. Your line is open.
Hi, everyone. I was just wondering from a demographic standpoint or income income cohort are you noticing any volatility or weakness at the higher tier.
Part of the customer base Theres been some commentary out there from some of the luxury brands just like the U S. Consumer is becoming a little bit more pressure, they're shifting their purchases elsewhere, just kind of curious if you guys are seeing that in the business and how you think about that thanks.
Yeah. So we are not seeing that right now there's a few different ways that we look at that we look at that obviously, because we're a marketplace. Both on the buyer and seller side on the buyer side like I mentioned, we're seeing average selling price in average order value going up.
Really focused on that mid and high value product as you know I am and where as far as the consignor is concerned and those dollars that are giving us that product vips.
As far as high and mid tier retail value is concerned.
We are seeing pretty consistent across the board over the last few months. So it goes back to the health of the consumer in my mind.
And we're cautiously optimistic that.
We'll see what happens over the next few months recession or are we in one are we not.
But we can report on our own metrics and again, we're cautiously optimistic that we're not seeing a trade down or average selling price decreased at this time.
Great. Thanks.
Thank you one moment for our next Washington.
Okay.
That will come from the line of Rick Patel with Raymond James Your line is open.
Yeah.
Thank you and good afternoon, everyone. I was hoping you could help us understand the assumptions going forward for gross margin a very strong performance in the first quarter I'm, hoping you can help the puts and takes going forward as we think about the sustainability of the improvement you had in the first quarter.
Sure Rick This is Robert.
Take that one so we did see tremendous year over year improvement in our gross margins almost 1000 basis points.
And I would say that it was primarily impacted by a shift in mix.
Recall that our direct revenue what percent of total revenue.
Last year in Q1, it was about 34% of our total revenue came from that lower margin direct business and in Q1 of this year, we reduced that all the way down to 17, 18%, which was our strategy and how we work.
If you shoot.
Chose to proceed with our business on our path to profitability, so that had a tremendous impact on our <unk>.
Gross margin. We also had the benefit of the commission structure change so that went into effect at the beginning of November last year, and we did across the board that net increase.
Hey, great and so.
And then also have the impact of.
Deemphasizing and having us have less of the items under $100, which was also unprofitable so those things definitely.
We're part of our strategy and I would describe those two changes thats more structural and permanent and even maybe a little bit more opportunity as we continue to reduce our direct revenue now.
Our direct.
We increased our direct gross margin now there is actually in that improvement of 1000 basis points. There are some headwinds in there.
As a transitory headwind as we.
Discount some of the older inventory and get rid of the things that were.
Harder to move.
We have taken a tremendous hit on gross margin for the direct piece of our business you.
You saw it on our reported results it was actually slightly negative.
In Q1, that's transitory.
Still some of that left I'm going to call it $5 million to $10 million of inventory of that type of inventory that may require some discounting, but once we get through that youll actually see our gross margins continuing to improve and so we are projecting going forward that we're going to continue to see improvement in <unk>.
Margin, maybe not 1000 basis points, but sequentially you might see another couple of hundred basis points a quarter.
Getting to.
Potentially high Sixty's.
By the end of the year.
That's very helpful.
And can you also talk about supply procurement as you make changes to your take rate and the retail strategy. How do you feel about the flow of new products coming onto the platform and anything to call out in terms of.
Getting more mid level sellers on board.
Yes, sure Rick I can speak to that.
So as you know we're focused on quality and value of product. So really focused again on that high to mid value tier as far as how we think about.
Our supply coming in for the rest of the year and so forth. We're really focused on the same strategies that we've talked about before and seen some upside there. So.
We always joke that everything old is new again really the relationship and the profile of our luxury manager we know that.
These relate more relationship based sales team brings in better retail values are really focused on that.
Pearl program, we launched that a couple of months ago now, having a meaningful impact on Q1 will continue that and then just a more personalized view on who we're acquiring on the marketing side. So again VIP strategy.
More lifetime value focus on lifetime value as far as our marketing dollars and bringing in the right salary.
And so our continued targeted approach there and are focused on quality not quantity and then kind of our partnerships and affiliate programs as well.
Thank you very much.
One moment for our next question.
And that will come from the line of Ana <unk> with Needham Your line is open.
Great. Thank you so much and good afternoon.
I wanted to follow up on the annual <unk> guide for flat to down which assumes the kind of similar flattish the downtrend in the back half.
Hoping you could talk a bit more what are you seeing with demand out there for your customer and then secondly, John I think you mentioned there are additional opportunities to reduce costs.
Thank you guys are finding in the business could you extrapolate on that are there additional bucket of opportunity that you're seeing and what's the timing on how those are expected to flow through the P&L. Thanks.
Thanks, so much.
So Anna.
This is Robert I'll, just start with the numbers.
