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

Hello. I'm Caitlin Howe, Vice President of Investor Relations at The RealReal. I want to thank you for your time and interest in the company, both those here today with us in our authentication center in Phoenix, Arizona as well as people joining us virtually via live webcast. On behalf of the leadership team, welcome to The RealReal's 2022 Investor Day. I'm confident today's presentation will give you a better understanding of our business, our deep competitive moat and our long-range financial targets, which we refer to as Vision 2025. As we move through the day, we look forward to highlighting the ways in which we continue to innovate and use proprietary technology, enabling us to improve unit economics, scale the business and drive higher ASPs. We are also excited to introduce you to a broader group of the highly talented management team here at The RealReal. Now, before we begin, I would like to remind you that during today's presentation, 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. Please read the full safe harbor statement in the presentation materials, which are available on our Investor Relations website. Allow me to take a moment to review today's agenda. So first, Julie Wainwright, our CEO, Founder and Chair of the Board, will provide an update on our business, competitive landscape and strategy, including sustainability, which is at the core of our mission and business model. Following Julie, you will hear from our President, Rati Levesque and her team in marketing, operations and technology. She and her team will provide an update on the pillars of our supply and lead generation strategy, our operational excellence and continuous improvement along with the progress our technology team is making in authentication and dynamic pricing algorithms. Today, you will also hear from Robert Julian, our CFO, as he drills down into our cost base, elucidates our path to profitability and defines our targets for Vision 2025. Finally, we'll open the floor for a question-and-answer session. Now, it is my distinct pleasure to turn it over to Julie Wainwright, Chief Executive Officer of The RealReal.

I need the clicker. Yes, that's good. I really don't need notes, but I decided to bring some in case I forget to the -- get the right accolades to some of our employees. So I started The RealReal -- gosh, the idea came to me in November of 2010, when I was shopping with a girlfriend. And I knew I wanted to get back in commerce, and I knew I wanted to get into a business that Amazon couldn't replicate. And I was really going to -- I had all these -- I've worked with different people. I had all these matrices. I had no ideas, none. And I'm like, no -- and I did have luxury as an area they couldn't do. And then I also had organic -- anyway, a lot of -- a long list, but nothing was really great. And then I shopped with a girlfriend, who went into a full-price boutique that had a little bit of consignment in the back that she called the Vault. And this is a well-known person, who is a self-made multimillionaire, and she spent all her money in the Vault, all in the preowned. And when we walked out of the store, I asked her what just happened because I've known her for years, and we chop together and never sell her buy consignment. And I said, "You just bought consignment." She said, "No. Maybe. Who cares? Here's what I got, I got a great deal on Louis Vuitton, Prada. Gucci, who cares about the price? And they're in beautiful condition, and it's a beautiful store, and I trust the owner." And I said, "Would you ever walk into a consignment store?" She said, "Never." I said, "Would you ever shop on eBay?" She said, "No, there's too many fakes. I don't want to go back and forth with people. I don't want that." I said, "But you will buy these products." She said, "I just did". So all of a sudden, I knew, I knew without a doubt, that was actually an amazing opportunity. And the first thing I did was really do a deep dive into the luxury space to understand actually how much luxury product is sold in worldwide and in the U.S. every year, and I was actually shocked at the amount of product. I went through my own closet of things that I thought that could be consigned. I've never consigned before. I had 60 over 5 years, 60. That was shocking, just sitting there. I tried consigning. I consigned in my local consignment store. I took things, but then you had to take your jewelry to pawn broker, took my things to a pawn broker, which, by the way, I didn't sell, but it gave me the creep. So -- but I wanted to see the process because that's how you sold fine jewelry than previously, on fine jewelry. I called up art dealers that I bought some art from before and said, "I'd like to sell my art," and they'd go, "Okay, you were not here." So I'm like, "Okay, so consignment store, fine, but it moves slowly. Pawned up for jewelry, horrible." I posted on eBay, nightmare. I'm like, "Okay, this is the opportunity." So that was the end of November. By March, I had formed a company, raised some seed and actually had gone back to the store owner, who was a former tech person, to say, "Do you want to collaborate with this with me? You have really good knowledge and you understand also the brands?" it was a high-end boutique. She said, "Oh, sure, let's meet. The first time I can meet is May." Well, by then, I had money, I had a name. I had my first employee, and I didn't really need to talk to her. So that was the genesis. And I can say, it was always -- the interesting thing about this business, I always knew we're going to take possession. I always knew we were going to authenticate because we want to trust for the consumer. We didn't want to sell fakes. I always knew that we couldn't break the romance of the brand. I always knew we needed people going to your house because it's too much work to consign. What I didn't know, and you're going to hear about a lot today, is the power of our technology, how it would change our operations. And at that time, the other light bulb -- there's two other light bulbs that went on, I didn't realize how bad fashion was for the planet. And how recirculating goods was such a net positive that it's not only a business that can be an amazing business, it's really, really good for the planet. That took about two years for me to get knowledge because the industry doesn't want you to know that, obviously. There's no benefit in telling people that every second, a truckload of trash goes into a landfill. And it's all previously owned goods. So I didn't understand that. And the other thing is, I didn't understand the power of retail as it would be to amplify our brand, both from getting product in and also other benefits because we were an online business only, and we still primarily are, by a long shot, an online business. But we ran our first pop-up in SoHo, those years ago. It was remarkable how it transformed people's perception of the brand and what it did for supply. We weren't even set up for supply then. We were like, "Wait, you want to consign? Wait, this is -- we're just striving to talk -- introduce you the brand." But they wanted to consign. So with all of that as a preamble, which I didn't say yesterday, and Catlin made me tell you, I'm going to jump into the presentation. And here's -- just set your -- some key numbers. But the only numbers, I think, are like really, really important for you to focus on. Most of it, you know, the 25 million members, why is that important? You're going to see it in Orr's presentation that we are -- those members are the gift that keep on giving. Even if they joined in 2012, they're getting activated much later. Now -- so things -- you have to become a member, member is a key marketing device for them. He'll walk you through, and the cohorts are incredible, 84% from repeat revenue from repeat buyers. Guess what? It's pretty much the same number from consignors. This allows us to continue to grow without spending tons of money to get to new to show that repeat rate. So really important and speaks to satisfaction with the brand, also. Now, when I first started out, and we hear a little bit of this, and we actually have one of our early investors, still a shareholder, in the room. No one believed how big the TAM was. All right. Part of that is I was -- and we still are in the land of Silicon Valley, where people thought luxury was a Tesla, which is fine, that's fine. But it's also, these luxury brands are huge. And when we -- we paid outside research to quantify, and they looked at, on average, people keep things about 5 years. So this is sort of the 5-year mark of what's built up in the U.S., a product that could be resold. So it's about $200 billion worldwide, it's much, much bigger. So we expect it's going to keep going because what happens is, especially once we get in the cycle of consigning, you consign you buy new, you consign you buy new. So you get that going. But the luxury market, historically, has been the market that's come back first during the recession. It's actually a vibrant market. It's alive and well. We -- The RealReal was the first one to address this market the way we do. We are the leader. So -- and -- what's happened is, resale is becoming more mainstream. I really believe we had a big hand in changing -- and we still do, going forward, changing people's perception because when we introduced our site, we did it and we made it relevant, and we made it cool to buy resell. Now, we had other secular trends that we'll talk about, that have actually aided us and will aid the entire resell market. One is, the fact that we sell a unique product that's highly covetable. Secondly, it is really good for the planet. And millennials and Gen Z are hyper aware of that. So all of these things are working in our favor for this resell market. And then, you're going to hear a lot of people talk about this, and I'm going to get redundant. We have a phenomenal moat around our business. A lot of it's data and technology. No one has the data and technology we have. Our category breadth is an asset, it's a huge asset than a single-category focus. Orr's is going to go into the [ Firewheel ]. I'm going to give you a little sneak peek of it, but you might have seen it, originally. But the buyer becoming consignor, consignor becoming buyer adds stickiness and decreases the back on a regular basis. And then you go through full service. Key for our consignors, we do all the work, they get paid. We sell things really quickly. It's a high-service, high-touch very good business that is hard, hard to replicate and then our members. And then the authenticators, amazing team, a lot of knowledge, what you saw today in the [indiscernible], their own knowledge, our own historical knowledge has been put into AI machine learning, so we can have the experts on the most difficult ones, the highest value and do a first pass with the [ computers ]. We're not quite there, but our goal is to get 40% of handbags there by the end of the year, and that technology can be expanded. Worldwide, huge market. This is just more on the data, goes into sustainability. Now, let me just say, not until about 5 years ago, did we see a shift in consumer buying, where sustainabilities become important. And we started talking about it about 6, 6.5 years ago, but we survey our customers on an annual basis, and we survey -- we do a national survey on an annual basis to -- that transcends our business. The attitude started changing about 5 years ago. And now we're actually getting almost a full tilt, where people really do understand resell is really good for the planet, and it's a key -- it's the second most important reason why they buy resell. I have to tell you price is still #1, at least for our customers. Price is #1, but a strong #2 and a reinforcer is sustainability, and that's why they also consign. We have, I think, a really good mission and a really good vision. I'll let you read the in the mission, but our vision is, we know we have a platform now to effect change and a positive change. And we're using our voice and our platform to influence laws while we influence consumer attitudes. So we do have a small team dedicated to helping change the laws, which would reward anyone, if they bought resell and to bring it to the forefront of, actually, general consumer that resell should be part of your mix, and it's really good for your planet. So we're working on a bigger platform now. And our vision is to make this just so acceptable, you don't even think about it. It's just one of your buying decisions. And if we replace just one purchase with the resell purchase, the planet is going to be better off. So we're really taking this very seriously and have started lobbying about -- oh gosh, I would say it's probably 15 months ago, but we're really kicking it up in high gear, now that COVID's receded. Which leads me to ESG. It's really part of our culture. We're concerned about the environment. We're concerned about having a diverse employee base. I think, when you walked out that you sell, we have a fairly diverse employee base. We have a diverse management team, and we have a diverse board. So we take ESG very seriously. And that's, again, part of core who we are as part of our pillars and that we do have a diverse board member. So I don't know if you all know, California passed a law that said you had to have x number of women. Well, first of all, just to go on the record, I don't like quotas. I thought that was ridiculous. They're not even enforcing it. So if you get around -- I love talented people that can add value. And guess what, a lot of them happen to be women. So our Board has been diverse, and it's a great board. It's a working Board. They were selected for their expertise, whether it's luxury, with [ care and cats ], whether it's technical, with Jim Miller, Rob Cole, PayPal -- CFO at Yelp. So public market experience, we've got Carol Mountain, who really understands Washington, did Investor Relations in D.C., Carita Coleman, high-tech HR executive for years, adds a level of understanding growth and also diversity. So it's an amazing Board that actually checks out the boxes. And the same thing with the team. Now, the team -- the only person on this slide that's not in the room, and this isn't our complete exec team, is Samantha. And yesterday, I was doing rehearsal, I forgot she's not here, everyone else is here. Michael walked the op center with you. So many of you met Michael, we're having Chris present. But let me just tell you about what we look at for, when we talk about our people. We really want an entrepreneurial mindset because we are still full of innovation, and we really want people to embrace an entrepreneurial mindset. However, we need people that know how to scale. And those combinations are really, really powerful, and they're harder to get. We also need a team that understands collaboration and a commitment to excellence, and they're deep in their functional area. The last thing that's really important and almost -- and everyone on the exec team has it, and a lot of people on the floor have it, they have to be passionate about our vision. So passion is important because what we're doing is changing the planet in a really good way. So I can say that this team represents that. You're going to hear from them. There are more executive heads back at corporate, but we wanted to bring these people forward for this meeting. And I think you're going to enjoy hearing from them. Competition. Really, guys, this is a nice chart, and it says a lot, but our biggest competition is getting people to think about consigning. So it's doing nothing. Over 40% of our consignors are first-time consignors. So once we get people thinking that they should consign, they tend to keep consigning. And then on a list, I mean, really, to be honest, our biggest competitor after doing nothing is brick-and-mortar stores because they make it easy, drop off. We have brick-and-mortar stores. Auction houses, they serve a really good purpose. So they're in the mix, but they're not broad, and we pay better, but they also can sell $100 million, $150 million items, we can't. So there's some overlap there. You didn't -- you aren't going to see any peer to peer in this market because our consignors don't sell post their luxury goods. That's not our competition at all. Flywheel. I'm just moving right along, so we have a lot to cover. Flywheel, really important buyers becoming consignors, consignors becoming buyers. This is where we were. I think this is the annual number. And yes, it is. This is the annual number, and/or we will go into more detail, but this is really integral to the success of the business. Now, Robert is going to spend a lot of time on this, but I can tell you the entire company is built as bought into profitable growth. And having Robert as a leader in the finance area and then working bottoms up with the exec team, we're all very excited about it. And it's -- I don't want to say it's pretty simple, but we just have to keep growing. You have to grow at least 30% a year. That seems highly doable, given the fact we're less than 2% penetrated. 84% of our growth is going to come from installed base. We have a lot of opportunity to grow. When we say drive operational excellence, it's leveraging technology to get our variable costs receiving just sort of a good, healthy decrease every year, nothing extraordinary. So actually, getting some efficiencies out of our variable costs and then holding our fixed cost fixed. Those are the 3 key pillars for everything the whole team is signed up for, and everyone is focused on a clear path to profitability that makes sense and actually celebrates the growth of the company without doing anything dramatic. So get a little -- a little redundant on some of these things. I just want to say, we're a large, large TAM, and we're at the beginning of recognizing our value in that TAM. So given the fact where we are in the U.S. alone, it's [ $200 billion ], we have a long, long way to go in the U.S. alone, and we will be, primarily, a domestic company until we get to good cash flow positive. We created the market. We're the leader, but it's an emerging market. So it's a baby. It's still a baby market, and we have a huge competitive moat around our business. So I expect many people to try to come in this space. And the market is so big, there's room for a lot of people to come in. But no one can replicate what we have across every category and full service without spending, probably, at this point, 5x or 6x more than we have. And we're so far ahead. We're really the ones to be -- and people know it, which doesn't mean that there aren't opportunities to build a nice-size business everywhere because it's a huge, huge space. So with that, I think it's time for me to turn it over to Rati.

