The RealReal, Inc. (REAL) Earnings Call Transcript & Summary

Okay. Well, let me welcome everybody to the 24th Crédit Suisse Tech Conference. We're so glad to have you here. I'm Michael Binetti, a digital retail analyst. And we're so glad once again to welcome this year, The RealReal. In particular, I'm thrilled we have Julie Wainwright with us, CEO and Founder of the company. I know you're head down running the business every day. We're so glad you could step out and join us again this year, Julie. And of course, Matt Gustke, the CFO of the company; and Paul Bieber in Investor Relations. 2020, the pandemic has posed very, very unique challenges for this business model. The company has been playing on the balls of the feet all year, pivoting the business model to try and adapt to the COVID challenges. And it clearly hasn't been easy, but you guys have shown a lot of resiliency.

Let's get started. I want to start with the very latest here, if we can, the holiday business update you put out this morning. Julie, let me start with that. You put it out this morning, GMV was down 3% in November, slight improvement from down 5% in October. Talk to us about the month. And then in particular, you had some commentary on the 5-day holiday period.

Sure. I mean, look, overall, orders were up. So what you're seeing is our product mix. So we were happy to see orders up versus a year ago. The product mix was light right now in our fine jewelry and watch supply. So our average order size was down, but we had a lot of highlights in this quarter. I mean, in this month, we had more buyers than we've ever -- new buyers than we've ever had, more repeat buyers than we've ever had. So that's exciting. If I isolate just what happened between Thanksgiving by Friday and the following Saturday, we were actually up. We're up -- and Cyber Monday was not a big win for us, but we're also seeing a depletion of some of our inventory, as supply has been a challenge for us all year and continues to be so, although that -- even that improved in October and November. But it's been a challenging year, but all the signs of a healthy business, healthy demand are there. And we've been able to take our prices up because we have a healthy demand for -- especially for the high-value things. So we're not -- I mean, clearly, we would love to get back to growth, but we are in a pandemic. And so, well, we think we did really well considering the nature of our business.

And then I know you said when we last talked to you in November -- sorry, November 9, you had the perspective that October was down 5%. You had accelerating inbound supply, I think, in late October, that should have helped. You thought this quarter could have the flat GMV. The number one question we get from the buy-side community on here is when you think you can -- when do you think is a realistic time frame to return to sustainably positive GMV growth?

Honestly, it's all about the vaccination at this point. So the more we get normalized, the faster we'll get there. I'd like to say Q1, but who knows. I mean the truth is, we did show real order growth this month. We are seeing improving supply. The pandemic is still raging. So all of that -- we're just sort of at the -- we're pivoting as we speak, but hopefully, it will be Q1. I think it definitely will be 2021. The question is when.

And you said -- you mentioned some comments on supply. You did start seeing some improvement in October, but I think that that's been back and forth around your availability to get into the different avenues that you have to unlock that supply. I know we've seen some other places locking down again. Can you talk to us about what's the latest you're seeing on the inbound supply? And then you did mention watches and jewelry, maybe your thoughts on what's going on there?

Well, so we're getting -- prior to COVID, we got some of our supply from drop-offs in our stores and it was like high-teens. Most of that was from in-home pickup. Some people just put label some backs and send it to us and then we had some vendor. So we shifted fairly quickly. We upgraded our team for vendor, and we expect that to do better this year and next year to even be a bigger -- a double digit. It was between 5% and 7% historically. So we expect that to go into the low teens. Dropoffs are growing for us, and we expect that to continue drop-offs at our brick-and-mortar stores, which include our LCOs, our Luxury Consignment Offices. We have a new store test running in Palo Alto. It's a very small footprint, about 500, 600 SKUs and then Luxury Consignment Office in the back. In the first few days, it's only been opened 10 days, we had a tremendous amount of product being dropped off. So our goal is to introduce 10 to 12 of those new -- those smaller format stores in the next 6 to 8 months, and we'll monitor that. Expect our store supply then to go from high-teens to some part in the 20s. And then virtual appointments pretty much replaced in-home pickups, although we did start going back in-homes before COVID started surging. So virtual will also have a place for us as we move forward, that ultimately will be more efficient, but it's not going to replace us going into home for getting unit pickup supplies to -- we had a couple of 500 to 1,000 unit pickups when we went back into home. So really, when you just put this all together, we have new tools coming out of COVID. The shifts into more drop-offs and virtual will ultimately turn out to be more efficient, but more importantly, we're unlocking supply. So again, what we're seeing on the drop-off is getting back -- at the store drop-offs prior to COVID, 50% of the people dropping off had never consigned before. So we're starting to see more new consignors just drop off now at the brick-and-mortar stores, which has started -- really started in October. I don't know. It all looks good going forward, it all looks like we're going to have to keep dancing until the vaccination gets there. But there's a lot of good fundamentals we set in play at this year. And we wouldn't have -- necessarily have done virtual, and we wouldn't have tested a small footprint either without COVID. So I think we're coming out of it with some better tools.