Certain reinforcing what you've said.
We see a very unusual pattern and our project projected <unk> this year that is.
Not typical for our business and it has been done quite purposefully.
And so it's important to remember that the reduction in our direct business, which.
<unk> about 50% year over year will continue for some time now.
Direct business did peak in Q1 it started.
To flatten out maybe in Q2 and it really started to decline in Q3, and Q4 and so we're anniversarying that in terms of a headwind on overall <unk> and we talked about deemphasizing items under $100. So we've very intentionally reset the baseline and we've talked about this being a reset year, but it's.
Quite unusual to see our GMB.
And revenue decline from Q1 to Q2, usually each quarter sequentially is a little better than the quarter before ending with Q4 being the highest quarter and so.
I think we will get back to flattish in Q4, although again, we haven't given guidance for the out quarters, but we are going to see this unusual trends.
GM being revenue going down instead of up from Q1, and it is quite purposeful and intentional it's what's driving our higher gross margin.
It creates what happened in Q1, where you see higher gross profit dollars.
Lower revenue dollars.
And then I'll, let the rest of the team talked to what we're expecting in terms of supply and demand and how that all washes out and I.
Thanks for the question from a cost perspective.
You would have any new CEO , you would expect them to have their own perspective as they come to the table.
Helped from a third party to review everything and the good news is raunchy and Robert had done a great job before I got here and we just think tweaking quite honestly and some of it has to do also with the nature of our business. We're moving from a hyper growth maybe not as profitable as we need them to be to.
Huge emphasis on profitability and what that does come with some lower volume. So we tend to optimize some pools not only on the support side, but on the operation side. So we're constantly trying to maintain flexibility and you don't want to cut bone and muscle, but at the same time, you need to really optimize your cost to make sure that we can profit would be profitable.
And then in the near term and we're seeing a lot of benefit sometimes the cost can't change as quickly as the revenue was changing or the GMB is changing we're trying to keep pace as quickly as we can and you'll see further optimizations in future quarters on that.
Got it. Thank you so much good.
Thank you one moment for our next question.
Okay.
And that will come from the line of Noah <unk> skin with Keybanc capital markets. Your line is open.
Hi, there. This is Ashley on for Noah just with the ongoing macro pressure wanted to see how you're thinking about that trade down effect you previously called out for the remainder of 2023, and then any opportunities you're currently seeing around new buyers.
Yes, sure Hi, Ashley.
First the trade down effects that we saw earlier in the year and say that.
We're not seeing that right now we are seeing average selling price if anything go up for like for like items. The good thing about our business as you know can sign business that we do need to discount our margins don't get squeezed. So we arent seeing that and that's our mix starts to change it.
Our as higher value goods more mid and high value. The a L. E. S. P. All continued upside and we do see a little bit more upside throughout the year there.
Okay.
Thank you and one moment for our next question.
And that will come from the line of Marvin Fong with <unk>.
Yes.
Good evening, Thanks for taking my question.
I guess I'd, just like to try to understand better.
And I'm sorry, if I missed this I joined the call late but.
In fact seeing that.
Number of transactions for low value goods coming down because the supply is coming down.
What are we seeing that impact.
And the numbers for the first quarter.
And for your full year guidance or how much of the guidance.
For the back half of the year.
No.
Related to the direct revenue coming down some of the other things I'm just trying to isolate how much so what's going on.
Due to just having fewer low priced goods on the platform. So maybe just kind of speak to that.
Yes, Marvin this is Robert so.
We mentioned earlier it is true that we have intentionally reduced volume.
Low priced items and we are intentionally.
Deemphasize.
For the most part stop buying vendor.
Seller inventory. So we do expect that to continue and that is reflected in our full year guidance.
But again it is totally done as a strategic.
The initiative to increase profitability and to focus on the things that are better for our business and our path to profitability. So.
<unk>.
It is.
Reflected in our in our guidance and it is expected to continue.
It's part of the reason that I had mentioned earlier why our gross margin is expected to continue to increase and again, we are going to be generating more gross profit dollars and higher gross margin on lower revenue.
And that makes our business less complex, there's less things to go wrong. It allows us to get our cost structure that matches that level of activity. All of that is in very intentional and part of our focus on profitable growth and the path to profitability.
Got it great. Thanks, all right and then I guess, maybe another question for you or John but.
I look at your guidance if I just look at the the consolidated take rate it looks like it.
Coming down a little bit compared to the first quarter. So just think of that as well.
Primarily driven by direct revenue coming down quarter over quarter in the marketplace take rate climbing or isn't as the marketplace take rate increase is kind of.
Gone through the system.
So just.
Yes. Thanks for the question Marvin just one thing the rack business has no impact whatsoever on take rate take rate is entirely associated with our consulting business now typically what we've said in the past is when you see a move in our take rate in the past, it's always been strictly a question of mix when.