Hi, everyone. Thanks, Julie. I know. I'll try not to trip up here. Nice to see everyone. Excited -- the team and I are very excited to talk to you about what we've been working on Really quickly, I'm Rati Levesque. I'm the President here at TRR. I joined Julie almost 11 years ago this year, and it's been, I'll say, an awesome ride ever since. We're going to get into it. So again, the team and I are really excited to talk to you a little bit about what we stand for, who we are, and how we are leveraging cost over the next 3 years. We're going to talk to you about a few different areas, and you're going to hear from the functional leaders or CMO, Orr. We're going to hear from our world-class data science and machine learning team. You guys saw some great work out there. And he's going to talk to you about some of our patent technology, [ Vision and Shield ], that we've created in-house. We're also going to talk to you about pricing automation, when I think about our moats, it's our world-class sales team in the home, specifically, sales team that really is our most valuable channel. It's operations. We're a single-SKU business. So across our entire network, we're moving around millions of items. And that's really important because they're all single SKU. So we had to build technology to make sure that we're doing that very efficiently. So we're going to talk to you a little bit about that. We're going to double-click into who our experts are, gemologists, and how we plan to scale that over the next 3 years. And then with the marketing piece, I will say one thing about that, and Orr is going to get into it. We're a data-driven company, and this is a performance-driven marketing team. And you'll see that in his results. This means lower acquisition costs, and this means higher retention rates. So with that, I'm going to talk a little bit about supply. We haven't touched on that in our facility yet, but this really is, I will say, our secret sauce. This is our in-home sales team, where it's our field sales team. There'll be almost 900 people by the end of the year. That includes our total sales network, not just our in-home. In-home is about 50% of that. And these people are optimized to bring in the best product at the best sell-through. So they're making these relationships with these sellers. They come from a variety of backgrounds. They do have sales experience. And if they don't, we'll teach them, we have a pretty robust training cohort that lasts about 3 weeks that show them what the best sales tactics are. A lot of them come with black books, their own black books. They have a lot of these connections for sellers. They're bringing in $4 million to $5 million a year, each one of these luxury managers. So this is a really important piece to bringing in the best product, the most valuable product for us in our facilities, and then operations takes it from there. And again, there -- they're optimized on sell-through. So we know what sells through on the merchandising side. We -- and I'm sure you've heard this in the tour, 80% of our product sells within 90 days. And this sales team is optimized to bring in that product. And then the last thing I'll say about this team is also that they -- we are seeing an increase in efficiency. So COVID, there was a little bit of a silver lining for us with COVID, and that was that we introduced new challenges. Virtual was one of them. We had a van-network pickup product. And then there's also our retail locations, which we invested in over the last couple of years. So all of these channels helped productivity, something that we measure on the sales side is how many items is a luxury bringing -- a luxury manager bringing in per day per person. And we've managed to increase that about 15% over the last couple of years because of introducing these new channels, and we see efficiencies to optimize that even further. Our second most valuable channel is brick-and-mortar. We did make an investment here, especially during COVID. We did that on purpose. We saw -- Julie talked about when we opened our first store in SoHo, that store continues to drive new sellers. So a lot of people think about our stores as selling demand, which is important. We see a higher average selling price in these stores. But they really are aggregators of supply for us. They're bringing in a lot of high-value products. They're meeting with fine jewelry experts. They're meeting with watchmakers, handbag experts to bring in that product. And it really is a trust builder for us, credibility on what our condition standards look like and so forth. So what we see with these stores is a halo effect. 30% of our new sellers come from these locations. We also see a halo effect of a GMV lift of about 11%. And customers who shop with stores, spend 30% more on an annual basis. And then we obviously see fewer returns as well. So when I think about our sales network, I think about in-home being, again, our secret sauce, really important piece to that puzzle, stores is our second. And then we also have a more of a self-service channel, where -- what we call inside sales, where someone can put items in a box and send an item directly to us. But those 3 components are the main areas for supply. Next, we're going to talk to you a little bit about marketing, but I'm going to have Orr do that.

