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

Great. Thanks, and good afternoon. I'm Erinn Murphy, the senior research analyst at Piper covering the global fashion lifestyle brands, and it is my privilege to introduce our next fireside chat. With me on the Zoom stage, we have the RealReal management team with Founder and CEO, Julie Wainwright; CFO, Matt Gustke; as well as Paul Bieber, our Trustee Director of IR, who is now going behind the scenes. But thank you, Paul, for being here as well.

So Julie, I'd love to start with you. You guys had a nice pre-announcement yesterday afternoon after the market closed, just giving us an update on how the business has been trending over the last couple of months. I believe GMV was up over 100% and AOV is really record levels from what we've seen of late. So I'll start with you. What is driving the acceleration as the world reopens? And what were some of the positive surprises from a category perspective that led to where you're seeing the quarter-to-date trend thus far?

Well, we did talk about in Q1 in our Q1 release that we are starting to see the world slowly open. And certainly, in Q2, April and May, we saw New York midway through the month of May with the restrictions in terms of capacity restraints in the stores. We started going back in homes around mid-May. People are, I think, just generally getting vaccinated. We're feeling better overall. So the net -- the reason our GMV and our top line report was so positive is the products coming in, and that's driven primarily by people feeling more comfortable. We're getting a lot of units when we go into people's homes. Still not back to pre-COVID levels, but we're -- everything is starting to open up and we -- supply is flowing in. And when we have great supply, demand actually is right there with it. Now in terms of trends, we are seeing apparel pick up. And it's not a lag on the overall business. So apparel for the, first time, started mapping to our overall business growth. Shoes are still down versus -- I mean, I'm not quite sure what to think of that but...

Maybe up, up, but not up as much as the rest.

They're up. Right. Now they're up, but they're not as aggressive as -- right now, with [ Carl ] keeping that -- really keeping step with the business growth. So I would say it's general -- supply is flowing in from various sources, and therefore, the demand is there.

That's great to hear. And I mean, I guess, on the AOV side with it being I think you said $520 quarter-to-date, can you share a little bit more -- I mean, is it truly just -- I mean, it sounds like it's like the handbags and watches, which were a big piece of growth last year even during the pandemic. Is that still what's driving it? Or then in apparel, is it higher price point? I'm just curious on the mix of things.

No. The apparel is -- it is slightly higher than pre-COVID times, there's no doubt about that on apparel, but it's still fine jewelry, watches and handbags driving the high AOV. So we're still seeing that trend that we saw during COVID. That has not slacked off.

So I think the way I'd characterize it is like, like Julie said, those categories that have been strong for the duration of COVID, namely the higher-value categories, continued to perform well. But what's now happening is apparel is starting to come up and track the overall business. So you're not seeing a falloff in the high value. You're seeing an increase in the apparel, which is contributing to increasing units per transaction, getting closer to what they were on a pre-COVID basis. So we're kind of -- both pieces continue to work. So it's not like as apparel is coming up, the other stuff is falling off. So it's kind of compounding right now.

And when you think about -- yes, it's really good. And when we think about people going out again, they want to dress up. So apparel is the [ cat bag ] keeping pace. So obviously, we published the results just to let people know that, as predicted, as COVID restrictions ease and people get vaccinated, our business is doing as well as we indicated in April and May.

So -- and then maybe just to round out the conversation here before zooming out to some of the bigger-picture strategy is, historically, can you just remind us what the seasonality is within the second quarter? I want to say June maybe wasn't as, just from a dollar perspective, wasn't as strong historically as May. Does that change because people are getting vaccinated and people are wanting to move out? Or just help us think about that as we fine tune our models.

I mean we -- Erinn, we got to start, Erinn. We just don't know. I mean, June historically hasn't been as strong because people start going on vacation. Apparel would drive a lot of our summer sales. And before COVID, the apparel we sell in the summer is lower priced. It tends to be cottons and linens and lower priced -- a lot of contemporary lower-priced items, but we can't predict them. So we're -- and it's just better to look back at what happened in April and May at this point. And I would expect we'll -- we won't really know June until we get to July 1. How is that?

Fair enough. And then just on take rates, Matt, for you. I know historically, take rate has been inversely related to the AOV. So curious, is that -- I think Q1, you were at about 34.3%. Any changes to how we should be thinking about Q2, just given the strength of AOV?

The inverse correlation will continue. So the higher the AOV, you're going to -- all things equal, tend to see a lower take rate. More or less in lockstep, but it's not a one for one. Higher AOV does drop through incrementally slightly more dollars on a per-transaction basis. The wildcard is what does apparel do. So apparel is additive to AOV and is growing strongly. Those -- that category has a structurally much higher take rate. So it's like our take rate is purely a function of category mix. There have been no structural changes for quite a long time. So it's just as simple as whatever sells on a category basis determines our take rate.

