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

Revolutionizing resale and the new life cycle of luxury goods. We're thrilled to have The RealReal here: Matt Gustke, CFO; and Paul Bieber, Head of Investor Relations and Capital Markets at The RealReal. RealReal is a leader in luxury resale. At Cowen, we believe in RealReal's long-term growth prospects which will drive higher shareholder value. It currently trades at EV to sales of 2x versus a historic average of 4x, and our price target of $29 implies an ETR over 70%. Matt Gustke has served as RealReal's CFO since April 2013. Prior to joining The RealReal, Matt served as the CFO and Head of Strategy at StubHub, an online ticket exchange company and subsidiary of eBay. Paul Bieber has served as RealReal's Head of IR since January 2019. And prior to joining The RealReal, Mr. Bieber was a Director at Credit Suisse from 2016 to 2018, where he covered e-commerce and online travel. Thank you so much, Matt and Paul, for being here.

Thanks, Oliver. Good to be here.

So kicking it off, going straight into talking a little bit about guidance. Based on encouraging results you've seen in April and easier comparisons, GMV guidance for the second quarter implies flat sequential growth. We think this could be conservative at Cowen. What could drive either upside or downside relative to your guidance?

Yes. Maybe I'll just put it into a little bit of context. So the -- what we did in Q1 from a GMV perspective was up 46% versus the 2 year ago period Q1 of '19. And as we indicated at our earnings call a few weeks ago, we're tracking ahead of that year-over-2-year growth through the point of earnings. We're seeing an acceleration from that. Comparing against 2020 is a little messy. But versus '19, it's a little bit normalized. So that would indicate, yes, the guidance at the time was conservative and still is. And it's reflective of the uncertainty around the balance of the quarter in June. June and -- the months of June and July are historically soft. So I don't know, and no one really does, what the world looks like as COVID normalizes and people come back to life. So we've embedded pretty -- more-than-average seasonality heading into the summer. So I think the guidance should be considered very secure. And if we see just typical seasonality or a muted seasonality, given the underlying trends in the business with opening neighborhood stores, getting back into people's homes to pick up consignment and general sort of enthusiasm for getting back to normal coming out of COVID, that would prove to be conservative.

Matt, supply gathering is a key core competency of The RealReal. And it's been more challenged during COVID, but you're beginning to see a recovery. What do you think we should know about with New York, L.A. markets? They were close to 40% of supply pre-COVID.

Yes. I mean, at this point, all of our markets are back to growth, inclusive of New York and L.A. New York is a little bit ahead. So I think you're -- as you were mentioning, you're back in New York and a lot of people are now, and New York is coming back to life. So geographically speaking, our supply trends are all back into steady strong growth. From a channel perspective, we're encouraged by coming out of COVID with a more diversified set of supply acquisition vehicles. In particular, the neighborhood store rollout is proving to be a meaningful contributor. More than 30% of our new consignors are coming from the small network of stores we have today. About 7 of those neighborhood stores are open currently, another 6 by the end of July. So the trends there are quite good. We began reintroducing in-home consignment, which prior to COVID was about half of our overall supply. Very -- our above-average consignments have come from in-home, typically 16 to 18 units per pickup. Since we started reintroducing it in March, we're hovering around 30 units per pickup, which, to us, just points to a lot of pent-up supply that was underserved or unserved during COVID. We still have a long way to go, however. So we're nowhere near 50% of supply from in-home, but it's a progressive rollout. In March, it was a test. In April, it was available nationwide but without us really pushing it. In May, we started again defaulting to it in the consignment experience. We're actually actively encouraging consignors to do that. Most recently, it was about 10% of our consignments and a little bit more than double that in terms of supply but sort of climbing. And the trajectory is quite good. So overall, encouraged by supply across each of the different components, whether it's geographic or method.

Thanks for that. It's encouraging to see that innovation take hold. Paul and Matt, what about the competitive landscape? Resale adoption has been increasing, and competition for coveted supply is going higher. What about RealReal's general competitive positioning like sneakers, handbags, jewelry? It is competitive to get that supply.