I want to ask you about that in a minute, but you mentioned -- the demand side of it sounds like it's still pretty good. We had a couple of conversations this morning. Matt, in particular, you mentioned a few things about some of the demand metrics you look at, the speed and velocity through the network once you are getting product in. Maybe you could talk us through that, what keeps you optimistic on demand? What are the underlying drivers that we might not see in the financials that are telling you demand is still strong?

Sure. So I guess one thing that's important to keep in mind that we -- we're almost a 9-year-old company, we've never had a demand issue. So we have like an uninterrupted set of data that shows that when we bring products into the marketplace, they sell at a predictable velocity and a predictable price relative to MSRP. That hasn't changed at all during COVID. If anything, it's actually gotten a bit stronger. Some of the dynamics in primary have supported actually increased prices in certain pockets of resale. So we've been able to sustain velocity, roughly 1/3 to 40% of the products we bring in sell in the first 4 days, that goes up to about 60% sell-through in 30 days. That has held really steady prices on a like-for-like have gone up in most categories, and ready-to-wear hasn't held up quite as well, but that's held up reasonably well. And now as we've been reinvesting in marketing, we've seen traffic go up, member growth go up. And now we're starting to see an acceleration in buyer growth. We put out in the release this morning, our best new buyer month ever, 24% growth year-over-year. So that was really encouraging. Now the next order is to really get enough supply behind that increasing demand momentum. So we start to see that sustain and drive overall GMV growth.

That's interesting, 24%. That's a year-over-year number for the month of November, right? I think you really reported to trailing 12, okay. So Julie, I wanted to get back to one point you made earlier. What have you learned about the business model during COVID that better positions the company for the long term? I know you've had a couple of initiatives. What do you think are the most impactful ones?

Well, a couple of things. I think we accelerated our move into a bigger facility in Arizona, which ultimately is going to allow us to expand faster. We're expecting to expand faster, getting out of COVID, but it's also a more efficient way for us to work there for both the rent and the labor force. So we're excited about that, and we pulled the trigger on that a little quickly. Having virtual consignments, right now as a blended mix, it's still pretty small, but virtual is not going to go away. And that's going to make the sales team more efficient. Having store drop-offs and encouraging store drop-offs also not going to go away. We were doing it before, but not as aggressively. And that looks like a really good source of product for us. The area that I think we're going to see pent-up demand for is our meetings with our gemologists, which right now happened at our LCOs or our stores and they're happening behind plexiglass. So hopefully, once we get through -- get into a safer world, we'll get more fine jewelry and watches flowing. But we're walking away with making progress in our automation in our warehouse, opening another op center in a more efficient place and new tools for product acquisition that we wouldn't necessarily have tried. So all of those things together sort of bode well for getting product in faster and more efficiently down the road.

And you mentioned, I think, something before, I apologize if you did say it directly, but you mentioned something that there was something specific to the watches and jewelry category that's tougher for sourcing product directly given the situation in the pandemic?

Well, only because if you look at drop-offs or people sending in things directly, they don't tend to just drop off a couple of thousand dollars' worth of jewelry and walk away. They really want to sit down and have a consultation. And for us to have a virtual consultation, we have to almost, in most cases, have that item, although we can give virtual consultations in the home, and then you get the goods. You can't really assess the diamond quality from afar, but you can give estimates. So I would say just having the -- making it harder or making people -- or people being a little more uneasy with meeting people in our LCOs or in our stores to have a consultation has been a little harder for us to get in the fine jewelry and watch supply. But having said that, we have all the plexiglass, we have the hand sanitizers. We have no evidence of actually anyone contracting COVID, either in our op center or in our stores. But it's getting -- people -- it's still a nervous time, but that's almost over. I really think the vaccination, once that kicks in, I think it's -- we can see the light coming quickly. But I'd say that people are comfortable dropping off high-value handbags and apparel and really good sneakers. And so there's other goods that are flowing in that are really, really positive.

Yes. I guess, let me add to that. So it's not like jewelry and watches and all these categories aren't coming in. But what's been happening through most of COVID there's been elevated demand for those categories. So it has been selling through more rapidly, relatively speaking. So we actually need even more of that supply just to keep pace and keep it as a steady percent of the mix. It's harder to bend the curve and get more jewelry and more watch supply and more handbag supply for that matter in the current situation, where that in-person interaction is important. So it's growing, but just not fast enough to keep pace with the demand.

