RealReal Inc (REAL) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to The RealReal Third Quarter 2021 Financial Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Caitlin Howe. Please go ahead.

Thank you, operator. Joining me today to discuss our results for the period ended September 30, 2021 are Founder and CEO, Julie Wainwright; President, Rati Levesque; outgoing Chief Financial Officer, Matt Gustke; and incoming 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, for which 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 Julie Wainwright, Chief Executive Officer of The RealReal for introductory remarks, and then we will go directly into a question-and-answer session.

Thank you, Caitlin, and to everyone for joining our earnings conference call today.

We're pleased to announce strong financial results for the third quarter of 2021, with continuing robust top line growth as well as solid bottom line improvement. Based on what we know today, the effects of COVID-19 are effectively behind us. Importantly, we have a resurgence of healthy supply in our authentication centers. During the third quarter, our product supply ramped nicely driven by at-home consignments that exceeded pre-COVID levels. Further, our retail stores continue to be an increasingly important and cost-effective channel for securing supply. Therefore, we believe we are well positioned from a supply perspective as we enter the holiday season.

Additionally, we believe The RealReal's unique business model is largely insulated from the supply chain shortages and certain inflationary impacts many businesses are currently experiencing. During the third quarter, we also managed operational pressures within the business. Like many businesses, we are incurring elevated shipping costs and staffing challenges, specifically in our authentication centers. To address these issues, we developed and implemented multiple initiatives, including shipping diversification and last-mile optimization for the shipping costs and expanded automation in our authentication centers to address staffing shortages. We are confident in our ability to manage these challenges.

While we are in the early innings of delivering operational expense leverage, we believe the company is starting to see the benefits of previous investments. These will create significant opportunities for operating leverage as we drive toward profitability in the coming quarters. Overall, our business is continuing to experience very positive trends, and we believe these trends will continue through the end of the year and into 2022.

On a final note on providing forward-looking financial expectations, we intend to resume a more typical annual and quarterly guidance cadence in 2022, along with committing to a time line to reach adjusted EBITDA profitability. Expect that to begin with our next conference call.

And with that, I'm going to open it up for questions. Caitlin, who do we have here? Operator?

Operator, we're ready for questions.

(Operator Instructions) Your first question comes from the line of Mark Altschwager from Baird.

I wanted to ask just about some of the supply strategies here. So you sound pleased with the trends with at-home appointments. At the same time, I think the target on the number of LCO openings may have come down a bit versus what you've discussed recently, correct me if I'm wrong there. But maybe just a little bit more on what you're seeing with kind of each of those channels. And now with some normalization in the operations, could you give us some current thoughts on how you think the supply mix might trend in the medium term and what the implications might be on profitability trends?

Well, that's a lot of questions. So let me just start with, LCOs are in our neighborhood stores along with, we do have one stand-alone in New York in Midtown. So we actually have more luxury consignment offices than we originally planned because we did at the beginning of the year make a decision to open more neighborhood stores. So we actually have more. But we did shut one down and that was in San Francisco because most people prefer to use our, well, we have 2 now in the Bay, 3 in the Bay Area. We have one in Larkspur, one in Palo Alto and one in Downtown San Francisco. So the center which is at the base of our office building became less and less relevant. So we chose to move that staffing.

But in general, supply, 30% of our new consignors are coming from our retail stores and coming drop-offs or appointments in the LCO. Supply across all segments, fine jewelry, watches, men's fashion, women's fashion, handbags, accessories, all of it is significantly up versus year ago. The average unit selling price, which we internally call AUR, is actually on target, if not slightly higher. So now it will be based on what people buy. And that will determine the mix. Certainly apparel has come back, and Rati can talk a little bit about that, but we're still selling a huge mixture of high-value handbags and fine jewelry.

And just one other note and then you can ask further questions if you'd like if I didn't cover it. Gross margin is clearly and our take rate is clearly a key component on the path to profitability, but it's not the sole path. It's not the sole component. So we feel good overall that everything is progressing better than we expected for the balance of this year. And we see things looking really good in '22. And we'll give you more specific guidance in the February time frame.

That's all really helpful. Maybe just a quick follow-up on the gross profit commentary. I guess with gross profit per order, I mean, have the buyer incentives, are those fully back to kind of normalized levels? Or how are you thinking about that as a lever as we head into the holiday period and 2022?

We did use it when supply was short in order to keep our cohorts engaged because we have such a high repeat rate, but that was last year. We returned to normal cadence of any kind of promotional activity earlier this year. And that means that, and we expect that to continue. That usually means one really bounce back, as we call it, a month. And so we're back to normal, pre-COVID. Everything is either better than where we were pre-COVID or back to normality.

