RealReal Inc (REAL) 2022 Q2 法說會逐字稿

Good afternoon, and welcome to The RealReal Second Quarter 2022 Earnings Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Caitlin Howe, VP of Investor Relations of RealReal. Please go ahead.

Thank you, operator. Joining me today to discuss our results for the period ended June 30, 2022, our Co-interim CEO and President, Rati Levesque; and Co-Interim CEO and Chief Financial Officer, Robert Julian.

Before we begin, I would like to remind you that during today's call, we will make forward-looking statements, which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in 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.

I would now like to turn the call over to Rati Levesque, Co-Interim CEO and President of The RealReal for introductory remarks.

Thanks, Caitlin, and thank you, everyone, for joining our earnings call today. Robert and I will provide some opening remarks and commentary on the business, and then we will go into our Q&A session.

During the second quarter, we announced that our founder and CEO, Julie Wainwright, will be moving on at the end of this year. We thank Julie for her incredible vision, tireless efforts and strong leadership over the past 11 years. Robert and I are energized in our new roles as co-interim CEOs, and we are enthusiastic about the direction of the business.

During the second quarter of 2022, we delivered solid financial results. While top line GMV growth was slightly lower than expected, we did meet our revenue projections, and we exceeded our guidance on adjusted EBITDA. While our Q2 GMV growth rate was 30%, we did experience some downward pressure due to a sales labor shortfall and a change in product mix. First, from the supply side, we entered the quarter needing more salespeople, and this hiring challenge was exasperated by a higher-than-normal attrition in our sales force. We proactively implemented multiple strategies to address the labor shortfall, including hiring and backfilling sales roles, selectively increasing compensation in key markets and utilizing technology for our consignors to self-serve. We believe these actions, combined with attrition returning to normal levels at the end of Q2 are meaningful steps in addressing the underlying labor issue.

Additionally, our consignment leads and opportunities continue to remain robust. Taken together, we believe we are well positioned for a significant step-up in supply for the fourth quarter.

The second pressure on GMV in Q2 came from the demand side. Starting in the first quarter and accelerating into the second quarter, there was a shift in consumer demand. The shift was from higher priced items like fine jewelry and watches to lower-priced items like ready-to-wear and shoes. While high value continues to perform, the second quarter mix more closely mirrored our pre-COVID product mix as consumers go back to the office, travel more and attend events. Therefore, the higher proportion of GMV coming from apparel and shoes resulted in improved take rates year-over-year, but also a reduction in average order value. While we expected demand to normalize across categories at some point, it occurred more quickly than anticipated. Overall, we are optimistic about the direction of the business. We believe our demand remains strong as both new and repeat customers continue to grow. Furthermore, we believe our flywheel has strong momentum and is helping us to reduce our buyer acquisition cost. Finally, we are taking a close look at expenses to more effectively manage our costs, which Robert will explain further.

I'll now pass it over to him for a brief financial update.

Thanks, Rati. We are pleased with our financial results for the second quarter. Despite some pressure on GMV, as Rati mentioned, we were able to effectively manage our costs and deliver better-than-expected adjusted EBITDA results for the quarter. For example, we implemented a modest reduction in force in our corporate support functions, slowed hiring for open support roles and reduced discretionary spending. We will continue to monitor the broader economic environment and trends, and we will be prepared to implement further contingency actions, if necessary.

In Q2, we grew GMV 30%, revenue 47% and narrowed our adjusted EBITDA loss, both sequentially and year-over-year, exceeding our guidance for the quarter. However, as a result of our supply shortfall in Q2 and the shift in consumer demand, we believe it is prudent to reduce our full year 2022 guidance. Notably, we continue to project that the real rail will be profitable on an adjusted EBITDA basis in 2024, and we are on track to achieve our Vision 2025 adjusted EBITDA target. As we've communicated previously, these financial targets and projections are based on 3 primary levers: top line growth, variable cost productivity and rigorous fixed cost discipline. We delivered on all 3 of these elements in the first half of 2022.

As Rati mentioned, we are energized about our long-term strategy and prospects and for the opportunity to continue to lead this business toward profitability and our Vision 2025 goals With that, we will now go into our Q&A session.

(Operator Instructions) And the first question will come from Simeon Siegel from BMO Capital Markets.

I was hoping we could talk through the supply versus demand factors that you mentioned. So I think you talked about the drop in ASP and the improved take rate, which sounded like that was a shift in demand from the items. And then on the other hand, we had the supply-driven shortfall that you talked about. So can you just maybe help us think through that slight miss in GMV versus the in-line reds broken down into the supply versus demand dynamic?