Yes. They're all a little bit different. So I think still, I think the most intense competition that we're observing but not experiencing is in the more self-service segment of resale, eBay and all the various derivatives they're in. We still sit pretty -- in a very differentiated position being multi-category in full service. To the places where we do see some competition, to your point, are they tend to be single category marketplaces, whether they have handbags or watches or sneakers. There's not so much -- actually, there's not a much of a well-functioning secondary marketplace for jewelry. So we kind of -- we have a unique position there. In sneakers, we're not the leader. We never have been. That's an animal [indiscernible] and I think that's becoming increasingly competitive. We have a nice business. It's small. It doesn't really move the needle. It's growing well. But we haven't had to do anything to our take rates across any of the categories in response to any competitive pressure. We benefit from being -- operating in all the categories that we do. So we can differentiate our take rate structure to remain competitive across price points and categories. So jewelry is going very well. Handbags has been actually an outstanding category through the duration of COVID and continues the demand both in primary and resale. And as a result, resale are at historic levels. And the average selling prices that we see across those categories is increasing as -- tracking the increases in the primary market as well. So we like our competitive positioning, and we like the momentum in the business.

Matt, your largest category currently is women's apparel. How do you think this category mix may evolve? And what are some financial implications on average order values, take rates, UPTs that we should be aware of as people go out more? And...

Nobody really knows. You're right. The categories that have been seeing strength through the past year or so have not been apparel. It's been bags and jewelry, watches, et cetera. Those categories continue to do -- perform very well, but we have seen a return to growth in women's apparel. It's actually growing quite strongly now, but the bar for it to mix back up is very high given the sustained strong demand for the other categories. I don't know where it's going to normalize out. But to your point, I would expect that as people look forward to a return to the workplace, to events, et cetera, that there will be a very nice period of strong apparel growth. To the extent that it does happen, when it's going to -- all things equal, it's going -- they're lower-priced goods. That would push down AOV, push uptake rates more or less one for one. But to the extent we see sustained strong supply and demand in the high-value categories than what you would just see is your units per transaction, or UPT, tick up and would actually push AOV higher over time. That's what we're seeing now. This quarter is our all-time record AOV, and I would never have predicted that a second quarter for us would be the high watermark for AOV. But just pointing to now you have all of our categories kind of growing strongly and UPT beginning to converge with like historic norms, but average selling prices are higher.

Wow, that's impressive. So what might be limiting the upside in terms of growth? Like will supply be a factor? Because we're seeing like better-than-expected consumer trends, and it's not necessarily as easy to flip on supply in the context of this model.

But that's -- yes, that's forever the constraints to growth in supply. But we're happy with how supply is going right now and again, having more ways to secure the supply. And it derisks and diversifies the strategy. The tailwinds from coming out of COVID are encouraging. Every one of the stores that we've opened without an exception are performing at or above our internal expectations. So I think we have the right strategies in place to benefit from a return to like normal society.

Yes. Matt, what about new customers, new relative to existing customers? Could you speak to engaging the existing and retaining new and nuances in strategies there as during the crisis, it was a great time to acquire new customers as well?

Yes. We weren't as much of a beneficiary of that during COVID with -- given how limited our supply had been. This is a broken record in a lot of respects. But as supply goes, so do cohorts go. Their -- our repeat base of buyers goes up in lockstep with an increase in supply, and it's also an accelerant for new buyer growth. So what we've seen during COVID from a cohort perspective is that all of our cohorts suffered. It was not just the new ones who were doing less than historical ones. All of them went down. But it's early days. But as of the first quarter, all of those cohorts have returned and are now back higher than they were pre-COVID, both the new and the existing ones. So that's inherently a benefit to our model of having a very high contribution from our repeating buyers in the mid-80% of GMV range. And that sort of moved up slowly over time. So I think your question is more specifically around marketing for new and existing. Product is the marketing for new and existing, but our advertising strategies can attract what we're trying to achieve, always trying to strike the balance between filling the top of the funnel and increasing the member base that we can then convert into buyers and consignors over time versus more real-time acquiring new customers and consignors in the period. So you'll see us always trying to strike that balance. But what I would say beyond what we do with our advertising strategy, which is, as you know, is for now has been a little bit more focused on TV advertising, and that continues to be the case. We've got some new ads coming out now that are really kind of playing on the return-to-fun theme. But beyond that, the stores are a powerful marketing vehicle. Still, about half of the consignors and buyers in the store are new to The RealReal, and those buyers and consignors are above average value to the company.