Next question comes from Oliver Chen with Cowen.

Gross profit per order was very encouraging this quarter. As we look forward, what are some key drivers to continue to increase this? And Julie, as you think about supply gathering regionally and across the country, are you seeing pretty broad-based strength in your important markets? It sounds like you have renewed confidence that we've entered a more stable phase.

I'm going to answer that last bit of your question first and then I'll turn it over to Matt and Robert for the financial numbers. So we have, yes, all markets are back. We have regional strength and national strength. And I wouldn't say it's stability. I would say we've returned to, we're exceeding pre-COVID growth levels in all markets. So it looks really good, very excited. And as you all know, at one point, New York was shut down for us. That is not the case. And in case anyone hasn't been to New York lately, it is vibrant. All markets are doing extremely well. So we're very pleased with the supply.

And then I'll cover the gross profit per order. Just to state what's in the letter, so we were at $94 gross profit per order in the quarter, which was flat versus the prior quarter. We'd expect that to go up in the current quarter as AOV typically is higher sequentially. That's one of the drivers on a go-forward basis. But on a sustained basis, it's really, ultimately, it's going to be leveraging shipping expenses and other kind of COGS. We do expect to see, over time, meaningful improvements in our shipping expense kind of once, not only because we're seeing short-term headwinds there. Beyond that, we have a number of initiatives over time to drive that down meaningfully. And beyond that, the other, just the key levers are really just our AOV and our take rate, which is stable and to modestly increasing going forward as well.

Yes. This is Robert. The only thing I would add is the gross profit per order was up year-over-year, up $4.

Okay. And last question, that active buyer statistic looks quite solid. What about the new buyers that you're seeing in terms of their purchasing behaviors and what might you do to make sure to engage them and keep them on the platform?

You know what keeps new buyers on our platform is the same thing that keeps repeat on our platform, really good supply. So that's coming in. The new buyers look like the other buyers. The difference between this new buyer group, which we started seeing during COVID, is we used to see an AOV that was slightly less than the repeat. And in fact, the new buyer AOV is strong. It's strong, as strong or stronger than repeat. So it's a nice, healthy new buyer. And again, it's driven by great merchandise on the site.

Next question comes from Susan Anderson with B. Riley.

I was wondering if you can give us an update on your store plans and how many you expect to have at the end of the year? And your expectations for next year and if anything has changed on the rollout there?

Yes, sure. This is Rati Levesque. So stores, our neighborhood stores, we have 15, which includes our flagship stores as well. We'll have 17 by the end of the year. They continue to be quite healthy for us. So they continue to drive supply and high-value supply. They continue to drive about 30% of our new consignors, so the supply side, again, very healthy.

On the demand side, AOV, average order value, higher average selling price, return rates are lower. We see a pretty big halo impact happening on a regional basis. So we're very optimistic about the stores. This is the first season that we'll have our neighborhood stores open, and we're looking forward to a healthy performance there. So we'll definitely keep you all posted on next year's plans.

Great. That sounds good. And if I could just add one follow-up. Wanted to get your thoughts around holiday with kind of now, I guess, the return to much more normal supply. What are your expectations around holiday? And do you foresee any shipping issues around the holiday demand?

Yes. We don't see any. We are not forecasting any issues on the shipping side. Like Julie mentioned, we don't have any supply chain issues. So our shelves are full of supply. We're very excited about that. Yes, we're excited about a healthy quarter with those 2 things said.

Next question comes from Michael Binetti with Credit Suisse.

Congrats on a nice quarter. Julie, at the time of the IPO, I think we were thinking we'd be approaching breakeven right around now. Obviously, there was a pandemic in between there. So clearly, we are where we are. But thinking about what EBITDA profitability, I think you guys were thinking on a run rate per year about $2 billion was what you needed to get there. And I know you're going to give us a path to profitability on the next call. And I know there's been a lot of numbers moving around. But at a very high level, it seems like the biggest parts of the cost structure are pretty favorable today versus what we knew about back then. Phoenix seems like it's more efficient than Brisbane. Small stores seem like you're very happy. I think cost effective was what you used in the prepared remarks to describe it. And I think a lot of the automation you talked about along the way has happened. Are there new takes to think about to help us think about what happens to profitability at $2 billion versus where we thought we were a couple of years ago?

Michael, I will be so excited to have our CFO walk you through our time line in February. I think that's better left said. But I have to say, we clearly lost a year. So we did lose a year. You're right. And then COVID, if we would have continued on our track of growing 40% a year, we would have been in a different situation. I think the key takeaways from today, we're growing faster than we were pre-COVID. Supply is strong. And we're going to resume to normal cadence and put out the path to profitability in February. So you've got a pretty energetic team here around the table.