Sure. I mean so as most of you know, we're a supply-driven company. So I will say that. And the miss and supply, like we talked about, came out of a couple of different factors. Early in Q2, we saw kind of the great resignation part 2. And that brought down growth that brought down some of the GMV miss that we're seeing in Q3 specifically. And what -- I separate those 2 things, that is the supply side, and we saw that effect on GMV. And then the second thing that happened, like we mentioned, was AOV and ASP came down. And so we saw that consumer shift really back to pre-COVID numbers back in 2019, where that shift of ready-to-wear increased.

Okay. All right. And then maybe any -- obviously not intentional at the beginning, but any good learnings from the technology for consignors to self-serve? Does that maybe help with how you're approaching labor going forward?

Yes, for sure. We -- during COVID, it was kind of forced upon us, and that was the silver lining, I would say. And what we saw there was stores, van pickup, virtual, all those self-served channels really helped our luxury managers. That's what we call our sales force become more productive. So we saw productivity go up. And really, what we've been focused on is making sure there's the least amount of friction through that channel. So our luxury manager can pick up more items per day. So we've seen that go up overall over the last few years, driven out of our self-service technology. So some really good learnings there, and we continue to optimize.

So Simeon, also one thing, this is Robert. I'll add a little context about the GMV and our expected growth rates. So in the first half of the year, we grew GMV roughly 30%, and it was pretty consistent, both in Q1, Q2, pretty close to 30%. We've talked about some pressure on supply due to labor and some changes in average selling price and everything. But at the midpoint of our guidance, our GMV growth rate is still sort of in the mid-20s, 23% or so above at the midpoint. So we're still growing quite rapidly. We're growing north of 20%, just not the same 30% that we grew in the first half. So while it's slow, and we've had some headwinds, it's still not a bad growth rate at 23-plus percent growth.

And the next question will come from Ike Boruchow from Wells Fargo.

Robert, 2 questions for you. Just -- I'm trying to do the math real quick before I forget my question. But it looks like you're looking for a decent amount of adjusted EBITDA improvement year-over-year in the fourth quarter based on what's implied. I guess I'm just curious, am I looking at that right? And if there's something -- some levers that you're pulling that are impacting 4Q more than 3Q?

And then back to the AOV question. I guess when we assume AOVs into the back half of the year, should we assume that this mix dynamic kind of continues and that we're going to kind of run rate a negative maybe mid-single-digit year-over-year growth rate on the AOVs as we move through Q3 and Q4? Any help there would be great.

Yes, sure. I can -- I suspect that part of what you're doing is kind of triangulating our year-to-date results and our Q3 guidance, and you can sort of get into the Q4 what that suggests of adjusted EBITDA. So addressing that directly. The midpoint of our adjusted EBITDA for Q3 is $28 million loss, which is 19% as a percent of revenue. And if you triangulate to the middle of our guidance for Q4, you do get to $13 million of adjusted EBITDA for Q4 and roughly 7.5%. So single-digit adjusted EBITDA margin loss in Q4.

And the logical question is why so much improvement and what drives that? Part of it is volume. And we continue to be a seasonal business in our largest quarter in terms of GMV and revenue is always Q4. And there's a significant step-up in GMV between Q3 and Q4 at the midpoint of our guidance, call it, $100 million. That has a flow-through. I would say that the take rates in the gross margin that just assumed in Q4 is not that different in Q3, where you get a lot of this leverage is in our support functions and our fixed cost. And what we're projecting is those costs will stay relatively flat from Q3 to Q4 on $100 million more of GMV, and that creates tremendous leverage. We'll also continue to experience good productivity in our variable cost in Q4. And so that's what leads us to that result in Q4 that's implied in our full year forecast in the Q3 guidance that we gave specifically.

And we do expect mix to continue. So we do expect -- that was the last part of your question, ready-to-wear, this is the new normal, we believe, for us back to pre-COVID numbers.

Yes. Not a continued shift or degradation, sort of consistent that maybe we've reached this new normal quicker than we previously anticipated, but would probably at a level that will stay fairly stable going forward.

And the next question is from Rick Patel from Raymond James.

A question on the labor-related supply shortfall. Does this pertain to any particular categories or price (inaudible) and in the past, I think, you've had a like constraints you've leaned on branded partners to cushion the negative impact. I'm curious if you see the opportunity to do the same this time around.

So no, this is not specific to price point or category supply. When I talk about a labor shortfall, I'm talking about people out in the field, our sales team. So like I mentioned, sorry -- if I'm repeating myself, I just want to make sure it's crystal clear. We saw attrition increase in Q2. We called this the great resignation part 2. And that's what had the biggest effect to our numbers and to supply. So it wasn't category or pricing-specific.