When we sell a higher price point lower take rate items proportionally more of that take rate goes down when we sell lower price point items, where its higher take rate. Okay. Great goes up on average and so it's not necessarily a bad thing to see take rates decline. It may just be an indication of we're selling more high value goods.
Lower take rate now the exception to that unfortunately, theres always something weird.
So explain you saw a tremendous increase in take rate in Q1 and that was not mix that was the commission change. So we had two variables moving at the same time in Q1. We have made this commission structure changed in November and that did have an impact to raise take rates.
Sort of across the board at every price point more or less now.
More so on low value items, and less selling high value items, but we did see a change in take rate due to a structural change in commission structure and what Youll see from this new normal of mix.
And then Youll see take rate moving just based on are we selling more high value goods or low value goods with the associated lower or higher take rates. So thats, what youre seeing going forward Q1 is a little bit of an anomaly because it also had that one time change of raising take rate across the board.
Average.
Got it alright, thanks, a lot Robert appreciate it.
Okay.
One moment for our next question.
That will come from the line of Edward <unk> with Piper Sandler Your line is open.
Hey, guys. Good evening and thanks for taking the question I guess, just first from a nomenclature perspective could you maybe better defined as mid value. It's a kind of a near term you guys haven't used in the past is specific brands at price points.
And then in relation to the train encourage more mid value inventory was there something in the pricing or she is mainly in the grid change that maybe deemphasize those products.
And then finally, John would love any observations and you've talked about costs, you've talked about some of the other initiatives that were already in flight any other observations operationally of the UI. The customer process that you can take from your previous experiences and bring to real real thanks.
Yes. Thanks for the question mid value is a newer.
Terminology that we're using right now so.
Going back to the commission structure, we did we made that change in November I'm really testing the elasticity of our service Theyre. Good news as it did what we thought it would on the high value, bringing in more high value low value less low value.
News there Ms value, we needed to tweak a little bit so that's exactly right.
We did have we made I think we went a little too far in the med value area and were tweaking that kind of range and you see those numbers getting better.
As we tweak, but net net value means for US is about 200 to 750 <unk> high value of 750, plus so we always said this would be a very dynamic strategy and we kind of continue to tweak This commission structure.
And Thats kind of where we are optimizing at this moment.
And then I'll, let you and I would say one the definitions.
Between 102 hundred is kind of low value and under 100 is very low value and for us we.
Primary he always effectively tried to eliminate very low value we do have some.
Low value between 102 hundred it's going to be in our offering for a variety of reasons, but.
Hopefully that gives you the definition you were looking for Edward.
<unk> as we think about it in terms of price tranches of our defined exactly and as we tweak in kind of test.
Value based on different commission structure as we're seeing some upside there. So we're getting that just right in that area.
And then I think you asked John about.
I'm Gonna observation perspective, a lot of marketplaces, obviously, it's supply and demand.
Highest king here. So I've spent a lot of my time learning and doing anything I can contribute to help increase the amount of supply that we can bring to this marketplace.
A lot of it is taking care of your consignor and forming emotional connections with them a lot of my luxury background is really built around that how do we formed a relationship between the luxury manager and the consignor, so that theres a great lifetime value there were not churning out these customers, but it's not just the sales team or the retail team the directly interacts with the FERC.
Consignment or subsequent consignments, it's actually how are the goods handled and processed through the pipeline. So we've gotten a lot better at operational efficiency getting things on the site from an SLA perspective, making sure any pricing discrepancies things like that are addressed in a timely manner. It was a very minor highlight of my speech, but this concierge pod.
That works directly with the signers and the luxury managers now you actually basically I have a team working together to resolve any issues.
Normal retail businesses, you buy things from our company and sell them to a person. This is a person that both that and there is different levels of sophistication different levels of complexity, we have to work through all of that together and we're getting so much better at it and having those teams work together.
I think the word that ROTC, just used and are answering with more testing and testing on commission structure changes and things like that I think that's another thing that I'm going to bring from my background. We made a dramatic change in commission structure in Q4 last year. My goal is to not do as many dramatic things because they are big risk of that you can't really do that.
And.
Reaffirm the belief that we're going to be profitable in 2024, if we make take a dramatic swing and miss so what youre going to see is a lot more tweaking a lot more testing from.
From the day I got here, we talked about the registration gate on the site you can go to one page where you can't go to any subsequent pages. That's the type of thing that we need to test, but again thats more on the demand orientation. All my initial focus has been based on supply and quite frankly with some of the customers improve the experience and build a better business. That's when it comes due.
<unk>.
Thanks, so much.
Thank you.
One moment for our next question.
Okay.
And that will come from the line of Tom Nick <unk> with Wedbush Securities. Your line is open.
Hey, everybody. Thanks for taking my question.