Okay. Let me ask you another thing. If I'm trying to look at, I guess, the model and compare the business to pre-COVID levels to 2019, I think in the quarter your sales were up about 46%. And excluding stock comp, there's about 200 basis points of operating expense leverage on that kind of a sales growth rate. Is that, until we get to February and we have to do our models before that, is that about the right amount of leverage to think about if we see that kind of GMV from you? Or are there inflection points along the way over the next few quarters that we should think about?

Robert?

Yes. So I'll make some comments on that. One, I believe our GMV growth was 50% year-over-year, our net revenue growth was 53% year-over-year. We're evaluating the business and the cost drivers and the unit economics. And I think when we give guidance next quarter, we'll give you a better sense of what sort of leverage that we should expect going forward.

I do think that there were incremental investments that have been made along the way that we're starting to see some benefit from. And I would not expect that you'll continue to see investments like that, that will prevent us from showing leverage. So I expect that we will see a fair amount of leverage. And again, I don't want to be more specific before we give actual guidance. But I don't think that the past is a good indication of the future relative to what sort of leverage you will see in this business.

Right. And that just as one example, we made a commitment to automate our auth centers, which meant that we really doubled down and actually doubled the budget in technology. We started doing that in late 2019. It really shows up. You don't have the isolated numbers, but it's a key driver of our expense structure. And we are seeing the results of doing that in both our data scientists and our technology group, but that isn't something we're going to be doubling every single year at all. In fact, we're at a really good rate where we're getting incredible leverage in our auth centers given the work that they've been doing.

Next question comes from Ike Boruchow with Wells Fargo.

Two for me on the model. There's clearly a lot of different things going on from a mix perspective that are more volatile than normal. Your take rate normally takes a leg down sequentially for Q4. Can you kind of help us with how to think about that given what's going on with the model from a mix perspective?

And then on the marketing side, there was a very large uptick in marketing in Q4 last year. I know you guys were just starting to really reinvest because you saw the consumer demand coming back and supply coming back. How should we think about marketing? Is there a chance that dollars come down? Just kind of curious how to model that out given the compares that you're up against.

This is Matt. I'll hit a couple of pieces. Obviously, we're not going to start going down the path of giving all the components that would add up to guidance. But directionally with respect to take rate, you're right, there's an inverse correlation between AOV and take rate. And typically, AOV is at its high point in Q4. We had a really unusual Q2 this year with our highest-ever AOV. So I wouldn't say that's necessarily a likely outcome, but sequentially up is very likely. So you should expect to see take rate be somewhat down sequentially.

And with respect to marketing, I don't think you can look at 2020 as a guidepost for anything, frankly. But we know, obviously, what our intent is for marketing in this quarter, which reflects more typical seasonal investment levels, which means it will be up versus Q3, but not in a particularly significant way.

Next question comes from Simeon Siegel with BMO Capital Markets.

Sorry if I missed it. I know it's a little tougher, but any way to frame how some form of like-for-like ASP did just to try and neutralize the product mix. I'm basically just wondering if you guys have an opportunity to capture the benefit of broadly higher industry prices without absorbing most of the inflationary cost input. So just trying to think through how you think about prices if you exclude mix.

Sure. Yes. I'll take that. And Rati, feel free to jump in. Over time, there's an industry or kind of environmental component, but there's also an operational and execution story. So our like-for-like ASPs today are significantly higher than they were years ago, but that really ties back to our efforts over time to leverage technology to optimize pricing at an increasing granular level. The overlay in the environment is very favorable from a promotional perspective. And certainly, there's kind of a knock-on effect for us. I follow your train of thought and concur that, that makes sense. That to the extent that you see robust prices across the industry, that's true, there's no incremental cost to us to process, so ASP upside would be a pretty powerful lever throughout the P&L.

Okay. Great. And maybe could you elaborate at all on the comment, the vendor transactions to secure additional product in the holiday. Anything there worth flagging?

Go ahead, Rati. She's got vendor under her.

Yes. No. We don't see any. I mean, vendor is a driver for high value for us. So again, fine jewelry, watches, handbags, and we'll continue to see that trend for the holiday.

But because we have a really robust supply coming in from our consignor base, which we didn't have before, it's not going to be an unusual activity. It will just be business as normal.

And we've seen increase in that channel because of the purchases we are making during COVID. So we have inventory which is selling through, which has some impact until that inventory has been sold.

Great. Congrats on the progress. Matt, good luck on the next chapter. Rob and Caitlin, congrats on the new roles.