As far as branded partners, that is more of a brand play for us. We have not used that for a as a supply lever, but it is a big branded and awareness play for us. So we'll continue to do those like we have been. And we're really focused, in general, on profitable growth. I will -- I think, it's important to say that. A part of the mix was a lot of this direct revenue that we had in the past, which was maybe 30%, 30% of our inventory in Q1 -- or sorry, as a percentage of revenue, it was about 30%. That's reduced to 28% this month, this quarter. And that's because, again, we are focused on profitable growth.

Direct revenue, just as a reminder to everyone, is our items that we purchased, especially in the vendor channel. We did that during hard times in COVID and we needed the inventory as we couldn't go back into people's home. And we're really limited in that category, again, focused on profitable growth.

And on that point, can you help us think about the magnitude of growth in the direct segment to back half and also how we should think about gross margins? I believe your gross margin comparisons get a little bit more difficult there, particularly in the fourth quarter. So just curious what that trend line looks like.

So Rick, let me talk about sequentially how much of this direct revenue, the owned inventory, what percentage that is of our total revenue. And if you go back to 2019 or before, that percentage tended to be in between 15% and 20%. And that is our lower margin business. In Q1 of this year, that percentage had risen to 34%. In Q2, we had reduced it and we started talking about deemphasizing that and sequentially, it reduced from 34% to 28% of our total revenue. By the time we get out to the end of the year, it should be in the low 20s.

And eventually, what we'd like to do is return back to the 15% to 20% that we saw back in 2019 and prior to that. It does have a pretty significant impact on our expected gross margin. So again, gross margin in the first half of the year was 55%. Back in 2018, '19 and so on, when we had a smaller proportion of our revenue coming from direct, our gross margin was in the mid-60s. Now we'll probably recover about half of that roughly in the second half of the year. And we'll continue to improve as that proportion comes more back in line. But hopefully, that answers your question.

And the next question is from Anna Andreeva from Needham & Company.

A couple of questions. Have you quantified how much of the shortfall in GMV was the result of this labor supply-related shortages? Curious if you're tracking in line with the 3Q GMV guidance currently. Or do you guys need trends to accelerate to get there?

And secondly, I just wanted to make sure, I think, in the shareholder letter, you're referring to continued top line growth as one of the levers to reach the profitability goals. Are they no longer based on 30% plus growth rate you guys talked about previously? And if not, is there a top line target that we should think about that you're basing the longer-term outlooks on?

So let me take the second part of the question because I think it's a good one relative to our projected growth rates. And one of the questions that came up when we had Investor Day and we talked about Vision 2025 was a growth rate that was 30-plus percent is assumed in our projections. And I think what we're demonstrating and what we feel confident in is that we could actually achieve our adjusted EBIT goals and our cash flow goals, in fact at a lower growth rate. And we haven't -- we're not providing a new update of what the top line might look like or what the growth rate might look like.

What we're hopefully demonstrating is we will address our cost base, and we will find productivity, and we will focus on more profitable growth as opposed to less profitable growth. And our order of priority in terms of importance in our Vision 2025 was first adjusted EBITDA then revenue then GMV. And so again, I think that our full year forecast and our reguide demonstrates that, admittedly, it's a fairly large reduction in GMV at the midpoint, but a much, much smaller miss on the adjusted EBITDA line. And I think that it's something that we can close that gap, and we feel confident we will make up in our Vision 2025 path. But it is true that we will feel like we can make our goals even at a less aggressive growth rate than what we had before by the means that I just described.

Yes, I agree with that. And I'd say one -- to answer the first part of your question more directly, I'd say, the GMV mix was 75% driven to supply -- driven by supply and about 1/4 driven out of the shift in consumer spend. I do believe we're tracking to Vision 2025. It's important to remember that. And even in the back half of the year, what we're focused on right now is getting that labor all hired up and trained up in Q3 to set us up for a great Q4, and that's really the name of the game right now.

And the next question is from Mark Altschwager from Baird.

This is [Jamie Husky] on for Mark today. Just a follow-up on the supply issues that we've been talking about. Can you parse out, is there any effects coming from competitive factors, not just the sales force disruptions that we've talked about as we've seen more platforms and brands themselves going after these categories?

Yes. Thanks for that question. I mean I think that's the good news. That's the silver lining. The opportunities on new and repeat sellers are very strong. The engagement is there. There -- the growth is there, all looking good. It really was a factor of labor. There was no other hidden issues. It was just getting hired up. And like I mentioned, we already needed to grow that team by 20%, 25%, and the combination of not being able to grow that team fast enough and the attrition volume was tough for us.

And I will add to that. There is a little bit of a tail to being underhired in the sales force and trying to catch up. And then as Rati mentioned, those folks do have to go through training. And there is some learning curve and they are not 100% productive immediately. And so there is a little bit of a tail that even when we do get fully hired, we do have to have a little bit of time for folks to get fully trained and be fully productive like somebody who's been on the job longer. And so that's all -- that's what's reflected in our current projections and forecasts.