Good morning, everyone. My name is Orr Shakked, and I am the CMO at The RealReal. And I'm so happy to be talking to you today about our marketing. I'm responsible for customer and consignor acquisition for growth for retention and for [ kind of ] experience and brand and communications. And before The RealReal, I had leadership in performance marketing team at Shutterfly and at TripAdvisor and at Expedia. So our marketing is highly efficient and getting more efficient every year. We're able to acquire new customers at costs that keep on going down, and our retention is high and growing. And the way we calculate our buyer acquisition cost is, we take our entire marketing cost to acquire both consignors and buyers, and we divide it by the number of new buyers that we acquire. So we fully load our marketing cost on the buyer side of the marketplace. And our LTVs for customers are going up, and that creates an ever-improving lifetime value, LTV ratio, to buyer acquisition cost that reduces the payback time to a mere few months and allows us to keep investing. And as Julie mentioned, we have a really strong flywheel in our business that makes sure that we have high growth on both sides of the marketplace. So our one-of-a-kind, highly coveted inventory that you saw in our authentication center out there, combined with personalization, leads to really high engagement from customers. So 50% of our communications are personalized, and we leverage algorithms that we developed in-house to match the right product with the right customer, using signals from search, from site behavior and from purchase to find those right products for the right customers. And on the acquisition side, we are very performance and data driven. As Rati mentioned, we operate in a diverse set of channels, and we use sophisticated models, analytical models that help us make the best investment decisions, time and leading performance marketing teams at large-scale international companies for many years. And I can tell you that some of the channel gains that we are seeing, are the best I've ever seen. And I joined The RealReal because I really saw the large opportunity out there. So our active customer list is growing at a very, very high rate, and that's due to high retention and significant growth in new customers. And we are really successful at growing purchases from all cohorts of customers, not just the most recent one. And I really love this chart because you can see that we have significant growth in each and every cohort here, even ones -- 7 years or more ago. And Julie mentioned, that's really, really strong and shows a really great strength in our business. And we see similar patterns on the consignor side as well, with significant growth and high participation rate from all cohorts. So one of the key assets we have and Julie mentioned, it is this 25 million member list that we have, that keeps growing, and we're really good at engaging them and converting them into customers and consignors, over time. And that's, in fact, one of the ways that we're getting more effective and more efficient with our marketing. So who are those buyers and consignors in our marketplace? Well, they're predominantly female, although our male segment is fairly large at 23% of buyers and 19% of consignors, and they [ skew ] younger and more affluent. And you may be surprised that they [ skew ] younger, given the luxury market that they do. They do [ skew ] younger. And to give you a sense of how fluent they are, about 25% of U.S. households are making $75,000 or more per year, but they represent 67% of our customers and 73% of our consignors. Our approach to the secondary luxury marketplace is unique. We do all the work for consignors. And our model is preferred by both customers and consignors, and satisfaction rates show that. Our NPS is really strong, really high on both sides of our marketplace and is on par with some of the most beloved brands out there, and it's much higher than other companies in the space. And I want to end with a few notes about engagement. People are obsessed with The RealReal. Customers visit the site 127x per year on average and spend over 40 hours on the site. Consignors are even more engaged, spending -- coming to the site 214x and spending 43 hours on the site. And I just thought that these last few slides, hopefully demonstrated how strong our business is, how sticky it is, and how much growth there is in it. And with that, I want to thank you and hand it over to Jessica, our SVP of Operations.

All right. Good morning. Hi. I'm Jessica Fortier, the Senior Vice President, Head of Operations, overseeing our end-to-end supply chain, including logistics, authentication and client services. I joined The RealReal in 2021. And prior to that, I was an executive of Supply Chain and Strategy at Gap Inc., where I had experience in omnistores, e-commerce, logistics and contact centers. So we, at The RealReal, have built and operate the largest full-service luxury resell platform in the world. And this model is both highly customized, complex and differentiated to offer our unique assortment, service, quality and value at scale. And we continue to build on the suite of advantages. As you've heard from Rati, as we've grown, we have diversified our supply acquisition channels. We've complemented our luxury consignment offices and in-home sales appointments with omnichannel, virtual and self-service supply channels, including 19 retail stores for drop-off, virtual sales appointments and self-service options, including UPS drop-offs and pickups and pickup by The RealReal's own van network in dense markets. This segmented model helps us cost effectively grow supply, market to new clients and consolidate supplies movement to our authentication centers, which includes over -- includes millions of items a year. All of our supply is authenticated in our 4 authentication centers, strategically located across the U.S. near supply centers, expert talent and logistics hubs in New Jersey and here in Arizona. Our authentication centers are the engine of our business. While a luxury manufacturer may know it's a handful of brands, we are experts at authenticating hundreds of categories and over 12,000 brands. And as we manage this complexity with quality at enormous scale, we authenticate and list for sale over 25,000 unique items a day, up more than 2x from 2019. And we handle millions of unique items a year for distribution to our stores or e-commerce centers. I'd like to double-click, for a moment, into the intricacies and complexities and innovation of our authentication and listing processes. So every item must be individually unpacked, logged and undergo initial vetting for acceptance standards, some of you saw today. Based on item characteristics, items are routed to the right experts for final authentication and attribution capture, including measurements, fabric, carat weight and so on. Each item must be expertly photographed to meet basic brand standards and retouched. And finally, it undergoes copywriting, pricing and listening to our website across 12,000 brands and millions of items a year. Truly, this simply would not be possible with speed and quality at scale, without our custom operating platform powered by our substantial data sets and investment in data science and automation. So luxury, authentication at scale is The RealReal's core differentiator. We employ hundreds of experts across all of our categories and are one of the largest U.S. employers of gemologists and watchmakers. But this expert talent is in high demand, and so to enable us to deliver at scale and quality, we've embedded these authentication operations with data science and AI and proprietary authentication tools. In the last year, we co-developed a proprietary gemological authentication device with the University of Arizona that helps deliver a 20% productivity improvement among the specialized talent base, while maintaining authentication accuracy. Rachel and Chris will also provide further insights into our authentication automation. So in addition to being able to be the most trusted luxury resell marketplace, our authentication operations have kept over 100,000 fix off the market to date. Next, within our operations, item authentication and listing processes are our largest cost base and where we have made our greatest operational investments for quality, throughput and productivity. Today, 80% of items go through auto listing processes, which includes photo retouching, copywriting and pricing. This has delivered up to 5 days saved in time to site. It's double team throughput and contributed to 7% cost savings since 2019, within our warehouse. Physical handling automation, as some of you saw, remains a major opportunity ahead. But as I've mentioned, we have previously distorted into the opportunities in authentication, pricing in other places that have given us the greatest ROI. Our operating model provides differentiated service at scale. As Rati mentioned, we leverage a multichannel sales model, supported by luxury client services team. Beyond our sales channel segmentation, we provide differentiated service for our new consignors, who are less familiar with our model and are our most loyal consignors. Increasingly, our clients are able to self-serve or interact with automated luxury sales and service support. And this model is working. Today, 30% of new consignors are from our retail channel, more than 1/4 of supply is generated from self-service methods, and self-service has helped improve our shipping economics 40% since 2019. So before I move on to my final slide, I just want to take a slight detour here for a moment and mention that it's this mission and this model and the fact that we're building something new in a new category that really drew me to The RealReal. It's single SKU, it's sale at scale, on top of this inventory stewardship, not inventory ownership and authentication, it hasn't been done before. And these are new problems, and that's exciting to me. But it's not -- it wasn't enough to be the thing that finally sold me on joining The RealReal because there's plenty of companies out there that are solving new problems, albeit maybe not in a new category. So what differentiated The RealReal for me is our people and our culture. And we built a team and an ethos that is built to execute and to innovate day in and day out. We're data driven, we're flexible, as you saw out there in the production floor. We have the ability to make improvements to our model every day, even while we're scaling. And that's not like big companies. I don't have to wait weeks or months to see those improvements take hold. We identify and roll them out in days or weeks, and they make meaningful differences in days and weeks. We can pivot to new business needs on the same day. And that combination of new problems and that culture that's primed to address those problems in real time, is really the winning combination for me here at The RealReal. So I'll share some of these examples. In terms of what we have ahead, we have to maintain our leadership in authentication at scale. So those of you who are on the tour today, and you'll hear a little bit more from Rachel and Chris, we will continue to invest in authentication automation that enables our authenticators at all levels to accurately authenticate items. We're further accurately authenticate items with the assistance of automation, and this will also enable them to be both more productive as well as to enable us to leverage some of our more junior talent to do that authentication. In addition, we need to continue to grow the business through expert talent, both homegrown as well as externally sourced. So we're continuing to invest in building ourselves as an employer of choice for this expert talent. In service, we're further segmenting our services with specialized support for our highest-volume consignors and personalized, AI-enabled virtual interactions. And finally, we're reducing our operating costs through leveraging our fixed costs and deploying further engineered processes and automation across our end-to-end operations. This includes densifying our warehouses, simplifying and automating physical inventory handling and ongoing automation of item processing. We're on track to deliver multi-digit unit cost improvements over the next 3 years and also improve time to site by several days. So in summary, our custom operating platform is built to manage our unique and complex business at scale, and we have a strong roadmap towards profitability. And now, I'll hand it over to Rachel and Chris to walk you through more on authentication automation.

Hi. My name is Rachel Vaisman. I'm our Vice President of Merchandising Operations. I've held a variety of roles with the company over the last 10 years. And prior to that, I was on the merchandising side at luxury brands such as Gucci and Christian Dior. I'm here with my colleague, Chris Brossman, and he's going to do a deeper dive for you in some of the newer technology that we're using in our automation process. So today, in order to keep counterfeit items out of our marketplace, we employ expert authenticators. That's a specialized workforce. So whenever we think about automation, we always focus here. We've made a lot of progress over the last 2 years. As Jess mentioned, over 80% of our items are automatically copywritten, priced and retouched, and this new automation is going to allow us to realize further operational efficiencies. And now, I will hand it over to Chris to do a deeper dive.