Next question comes from Erinn Murphy with Piper Sandler.

A couple for me. First, I wanted to go back to the neighborhood store conversation. You talked about 30% of supply coming from neighborhood stores today. What percent of your consignors in these retail stores are also buyers? And then I've got a follow-up.

It's actually 30% of new consignors are coming from our retail locations.

Of new consignors, I'm sorry, not supply. What percent of your overall supply comes from the retail locations then?

Yes. I'm sorry, we don't give out that number at this time.

Got it. Okay.

And on your question, how are the new consignors, are they becoming buyers like our old, like our current? Yes. So as you guys may recall, we do have a really great flywheel effect. We're over 50%, about 57% of our consignors end up being buyers. We're seeing that trend continue across our new consignor base.

Okay. Understood. And then a question for the CFOs. On ops and tech, that was better than expectations. Should we expect this type of leverage moving forward now that Phoenix is operational and Brisbane is rolling off? Or is there anything else we need to be mindful of, particularly in the fourth quarter as we round out our models on the ops and tech bucket there?

Tag team, Robert.

Yes. Well, one thing I would say, there were certainly some redundant costs in the move from California to Arizona that I think is largely behind us, and you should not continue to see that.

That's absolutely true. I think in the quarter, if you're looking back at Q3, OpEx in general, certainly inclusive of ops and tech, was somewhat lower than we expected, and that's largely due to the difficulties that everyone is experiencing hiring hourly labor. So we do expect to get caught up with our hiring. So in the near term, we would expect to see ops and tech go up somewhat sequentially and it's really around supporting our growth. But the fixed components of ops and tech, you should see very little growth going forward. So the leverage that you're seeing now is really just the beginning.

Next question comes from Marvin Fong with BTIG.

Fantastic. Most have been asked, but 2 if I could. So congratulations. It's great to hear that the at-home visits is above pre-COVID levels. I thought maybe we could just ask about some additional color like how, what's the mix now between at home versus virtual? Has the virtual channel kind of gone down quite a bit? Any color there would be great. And secondarily, just on the return rate, that improved yet again this quarter. Just curious if that's a function of the policy on handbags and jewelry or is there actual kind of like-for-like decrease in the return rate?

Yes. I can take that. At home, yes, has increased but mostly back to pre-COVID numbers like we mentioned. Virtual is still a component. I will say that our sales organization is becoming more efficient. I think that's where you're going with the virtual question. They have become more efficient, and that's driven out of our stores and our van pickup that we launched during COVID. So we feel good about their productivity.

Return rate, yes, slightly lower, and that's driven out of 2 things, the stores becoming a larger component as well as product mix. So those items that are not returnable like handbags growing in contribution.

So that's on a sequential basis. But on a year-over-year basis, returns are going up. And that's just reflective of how low they were in the middle of COVID. So they're starting to get closer to what they were historically. But to Rati's point, it's really just a function of category mix at this point.

Right. And they were an all-time low because people didn't need their help. So I mean, you can't really compare versus a year ago. We're still significantly better than we were in 2019 for returns, driven out of what Rati said.

Great. Congratulations and best of luck, Matt, on your next move and welcome aboard, Caitlin and Robert.

Next question comes from Michael McGovern with Bank of America.

Two, if I can. The first is just for the AOV in-store versus online. I think you've given some commentary on that in the past. And I was curious if you have any commentary this quarter or also if you could comment on like the AOV in neighborhood stores versus more legacy stores in urban markets?

So AOV in stores, we track average selling price. They are a bit higher or much higher in stores versus online. And that's driven, again, out of fine jewelry, watches and handbags. And I'm sorry, what was your second question?

Flagship versus the neighborhood.

We're not seeing any differences between neighborhood and flagship stores in product mix or value. They are driving the same amount of value on the demand side as well as the supply side.

I think in the past, the AOV in the stores was about 2x greater than what it is online, and I think that still holds.

Got it. And I was just, one more. I was curious if you have any commentary on like in-store GMV maybe in those core legacy stores from international travelers given the restrictions that were lifted today. I was curious if like you think there could be some pent-up demand from international travelers that are coming to say, New York and shopping for luxury goods?

We don't know. I mean, we weren't really driven that much. When we track international in the past, it's been, and the people in the stores, it's been a pretty small percentage. Hence, we weren't really impacted by having no international travel. I would say all of our stores, and Rati can give a little bit more commentary, all of our stores are, while we opened one right before shutdown in COVID. That was San Francisco. And Chicago, we opened up during COVID in October 2020. Every single flagship store, except San Francisco, is exceeding pre-COVID revenue and doing really well. San Francisco, in case you all haven't been there, has been a little slower to come back to life. So we're expecting that it does have a longer tail, but the neighborhood stores are also on fire. So the stores are, but they were never dependent on international. So if planes start, I know the ocean liners or the tourist ships or cruise ships are landing here. So we'll see. We'll see if they go to Union Square in San Francisco.