Okay. And then just as a follow-up there. You've talked about how there's been a shift into apparel. Is -- are you seeing any differences in the new customers that you were bringing online versus your existing customer base? Maybe as people are attracted to resale because of inflationary pressures.

No. No difference in the cohort. It really is just about the consumer pattern that shifted to pre-COVID numbers.

The next question is from Kunal Madhukar with UBS.

A couple, if I may. One, what is the risk that there is a great resignation part 3? And how would you address that? That would be one. And the second would be in terms of the supply mix. So Rati, you talked about GMV being impacted 75% because of supply issues. So how much did having stores kind of help with the supply versus if you didn't have stores?

Thank you. Yes, yes, as far as the great resignation part 3, this is a part of what we're looking at every day. The compensation, we've done multiple things to rightsize supply and to kind of get ahead of that. We've rightsized compensation, the self-service piece, so that we're not so labor-dependent is really important. And we've added leadership across the board on the sales side, bringing in a new CRO and making sure that we have the right people on the ground.

So it's interesting, we saw this happen in the back half of 2022 on the offside. And we did all of these things to make sure culture, career growth to make sure that it didn't happen in the second time. The good news is all those things that we had implemented worked during the great resonation part 2. So this is now the sales piece of it.

And we're starting to see it recover already. But Rati, we're starting to catch up. And so we've seen the trend improve from -- when we have the biggest issue, it's -- we are starting to recover.

Right, right. And I think the market is shifting, as I'm sure a lot of you are seeing, we are seeing that happen. We're seeing retention numbers getting better. And again, our focus now is getting all of those new hires up to speed to execute on Q4.

And then I think your second question was how did the stores perform. The stores continue to be quite healthy, especially as an acquisition tool on the seller side, 30% of our sellers continue to come in from stores. The payback or breakeven is in 1 year. So that is also really great. But we focus on supply in that piece. It has made the sales team more productive because of the self-service channel, and we'll continue to optimize. And we're opportunistic. We keep saying that about stores and about new ones. We said that next year, we'd open from anywhere from 1 to 3 stores, and that continues to be our thinking as of now.

Okay, great. And one more, if I could. And this is with regard to the economic or the macro fares and consumer discretionary spend and what have you concerns around that. Are you seeing a trade down in consumer spend? In the AOV that may be you attributed it to mix shift. But even within -- even within apparel, are you seeing people kind of buying lower?

We are not. It really is just mirroring our pre-COVID numbers back to 2019. So we aren't seeing anything trade down within the category. It's just more category mix-specific.

And the next question will be from Susan Anderson from B. Riley.

I guess just to make a follow-up on the guidance. So the lower EBITDA on sales with EBITDA being lowered less, I guess, I'm curious what expense areas you think you're able to flex more, I guess, now to get to that bottom line even though you brought the top line down?

Looking at multiple things. We're looking at everything from tech leverage to variable and fixed leverage, marketing spend. And the good news is we're seeing that flywheel effect. I'll let Robert add on here. But we are -- there are many expense areas that we've tackled already and that we'll continue to tackle both on a project, people and leverage basis.

Yes. And we've gone through a couple of exercises to examine our cost structure and to put in cost reduction actions, which I mentioned earlier and further contingency plans. But I will say, Susan, that largely the benefit to this Q4 result that's implied in our full year guidance really is maintaining the cost structure as we have put it in place the fixed cost structure for Q3 to continue into Q4 essentially flat on $100 million more of GMV.

But we'll continue to monitor it. And we're always looking for places to be more productive and more efficient. I didn't really talk that much about our variable costs, but we continue to look at the productivity of our sales force and the efficiency of our retail footprint and our entire operations, inbound and outbound and authentication. We're constantly looking at ways to continue to become more productive and efficient.

Susan, this is Caitlin. The other thing I would just add in outside of the operating expense and the good cost control is really gross margin improvement in the back half is directly becomes a smaller percentage of total revenue. We're going to see some pick up on the gross margin line, too.

Okay. Great. That's really helpful. And then also on the (inaudible) about the AOV and take rate, I guess, now with the mix shift kind of going back to pre-COVID, how should we think about that going forward? Should we think about this quarter as kind of being the right percentage levels now?

Yes. I'll start on take rate, which has been pretty consistent. I'm going to say it's been between 35% and 36% in the first half of the year. I think that it's roughly in that range in the second half of the year. So even with all the shifts and movements and so on, on average, it's sort of modeling out to be fairly consistent throughout the entire year.

Okay, great. (inaudible).

Sorry, go ahead. Was there another part of that --another part of your question?

