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

Good day, and thank you for standing by. Welcome to The RealReal's Third Quarter 2022 Earnings Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Caitlin Howe, Vice President of Investor Relations at The RealReal. Please go ahead.

Thank you, operator. Joining me today to discuss our results for the period ended September 30, 2022, are Co-Interim Chief Executive Officer and President, Rati Levesque; and Co-Interim Chief Executive Officer and Chief Financial Officer, Robert Julian. Before we begin, I would like to remind you that during today's call, we will make forward-looking statements which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Today's presentation will also include certain non-GAAP financial measures both historical and forward looking, for which historical financial measures we have provided reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a stockholder letter earlier today, both of which are available on our Investor Relations website. I would now like to turn the call over to Rati Levesque, Co-Interim CEO and President, for introductory remarks. Rati?

Thanks, Caitlin, and thank you everyone for joining. Robert and I will provide an update on the business and then go into our Q&A. Today, we reported solid financial results for the third quarter of 2022. Both GMV and adjusted EBITDA came in at the midpoint of our guidance. For the third quarter in a row compared to prior year, we improved both our adjusted EBITDA loss and margin, despite a more challenging business environment. As we continue to focus on profitable growth, our objective is to accelerate our timeline to profitability. Since assuming the role of Co-CEOs, Robert and I have thoroughly analyzed the business and were able to provide new insights. Through this deep assessment, we determined that there are levers in the business that enable us to reach profitability with lower top line growth compared to what was previously projected. To this end, we are focused on the following strategic initiatives: first, overhauling our seller commission structure, which took effect on November 1; second, further optimize our pricing algorithm to get the best price for our sellers; third, take a more aggressive approach on costs; and finally, capitalizing on potential new revenue stream. The first strategic initiative is an adjustment and simplification of our commission structure. We believe the update to rates will incentivize the consignment of higher-value items and limit the consignment of low-value items, which are unprofitable. We are also in the process of deemphasizing certain categories like home, art and kids. Additionally, we added a dynamic and personalized tool to our website to allow sellers to calculate their expected earnings, which we believe will increase transparency and motivate sellers to consign their luxury goods at The RealReal. In combination, we believe these actions will move the business closer to profitability. The second strategic initiative is to further optimize our dynamic pricing model to maximize value for our sellers and The RealReal. We will continue to refine our dynamic pricing algorithm. The third strategic initiative is taking a more aggressive approach with regard to our cost base. Early in the fourth quarter, we implemented a reduction in our workforce and remain highly selective in new hires and backfill. The final strategic initiative is capitalizing on potential new revenue streams, including a warranty program, advertising technology and other data monetization opportunities. This final initiative is still in the early stages, and we will update you as these opportunities develop. In summary, we believe these 4 strategic initiatives will improve cash flow, and we are energized about the new strategic direction of our business as we move more aggressively to pursue profitability. I'll now pass it over to Robert to discuss our third quarter results.

Thanks, Rati. I'll open by saying we were pleased with our financial results for the third quarter. Both GMV and total revenue grew 20% compared to prior year. During the third quarter, gross margin improved to over 60%. This is primarily due to direct revenue as a percentage of total revenue declining to 24% in Q3. This compares to 33% in Q1 and 28% in Q2. Adjusted EBITDA was a loss of $28.2 million or minus 19.7% of revenue compared to a loss of $31.5 million in the prior year or minus 26.5% of revenue. We ended the third quarter of 2022 with $300 million of cash and cash equivalents on hand. Total use of cash in the third quarter of 2022 was $15 million compared to a $102 million use of cash in the first half of 2022. At the end of Q3, we had $63 million of company-owned inventory on hand, a decrease of $11 million compared to the end of the second quarter of 2022. We expect that our inventory balance will continue to decline through the end of the year. Today, we are providing fourth quarter 2022 guidance against the backdrop of broad economic uncertainty and many strategic initiatives that Rati mentioned earlier. We are confident that these initiatives will have a meaningful positive impact to our business going forward. However, it may take a quarter or 2 for these initiatives to be fully reflected in our financial results. We project Q4 GMV to be in the range of $480 million to $510 million. We project Q4 revenue to be in the range of $145 million to $165 million. And we project Q4 adjusted EBITDA to be in the range of minus $27 million to minus $23 million. Turning to longer-term targets. We continue to project that The RealReal will be profitable on an adjusted EBITDA basis in 2024, and that we are on track to achieve our Vision 2025 adjusted EBITDA target. Overall, we are encouraged by our new strategic initiatives and direction. With that, we will now go into our Q&A session.