Interesting. Let me -- another question we get quite a bit is on competition for supply. Is -- do you feel like -- there's been some new competitors popping up. Obviously, you know who the old set is. Has there been any indications that there's increasing competition for supply that's impacting you at all?

No, not at all. I mean, look, our consignors don't want to do the work. And the peers that -- people that have popped up are peer to peer. And our consignors don't want to do the work. They're not going to sell -- sometimes selling their high-value items and going back and forth with customers and then shipping it themselves. That's not really what they're there. I think our biggest challenge, which is what it's in the past, but now more so is just inertia. So if you think of your homeschooling your kids and you're still working, and you're seeing some things pile up in your closet, piling things following up in your closet really isn't your top priority. But I have to say, the other thing is in the Bay Area, the only drop-off locate -- we really had 2 drop-off locations, both in San Francisco. Once we moved it to Palo Alto, we did unlock new supply right away. So it does show once we get within proximity of where our consignors are, they're going to take an action just because it's easy. So the key for us is to make it easy. We're not -- to our knowledge, we have no reasonably we're losing any competition for self-posting sites. And more importantly, if those sites are getting product, that's fine. There's billions of dollars trapped out there. So we're not really worried about that. We're more worried about how to make it easy to get our supply flowing again.

Got you. And I know that the Bay Area media really picked up on the opening and big crowds in Palo Alto a couple of weeks ago when you opened that location. It's hard for us to tell from the outside looking in if we see a line outside of store these days, whether it's because of the distance or there's actual demand. But you sound fairly happy with it. And I know you talked a lot about it on the third quarter call that you think that there's an opportunity to do some more of these small stores.

We do. I mean, we're not going to rush out and do a 100, but get it maybe 10 to 12 out next year, absolutely. Madison, our store in Madison has been a consistent success for the company. It's a much smaller footprint in SoHo, really big generator for supply, and the average unit sold there is also very high, sell smaller SKUs in that store, a smaller footprint, less cost to operate, and it's doing phenomenally well.

That's great.

So what we're aiming to learn, and we're actually hopeful that we will learn is by having a smaller footprint, and these are roughly 2,000 square feet. Relative to a full footprint store, a full-size store of about 10,000 square feet, about 20% of the size. We believe that we can get substantially more than 20% of the supply volume that a full-size store would do, perhaps more than half as much. So just from a cost per unit basis or cost per consignor acquisition, our stores as they are our portfolio are a more efficient method of acquiring consignors, both from an effective all-in cost per consignor acquired as well as the speed at which we acquire them such an accelerant and an efficiency play in our existing portfolio. And we think the mini stores could be incrementally more efficient because we're really just leaning on the supply side. And yes, there's a demand aspect to it, but it's really about unlocking efficiently and accelerating supply growth. So we've got one in a couple of weeks' worth of data, so it's not really enough to draw conclusion. But that's what we're going to be looking for as we roll out. And if we see more data points that kind of underscore that our hypothesis, then we would accelerate that rollout.

Matt, I know we talked about this, but I'll make it a jump ball question. On the virtual appointments, you've been testing those for a few months now. You've been hiring people directly into that. I think you've been optimizing around your in-home appointment model for a long time. So these are some new muscles you're developing. Tell us -- you sound like it will be a permanent part of the business going forward. But do you want it to be? What is the economic upside? And how long to get to it as you see the economic upside?

I'm going to let him talk to the economic upside. But from a consignment standpoint, we want to work the way they want to work. And virtual consignments don't work for large pickups and by large pickups, I mean 500 to 1,000, even a 100. Do they work for 10 to 20? Yes, but you're not going to go spend your whole day going through and like I've got a thousand things. And by the way, we get 1,000 items for home pickups. So they don't work there. And to me, it's just another way that another tool we have in working the way that consignor wants to work with us based on the quantity and quality of the product they have.