Just the AOV and the take rate level.

Yes. So AOV has had some pressure on it. As we said, average selling prices are down slightly. I think units per order are fairly consistent, maybe slightly up net-net, it's a small decline in average order value. We'll say that there was a very unusual result that's worth mentioning in prior year as a comparison from Q2 of this year to prior year, I think, our average order value last year was $520, which is really an outlier. The full year was under 500 prior year, but Q2 was $520 million. So we had a very strange compare. And what we're seeing now is AOV in the $4.85 to $4.90 range. I think we see a little drop off in Q2, but kind of a return to that level, maybe a little higher in Q4. But on average, somewhere in the $480 range for the full year.

And it's important to note, I think, the take rate usually goes up and down based on product mix and commission changes. We did make a commission change in Q4 of last year and unbranded jewelry and items under $100. We also made a commission change this quarter in Q3 for items under $50. So you do see those move with, again, product mix being the biggest factor, and then of course, our commission changes.

Yes, that's a good point, Rati. By category, we've been consistent or maybe a little more aggressive in terms of take rate. It's being offset by some reduction due to mix. And I think the net of all that is what I described before that it's a wash, more or less in terms of our expected take rate in the second half of the year versus the first half of the year.

And the next question will come from Michael Binetti from Credit Suisse.

So Robert, last quarter, you -- I think, you told us that (inaudible) sorry, I have a bad connection here. The 1,900 basis points of OpEx leverage. I think you said 1,600 basis points of it was on those fixed costs that you focused us on at the Investor Day and about $250 million on variable. Can you update us on what that was in the second quarter? You had roughly the same OpEx leverage about 18 to 50, I think.

Yes. So what I have is our total OpEx leverage, excluding stock-based compensation was roughly 2,900 basis points year-over-year. And about 2,400 was support -- OpEx and roughly $500 million was from variable cost or productivity on our authentication center and our sales organization.

Could you help us roll that forward into the back half a little bit that 500 variable was up quite a bit from the first quarter when you said it was 250, maybe some of the puts and takes? And does that continue to improve as you go into the back half?

Frankly, we're -- the back half productivity is mostly from the support functions. I think what we're experiencing with the reduction in the top line projections of lower GMV and revenue, it's harder to get as much productivity in our (inaudible) centers and on our variable expenses because there are some fixed elements to that, and it's just tougher on lower volume. So I would say what you -- what we're projecting and expecting to see in terms of operating cost productivity in the second half of the year is primarily coming from the support functions.

Okay. And then I guess, just walking forward the comment that you think you can get to the EBITDA -- the multiyear targets on -- even if the GMV flows a little bit lower than what we thought. Maybe what are some of the -- can you help us bridge maybe what you held back and showed a little bit of conservatism in the Investor Day numbers on the leverage profile that you think you can go after and capture at this point?

Sure. There are so many variables, Michael, that goes into our projections and the LRP model that we use to create the Vision 2025 numbers and our projection to breakeven -- or not just breakeven, but it'd be positive adjusted EBITDA in 2024. And I will tell you that in that modeling, I never really did count on a completely linear path. And I understood that there would be some ebbs and flows along the way. And so we built in some accommodation for that variability along the way. And I would admit that I didn't run a full Monte Carlo analysis on all the possibilities of all these different variables moving up and down over the next several years.

But I will tell you that I did build in enough of a safety matter or a cushion, if you will, that I could still say confidently that we feel good about being positive adjusted EBITDA in 2024, and that we can achieve our Vision 2025 target of at least $100 million of positive EBITDA. But I don't know if that's enough of an answer to your question, but I wanted to make sure that I would allow for some variability and some potential bumps in the road. And because some of the bumps that we described, we feel as transitory. It was a labor shortfall that we're addressing and that we can catch up on that. And so that's what gives me confidence to be able to reaffirm the Vision 2025 numbers.

And the next question is from Tom Nikic from Wedbush.

Robert, sorry if this was addressed already in all the discussion around guidance. But -- so when I look at the Q3 guide relative to what you did in Q2, you're essentially saying that revenues -- like total net revenues will be flattish to down versus Q2, but the adjusted EBITDA will be a lot better, something like $14 million to $18 million better than the loss in Q2. Like how does that happen on less revenue? Is it that like the OpEx dollars will actually decline quarter-over-quarter? Is it like a huge increase in gross margin? Like can you just kind of help me reconcile that?

Yes. And Tom, I hate to contradict you on the numbers. But what we're projecting for to the midpoint of our guidance is a loss of $28 million versus a loss of $28.8 million in Q2. So it's about an $800,000 improvement. Let's call it, in round numbers. It's about $1 million improvement on adjusted EBITDA sequentially on roughly $15 million less in GMV and about $4 million to $5 million less in revenue.