[Operator Instructions] Our first question comes from the line of Marvin Fong with BTIG.

First question, just on the commission structure change. Could you just give us a sense of some of the specific changes you made, but also, more importantly, just how that might net out to your overall expectation for the marketplace take rate or the consignment take rate? And second question, just on the consumer environment. We are -- obviously saw a lot of American buyers looking to purchase -- leverage a strong dollar to purchase some first-run luxury goods from Europe and stuff like that. So just curious if any of your GMV outlook is impacted by dynamics like that, perhaps just the consumer taking advantage of opportunities for discounts and sales in the first-run channel.

Sure. Thank you for the question. I'll start, and I'll have Robert chime in on the commission structure and the take rate results. High level, we believed on the commission structure. Let's take a step back for a second. We really believed we had some room to take more because of the service level that we offer. And we looked at many things. We looked at our seller and buyer carts, our VIP, our loyalty, contribution margin and so forth. The good news is our new commission structure and the feedback we're getting is that it's much more transparent, and it's much more clear on what the earnings look like. As far as take rate goes, what we did was we deemphasized the low-value goods where we're unprofitable. So we took more in these areas. The mid-tier and high-end luxury goods is little to no change. We did incentivize the top-top tier of items and high value, so that means that the seller may get a little bit more, but that means more gross profit dollars for us at the end of the day. So really high level, more in low-value goods that are unprofitable to us and little to no change on the mid- to low value. And I'll let you talk about take rate and how that could play out.

Yes, Marvin. So in terms of the overall impact of the commission changes, we do expect net-net it to be positive to The RealReal's financial results. But I would say, all other things being equal, at constant mix. And so by category, you're seeing us taking more especially at the low price ranges. As Rati mentioned, we're protecting more or less the mid-price ranges. And there are, even in some cases, at the highest price points in the most desirable types of products and categories, we're allowing the consignor, the seller to earn a little bit more. But net-net, all other things being equal, you should see a not insignificant increase in our overall take rate. Now the thing that I would caution you on, though, is our nominal take rate may not actually go up as much as you would expect, all things being equal, because we are intentionally deemphasizing lower price point, higher take rate items in favor of higher price point, lower take rate items. So nominally, you might not see the take rate improve as much as you would otherwise expect. But you will see the results on the bottom line in terms of our overall profitability and the improvement to adjusted EBITDA.

And then your second question was more about the health of the consumer. And what we're seeing, I guess zooming out for a second, we're seeing both on the buyer and seller side, quite healthy as far as opportunities on the seller side, new and repeat sellers, opportunities are growing 20% year-over-year. On the buyer side, active buyers are quite healthy, up 23% year-over-year, new and repeat buyers looking quite strong. The cohorts are looking strong. And so I will say that's the good news. What we are seeing is the trade down effect, and I'm sure you've heard this in other portfolios, but we are seeing people may be deciding instead of a top-tier luxury item, they're maybe trading one down for like a mid-tier item. Or in order for the item to sell, you'll see us reduce an item by 5% or 10%. The good news with that is that we're not squeezing our margins when we have to do that and when we have to kind of take down pricing by a bit. So we'll continue to watch that. So I'd say that we saw that kind of trend happen in late Q3 and then into Q4.

And Marvin, you had mentioned the strong dollar potentially impacting U.S. consumers participating in the primary market in Europe. And certainly, we've heard plenty of anecdotes about that. Your question was, is it specifically impacting our GMV outlook and so on? I wouldn't say it's specifically reflected in our numbers in the short term. But certainly, that's not bad news for our business to have more U.S. consumers participating in the primary market, whether it's here or in Europe or whether it's [ because of strong ] dollar or other influences.

Our next question comes from the line of Kunal Madhukar with UBS.