Thanks, Rachel. Everyone, I'm Vice President of Machine Learning and Data Engineering here at The RealReal. I've been at The RealReal since 2018. And since then, we've implemented a number of high-impact solutions automating our inbound process, using AI and ML, prior to The RealReal [indiscernible] data at [ Liza ]. The mission for my team is to create the best experience for buyers and sellers while enabling profitability at scale. We do this by augmenting and enhancing our workforce by building best-in-class AI and ML solutions. We saw some of the toughest problems. Both innovations, I'll discuss today, will support decreasing costs significantly over time. The first innovation is the [ Shield ] model. [ Shield ] is our intelligent routing solution and kicks in right after receiving on the inbound process. Prior to Shield, we just had simple heuristics, just two rules to determine which items will be reviewed by our expert authenticators. As a result, our experts reviewed lots of items, even the items that were more obviously authentic, and we thought we could do better. So to optimize on this design, we need to identify cohorts of items with higher [ fake ] concentrations to send for review. And to identify these cohorts, we need more data inputs than the two we've had, historically. Luckily, The RealReal, through its operations, has authenticity data on a lot of items in its 10-year history, and we're able to connect this data set with a 360-degree view of the consignors buying and selling history. No one else has a data set like this. Utilizing this data set, we're able to build [ Shield ], which can more accurately estimate the risk of a consigned item and use it for routing. It's already making a big impact on ops efficiency and keeping incremental fakes off the market. Our second innovation, I think as you've seen on the tour this morning, is [ Vision ]. [ Vision ] attempts to achieve the accuracy of an expert authenticator, which is no easy task. It's able to do this because there is image data of the actual product in hand to estimate the items risk. To bring [ Vision ] to life, we implemented custom image capture at scale, collecting multiple images of each handbag in areas which have historically been rejected, based on authenticity. In the past year, we've built up a database of over 80,000 items with over 1 million total images. Using this data, we've built a highly accurate model, released on just a few designers today, but plan to scale out to most of our high-risk handbags by the end of this year. I want to note that both innovations I discussed today, are not static. They're dynamic. So as bad actors generate new counterfeit items, these models will take in those features and learn how to keep incremental fakes off the market. Now, while others may try to replicate a similar approach, they will struggle for 4 key reasons. The first is, they don't have the internal knowledge that The RealReal has about how to authenticate products. They don't have the data that we've collected over the past 10 years to make value out of it, nor the image data we've harvested over the last year. They don't have systems in place to catalog this data, but then also operationally handle, each day, tens of thousand of items today. And without those foundational elements and our algorithms we built on top, they don't have a 0-to-1 fully-automated solution using AI. But let's just say for a moment, if they had all those things, will they still couldn't replicate our approach because as of last week, we've submitted this technology for patent review, and it's currently patent pending. So it's super exciting. We'll be submitting the rest of the tech that we've innovated over the past 3.5 years for patent review as well. Been a great year. Passing back to Rachel to highlight what's next.

Thank you, Chris. So to summarize, we're going to continue to roll out [ Shield ] and [ Vision ] on to more of our supply, like sneakers and clothing. And by the end of this year, 40% of items of our handbag supply will be authenticated using [ Vision ]. And again, that's going to allow us to realize further operational efficiencies and allow us to continue keeping counterfeit items out of our marketplace to ensure we remain the leaders in the authenticated resell space. And now, we have some more automation from Courtney on pricing.

Thank you, Rachel. Thank you, Chris. Good morning. My name is Courtney Casabat, I am thrilled to be here today. I've been with The RealReal for 5 years, and I currently oversee the pricing and planning divisions underneath the merchandising umbrella. Previous to The RealReal, I have held various leadership roles at Macy's, ModCloth and Banana Republic across both e-comm and brick-and-mortar. So I'm excited to walk through how we price. So our pricing philosophy. So at The RealReal, we are committed to selling at the highest price the market will allow. Our strategy is to have the right price at the right time for our buyers and our sellers. As you've heard, all of our items are very unique. They're all one of a kind. And that created a very interesting problem for us, early on. So early on, we knew we needed to create our own internal smart pricing algorithms. These algorithms are -- use real-time data, and it results in 60% of our items selling within the first 30 days. So we are selling fast, and we are selling at the highest price the market will allow. This is a win not only for our consignors but for The RealReal as well. So our marketplace is very dynamic. It is always changing. And we know, in order to keep up and be competitive and continue to have the highest prices, we need to continue to optimize our models and do continuous testing. So I'm going to walk you through how that works. So we have built proprietary technology, utilizing our 10 years of historical data that you've heard about a couple of times today and the fact that we've sold millions of items. So we have a huge moat, like Julie and Orr and Rati talked about, around our business, and these things make it -- make pricing very powerful for us. And so we partnered with our data science team, in order to build a model that can scale and iterate over time and it is always fresh and up to date. So some of the inputs into our model are things like item attributes. So these are things like pattern, color, print, silhouette. We also have market demand, and elasticity is built into our model. So in this example behind me, you can see with our continuous testing and some of the enhancements we've made, this item now sells for 10% higher than it would have previously. When you sell millions of items a year, this is going to have a pretty meaningful impact on our top line and bottom line. And we are very, very encouraged by these results. So by the end of the year, we're going to be rolling out these enhancements to 60% of our supply. So in summary, our dynamic pricing scales, and it continues to give us leverage from a top-line and bottom-line standpoint as we maximize our selling prices. So thank you for your time today, and I'm going to pass it back over to Rati.

Thanks, Courtney. Yes. So I'm not going to be too repetitive here. You guys are going to break for a few minutes, and then I'll hand it over to our CFO, Robert, to talk a little bit about Vision 2025. But I do want you all to hear, this team, you heard about -- you've heard from all the functional leaders here, and they are really focused on profitable growth. You mentioned Julie talk about that, and we're going to get into Vision 2025, continuing our growth, 30-plus percent, leveraging our fixed and variable costs. We made some investments on the [ FIC ] side that we don't need to make anymore. So we're excited to double-click into that after the break. Thanks so much. [Break]

We're getting the count down from the back. And the reason we're starting on time not to on your time, but we're all getting hungry up here. So we want to -- we've got both things operating. So with that...