So the way I would describe it, Tom, is that Q3 looks an awful lot like Q2. A little bit less GMV and revenue, a little bit better adjusted EBIT dollars on an EBITDA margin basis, adjusted EBITDA margin basis exactly flat. Both of them, minus 18.7% at the midpoint of our guidance. So I see Q3 is very, very similar to Q2.

And the next question will be from Lauren Schenk from Morgan Stanley.

I wanted to ask about supply again. The pullback in vendor inventory, I guess, given the lack of supply, particularly, it sounds like maybe around the higher-end items, why decide to pull back on that now? Is it just really an EBITDA trade-off? And is that sort of a trade-off that you'll continue to make going forward?

That's exactly right. It is an EBITDA trade-off. I think you heard us talk earlier about profitable growth, and that is our focus. EBITDA being the priority when we take a look at EBITDA, adjusted EBITDA, revenue and GMV. So it was important for us as we flowed-through some of this product that it wasn't profitable when you flow-through. So it was important for us to kind of -- and we're a consigned business. We're really going back to our core of what we do, and that's on the consigned side. We're seeing the high value come in from the consigned as well and again, getting that team all hired up and trained to set us up for a great Q4.

Right. And this is part of our strategy that maybe a little bit less growth leads to a better result, especially when you're talking about the direct business, which is very cash flow intensive, requires us to put cash out upfront. It requires us to hold inventory. And if you look at -- nobody asked us about there's a little bit of a change in our accounting presentation where we have separated consigned business and margin versus direct business and margin, we kind of stripped out the shipping so that you can see the margins of those 3 parts of our business in a clean way. And so the consigned part of our business is reported as in round numbers, 85% gross margin, while the direct business is 15% gross margin and it is very cash intensive. And so our decision is to deemphasize that, focus more on the consigned business, as Rati said, focus on profitable growth and, frankly, also to conserve our cash. And so for all those reasons, we're willing to accept a little bit lower of a growth rate, which we think will give us better gross margins and ultimately a better adjusted EBITDA results.

Very clear. I guess just one follow-up on the 75% of kind of the GMV miss that you attributed to supply, I guess, how much of that 75% would you say is labor shortage versus the pullback of vendor supply?

It's all labor shortage. So labor shortage as far as -- again, we're a supply-constrained business. So that was the #1 reason over there. I mean I kind of separate those things, those 2 things, direct as a percentage of business and the supply-related miss. So again, the GMV mix is driven out of the supply piece.

And the next question is from Noah Zatzkin from KeyBanc.

Just on the marketing rate, it ticked down in the first half versus last year and then sequentially in the second quarter versus the first quarter. Was the step down in the second quarter related to the supply shortfall? And kind of how should we think about that rate more long term? And then also, any color on how you're thinking about marketing mix as well as the flexibility and media plans as we move through the back half would be helpful.

Sure. The marketing change in the back half of the year has nothing to do with supply, I'll say that first. It really is about driving efficiencies. I think I mentioned earlier, the flywheel, that's a little bit of gold nugget there, the flywheel effect in the back, continuing to decrease. We see it in Q2, and we continue to see those marketing efficiencies.

And as far as marketing mix goes, I'd say we're getting smarter. We're optimizing our channels. We're getting smarter about our objectives, and we're using different channels differently go forward. We just have better data, and you'll continue to see that through this year.

And the next question will come from Ashley Helgans from Jefferies.

Just one quick one from us. We were wondering if you could give us some color on the cadence of consumer spend on the platform throughout the quarter.

Sure. In Q2, the consumer spend was just what we said it was. So we saw a shift from higher-value goods, fine jewelry, watches, handbags. And even though I'd say that continues to be healthy, we see it mix shift into ready-to-wear and shoes. Is that what you're asking?

I guess in terms of like the month like April, May or June, if there was any variances between the 3 months in the quarter?

I'd say, we saw it kind of accelerate in the back half of the year more closer to the summer months. And we do see seasonality in general in our business during the summer months as well.

And the next question is from Ed Yruma from Piper Sandler.

Two for me. I guess first, I know that you've deemphasized direct as part of the business, but we are seeing some actual deflationary pressures in hard goods, particularly watches and jewelry and handbags. Are you seeing any impact? And is there any potential risk to inventory that you do have?

And then as a follow-up, I appreciate all the commentary on supply and the readjusted GMV guys for the back half of the year. Have you taken any consideration for macro or the potential weakening? Or is the GMV adjustment simply driven by the lack of supply driven by staffing?