A couple if I could. One would be on the CEO search. Where do we stand on the CEO search? And second, on the 4 strategic initiatives that you kind of mentioned, you also mentioned it could take a quarter or 2 for these initiatives to be fully reflected in the financials. So part A would be, what are you going to do in the next couple of quarters for us to kind of see those effects in the financials? And part B would be, so what effect are we going to see? So realistically, Q1, maybe Q2 of '23, where should EBITDA be? Just ballpark, I mean, not like looking for a guide or an outlook, but just thinking about it rationally.

Right. Yes. So I'll start, and again, I'll let Robert add here. So first question on the CEO search. I think we mentioned last time, we have hired Spencer Stuart to lead the search. The good news is we're all in line on what this profile looks like. And the other piece of good news is that there are -- there is a strong pipeline. So more to come there, probably early next year. As far as the full strategic initiative and when you're going to see that play out, we talk about really seeing it in the back half of next year. So Q4 -- Q3, Q4, they're transitional quarters for us, to be totally honest. And why I say that is a lot of these strategic initiatives have taken place in early Q4 to mid-Q4, like the layoff, like the commission changes, like the deemphasize of low-value and categories. So we really see -- to see any meaningful impact, we will have to wait a couple of quarters and really see it in the back half of next year.

Yes. And I would say, Kunal, in terms of order of magnitude, what has the biggest impact on our business, the commission change certainly is the most impactful in terms of how it will impact our bottom line. That commission change became effective with items that we received on November 1 and later. And so there is a time frame in which it takes us to receive those goods, to get them up on the site, to eventually sell them and so on. And so there is a natural lag time for that to eventually show up in our financials. So there's nothing to be done per se in order to get that benefit other than the time that it takes for items to move through our system. The second most impactful one would be the pricing optimization. And that may have a more immediate impact because it has less of a natural lag time to get through the system. Obviously, the cost changes we've made will have more or less immediate impact and the longer-term strategic monetization things, again, are in early stages. So there's a number of things that need to be done for you to see all of that. To answer your question about EBITDA in Q1 and Q2. We're not going to provide 2023 guidance at this time. We will update on 2023, and we'll give Q1 on our earnings call in February.

Our next question comes from the line of Oliver Chen with Cowen.

This is Jonna, on for Oliver. Could you just provide more color on which categories performed well during the quarter and what's working quarter-to-date? And would love some more additional color on monthly trends, what you saw throughout 3Q and what the exit rate was.

Sure. From a demand perspective, we see a continuation of trends the same -- very similar to Q2, which was ready-to-wear going back to pre-COVID numbers, handbags, high-value fine jewelry and watches still really strong. So nothing new there, except for the trade-down effect that we talked about. Again, on the seller side, same information. Opportunities looking really strong engagement there and the cohorts as well. And there is a volume decline, and a lot of these reasons are strategic initiatives that we talked about at the beginning of this call, which is cutting out some of that volume that was unprofitable to us. So you'll start to see that in the guidance for next year as we give you real numbers.

Our next question comes from the line of Simeon Siegel with BMO.

I know this is an overgeneralization, but just can you speak to the profit delta between that high and low-value items? And I guess, if they're structurally unprofitable at this point, is there any thoughts around just putting a minimum price threshold on consignable goods?

Yes. So it really depends, Simeon, when you talk about the different items, and I know sometimes we get questions about the unit economics. And my answer is always, well, it depends on the unit. And our offering is so broad, whether it's fine jewelry or watches or fashion or footwear. And so each category is unique and the economics is unique at the different price points and the different commission rates. So it's hard to generalize. But it is true that the actions that we have taken put us in a much better place and do we eliminate or really disincent the lower-priced and lower-profit items, some of which were, frankly, negative contribution margin. And so I do think that with the actions we've taken both with the commission structure and in some of the brands, we talked about deemphasizing some categories, but there are some brands that we've taken off our list as well. We really expect to disincent those items to the point where maybe you won't see very much of it on our site. And it's really not the way our business was designed. Our business was designed to be high-value luxury items that benefit from authentication, both for sellers and buyers. And so the actions we are taking are really trying to encourage that, which is how the business started really.