Next question comes from Anna Andreeva with Needham.

Great. And welcome to Robert and Caitlin. A couple of questions for us. And apologies if I missed this, I was hopping from another call. But in the past, you talked about approaching $100 in gross profit per order in the fourth quarter. Is that still the case? And I know pulling back on buyer incentives is a big part of the story here. So are incentives now back to '19 levels or do you think there is room to cut back a bit further there?

And then secondly, curious if you could talk about the Get Paid Now program. I know it's early days, but what has been the initial traction? How big do you think this could get for Real down the road? And how do you think about the working capital component of this new initiative?

So we did cover most of your first question earlier on, Anna. So I'll just reiterate very briefly. Yes, we would expect AOV to be up sequentially in Q4. Buyer incentives are back to pre-COVID levels and they're very steady. So you should expect a higher GP per order in Q4. With respect to Get Paid Now...

Sure. I can take Get Paid Now. We launched the program to our consignors and our sales team. It's going quite well. It's another offering to get high-value goods, but we still pay more on the consignor side. So when a consignor is offered both cash upfront and to sell via consignment, they usually go with a consignment offering because that's how they're earning more money. So it's a great way to bring someone in our door and get them interested in TRR, and then consignment usually what gets them converted.

The second part is just around working capital. And the answer, there's no impact really. This is a relatively small use of capital. So there's no meaningful impact.

Next question comes from Edward Yruma with KeyBanc Capital.

I guess, first, and I think this is more of a follow-up to Ike's question. As pricing of goods kind of continues to escalate and commensurate kind of the price in the secondary market as of late, is it your sense that you also have to chase and kind of pay more on the sourcing side from your consignors or are you able to kind of hold that steady? And then second, I know it's kind of early days, but any initial commentary from Mytheresa and maybe helping us dimensionalize how big this handbag program could be?

So I mean, I'll kick it over. Look, we don't buy a lot of things. So we don't really have any impact on the consignment side of our business. So for us, it's more about, do we have enough product flowing and so our shelves aren't empty. We have tons of product. Where inflationary forces are hitting us, which we mentioned at the beginning, are on our shipping costs. And we've offset that by last-mile diversification, shipping optimization and diversification of carriers. So we feel good about our shipping expenses, be able to keep those low going into the holiday and going forward. Even if they creep up, we have other methods we can employ.

Other than that, it really comes down to, we buy so much upfront for things like cardboard boxes that we don't have a real impact on our pick, pack and ship side on supply. So we're really untouched at this point. And how it impacts the consignors in theory and in practice, their things are going to sell faster. They've always sold fast with us. So we're always looking to give optimal prices in 90 days. But we have a healthy sell-through as we always do, which means they get paid faster. So it's, right now, we don't have the same issues that other retailers have.

On Mytheresa, early days, good press from both of us. Supply is coming in. They're smaller in the U.S., but it's still a good relationship. And we're happy we have it. So still early days, these things take a lot to get going.

Your last question comes from Lauren Schenk with Morgan Stanley.

You've got Nathan Feather on for Lauren. Understanding it's early, but on some of the new categories you've launched recently like sporting goods, collectibles and tech. If you could provide an update on what you're seeing there, very helpful. Is there any difference in the types of buyers you're attracting for those categories? And then, has it been more of a new buyer driver or more so helping increase revenue per buyer?

Yes, sure. This is Rati. I can take that question. Our new categories that we launched is in trading cards, collectibles as well as, yes, sporting goods are doing quite well. How we launched these categories is our consignors asked us to launch these categories. It's what's in their homes now. And they have this extra pieces that they wanted to also give to their luxury manager or drop off in stores. I will say, especially in the trading cards and collectible space, we're seeing quite healthy consignment as well as demand, so feeling really good about that. And I'd also say that they do skew more male in general.

Thanks, everyone, for joining us. In closing, we want to thank the entire team at The RealReal for their hard work and dedication for delivering the strong Q3 results. We want to thank Matt for his last call. He's doing a little happy dance. You can't see him.

But everybody's commitment to excellence helps drive our business forward every day. We now have over 24 million members. So thank you very much, members, who are joining us on this mission to extend the life of luxury and make fashion more sustainable. So thank you all and we'll be back in the new year, have a wonderful holiday. And just leave one final note, we are ready. So we're going to have a good one. Thanks so much, everybody.

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