So I answer the first part of the question as far as risk to higher-value goods, watches and joy in the direct business. The good news is we're seeing higher value goods come in from our consigned business, specifically. So we are seeing -- whereas before, I would say, we didn't have the proper tools to bring in the high value through our consigned channel. One of the reasons that we use direct as a crush of it, I will say. We were able to kind of offset that with the supply coming in, again, the high-value supply coming in on the consigned side. So there's more levers that we can pull specifically these high-value events that we've been having to drive the value. And then as far as guidance, I'll let Robert take that one.

Yes. So in terms of the guidance in the second half of the year, it's really reflective of what we saw in terms of the supply shortfall due to the labor issue that we described. And it's also a reflection of a lot of inputs on both the supply and demand side, whether it's opportunities or conversions or mix or high to low value, take rates on the demand side, consumer mix and average selling prices and units per order. And so it's really a reflection of those things. We are not economists, and we don't have a crystal ball. And so we don't know really what to expect in the second half of the year. Certainly, there's some uncertainty just broadly, but that's not really the primary reason that we have adjusted our top line. It's more related to these inputs and also very much related to the deemphasizing of the direct business. In the past, that would have boosted back half growth, and we've turned away from it just because we feel that we want to really focus on the profitable growth.

The next question is from [Albert Chen] from Cowen and Company.

It's [Albert Chen]. Regarding the profitability guidance that you're giving, Robert, what are your thoughts on the 6 versus variable components in terms of how you see that evolving? And I think you answered it earlier, but you lowered guidance yet you kept the 2024 view of profitability? Would love comments on that.

Second, we're definitely seeing more innovation at competitors and other competitors do some things to really accelerate gathering supply as well. Do you -- how do you feel about your take rate? And what might happen to that longer term as a potential risk factor?

And third point, the labor market is really tight still and luxury salespeople regarding compensation and turnover. I'm just curious about strategies you'll take to retain and inspire and also hire and what still is a really tight labor market in certain segments.

So Albert, I'll start with your first question about the 2024 and 2025 projections considering that we've lowered our guidance for 2022. And as I mentioned before, there's a lot of different paths and there's a lot of different variables that go into that Vision 2025 financial projections. And when you choose one of those elements to be the primary focus, the most important. And in our case, we described that as being adjusted EBITDA, there are many ways to achieve that goal.

And as I mentioned earlier, we've allowed ourselves some variability in those projections. We expected ebbs and flows along the way. It looks like the most at risk in terms of the 2025 projections is GMV, which we've actually described as the least important of the 3 main elements that we are guiding towards the most important being adjusted EBITDA. So I think that we continue, as I said, to look at our cost base, to find productivity, to manage the other inputs to ensure that we can get to our adjusted EBITDA and our cash flow projections. And again, even with some slower growth, we believe that we're still on track to hit the adjusted EBITDA and cash flow numbers.

And again, some of those problems that we saw are transitory. So we feel like it's more of a bump versus...

We'll catch up.

Exactly. And then your other 2 questions, I think, the second one was about competitors and take rate pressure. We win on service and earnings and value and pricing. We're always looking at take rates, and we're always looking to see where we can optimize. We haven't seen us hit any kind of threshold yet. We look at pricing regularly as far as what -- how we pay versus our competitors. We have almost 30 million luxury shoppers. And our pricing algorithm is pretty sophisticated to kind of offer our seller that best price.

So we'll continue to look at that, and we continue to look at take rate. We look at it about a couple of times a year again with pricing to make sure that our values are still there, especially on the pricing and earnings side.

And then on the labor market, I think, someone asked this earlier as well, what are we doing as far as if we continue to see some headwinds here on the comp -- and we're continuing to look at compensation, our leadership strategy and we'll continue to monitor. We're really making sure that we're staying on the hiring piece. On the compensation side, we've been really looking at a couple of key markets. I'd say we needed to right size there, and we have done that, and we are seeing progress in a big way going into Q3.

Okay. Very helpful. And your letter mentioned reservation as a key priority, which actions are you prioritizing to do that? And how do you do that in a strategic way to retain all the innovation and core competencies in data as well?

Albert, you broke up there just when you were getting to the good part of -- the main part of your question, and we didn't catch it. I'm sorry.

I was just curious about prioritizing cash and decisions that you're going to make sure to do that and balancing tough decisions about innovation and investment relative to cash and cash flow.

Yes. So one of the main elements of cash in prioritizing cash and improving cash actually is related to our inventory. And we're holding $74 million roughly of inventory. Now some of that comes from out of policy or from other get paid now programs and so on, but about $40 million of it was inventory associated with this direct business, inventory that came to us through vendors and wholesalers, and we have really cut that off completely in terms of bringing in any new inventory in those categories.