Welcome back everybody. Congratulations. You've made it to the last formal presentation of the day before we take Q&A. And I would like to start initially just by saying thank you. Thank you to everybody, who is participating in our Investor Day today, whether you're participating virtually through our live webcast. And especially, I want to thank the people who came here today, who joined us at our authentication center here in Phoenix. And you were all rewarded [Audio Gap] with the opportunity to tour our authentication center, and I've had so much positive feedback since we did that about how valuable that was and how that really [Audio Gap] helped illuminate our business and our business model and what makes us unique, and people were really impressed by that. Catlin and I have talked about, perhaps, because it's so valuable, maybe we'll try to do something similar on the East Coast for folks in New York and the Atlantic seaboard that didn't have an opportunity to join us here today to maybe do the same there, which I just think would be incredibly valuable. So thank you all for being here and for your attention and your participation. So before I begin, I will introduce myself. Everybody gave a little bit about their background. I'll give an abbreviated version of my background because it spans more than 35 years, which just means I'm really old. But the vast majority of my career, actually, was quite different than this business. It was an industrial manufacturing. I spent most of my career working in distribution centers, warehouses, factories, in the automotive industry, in the aerospace industry, specialty materials, that sort of thing. And so my background in specialty, really, was cost accounting, financial planning and analysis, supply chain accounting, eventually became merchants and acquisitions and corporate development but really, a much more industrial sort of background. And then after that, this is my fourth public-company CFO job and working backwards. My most recent experience was at a traditional brick-and-mortar retailer. It was actually becoming more focused on e-commerce and an omnichannel strategy, sort of the opposite of our situation here at The RealReal, brick-and-mortar going into e-commerce. Prior to that, I was the CFO of a very famous global brand in the consumer product space in the golf industry. And my very first public-company CFO job was at an industrial manufacturing company, which shouldn't surprise anybody in the automotive space in specialty materials. And at the beginning, Julie said she was encouraged to share a little bit about why she started the company. I've been encouraged to share, sort of, the background and history of the previous 3 public companies that I was CFO at. So at the risk of sounding immodest, if you look at those last 3 companies, where I was a public company CFO, you do see some common patterns. One, all of them grew very, very quickly in the time that I was there, tremendous top-line growth. All of them saw improved margins and profitability during that time, and all of them saw tremendous shareholder wealth generated in the form of higher share price. And so Julie jokes it, "That's why you're here." And I also -- I, sort of, attribute it to something else, too. And I hope that I did have a hand in the success and many contributions to the success of those 3 companies. But I also attribute it to something else. I attribute it to an ability to pick the right companies, to recognize companies that are at an inflection point and have the opportunity to have that sort of success and to create that sort of value. And so I guess, I could joke right back. That's why I'm here. So that's a little bit about my background. So let me get into my presentation. So I'm Robert Julian, the CFO of the RealReal. I've been here about 6 months, so new kid on the block, I suppose. Although during that time, I've really thoroughly immersed myself in the business, I've visited our authentication center here and on the East Coast. I've visited in many, many of our stores, flagship stores in neighborhood stores. I spent a lot of time with Julie and Rati and the whole management team, really learning the business. So I think, maybe based on hours worked, I think I'm pretty much up to my 1-year anniversary, even though I've really only been here half a year. And so I do still get a lot of questions from analysts and from shareholders, some common questions that I'll address initially. People ask me, what attracted me to the company? Why did I choose The RealReal? People ask me, what are my initial observations of the business? And very often, I'll get asked, have you been surprised by anything? And so my answer is to all 3 of those, there's a lot of commonality in my answer. So what attracted me to the business initially and when I learned about The RealReal in the business model, my first reaction was, that is a really smart and clever business. There is clearly a market here that is being unserved, there's tremendous potential. There's a huge moat around the business. And I remember, thinking Julie started this business, I remember, thinking, "Man, I wish I had thought of that. That was really smart." The second thing that attracted me to the business and maybe certainly, one of the most important things of that -- the most important thing was that people I would be working with. And so initially, when I was going through the interview process, I met Julie and spent time with her. I met Rati and a few of the other executives. And I was just so inspired. I was just so inspired, and I so much wanted to work with these people, really smart and engaged and committed and motivated. And also, frankly, folks who, I felt, shared my values, my personal values. And I just felt that it would be a really fun environment and an exciting environment, and I was inspired by that. And then the third thing that attracted me to the business is what I had said before, I saw this tremendous opportunity. I saw this company at an inflection point that had the opportunity to do amazing things and create amazing values. Amazing value in terms of shareholder wealth and so on. And to be totally honest, the management team here is very much incented and aligned with the shareholders. Our compensation is very heavily skewed towards equity. And what I saw is a tremendous opportunity there, both for the shareholders and for me personally, to do something special. So that's what attracted me to the company. In terms of initial observations, I would say, it's mostly being a reinforcement of what I believed and why I joined and what compelled me to be here. It's always a little bit of a leap of faith, when you start in a new company, in a new role. You think you know what you're getting into, and sometimes you find yourself in a different situation. And I would say, my initial observations is a further reinforcement of this tremendous business model and the potential there. Beyond Julie and Rati, I started to meet the rest of the management team and all of the people from senior leaders to the people that -- some folks met today on the floor of our authentication center. And I found that the entire company was filled with these really smart and committed and engaged people, which is really encouraging. And in terms of being surprised by anything, any surprises, as I've had since I've come here, have really been on the upside. There have been positive surprises, just further reinforcement, all the reasons that I chose to come here. So new CFO, fresh eyes, different experience, maybe a different way of looking at a business. Again, choosing me as the CFO might not have been the most obvious choice for a tech company in Silicon Valley. I may tech outsider. There was a point in my career that I worked for Cisco Systems 20-plus years ago. But it wasn't the natural choice. But I do think that Julie felt that my particular background in industrial manufacturing and operations and financial planning and analysis and so on was the appropriate skill set for where the company is now. So I am looking at the company slightly different than how the has been looked at before. And I would say, I'll start with this focus on different and fewer metrics. We are a very data-driven company. You've seen that. You've heard that from other executives, and we will continue to be a very data-driven company. And all the data that the company was looking at before, we're still looking at. However, I would argue that in the past, we were looking at dozens of metrics and key indicators and unit economics and an alphabet soup of numbers and metrics that it felt like people, both externally and internally, were sort of getting lost in the weeds, and you couldn't see the forest through the trees. And there wasn't a clear way to synthetize all that into what does that mean? How does that affect your P&L? How do you get to profitability? And so I do believe that the business itself can be modeled and explained in a more direct and intuitive way. And you're going to see some of that in my financial schedules that are coming up and how I describe our P&L and our cost base and so on. The second thing is, I would say, I've taken a little more holistic and I would describe as maybe a more linear way of looking at the business, very simple. And in the past, I think the company you've heard a lot from the previous regime about focusing on GMV, gross merchandise value, and gross profit per order. And those are very important, and we still look at those, and they are metrics. But you're going to see in my way of looking at the company, much more simple and linear revenue, gross profit margin, operating expenses as a percent of revenue and ultimately operating income in dollars and percent. It's really -- can be that simple. And so that's a little bit of a different perspective and approach that I have taken from the past. So talk about the key messages. So when Catlin and I joined -- we joined together, actually, Catlin and I have been in 3 public companies together in similar roles. So we're kind of a team. She hasn't learned her lesson yet, and she keeps following me, which I really appreciate. But at the very beginning, Catlin and I spent a lot of time meeting with all 16 of the analysts that cover our company. And we met with dozens and dozens of shareholders within the first month or so, we accomplished all of that. And it was partially just to introduce ourselves and start a relationship with the investment community and the analyst, but it was also to receive feedback. And we ask people, what's on your mind? What are you hearing from investors? What do people care about? And there was one topic that had a 100% hit rate of everybody we talked to, without exception. Everybody wanted to talk about the path to profitability. So you're going to see, in my central themes, there's a central idea, it's all about how do we get to profitability and what does it look like, when we get to profitability, what do we need to do to get there? So the first 3 items on this chart, in my key messages, is -- and you can think these -- the 3 first series, 3 main elements to get to profitability are the 3 legs of the stool, if you will. One is continued top-line growth of at least 30%, the second is what I'm going to describe as relatively modest improvement in productivity in our variable cost base. And the third is leveraging the fixed cost investments we have already made over the last couple of years and vary -- with a lot of discipline controlling our fixed cost growth, going forward. Those three things, when we accomplish that will lead to, we're projecting positive adjusted EBITDA in 2024. And what we have described as our Vision 2025 numbers, which is -- it's -- there's big numbers. It's $5 billion plus of GMV, $1.5 billion plus of revenue in more than $100 million of adjusted EBITDA by 2025. So the next few slides, I'm going to go into the 3 main elements, the 3 legs of the stool on our path to profitability. So let's start with the first one, growth, continued growth. This is a business that has lots of tailwinds and very favorable trends that have in the past and will continue in the future, drive our growth. Let's start on the right-hand side of the chart, and Julie has talked about this before, the global market, worldwide market for luxury goods available for resell is $700 billion. In the U.S. alone, it is almost $200 billion. This is an enormous market. We are just barely scratching the surface right now. And historically, the middle part of this chart, you can see our historical CAGR rates of growing the top line, whether it's GMV and revenue, between 2017 and 2021, 4-year CAGR rates in roughly, call it, the mid-30s. That includes the 2020 year, where we actually had a decline in both revenue and GMV. So even with that headwind in our 4-year CAGR, we are growing at a rate of 35 plus and more recently, in our most recent quarter, sometimes we're reporting growth of 45%, 50%. So we have a history, we have this huge market. We have strong historical growth. And the last point here, greater share of wallet, you talk about the younger generation, focusing on what we offer as a business, and they're very much -- they care very much about the circular economy and sustainability and extending the life of luxury. And for all those reasons, we feel very confident that the first leg of the stool growth is very, very much achievable. So -- this is -- this may be the most important chart in my presentation. This is also our operating -- so this is our operating expenses, everything below the line, below gross profit to operating income, and I will suggest this is the single most misunderstood part of our business. And for some good reasons -- there's reasons why I think people got confused about our cost base, and I'll describe them, and we'll talk about them a little. But in the past, when we have talked about operating income and the way we report our results on a GAAP basis in our SEC filings, we break our operating expenses into 3 categories: one, marketing, just by itself; two, operations and technology, together as a category; and three, SG&A. And I would suggest that it's not a very useful way of looking at our operating expenses, if you want to understand what our fixed costs are, and what our variable costs are, and what our contribution margin should be. Not that interesting, not that informative. And so my approach to looking at our operating expenses, first of all, is to look at 20-plus different departments. And every one of those with an owner and with accountability and that we're going to track very closely of what is happening with that part of our cost base. And within those 20-plus categories, I've bifurcated into 2 main categories. What I will describe as support OpEx, which fundamentally should behave more or less fixed. Within that support OpEx, there are some hybrid expense, departments, functional areas, where some combination of being fixed variable. But I'm going to default to calling them support. I'm going to default to calling them primarily fixed. And then there's the other part of our cost base, what is truly variable, the sales and operations part of our cost base. And I guarantee you from the conversations that we've had with investors and analysts. When you see this breakdown, that 62% of our costs are actually in the support category, and 38% of our cost is in variable. And remember, in variable, I'm including both sales and the retail expenses along with the authentication center. And I bet you that many people think that the authentication center, that the fact that our business model requires us to take possession of these goods and to authenticate them and put them away and pick back and ship that, that is the majority of our cost base, and that is clearly variable and therefore, your contribution margin must be very low. And at any level of scale, you can't be profitable. That was the thesis. That's the short thesis, and it's wrong. It's wrong. This represents our 2021 operating expenses broken into these 20-plus categories and bifurcated by what is primarily variable and what is primarily fixed. And so I mentioned that there's good reason why people may have gotten confused about our cost base because if you look at our operating expenses, in aggregate, all of them, the whole pie, over the last 2 years they have grown at the rate of revenue. So it's very easy to confuse that our cost base must be nearly 100% variable. And what we probably could have done a better job at is explaining why this support OpEx grew at the rate it did and to explain the investments that were made that, frankly, put us in the position we are today to be able to be successful, to be profitable in 2024 and to be able to commit to these Vision 2025 numbers. So let me talk about the investments that we've made over the course of the last couple of years. So one of the things we did is, we accelerated our move to the authentication here in Phoenix. We were in Northern California. We moved to this facility. It doubled our capacity, in terms of footprint, and it sets us up for growth, not in an expensive proposition. During the last 2 years, we expanded this retail footprint. We opened 2 more flagship stores. We opened 11 neighborhood stores, we opened 3 LCOs or luxury consignment offices, tremendous growth. And as Rati talked about, it was really critical, during the time of COVID, to have that to supplement supply and to keep people engaged in our websites and they have product available. We, during the last 2 years, doubled our technology budget. We've invested in a lot of data scientists. We've invested in a lot of engineers. And those people are driving some of the operational efficiencies, the [ defaults ] are on the tour that they saw. It is driving the pricing analytics that you heard about earlier today and is improving our experience for both consignors and for buyers and improving our website. So tremendous investment in that. And finally, even some of the more traditional back-office functions like finance, like HR, like legal, they had to be built out. We became a public company. The finance department had to produce GAAP-compliant, SEC-compliant financial statements. And so the sum of all that, to put it in context for you, within, when I talk about -- I'll go back one slide, this support part of our cost base in 2021. Between 2019 and 2021, that part of our annual spend, OpEx grew by $100 million for all of the reasons I just described. In our financial guidance and our projections for 2022, that slice of our cost base and OpEx and committed to and vet it and everybody agreed to these targets, is growing $15 million. So we're seeing it already. We are capable of taking what we've done and what we've invested in, in leveraging, and we don't have to continue to grow. We won't open 15 or 16 more retail stores in the next couple of years. We won't open another authentication center. And so we have this tremendous opportunity to leverage those investments, going forward. So what does that all mean? Or what does that look like, again, in what I'm going to call a simple, abbreviated P&L view of our business? And what you see on this chart is our actual results in 2021, the midpoint of what we have committed to in 2022 and our Vision 2025 numbers. And again, very simply, GMV revenue, gross profit, operating expenses down to op income and eventually adjusted EBITDA. So I want to drill in a little bit, and I've talked about the different elements, the 3 legs of the stool that get us to profitability in the 2025 Vision numbers. Let me give you a little bit different view of this. So a graphic representation, I think, makes it a little bit easier to understand this path. So in our guidance for 2022, our adjusted EBITDA margin is between 13.5% and 14% negative. And our Vision 2025 numbers is to have adjusted EBITDA margins somewhere between 6.5% and 7% positive. So there's 20, 21 percentage points of improvement during that 3-year time frame. Where does it come from? Well, it comes from growth, right? We talked about growing at more than 30%. But on a cost basis, on a P&L basis, in the simple way that I look at it, it comes from an expansion of gross margin of a little more than 300-plus percentage points. And that expansion of gross margin, actually, doesn't assume any real productivity in our gross margin. It only assumes a change in mix. When we were in COVID, we had to buy more inventory and have more direct revenue and a lower gross margin. We do not need to continue to do that, going forward. The supply has come back. And just naturally, the percentage of our total revenue comes from low margin, direct business is going to decline. And over that time period, when it goes back to normal to where it was before, we will pick up 300 basis points of gross margin. The biggest bar in this waterfall chart is the support OpEx. And that is the support OpEx growing at a rate of inflation, plus a little bit more for some growth, while we're growing the top line, that's where the magic is. That's where the big impact is. By the way, you won't find that if you're just focusing on GMV or gross profit per order. This is below the line. And then finally, we talked about the sales and ops, the variable part of our cost base, improving a few hundred basis points, 300 to 500 basis points of productivity during that time frame. Nothing heroic. And frankly, nothing that we haven't already seen, Rati talked about that. We have seen productivity in our sales organization, in our inbound and outbound, in our authentication and all of this technology in automation and artificial intelligence. All we need in my model is modest productivity on that variable cost base. And that leads to these numbers, our profitability in 2024 and these 2025 Vision numbers. So before I get off the stage, I do want to talk a moment about our balance sheet and our capital deployment and our liquidity. So we ended 2021 with over $400 million of cash on the balance sheet. We do have some convertible notes. They do not mature until 2025 and 2028. And we are forecasting improving cash flow throughout the journey to our path to profitability such as we do not need additional capital, we do not need additional funding to execute our plan to get to profitability, to get to positive free cash flow. In terms of our investment priorities, it's what both Julie and Rati said, it's all about profitable growth. So we will continue to invest in technology and automation. We'll invest in our sales force. We'll invest in some expansion of our retail footprint. But nothing unusual, nothing change in trend relative to our overall capital requirements. And then finally, what we expect to do is demonstrate through all of these actions the strength of our business model and our ability to deliver on our path to profitability. So I will end my presentation where I began, which is the 3 major elements, the 3 legs of the stool to our path to profitability: 30% growth; modest variable cost productivity; controlling our fixed cost and leveraging them; and that leads to the financial projections that we made. And I know I'm going to get this question. I've got this question. How confident are you? How confident are you? And I'm totally confident. I'm completely confident. And part of the reason I have this confidence is, I have a model like many of you have a model. It's a financial projections, and it has a bunch of inputs and so on, and I created this long-range plan that projected our results from top to bottom. And then as a management team, we all got together, every functional leader from the bottoms up. And they vetted it, and they vetted those assumptions. And we asked everybody, is this possible? Do you believe in this? Can this be done? And universally, everybody said, yes, everybody said yes. And also, I think a lot of people said, "Look, for the first time, I totally understand the path to profitability and what my role is and how I will be held accountable and how we're going to get from here to there." And of course, everybody agrees how great it is if we're able to achieve that, the result. And so that makes me very confident and it makes me very excited to be here. That's it.