Right. And you may see some of those items in the low value still come through when they're discounted. But that's really, at the end of the day, what you'll see now is a pair of Manolos that didn't sell at $300, maybe get discount into $100. But at the end of the day, the brands that come in at that price point have been removed from the list and the combination, like Robert said, of that and the commission structure, we believe will deemphasize the business overall.

It does have a meaningful impact on our P&L, Simeon. I will say that, but I can't give you a specific change in the profitability because it's complex. It is true that this strategic change has a meaningful impact on our overall profitability. It has a meaningful impact on our growth rate, which you see reflected in our Q4 projections, and you will see reflected going forward. And we talked about being able to achieve our bottom line adjusted EBITDA and cash flow targets at a much lower growth rate, and it's quite intentional. But we do think that it has a meaningful impact on our path to profitability. There's a [indiscernible]

Got it. That's really helpful. And then just at this point, however, the easiest way to go through this, what percent of the expenses would you characterize as fixed versus variable?

The last time we did this, and again, we talked about bifurcating our expenses into support and then sort of sales and apps. I would say that it's roughly 50-50, more or less, it's changing because we've really limited the growth of our fixed cost while we continue to grow. So there's a natural mechanical sort of equation that has variable becoming a larger portion as fixed stays fixed. And so it might be trending a little bit more towards 60% variable and 40% fixed, but only because the fixed costs aren't growing.

Our next question comes from the line of Lauren Schenk with Morgan Stanley.

Maybe just following up on sort of last conversation, giving up some of the lower-quality revenue growth for the sake of profitability. What do you think a more normalized GMV growth rate of the business should look like going forward? And then just one follow-up on the commission rate changes. How do you think these changes could impact customer growth and potentially retention more broadly if you are successful in lowering the amount of this lower-value inventory on the platform?

So Lauren, on the first part of your question, I do think that there's somewhat of -- being totally honest, there's somewhat of an unknown in terms of what the normalized growth rate might be with this new approach in this new commission structure and taking things off our list in terms of different brands. And you can see it in our actual results in Q3, both GMV and revenue grew 20%. And compare that to the first half of the year, in which GMV grew 30% and revenue grew almost 50%. So you're already seeing some impact in Q3 not because of commissions, but because of things that we did with brands. And what's implied in our forecast for Q4 at the midpoint is growth rates in the low to mid-teens and even a little bit less in terms of the revenue growth rate, mostly because of the change in mix to having less direct revenue. So we're assessing that. We're going to see what the impact of the changes that we've made. We will give you some projections in February when we give our full year guidance, our Q1 and full year guidance for 2023. But the most truthful answer is that it's to be seen what the new normalized growth rate will be. It certainly will not be the 35% CAGR growth rate that was built into the original Vision 2025 plan. It's going to be much less than that, but it's also going to be more profitable.

Right. I agree with that. And then I would say on the customer and seller side as far as growth is concerned, we do believe we'll see a slight slowdown there as well. But if we are successful, what we're doing here is just cutting out that low value, but that mid-tier and high value stays consistent. And those items continue to come in because we didn't change the commission structure in that area. So again, we looked at many things when we made these changes, including our cohorts, our VIP, our basket size for both our seller and buyer, both on a brand and item level. So I do believe that there may be some slowdown, but you're still getting the value coming in from the seller and the buyer. So it might be less units but higher value of items.

Our next question comes from the line of Ike Boruchow with Wells Fargo.

So on these unproductive categories, I think you said home, art, kids. Can you just say what percent of GMV these categories contribute today? And by the end of next year, are you expecting that you will have kind of fully worked down those categories?

It's a really small percentage of GMV, these categories, but I will say it's not unmeaningful in the amount of units. So what I mean by that is it's a lot of operational expense for some of these areas for not a lot of revenue. And I will say that we'll work through selling through these items in the first half of the year. Again, you keep hearing us say this, but you'll see meaningful impact from our changes in the back half of next year.

And then if I can just ask, I mean, maybe this is overly simplistic. But if these were unprofitable categories, why were you guys selling it?