Yes. So if you think about prior to virtual, but we had in-home, and that was obviously very important and then we had a direct shipping model. In direct shipping, we get 5 to 7 units on average. When we went into home, we get somewhere between 15 and 20. And we had to make the distinction and make the call of what to encourage for any given consignor, where we had a like salesperson in their market. So of course, we don't want to go to pick up, so we're going to get 1 or 2 units, but there's some gray area of where does it make sense for us to encourage that in-home visit. I think that's where virtual longer term is going to fit in sort of filling out the spectrum in the middle and giving us a wider range of options to better fit the model both for the consignor and for us from a cost efficiency and a scalability perspective. In terms of when and how we see that leverage in productivity, it's speculative at this point. So I'd say, once we get to substantial growth and we're really filling up our salespeople's calendars to the point where they can't handle more volumes is when we'll start to see that. But conceptually, yes, I mean, that particular channel of virtual should be materially more scalable and productive than our folks going in-home in the order of 2x in terms of number of appointments that they could handle on a given day and will translate to roughly 2x the quantity of products. Because so far, what we've been seeing, it hasn't really changed throughout COVID is that we're still getting 15 to 20 items per consignment in virtual. We may be losing a item or 2, but it's nowhere near the delta between in-home and the direct shipping model.

Interesting. Now -- I guess you guys have talked through a bit of the bundle of the innovations and learnings you've had here. Let's step back to -- during the IPO, we laid out a path of where the business is going to go, what your thoughts were on the TAM and the GMV growth and the path to profitability. When you look at the bundle of innovations and learnings you've had during this period, some of these things are in your forecast, already. You just got -- you did a lot of the automation, perhaps a little faster. You've got a new distribution center coming. Some of them were not virtual appointment, small stores. Talk us through when we get back to the normal world and when we get back to GMV growing at the run rate that it was before, how do we think about the path to profitability? Are the new innovations and learnings you had, do they put us on a path to get there faster once we get back to that resumption of growth? Do they -- can we get to a lower GMV that will be breakeven for you because of the new learnings? Talk us through how you think about this as we come out the other side.

Sure. Of course, I'm not going to plant a new flag exactly when that looks like, it's tempting if that is. But I think you laid out the different aspects well and how we think about it, right? So most of what has been happening since the IPO and including the COVID period were baked into our assumptions and models. So I think there haven't really been negative surprises in terms of our ability to execute on the enablers of efficiency and scalability and leverage in the model. Automation is going very well. Sales scalability is going very well. Virtual is new. That could be some upside. All of the other above the line items, gross profit per order, which is a key enabler, we made good progress on that. So all of the conditions are sort of set up to let us benefit from scale. So the way I see it principally is we've moved further along the curve, we've got more experience, we're getting more efficient. So the risk of getting to breakeven on that relative that scale that you would have expected in your model, it's a lower risk assumption than it was at the time of the IPO. Could we get there slightly -- at a slightly lower level? Possibly, but I think let's get to growth first, and then we'll start talking about the timing.

Fair enough. Julie, I know you're excited to talk about this one. Let's talk about Gucci. You've got a growing number of brand partnerships. The Gucci one was really, really different, a little bit more prominent. How is the Gucci partnership coming along? Walk us through what you'd like that partnership to grow into?

So early days still. We just launched on October 1. And Gucci took a different standpoint. First of all, it's the single largest brand we've ever had worked with us in the resale environment. So that was a big win. I mean they're one of the biggest luxury brands in the world, right behind Louis Vuitton, Hermès and they may even surpass Chanel, I don't know where they are. But in our list of desirability, they were #1 or #2 for a long time, both for men and women. So important partnership for us, important for the industry, set a note to the industry because they didn't just say resell is important. They also said you should buy resell goods. And they put a store in our store where we sold Gucci items that they had in their inventory previously owned or from their warehouse. So they really embraced it. To me, that is a big signal for other brands. It sends a signal for sustainability because for Gucci, this is all about sustainability. And we're off to a really good start in that partnership. We do provide them with interim data. It's all indexed. Everything is up in a positive way in a crazy time. So we feel good about that. As far as where it goes, hopefully, we will continue to get more Kering brands. The Kering umbrella has some amazing brands underneath it and work with them. Hopefully, we'll attract other brand groups. I can tell you already it attracted the luxury brand groups in the U.S. and the luxury content programs, where we're working on programs to work with them, and we've got other initiatives going. So it sends a big signal to the market, sends a signal to buyers and to sellers, the potential consignors to let people know that, Hey, consigning is a really good thing and it sends a message to the brand. So it's really an all-win. I mean it's weird that it's happened in COVID times, but everything is weird now. So it's a good message all the way around. And it's a good message for us because we are working with them exclusively.

Certainly. Let me ask you about stores. So let's go back to this for a minute. You have the 5 full-size stores. You opened in Chicago in October, looks great. But you introduced a new smaller format store in the third quarter call. We saw Palo Alto. We talked about it a little bit ago. Just how does this change your prioritization as far as you think of your presence in the real-world between your large-format stores, your LCOs and your small-format stores as you look out? Is there -- does this replace the priority that you had in your mind for the 12,000 -- 10,000, 12,000 foot stores?