And so as that sells through, we do expect to generate significant amount of cash, and you'll see that reflected in a pretty significant reduction in our overall inventory balance between the end of Q2 and the end of this year. And so that's part of our prioritization of cash. Also, just to focus on just higher margin, less cash-intensive consignment business versus direct. Of course, there is no pass-out for us when we take items on a consignment basis. And the consignors themselves get paid more or less after we get paid. So that could be very positive on a cash flow basis. So those are a couple of things that will allow us to prioritize cash and some things that we're doing a little bit differently than in the past to generate cash.

In terms of investment, now there's a little bit of a trade-off there because we talked about the 3 elements of our path to profitability. One of them is continued variable cost productivity. And so we do have to invest in some innovation, in AI and other ways to get more efficient in authenticating items and so on. And so we just look at each one of those decisions on a case-by-case basis and find the ones with the best return. And you will see us continue to invest in technology, in automation and innovation, it is fundamental to our path.

And the next question is from Marvin Fong from BTIG.

Great. Two questions. First one on active buyers. It seemed like one of the better performances in recent memory. Just wondering what you do attribute that quarter-over-quarter growth to? Do you think it's people because of the macro, looking for a deal or good value? Was there any programs you guys instituted or were we able to activate some (inaudible)? Just any commentary on that would be great.

And then my second question, on the new disclosure, I just noticed you guys have broken up shipping revenue, and it looks like it's been continuously operating at a small loss. And I know that in the past, you guys had done some -- renegotiated some deals around shipping. Just wondering if we can expect shipping to eventually reach breakeven. That would be great.

I'll take the first one. As far as marketing is concerned and our customer base and our active customer base or buyers have gone up 84% are coming from our existing -- our buyers are coming from our existing buyers or revenue are coming from our existing buyers. And I would say it contributed to a couple of different factors. Like I said, we're getting more efficient on the marketing side, specifically driven out of our marketing model mix and our attribution channel.

So that means more attribution through the journey of the customer and the buyer having us -- or enabling us to optimize more efficiencies there. So we're getting smarter there. And then sometimes what we see is we see when we have lower value goods, we'll see buyers go up as well and active buyers go up. So we've been able to really dig in, dig deeper into our lapsed fire base and some of the things and some of the tools that we're using to get into our last space is working really well for us. And then your second question was on...

Yes. So the second question around shipping in our presentation in our GAAP financials, which we modified a little bit, and I'll talk a little bit about what the motivation was behind that, and then I'll answer your question directly about the net shipping margin.

In the past, we were reporting 2 business segments: direct and then consigned in other services. And lumped into that consigned in other services was the net shipping. And after our last earnings call, we started to get a lot of questions from shareholders and analysts about the movement in that reported gross margin of the second [cater] and consigned and services, and it was getting polluted in a way by what was happening in shipping and people were reaching the wrong conclusions. They were saying, "Why did your consignment margin go down?" And the answer was, well, it's actually the other services parts of that category that was causing confusion.

So we felt like that it would be a better disclosure and more useful to shareholders and analysts to break out the 3 elements and to show consignment as its own category in a pure way and then break out shipping and other as its own line. That resulted in -- now we do show consigned margin in sort of the mid-80s range, the direct margin mid-teens and a small negative margin on the shipping.

And so there has been pressure on shipping. Shipping costs have gone up. We have done things to try to mitigate that. There is some more complicated aspects we do charge for shipping to customers, one time, folks get a onetime charge, $12.95, but it is possible that we are shipping from multiple locations. There is these mixed shipments that naturally the consumer will not pay for and we're a single unit, and we have some units in our retail organization, some in Phoenix, some in New Jersey. And so we only charge on shipping expense to a consumer, but there might be multiple shipments, which makes it harder for us to turn that positive. And Rati, you want to add to that?

Yes. So I would say that overall shipping margin is flat year-over-year, and that's because of some of the things we do that Robert talked about. We passed some of that cost to our customers, that doesn't seem to affect and hasn't seemed to affect convergent. We've diversified our shipping carriers also working for us. But it's always been a headwind for us because of the nature of our business. And because of the rate increases that we saw earlier in the quarter, those rate increases have seemed to slow down. That's the good news, but we'll continue to optimize. We have some other levers that we're pulling at the end of this year. And really, our goal is to stay flat over the next few years when we think about shipping margin.

Right. And if we can narrow that gap, we would certainly like to. That's been a goal in the past. It's just -- frankly, it's not easy given the nature of our business.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Rati Levesque for any closing remarks.

Thank you for joining us today on our earnings call. In closing, I want to thank The RealReal team for their continued dedicated to moving our business forward every day. During our next earnings call, we look forward to sharing results and further progress on our path to profitability. Finally, I'd like to thank our more than 28 million members who are joining us on our mission to extend the life cycle of luxury goods and make fashion more sustainable. Thank you.

And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.