Now it's Q&A. And Rati, Robert and I will take your questions for a while. And your questions are between us and food. So if we start getting a little grumpy.

Should we bring a chair?

We can bring some chairs. I don't know. Up to you guys. You got it?

Yes.

We've got -- we have a lot of chairs. Well, you may want one, Caitlin. Okay. And maybe can you -- you've got us the microphone to go in the audience?

Yes. So we have a microphone in the back for the audience, and we'll start with a question from the webcast, but just flag Aaron down in the back if you'd like to ask a question. So first question, the AI-driven authentication tools are very advanced. Which parts of authentication still have the most opportunity to automate and/or are the toughest?

That's a good question. So we started with handbags. That's where a lot of our labor lies, high-end handbags as well as you saw a lot of the fine jewelry and watches. I'd say fine jewelry and watches probably the harder categories, and we've sunk our teeth into that area first, and we feel good about that. As far as opportunity goes, you heard 40% of our handbags will be authenticated via machine learning by the end of the year, and the strategy is then to increase our categories. We're looking at shoes and accessories next, fine jewelry, watches and then ready to wear.

On the front. I think he's got a microphone.

Great. I wanted to get a little bit into the fixed cost piece. We obviously toured the facility. It looks like you have a lot of capacity to grow over the next couple of years. Do you need more capacity or another fulfillment center to get to that $5 billion in GMV would be my first question. And then marketing sort of assumed as a fixed cost, are you sort of assuming that buyer acquisition cost comes down dramatically over the next couple of years? Or do you just assume that perhaps net add flow and great percentage GMV comes from existing buyers?

Yes. So we're not anticipating the need for another authentication center in the next couple of years. Jessica talked about densifying and building up and expanding into the space that we have. And we always knew that we would be growing at this rate. And so this facility was designed to be able to accommodate that. we will probably need an authentication soon after if we continue to grow at this rate, which we expect to. As far as the marketing, I'll just remind you guys that when I bifurcated the cost base into primarily fixed and primarily variable, the marketing is actually in that hybrid category. And so it is more variable than the other categories within support. We do anticipate some improvement in back going forward, but again, nothing heroic. And it's one of the common themes as we built this model to ensure that we're not building in something extraordinary in terms of our performance, but the marketing group is going to be expected to create productivity, just like everybody else, just like the other folks in the authentication, just like the functional areas, but modest improvement.

Robert, when it comes to maintaining above 30% levels of growth over the course of this 3- or 4-year CAGR, what gives you confidence in maintaining that level of growth? What are some of the key areas of growth for the company? And secondly, in this inflationary environment, if there is a kind of consumer crunch, consumer spending crunch, what happens to the industry in that kind of market? Is it better for the company in a way because more luxury buyers are leaning towards consignment?

Yes, I'm actually going to defer to Julie and Rati on the growth assumptions.

I mean it really comes down to us getting supply. And given how we're not really deeply penetrated in the U.S. at all and the fact that still from the beginning about 45% of our consignors are new to consignment. We're still at that percentage. And then we also monitor our current stores just because they're a new -- a good source for new consignors. And even the neighborhood store in Soho is still getting about 40% new for consignors. So we have a long way to go. There's a lot of supply trapped, and we have enough movement. And people understanding that you should consign things that, in fact, if you don't consign them, you're leaving that value in your home. Or at worse, it goes into a landfill. So I think just general -- and the other key point, we know how to do performance marketing to convert people who have never consigned to consignors. So we have a lot of confidence there. Do you want to answer the other question? And I would just add to that, opportunities leads. I mean, the traffic, those are all strong indicators. So we're monitoring that full funnel, and we're not seeing any sign of slowdown or plan to. And sorry, I forgot your second question.