<unk> been asked on radio bouncing between a couple of different earnings calls.
The average order value I think was up something like 2% and I guess I would think like with the concerted effort too.
Reduce.
Lower priced items, Besides I guess I would've thought that that would've been a bigger increase in.
ALG is that mix shift is not as meaningful I think it is or was there was there something else.
The rest of the assortment that maybe.
Maybe.
There were category shifts or anything like that that were affecting the <unk>.
Okay.
Yeah. So <unk> is about $500 almost $500 in Q1.
And I will say a couple of different things about that.
As we continue this new strategy around deemphasizing low value add more in the mid and high value I do you think youre seeing more upside throughout the quarter. There and then the other thing that Youll see is a S. T goes up sometimes youll see units per transaction goes slightly down there is an inverse relationship there.
But I think what we will see throughout the quarter and some continued upside in <unk>.
Yes, the 500, it's not so bad either Tom as you think about it as an absolute number I know it didn't change much year over year or sequentially, but I think it's moving in the right direction Thats, a pretty healthy number we saw.
Average order value peak I.
I think around Q3 of last year, and who knows when we're really seeing people, especially.
Especially during COVID-19.
Higher.
Price point items, like watches and handbags and jewelry.
So there was an expectation that average order value and average selling price would go down is that normalized and what we've seen is a pretty decent results in Q1 at nearly $500 average order value and again, the average selling prices increasing not decreasing.
And as Rajeev said, we expect that trend to continue.
If I could just follow up there.
Think about getting to EBITDA profitability next year.
Is there more benefit that you expect to see next year from the elimination of.
Low value items or will the improvement in profitability next year be more driven by.
Top line growth.
Yes, I think it's going to this is Robert I think it's going to be both Tom at some point, we will anniversary.
The effect of reducing our direct business down to call it 15% to 18% of total revenue and really eliminating as much as possible items on your 100 that will anniversary itself at some point there'll be a what I would call a rollover effect into next year is as you get a full year impact of us being.
Get that better mix level versus whats coming down during the course of this year.
But I think youll see benefit from both we do expect to continue to grow.
<unk> signed business as I said and very a very wide range were providing at the moment, 10% to 20% and so that will have benefit.
It will create leverage and it will be more profitable revenue and growth and so all of those things come into effect in our projection that we're going to be positive adjusted EBITDA in 2024.
You are also going up by the way you are going to get a full year effect of some of the cost cutting actions that we have more recently taken.
Again, there'll be some point some rollover effect of getting a full year impact of that in 2024 versus a partial impact in 2023.
Got it thanks, everyone and best of luck the rest of the year.
Okay.
As a reminder, if you would like to ask a question. Please press star 111 moment for our next question.
That will come from the line of Warren Cheng with Morgan Stanley . Your line is open.
Great. Thanks.
Two if I can the first was whether or not the shift away from some of the lower value items has has impacted buyer retention at all and then the second is if there is anything more you can share on the new revenue opportunities that you've identified and whether or not there is any.
Upside from that contemplated in the full year guide thanks.
Hi, Lauren I'll take the first one and I'll, let John take the second part of your question as far as low value and deemphasizing the brands and items. There we're not seeing much of an impact on the retention side, we're pretty surgical when we went in and looked at which items are brands, we were going to.
Deemphasize their and make sure and then we also looked at the seller basket and the buyer basket as well to make sure that there was high infinity with the brands that we were cutting our low end and in this case.
So nothing alarming on the retention side there and.
And from an advertising perspective, there is minimal impact to 2023.
A lot of it's the fact that testing comment that I just made a moment ago some of us listening to our customers we need to offer products, where we don't take returns on handbags right now.
But if we actually offered return insurance alright, those are the type of thing, but the market is asking for we're going to bring those forward at the same time, we have 32 million members and we have a lot of active members and we have a lot of page views and we havent monetize that from an advertising point of view so.
I don't want to talk about things that we haven't done yet we've done enough that we have plenty to talk about there, but you won't see a big commitment from us to turn on those type of things and bring those to green from a testing perspective, and then hopefully have an outsized impact in 2024, when we're doing it in a conscious and judicious way in the back half of this year.
Great. Thank you.
Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to the real real CEO , Mr. John <unk> for any closing remarks.
Yes. Thank you for joining us today before we close the call I wanted to take a moment to thank the real real team.
All welcoming and let the organization have already taught me a lot about the business. Thank you for your openness enthusiasm and commitment to our mission.
Excited about the direction of the business and look forward to partnering with you to keep making a difference and luxury luxury resale and for the planet.
Finally, I'd like to thank our more than 32 million members that are joining us on our mission to extend the life of luxury and Mike make fashion more sustainable. Thank you very much.
Thank you all for participating. This concludes today's program you may now disconnect.
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