Good -- yes, it's a good question. I think we always talk about how it was a little bit of growth at all costs. And we're really looking at everything with fresh eyes and really taking a look at the unprofitable categories, in general. So it's not just categories, but the direct business was another piece of it. Items under a certain price point weren't profitable as well. So it was really to bring in the product and to grow -- one of our core initiatives early on was own the home. And if we're already in the house, why not pick up everything we can because we've already got the luxury manager there. But to be honest with you, it's quite expensive to ship these large items like home and art. And these -- and items like kids are so low-value that our business is not set up. Our high-touch business model is not set up to take these items, like Robert mentioned earlier.

Yes. And I'll add a couple of things to that as well, Ike. I do think that it's not uncommon for start-up companies, tech companies to feel like the answer really is just scale. And that there is a desire to grow as fast as possible with as many categories as possible and try to get the top line and enough scale of GMV and revenue to cover your cost. And as Rati mentioned, we have a little bit of a different approach now as we think about the path forward and the path to profitability. There's one other thing that I will add as well. I do think that there are many times for companies that are making decisions about incremental volume or the next unit and whether to take that unit or not, and this is -- it's a little bit technical from a cost accounting point of view. And I think you guys know that my background was operations, finance and cost accounting in industrial manufacturing environment. In my approach to looking at our P&L and our contribution margin or our fully-loaded OI may be a little bit different than how it was looked at before. And there are some folks that really think of the next unit is what is the truly incremental variable cost of a unit as opposed to looking in aggregate what does it cost us to process an item and move it through our system and what revenue are we receiving for it? And so I would say that the analysis that I did was a little less incrementalism as it relates to our cost and a little more holistic, and so it gives a little bit of a different answer in terms of at what point does the next incremental unit become profitable. And so based on that analysis and that different approach, we found that there are items that we really would like to disincent. And that's what informed this commission change.

Our next question comes from the line of Michael Binetti with Credit Suisse.

It seems like the direct revenues, you're finally starting to work some of that inventory down. You can see it in a few places here in the financials. Would you mind giving us just a rough thought on how you see that going in fourth quarter as we build to your revenue in the fourth quarter? And then I guess the second question is with the commission changes. How do you contemplate what the competitive response might be to a big participant like yourself trying to compete for those high-value goods? Have you seen any competitive response yet that you should be aware of? I guess -- and then as you -- finally, as you think through the categories that are uneconomical, it's been a question for some time. But as I look right now at the website, there's -- and if I just go into one of the basic apparel categories, there are hundreds and hundreds of items under the $20 price point in here, in men's apparel and women's apparel. I have to think those are -- show some economic dynamics close to categories like kids that you just told us don't make sense to put that many units through the system. Once you're done with doing the work that you want to do on the categories you highlighted today, are there other categories that you have to rethink on GMV? Or do the -- is it what you spoke to that these build the ecosystem, they bring people back? Like how do you think about whether there's other parts of the GMV that don't make sense in the way you see the model going forward?

Okay. So Michael, that was -- I think that was a 3-part question.

I'll let you pick one, and I'll start with the other two.

Yes. I think we have them all recorded here. So regarding inventory, to give you a sense of what you might expect, let me give you a profile of the owned inventory that we have currently. So of the inventory on hand, about half of it is from vendor purchased inventory. And we have described before that our open to buy for vendor purchased inventory is essentially 0. And a lot of the reduction we've seen so far has come from that category and will continue to come from that category. And so about half of what we have on hand is in that bucket. About 30% of the inventory is from out-of-policy returns. And we've talked about getting a little tighter in terms of how we enforce our rules and what we will or will not accept, go by the policy, and about 20% of the total inventory is from this get-paid-now category. And so we expect to continue to see the owned inventory decline, maybe roughly in the same order of magnitude you saw in Q3. We do hope to limit the out-of-policy. And the get-paid-now is probably at a decent level of equilibrium in terms of what we want to focus on and very strategically and in surgically identifying things that we want to continue to purchase in that category. So that's the context of inventory, and that's what we're expecting in terms of going forward.

On the commission changes and kind of the competitive response there, we are still competitive in the mid- to high-value structure. So you still earn more with us from a competitor standpoint because of our 30 million luxury members. It's because of our pricing optimization and so forth. We made no change there. If anything, for the top-top tier items like watches, Birkin bags, they earn a little bit more. So we're not worried about that. The items -- the low-value items, you're right, we're not competitive anymore, and we're okay with that because we do -- we're deemphasizing that business because they're not profitable. And that goes back -- goes to your third question -- yes, go ahead.