It was about inflation, and that's actually a positive trend for us, right? It's like when the primary market, and you saw a lot of that, the primary market raising prices and so on, we're a value play. And I think that's actually a tailwind for us as you see inflationary pressures, especially in the primary market for luxury.

I mean it goes back to what Julie always says, we were built out of a recession and not to compare us to TJ Maxx, but yes, we are a value play. So we do well in that kind of market.

The EBITDA margin bridge that you laid out, you talked about fixed costs growing in line with inflation. We happen to be in a very inflationary environment right now. So can you maybe contextualize that in terms of what it means for year-over-year growth to get to your long-range EBITDA margin target? And then the second part of that question is, I think you also highlighted about 150 to 200 basis points of negative impact for adjustments in that bridge. Just curious what's embedded in that.

Yes. So the last piece is just mathematically because I am bridging operating income. The adjustment piece is just the difference between what is an Op income versus adjusted EBITDA, just the reconciling items become a smaller percent of the total revenue. And so just mathematically, it's sort of a headwind. And we could do the bridge after. It's a little more technical. On your first question, we are not immune to the impacts of inflation, whether it's on the labor rates or other things. We do try to offset it. And again, what some of the folks saw today through automation and the use of AI and technology, we find ways to take costs out of the process otherwise. But I do think there's sort of a natural offset. If there's more inflation than I may have assumed in the cost base, there's probably more inflation on the top line as well in terms of us taking price. And net-net, I don't think that interferes or sort of breaks the model in terms of our path to profitability, our Vision 2025 numbers.

And the biggest one is shipping, which is everyone is under that pressure, and we built in -- we assumed that we'd have a gap in shipping, meaning the revenue that we take in versus our expenses going forward. So we feel like we're conservative, but the shipping is the one that actually we spend a lot of time figuring out how to stay in front of that one because the other things really are sort of taking -- our prices are going up and part of it is just all the data science you're seeing. Our labor is getting more efficient. And so even though some wages have gone off, it's been more than offset by efficiency. And everything else is sort of built in, I think.

Yes. And maybe this whole OpEx bridge thing, when I'm bridging the OpEx, it's unadjusted. So there are unusual onetime items that might be in our adjustments or a change in depreciation or so on, that when adjusting from operating income to adjusted EBITDA, it's just become a different percentage of the total.

Great. A couple of questions from the webcast. The penetration of consignors who are also buyers is exceptionally high. The penetration of buyers who are consignors seems to have an up-some opportunity at 14%. What are key strategies to drive higher penetration of buyers to become consignors?

I was talking to someone about this earlier today. We have some opportunity there, for sure. I mean, not to get too tactical with you, but some of the things we're doing is personalized messaging towards that group. Buyers, not sellers, specifically. So we can target them. We know when they bought a handbag. We know when they bought a handbag. Because they bought it from us, whether it's 6 months ago or 8 months ago, and we are kind of personalizing messaging towards them. There's loyalty programs in place, but that's definitely a key focus for us over the next few years.

One for Julie. Vestiaire Collective announced acquisition of Tradesy last week. How do you think about consolidation in the space? And would The RealReal look at any M&A opportunities?

To the last question, we always are looking at M&A opportunities because there's -- it just makes sense to take a look. We haven't seen any that actually would be accretive to us. At this point, I don't know if any on the horizon. And to Vestiaire, they've always wanted to get in the U.S. They've been trying for the last 10 years. This is the most active they've been. We don't really compete with peer-to-peer sites. They are a self-listing site. And I do think there will be more consolidation in businesses that are more alike than different, which means that the peer-to-peer business, there's a lot of businesses that will either find a home or they're going to be part of the walking dead. So it makes sense that they bought them. It wasn't for us.

And one for Robert, and then we'll head it back into the room. Robert, can you talk a little bit about what levers you have on the gross margin line and how we should think about that expansion, that 325 to 350 basis points that you outlined?

Yes. As I mentioned, that is strictly a shift in mix. When we sell items on a consigned basis, our gross margin is very, very high, 85% to 90% before allocated cost. When we sell items that we own, we have the cost of the item in our gross margin. So just mechanically, those items are 15% or 20% gross margin. Now they may be good items actually. The owned business can be very good if they are high-value items and higher -- use of previous terminology, higher gross profit per order items. It could be a good business for us. But our business skewed much more heavily over the last couple of years during COVID for obvious reasons that our gross margin is quite depressed. If you look at our history, gross margin has declined considerably over the last few years due to mix, not because our take rates have gotten worse, not because we're making less money per item. It's because we've sold more of this direct business at low margin and less of our high-margin consigned business. So my assumption about improvement in gross margin is strictly a change in mix. It doesn't suggest any improvement in take rate. It's just a more normalizing and going back to the proportion of our total revenue that comes from consigned items versus owned items.

Your decreasing back cost has really bucked the trend we've seen in the other e-commerce companies. So between keyword inflation and just lower marketing response rates in the wake of the app tracking episode. Most people are seeing CAC soar, and you're seeing the opposite. So could you speak a little bit to why that is? And also talk about how your marketing budget is allocated on digital versus traditional and how that may differ?

Yes. I mean, we didn't see that trend during the social, the Facebook. And because we're more diversified in our channel mix, we weren't as reliant on that. And as far as our back costs, we continue to optimize, right? I mean Orr talked about test and iterate. He's always testing new channels. We have a whole analytics team dedicated to this area and to optimize that growth. If you take out 2020 and '21 out of those numbers, you do see a trend there, and we'll just continue to optimize overall. I'll just add, we also have highly coveted product and single SKU that no one else has. So it's not like you can find our product anywhere, and that's also a key differentiation from a consumer standpoint versus a self-posting site because the people that actually make money self-posting don't post on one site. They post on multiples and wait for it to sell. All of our product is unique and highly covetable. And that also shows a really good conversion ratio.

Back on the increases in price in the primary luxury market, I'm just curious, I mean, that raises resale values. Is any of that increase in price built into the 30% growth expectations?

We do assume a modest -- that's our assumptions. Overall, you see a trend, a modest increase. And that's because of our pricing model. So again, you heard Courtney. I mean inflation is one piece of it. But because the algorithm is so dynamic, it factors in inflation into the numbers.

Another one from the webcast. As you scale the business to $5 billion plus of GMV by 2025, how do you think about new versus repeat? And how do you think about market share? Do you want me -- okay.

Well, market -- I mean it's a nascent market. So it's not like we're -- I mean, look, I started my career in Clorox, which -- and I was on liquid bleach. And the only way you grew is if households grew and you stole share from private label. So like 3% growth was a win. We're not in that world here. We actually have -- we really have this tremendous opportunity. We're just converting people. We're not taking share. We're actually changing behavior. That's what we're doing. We're changing behavior, which means the opportunity is really huge for us to grow. Do you want to answer the second part?

The second part was how do you think about new versus repeat.

Well, I mean, new versus repeat, so when we -- it's a bottoms-up model, right? So when we're growing 30%, we need a certain percentage of new to feed our cohorts as we grow every year. So that's kind of how we divide that. And repeat is the same. So it's really important that we get in that new as that cohort needs to grow.

Great. I think we have a question up here.

For Robert, when do you think you might actually get to a quarter of breakeven? I know not the whole year, but...

I'm going to respectfully refuse to answer that question. I don't want to be boxed into a particular quarter. And I do think in the past that it has been -- was a habit to say, on this quarter. And so I would rather stick to the 2024 full year. And if we surprise you along the way, a quarter or 2, all the better, but I'm not going to give a quarter. Thanks for asking, though.

Can I just follow up on the direct piece in terms of the gross margin expansion? Just help us contextualize where we were in 2019 as a percentage of supply, where we are today and where it needs to go to get that full 350 basis points of expansion?

Yes. If I remember correctly, I think that the direct business as a proportion of total revenue was sort of high teens, 18% to 20%. It rose to 1/3 of our business at the peak. And we've had some quarters and as we sell through that, you're going to continue to see that trend for a little while, not because we're buying more product, but because we have product that is selling through. And so you're going to continue to see in Q1 of this year and really the first half of this year direct revenue being a higher proportion of total revenue than normal, which will put pressure on our margins. And you're going to see that abate in Q3 and Q4. And you'll see the reversal of our margin based on mix at that time.

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Yes. That's our goal. And I think by the time we get out to the end of the Vision 2025 numbers, the assumption is somewhere around 20%.

I think when you were talking about making some investments in growth over time, I think you said modest store growth from here after making a pretty decent-sized investment the last couple of years. Like how should we think about that, the store growth going forward? And can you contextualize how much an incremental store adds to your expense base?

I'll answer the first part of the question. We plan -- we opened -- we have 20 stores now. Most of them we opened in the last couple of years. We aren't going to open that many that quickly, but we will be opening more stores. So we did put in the model about 2 to 3 stores a year over the next few years. And then out from there on, like we don't -- we're not going to open 500 stores. The question is we go back and forth on what that right number is, and it's probably between 40 and 50 stores in the U.S. But again, that will happen over time.

And in terms of the cost, these neighborhood stores are the ones that seem the most interesting. They're relatively small. In my previous life when we opened a new store, it was a $5 million or $6 million investment, including the cost of inventory, which of course, we don't really have here. And I would say, to open a new neighborhood store is quite modest in the $500,000 range more or less.

Great. Another question from the webcast. What are some common misperceptions about the RealReal that you would like to clarify for investors?