And the women's apparel, I mean, Julie, to your point, it's really encouraging to see it track with the overall growth. So we're all dressing up again. So I like it. And so maybe just zooming out, Julie, for you, strategically, I mean, the pandemic, clearly a challenge for everyone's business, including RealReal's. But there were a lot of strategic pivots that as I feel like you guys need, whether it was accelerated neighborhood stores and just rethinking about different ways to procure supply. You might move to virtual. Can you just share some of the other pivots that you made? And just maybe give us an update on what you're seeing with some of those incremental tools you have that are helping you kind of source supply.

Sure. So we did make quite a few pivots and some of them are going to have long-lasting effects. So just to refresh people's memory, at this time last year, we were just coming out of about a 6-week complete lockdown in the State of California where we could not conduct business at all in our op centers. And it was very hard to gather supply. So again, in a supply-limited business, if you can't pick up supply, you're in trouble. Therefore, we immediately went to virtual appointments as fast as we could and trained our sales team, which allows us to have great contact with the consignor and then send the van to pick up the goods or sometimes our own LMs, our luxury managers, pick up the goods outside the person's home. So we're going to keep that as long as we need to keep it. There are many positives about that for people still getting more comfortable with returning to normal. The negatives are there are not as many units for pickup as if we go into your home, but it's still a really good tool for us to have. The other thing we did is we upped our focus on vendor, which is something we've always been opportunistic about, and it's always been a filler strategy and a lot of deals were coming our way. So we started doing more outreach, looking at what we could add to supplement our inventory, and we hired some new personnel there. That is going to continue to serve us. We don't know where it's going to shake out. It probably won't be as high as a percent as the products we get from people's homes and going to people's homes, but it's still another supply strategy for diversification. The neighborhood stores came a direct result for us wanting to get closer to the consignors. We looked at what was happening in our Madison store in New York, which is really our first neighborhood store. And even during crazy COVID times when that store reopened, we had a tremendous influx of supply and people standing in line wanting to shop because people couldn't just walk out their doors. So that just made sense for us to test a few more. And it looks like we're still in early learning mode, but it looks like it's going to be a net positive for the business. And the interesting thing about the neighborhood stores, so drawing in a younger generation, so a Gen Z that's really comfortable with popping in and dropping off. So that, again, will continue. So on the supply side, if you just look at it, we diversified the methods we have for getting supply and our whole goal from a consignment perspective is remove friction. And I feel like we're on a really good track there. From an operation side, we actually expedited our move into our Phoenix facility. That was something that we always needed to facilitate for growth. We could not find one in California that was large enough without a phenomenal disruption to the staff. Given that we were going to have to disrupt the staff anyway, we had located a facility in Phoenix during COVID times and we expedited our move. And the value of that, while short term, it's going to increase expenses as we overlap, it just actually has a net positive impact on our fixed costs and our team costs, our variable costs over time. So again, we knew we're going to have to move warehouses because we only have 240,000 square feet here in Brisbane, in our Perth Amboy warehouse. It was filling up quickly at 500,000 square foot. So moving that up allowed us to anticipate growth in the future and get our costs aligned so -- because we certainly have our eye on the path to profitability. Although so, needless to say, we are very, very busy. The team was agile, and it's -- I think we're starting to see the results of it now in April and May in the numbers we posted this morning.

Great. And maybe taking some of those comments, Julie, together. My question is for Matt on the path to profitability. I mean, historically, you've talked about getting to that $100 in gross profit per order. How does the recent results and really just the trajectory year-to-date, as you've seen the world reopen, how does that shape up like the when you could see that being a potential opportunity to get to that $100?

Sure. So let me just, I guess, disaggregate a little bit. So we were at $85 gross profit per order in Q1. If you went back to 2019, we're at $92. And really, the principal difference there was a higher level of buyer incentives that we were using in the fourth quarter into the first quarter of this year, and that has a tail. So that's $7 or $8 of elevated levels of buyer incentives that we're weaning off of. You'll see still a somewhat elevated level in April, but even in May, we're going to start to see that come down dramatically. So you're going to start to see that this quarter with gross profit per order going up. Of course, AOV being where it's at is helpful as well, right? And to the extent that we continue seeing elevated category mix in the higher price point goods, that can also contribute a few dollars of gross profit per order over the coming quarters. And the final piece that's of any substance is the progress we're making in various shipping expense-reduction projects. And I won't get into the details here, but suffice it to say, we have line of sight to a few sort of incremental steps that can get us a few dollars. So if all of those things hit exactly as they could, we could approach that $100 this year in Q4. But we put out officially Q4 of next year and that feels highly secure, but you're going to see substantial progress over the balance of this year.

That's great to hear. And then maybe for the at-home consignment appointments or in-home consignment appointments, Julie, I know you referenced in the release, you've been pleased with some of the consumer appetite to return to that. Can you share a little bit more about what you're seeing from a unit perspective? Are there certain regions where you're seeing better hits on the at-home consignment? And just curious on how you see that recovering in the mix of all of your supply.