And I'll add one last thing on the competitive response. It's going to be interesting, Michael, because as Rati mentioned, at the very highest end, at the highest price point watches and handbags and if you're a VIP with The RealReal and you get an incremental kicker to the commission you earned, we are going to clearly be the best game in town on those items. Now it is a very small part of our business. It's a small percentage of GMV. But it will be quite interesting to see what sort of response there might be from competitors, or what sort of response there might be from consignors because we have a clear advantage in that very, very, highest price point item in those categories now.

And then your last question around categories and kind of looking at the site and seeing many items at $20. First of all, I want to say, we have millions of items on the site. So it's still a very small percentage. It's just good to put that in context. And we'll continue to look and optimize our brand list and price point and categories and all of those things. But for now, this is as far as we're going to take it over the next couple of quarters.

Our next question comes from the line of Noah Zatzkin with KeyBanc.

A couple from me. First, how should we be thinking about gross margin for the remainder of the year and maybe structurally longer term given deemphasizing home and some of the lower-priced, less profitable items? And then second, marketing rate came down quite a bit during the quarter. Was there a decision to pull back on spend there? Or is that a reflection of improved efficiency? Any color on rate during the quarter and how we should think about it going forward would be helpful as well.

So Noah, I'll take the first question related to gross margin. We've seen a nice improvement in gross margin sequentially throughout this year. And in Q1, our gross margin was roughly 53.5%; in Q2, it was nearly 57%; and then in Q3, it was now at 60%. I'm glad you asked the question about sequentially what to expect. In normal circumstances, I would expect that trend to continue in Q4, but I think what you're going to see in Q4 is a flattish, maybe a very slight improvement in gross margin in Q4 versus Q3, only because we continue to discount some of this owned inventory that we're trying to clear out of the system or trying to remove and lower our overall inventory balance. And so we do see some discounting that has been projected in Q4 that is preventing a further continuation of that sequential improvement in gross margin. I don't expect it to go down, but I don't expect it to improve in the short run because of that reason. Now if you project into next year 2023, 2024, what I really expect is a continuation of this trend and a return to where this company's gross margin was before the COVID era, which was low to mid-60s. And so I think over time, you're going to see that trend continue and you're going to see us return to that level of gross margin in the long run.

Noah, your second question on marketing and percentage of revenue. You do see it come down. I'll say that marketing is a good story for us, in general. Back -- we don't share the specific back numbers, acquisition cost, but it's down 20% year-over-year. And there's a few reasons for that. First of all, our product market mix is quite strong. Our flywheel effect is working. Our repeats, both sellers and buyers are quite strong. And the team has gotten smarter and better at what we do. We now use a multi-touch attribution model. And at the end of the day, that just means richer data to optimize our spend, what has the best ROI and so forth. So again, a really good story there, and we'll continue to work on optimization.

Our next question comes from the line of Tom Nikic with Wedbush.

If I could follow up on some of the questions earlier about the commission structure and the take rate, I'm a little kind of confused about all the puts and takes there. So I mean if you're incentivizing high-end products and disincentivizing low ASP products, there's a mix shift headwind that you talked about, presumably to incentivize people to sell higher-end goods. You're going to improve the payout on those goods, which would be detrimental to your take rate. I think you also said you're not changing the middle tier. So I'm not sure like kind of where the offsets are that, Robert, I think you kind of mentioned that you would expect like a little bit of improvement in the take rate. I don't -- I'm a little confused as to where that comes from.