I'll start because people are going to know what I'm going to say. It's this misconception about our cost base and how variable the cost base is because of the model and that we have low contribution margin can't ever be profitable, then that is the biggest misconception for me from a financial point of view, a misunderstanding of our cost and the fixed variable nature of it.

And I would say that, when I talk to people, we're still educating people on where we sit in the space, who the competition is and why we're different. And so the more we can reinforce it because we are not a self-posting site. We are a site that does take possession of the goods. And everything we do is there isn't a perfect one-to-one comparison. And why that's important? So just making sure people understand our fit and the opportunity in front of us. I remember one analyst most -- not too long ago -- wrote that we were losing share to Poshmark, and that was the biggest head scratcher I've ever seen. We don't even compete with Poshmark, and we're certainly not losing share. So that just -- to me that said we have a long way to go in educating people and what our opportunity is, where we sit and why we're different.

Yes. I mean, for me, it's that we're not finding leverage in ops and sales and our variable cost structure. And you heard from Robert, and you saw that chart, but you also -- some of you were able to see and hear about the technology that we've added. So we've done a lot of investments into these areas. And when you look at this over time and you look at unit economics, and you look at this growth percentage of revenue, you are seeing a significant amount of leverage there.

Okay. Another one from the webcast. You have laid out an ambitious growth strategy. What are the risks to achieving your targets?

Our ability to attract and retain great people is really as simple as that. Because the foundation, the table is set, and that's what we have to do. I mean, really, it's as simple as that. We're -- this is ours to lose, so we're not going to.

That's great. For Robert, do you believe that you need to raise more capital to fund all of your growth investments?

No.

Do you care to expound, sir?

No, I think we think -- no. And I think I talked a little bit about it. We do have this model, this long-range plan. It is predicting and forecasting our business with detailed input bottoms up. And what I see in that is an improving cash flow sort of scenario every single year as we improve profitability. And as I said, we have plenty of liquidity and won't be required to raise capital. Now if we decide -- we may decide to do something, we do have these convertible notes outstanding, and we'll take a look at them and what they're trading at. And if we want to roll them over or take them out, but that won't be because of necessity. That will just be a capital deployment decision.

So within the 2025 goals, as we think about getting to profitability, could you tell us how you think about the CapEx needs of the business and the capital structure? And then in addition to that, on the sales team, I think you mentioned it was going to grow by 20% to 30%. Could you just talk about what's driving that and then how you balance that with the goals for the mid-single-digit productivity gains that you had mentioned.

What's the first -- well, the CapEx. Traditionally, our CapEx has been sort of in the $30 million to $40 million range per year. That includes the capitalization of some labor for the technology team. And so I see it growing proportional to the business. No real change in trend. Nothing unusual until we get to the point where we'll need another authentication center. You might see a step function increase at that time. But really, sort of a continuation of the trends of what we've seen before growing proportionately with the business.

And then sales team, do you want to answer that?

I can take that one. We do have it growing at 20% to 30%. And both things are true, and we continue to see productivity gains from this area. That's just kind of the range that supply fuels our growth. So it's really important if we're going to make an investment that we make it there. It's all driven out of hiring, and we'll continue to do both. We'll continue to make sure we're hired up there, and we'll continue to make sure that we're finding productivity gains.

And was there a third part of that question? Okay. I'm sorry. I'm trying to keep track. Thanks.

In terms of take rate, are you assuming flat take rate for those 2025 goals? And then I know you've made some adjustments to certain categories, increasing that take rate upwards, in some categories, decreasing it slightly. So how are you thinking about that? And how is that evolving?

Yes. So do you want to answer, Rati?

Well, for me, take rate, yes, we don't -- we did make some changes, like you said, for some of the low-value goods when we're taking more take rate. We didn't factor in any take rate commission changes for it. But that said, that number does change because mix changes. So it's just important to remember that.

If we just do back of the envelope math on the 2025 target, sort of incremental flow-through rate looks to be mid- to high 20s. Is that the right way to think about the long-term margin of the business?

Are you asking about long-term adjusted EBITDA?

Long, long -- EBITDA. Yes, yes.

I'm not -- we've just laid out a plan. We were trying to get to profitability. We've laid out these 2025 numbers. And at some time, we'll do a Vision 2030 number, and I'll tell you what I think is possible. I do think in the past there's been some very high sort of fancy numbers thrown out there of what long-term adjusted EBITDA might be. And I don't know that I'll get to that answer, but I haven't gotten to that point yet. But to me, it's a little bit first things first. Let's get to profitability. Let's hit these Vision 2025 numbers, and then we can -- you might not be wrong, but I'm not going to confirm or deny that number at this time.

A couple more questions from the webcast. Can you speak to how much you can influence the product mix toward more economically attractive categories? If you split the business into the different categories, for example, how would you think about profitability for handbags and jewelry categories versus apparel?

So we look at basket analysis. So that's important, but it's also important to look at the buyer and the seller holistically as far as basket analysis goes. We -- I mean we have a good amount of control on what's coming in, to your first question, and that just shows through in the sell-through. So 80% of our product is selling within 90 days. The other 20% sells shortly after. And how we do that is through the sales team's commission structure, and I talked about that a little bit. But to give you a little bit more detail, they have to bring in a certain amount of points that's weighted towards units and value. a certain amount of their supply that's coming in, in order to get paid and hit the highest commission structure, they need to be bringing in a certain amount of value. And so they're optimized that way based on sell-through and constantly tweaking and updating that based on our sell-through metrics.

Strategics like Caring and LVMH have gotten active -- sorry, this is another webcast question. It's a long one. Strategics like Caring and LVMH have gotten active in terms of investing in digital commerce platforms like Farfetch even recently Vestiaire Collective. What would be the positives and/or negatives in having a strategic like a luxury company more aligned with the business?

Well, we've been working with the luxury brands for, I don't know, now 5 years. So Stella McCartney is now part of LVMH, and they're a long-term partner of ours. We've worked with Burberry, which is one of the biggest stand-alone luxury brands. Gucci, we've had a partnership with. We're in discussions with all brands at all times. The biggest value for us is it helps generate awareness of consignment. That is the #1 value that it actually reinforces that this is a thing to do. And so that's important for building the category. And for them, it shows that they're actually understanding the importance of consigning a good for the planet. So it's a win-win. We're in constant discussions. And I'm always happy when the people get involved because it -- the more we can raise awareness in general that you need -- that consignment is good and every everybody understands that and they start thinking about consignment the more, actually, we win and the planet win. So I'm all about that. I really -- I'm glad they -- I was thrilled when Stella McCartney embraced us. That's sort of her brand. That made sense. But having Burberry and Gucci follow shortly thereon, again, it legitimizes the whole circular economy.

That's great. Julie, you mentioned that international expansion isn't in the cards in the near term. Any international plan long term? What would be the geography that you would target? And would you consider opening stores internationally?

Yes, it's in the long term. Yes, we'll most likely open stores. And there's a lot of shifting going on internationally. So originally, we had targeted and did a deep dive into London as it would be a key city plan, not a key market plan, but it's going to be we'll see how things shake out between now and then.

Great. For Robert, in your primarily variable expenses, could you explain my stores and LCOs, or luxury consignment offices, fit in that category? You would see that perhaps these costs are somewhat fixed?

Yes, I should differentiate the occupancy cost of the stores is in G&A and in my primarily fixed. The regular operating costs of the stores, the ongoing daily cost of the stores is in the variable.

Great. And a follow-up to that. Also in the variable category is customer service. Are there opportunities such as outsourcing or automation that could be leveraged to keep that cost from growing as fast as sales.

Yes. I mean we do optimize offshoring. A lot of our team is offshore. We've also implemented an AI solution there and starting to ramp up. So there's definitely some things we can do to leverage cost there as well, and it's a combination of technology and processes right now.

Great. If you will be cash flow from operations positive by 2025, how much cash could you quantify any of that for us? Do you plan on using until then?

No. No, I'm not going to be specific. I think that what is important that people know that we have plenty of liquidity that we can execute our plan that we'll be able to invest in the business and invest in growth. And I'm not going to peg a specific number, but we're in great shape from a balance sheet and a liquidity point of view.

Maybe like a couple more questions because we're...

From your profitability bridge chart, if you were to take that big chunk that's the fixed cost leverage, can you give us any more color on that? What would be the kind of the buckets or size of buckets as you think about it, Robert?

Again, I'm not going to break them out specifically, but if you go back to the pie chart that shows the list of the 20-plus departments that we're looking at and we're managing and we're holding people accountable, the ones on the far left-hand side of the chart are the traditional true back-office support functions, you get a lot of leverage from that because they will grow very modestly while the top line is growing from $2 billion to $5 billion in GMV. So those are the areas that have the biggest impact.

Perfect. Any other questions in the room? We'll go one last question from the website. In the last earnings call, you talked about certain processing delays due to Omicron. Can you give us an update on that?

Yes, sure. We're happy to say that, that is behind us. We were hit pretty hard between The Great Resignation and Omicron, so we did experience some processing delays, but we're in a much better place now and back on, as always.

And with that, happy note, First of all, everyone listening, thank you very much. Everyone that actually came to Phoenix, it really means a lot to us to share this facility and to meet you in person, and we really appreciate it. And this sort of concludes our formal part. There is lunch. Thank you so much, and we just need to get back to work now. Thanks.