Thank you for that. Would also love to talk about path to profitability. $100 of gross profit per order is a key breakpoint. We're modeling less for FY '22. What are key drivers to get to this level? And then the leverage points, it would be great for you to highlight in terms of reaching this.

Sure. So we -- our gross profit per order, and that is the best metric for us to kind of track our progress to profitability, at least on the top line because it normalizes for different margin structures and consignment versus direct, we were at $85 in the first quarter of this year per order. And that compared to $92 full year 2019. The delta between $85 and $92 is entirely an elevated use of buyer incentives that we needed to use as a tactic coming out of 2020 into the beginning of 2021. That's sort of trailing off now. So we're kind of at a more normalized level of programs and incentives. So you start to see the benefit of that this quarter and more or less a full quarter benefit of it in the third quarter. So you'll get, call it, $7 of gross profit per order improvement by getting back to normalized levels of incentives. So that would take you back to the roughly $92 level. And the remaining roughly $8 is going to come from -- largely from a combination of shipping expense improvements and elevated average order value without an offset in take rate percent, so higher take dollars on the back of continuing strength in category mix but also through price optimization work that we have been doing for quite a while. As you're well aware, the vast majority, more than 80% of our products are algorithmically priced. But that is kind of level 1 as a kind of a -- think of it as like a product level or a model level, by getting more granular and getting down to a taxon level of colors, condition, that sort of stuff. As our data set grows and gets richer, we can start to tune the algorithm to become more sophisticated and eke out a couple more dollars per product on average. So you can get a few dollars trickling through from average order value. And in the shipping side, it's a series of initiatives. But the simplistic way to think about it is having fewer distribution centers from which we're fulfilling. And the fewer nodes that we have in the network, the fewer number of packages we need to ship per order. So we've consolidated our 2 warehouses in New Jersey to have only 1 of them as a fulfillment center, and that's done. So we're starting to realize that. And then later this year, we'll open our Arizona facility, and then we'll be closing down our Bay Area facilities. So we'll just have 2 nodes in the network and then some other initiatives. So there's $3 or $4 of run rate on a shipping basis. And then there's a small amount that you get from just leveraging scale there. So most of those pieces should be in place by the end of the year, and like there's some variability in the different components of it. But we should be approaching that $100 target by the end of this year.

On your comment, Matt, the level of incentives going down in the $7, what will be factors to that? Are you seeing that happen now? Should we be concerned about the risk factor around needing incentives in the year ahead?

As long as supply flows, it takes all the pressure off of using incentives. So if you think about the experience that I'm sure you had for most of last year, if you're coming to the site regularly, you're just not seeing an abundance of fresh supply. So if you're seeing the same things over and over again, we had to use incentives to get you to buy something that you may be more interested in the first time around. But as supply replenished, and we kind of hit the milestone in January where the total value supply in the marketplace was back to flat year-over-year and now it's growing, so that -- there's a direct relationship between needing to use that as a tactic and supply overall. So that's the simplistic view. And then the other portion where we do use incentives is whenever we're opening stores. So we'll incentivize people to come in and consign and drop off for the first time, and we'll give them a site credit they can use to purchase. So it's technically still a buyer incentive but is directed at consignors. And that's short term in nature. So we do it in advance of and just to support a store opening. Those -- all the stores will be open by the end of July, and then we'll kind of take a pause.

Another really exciting thing has been the vendor channel. This channel has been growing rapidly as you see more brands also growing DTC. What role and percentage of total might the vendor channel have for RealReal? You've done a great job expanding this quickly.

Yes. I mean, it was opportunistic during COVID. That was the easiest supply to get our hands on. And so it's at a higher level than it was pre-COVID. In the past, we've talked that we could see that channel getting to 15% to 20% of total GMV. To be clear, that's not an explicit goal. That's just more directional where we saw the opportunities. It's still -- the vendor channel is still growing its contribution of GMV, but we might not get there, right? It's -- so we're going to be very disciplined about -- particularly if we're using capital to procure supply. We're going to be very disciplined about the products that we're bringing in, making sure that they are good products that add to the vibrancy of the marketplace. But more importantly, they meet our margin requirements. So we turned down the vast majority of deals that come in front of us because they're not additive to gross profit per order. So to the extent that the deals meet those criteria, good products, good margin, we'll execute on them. If not, no big deal.

Yes. Thank you for that. So this is a question we're asking all attendees on supply chain. So as the retail ecosystem continues to transform, what do you view as your top supply chain priorities at The RealReal?