It might. We just don't know yet. It certainly might. So we'll see how well we do. Look, the stores are really important for branding. There's an intangible there. They've moved -- in aggregate, they can move the AOV of the company up because you tend to sell higher priced items in the brick-and-mortar stores. And as we mentioned before, they're even more important for supply. So all of those things are really important. The key for us is do we need 10,000 or 12,000 square foot stores in other cities? Or is 2,400, maybe even 3,000 fine to accomplish those goals? So I don't think we know enough yet. I would say our meaning is more small stores in the immediate and watch the larger stores.

Okay. Let's talk about the B2B, the vendor sales increased a lot during COVID. I think you said it was up 65% year-on-year in the third quarter. I think you gave another number on that this morning as well. I know it's a small base of sales but that's a big growth rate. Is this a onetime business for the brand? Do you seem to think it can be bigger next year? Is it -- talk to me about the longevity of it and why you see it being a bigger business? What opened your eyes to it that you hadn't imagined before?

We had a lot of vendors come to us that said they wanted us to work with them because their inventory was trapped. And so we realized that we have a bigger opportunity to work, not just in overstock but with vendors who really were challenged during COVID times. So the product that we picked up tended not to be overstock, it never made it to the marketplace. We think that's going to continue. So we did upgrade the team. We put a renewed focus on it, and it's not going to be the majority of our business or in the single largest category, but we think we should -- it should more than double next year and get it in the high-teens. And it makes sense. You always use vendor more strategic, like we need more this or that or an opportunity fell in our lap. But now we're going to be more strategic about it.

And all the supply effectively is incremental. And as we talked about at the beginning, our demand -- I won't say our demand is unlimited, but like demand is healthy and robust to absorb, certainly, the current level of supply we have. So if you think about going from 5% of the business to 15% to 20%, that's 10 to 15 points of incremental supply that should sell through at healthy rates, and we can support strong growth going forward.

And I know we talked a lot about fashion because we're primarily a fashion company, but we also got a lot of home companies come to us saying, we have product, and we expect that to continue, although home sales, I think, are up substantially. But we do have a broad range of products that we can take and it just makes sense to invest more in that channel.

Let me ask you on the -- on automation. What's the state of it? You sounded like you were feeling pretty good that you're at or even ahead of pace on a few of the key initiatives. What's the current state of it? What's more left to cover on automation?

Yes. Yes. So I think at the end of the third quarter, we were right around 75% in our kind of core 3 automation projects, pricing, copywriting and the retouching of photos. And we had aimed to get to that by the end of this year. So about a quarter ahead. We continue to make progress. We're higher than the 75% now. We thought, frankly, at the beginning of this year that that's right around where we're going to level out. We found some additional unlocks. We can push that into the 80-plus percent range, sort of a deeper penetration in those 3 than we thought at the beginning of the year and then coming into COVID. And then we're going to start putting some energy against moving into some other efforts that are going to help with, yes, productivity but also quality. And so if you think about things like investing in technology to support authentication, that's going to help both with quality and efficiency. Work that we're starting to do in price optimization, we started with automation. So now we're using the same data to build algorithms to see where we can potentially extract more ASP for those products using smarter technology, et cetera. So there's a series of other things that we can do that are going to support both automation and efficiency gains as well as kind of expanding our basket size.

And if you had to rank order -- I know we're running up against the clock here. And if you had to rank order those as far as your priorities for what you really most want to invest in for next year as we start to come back out of COVID, how would you rank order those?

Anything that helps us scale supply is number one, frankly. That's number one, two and three. Supply, supply, supply...

Yes, supply, which is brick-and-mortar stores. It's that -- as we didn't talk about it, we have enhanced our buy upfront program to a small degree. It's buy upfront. It's...

It's mainly virtual.

It's mainly virtual. Watch, we're a lot better than we were a few weeks ago or even a few months ago. So it's that -- it's -- and working on our sales funnel and our funnel on the consignor funnel on the website to optimize that. So we've got -- it's turning our buyers into consignors.

Mini stores. It's like that's a...

Yes. We've got a long list, but it's all about supply, supply, supply.

Got you. And I think we're up on time here for this meeting. So I'm going to thank you guys for your time. And you've got a couple of more meetings here the rest of the day for everybody listening. I'm here if anybody wants to follow up. Thank you, Julie, Matt. Paul, I know you didn't get to hear from you. Paul is here, too. I think everybody knows him. Wish you guys the best through the holiday.

Thank you so much.

Same to you, Michael. Thank you.

Thank you so much.

Thanks.