Yes. I mean, our business is a little bit unique. So for us, supply chain is really about procuring supply efficiently and then transportation logistics. So we're obviously not getting products directly from manufacturers. So our supply chain is around making sure that we have the right balance of volume, quality of supply at the right cost structure. So that's mixing the different sales channels that we have. So in-home is really effective for getting high-quality, high-volume supply. But it's more expensive than some of our other sales channels. So having a healthy mix across the channels benefits us from a unit economic perspective. And on the transportation side, we've got a great team that's focused on finding another few dollars of shipping expense leverage and has a series of initiatives that are going to continue to help us continue to make progress there. And that's above and beyond just negotiating better deals with our carriers over time. And that's still available to us in the future. But there's a lot of work we can do to decrease cost while improving the experience for consignors and buyers.

You've also been a leader in ESG. How do you think about your ESG priorities in the context of demand creation? As you know, Cowen believes that many new customers are much more attuned to environmental and social issues.

Yes. Our buyers and consignors tell us, without being prompted, that buying sustainably is important to them, and participating in resale from a supply perspective is important to them to keep goods in circulation. And that's been a pillar of the business since day 1. And that now really dovetails nicely with secular trends. To your point, our largest group of new buyers and sellers are a younger demographic, millennial and Gen Z, for whom these factors are of critical importance. They're like decision-making criteria for people. So we're set up nicely just kind of structurally based on what our business is, but we do much more than that. We have a comprehensive ESG program that Paul is at the center of, where we are enhancing our policies, procedures and governance to align with evolving standards, getting scores across multiple rating agencies that are quite good for our company. I think we're ahead of the curve for a company of our stage of development, but we're going to continue trying to be on the forefront there. And then we also announced that we had previously a goal to become carbon neutral this year. We actually achieved that a year early in 2020. So all the pieces are in place for us to build on and be a thought and -- thought leader as well as just an overall leader in the circular economy.

Paul, what would you say is least well appreciated in terms of what you've achieved from an ESG perspective?

That's a good question. From -- externally, a lot of people, they defer to rating agencies or they do their own work in terms of ESG. But internally, we've really put in a lot of process and infrastructure for ESG. And you don't necessarily see that externally. For example, we have a sustainability task force that is a cross-functional team where people come up with ideas to really drive sustainable outcomes and -- sustainable outcomes in the business but also tactical opportunities that are good for the actual business. And Matt kind of alluded to one, which is lowering the amount of split shipments in terms of our packages. And that's something that from an ESG perspective, it really is a positive because it lowers the number of last-mile deliveries, but it's also very good for the business. So we're very focused internally, cross-functionally to drive sustainable outcomes, and you don't necessarily see it from the outside. But we're embedding both sustainability, D&I and a number of other things throughout the organization. And it's something that we're very focused on. And it's -- ESG and this whole effort to be more sustainable is really -- it's a journey. And even though we've made a lot of progress and we think we are a thought leader, there's still a lot of work to do. And we continue to do that work.

Thanks for that. Matt, final question. So I thought I'd be working with you forever, and we have been on a great journey here with The RealReal. Why are you leaving the company? And why did you choose the current timing for this?

Yes. So I'm not going anywhere anytime soon. But by the time I leave, I will have been about 9 years in the company and 9 years as the CFO. And that's a long time for anyone in the CFO seat. It's not always an easy job. So the timing is consistent with the conversations I've been having with Julie, predating even our IPO. So this is actually a little bit later than what we had talked about. But COVID happened, right? So that is not a good time to be selfish and think about my personal journey. So we needed to stabilize the business and kind of come out of that and like have a good, strong trajectory where everything is up and to the right. And we're marching toward profitability, strong and sustainable growth. And that's where we're at. So this seemed like actually the best time to announce a future transition as opposed to the opposite of leaving when things are troubling, right? So this was timed to be a nonevent in terms of what I'm going -- I'm not going anywhere next. I'm going to take, I believe, a well-earned rest and recovery period.

Well, thanks for your time, Matt and Paul. It's been great to learn more about it and all the innovation that's happening. And I've been a big personal customer of The RealReal for many, many years. So excited to have you here. Thank you.

Yes. Thanks, Oliver. Thanks, everyone.

Thanks for having us, Oliver.