Yes. Thanks for the question, Tom. The way I would describe it is, in the past, we've talked about when there was no changes structurally to our take rate or commission rate by category, sometimes you would see our take rate move by 100 or 200 basis points from one period to the next. And we would say that's not a change in rate or what we are taking per category, it's just a change in mix. And as I said before, the higher price point items, we have a less rate -- take rate, but maybe more gross profit dollars. And for lower priced items, we have a higher take rate, but we're earning less gross profit dollars. And so in the past, we would say, look, the take rate is just a mix question because we're not changing the actual rate. What we've done with this strategic change is actually change the rate of commission. We're getting all of things being equal at constant mix, you would see a significant change in our overall take rate and increasing our overall take rate, all other things being equal, which means sort of across the board, we're earning more, we're keeping more. Our overall revenue per GMV dollar is going up, and we're going to be more profitable. And what I've cautioned on is this mix question. So that is true at constant mix. All I'm saying is our mix may change. And now we're back to at this new rate, which net-net is higher. You make get a different nominal take rate strictly because of rate. And just like before, a declining take rate is not the equivalent of bad news for our business. Sometimes a lower take rate is good news for our business because we're selling more high-priced items in which we earn more gross profit dollars for that item. And so I know that's a lot to unpack. But net-net what we expect is an improvement in our overall profitability due to the change in rate by category. So the nominal take rate is a little less predictable, but it will be more profit for the company.

And we're happy to walk you through that separately because there are a couple of different puts and takes on that one.

Our next question comes from the line of Edward Yruma with Piper Sandler.

I won't beat the commission. Of course, anyone can see what other people [indiscernible] on the call. I guess...

I guess we earlier confused everybody on that so far, ever. So that's going to probably take a little bit of follow-up and a little more time with folks. It's just a topic, and so happy to spend more time with folks individually to help.

Right. And we didn't even talk about like the VIP program and the -- and so, again, we can take that offline and we're happy to walk you all through it.

Yes. No, most certainly. I think we've gotten that piece down pretty pat. But I did want to ask actually about the change on the consignor operating model and the kind of what the objectives are, right, with splitting up the consignment specialist and I think their concierges. And then as a follow-up, I think there's some that would argue that there's some countercyclicality of the business on the supply side, maybe macro softens. Like are you seeing any increase in consignment maybe that you expect like could be macro driven?

Thank you, Edward. On the cosigner concierge service is what we've coined it, it's about at the end of the day, just getting better service to our sellers and making sure that they get the information they need right away. I think we all saw that we had some operational challenges during the Great Resignation Part 2 earlier this year. Good news is we're all hired up. We're trained. And we continue to optimize and really look at operational excellence. And one of the last pieces of that was making sure we're getting back to our seller on time and any time they call us that we're hitting our SLAs. And really that who -- they know who to go to at the end of the day. So their service provider is sticky and not changing constantly. So we're really excited about the service, and we really do believe that it's going to increase NPS and CSAT, customer satisfaction on the seller side.

Yes, I agree with everything that Rati said. The other thing that I would add is I do think it's a benefit to our sales organization who are spending an inordinate amount of time dealing with these issues. Maybe they weren't best equipped to handle where somebody else who's dedicated to managing these sort of issues could do a better job. And it does allow our sales organization to focus on what they do best, which is to sell. And so it also is, partially, a productivity initiative for our sales organization to allow them to focus on the things that they should be focused on as well.

And on the supply side and any macro trends that we're seeing, I think I mentioned earlier on the seller piece, opportunities are strong, repeat is strong, not seeing any decline there. Will we even see more supply? People want to optimize and monetize their closet during a recession, we're not sure yet and more to come on that. On the demand side, we are seeing a trade down. So -- and I think I talked about that earlier. So as far as macro is concerned, not seeing anything on the supply side yet. More to come if people want to monetize their closets and are looking for cash. But the trade down is something that we're seeing on the demand side. It's small, but it is there.

Our next question comes from the line of Anna Andreeva with Needham.

A couple of questions for us. I wanted to follow up on the lower value being deemphasized. Just curious, what percentage of the buyer base are low-value buyers only? Makes sense that you guys lose money on some of those price points, but just curious if we should expect the buyer numbers to be lower in the next few quarters as a result. And then secondly, just on the guidance. The sales range is wider than what you guys typically use. Appreciating the volatility out there, but just curious what kind of assumptions are you making at the high end versus low end of the GMS or sales guy? And what are you guys seeing in the business quarter-to-date?

Sure. On the low-value buyer, it's about 20% of our items are low value. So if we do this the right way, which we believe that we made the right commission structure changes to deemphasize that 20%. That 20%, it becomes a much smaller number. But again, the value increases. So the value of the items that we are getting is growing much higher than that. And so overall, you'll see that come out of the growth rate. And then as far as guidance is concerned, I'll let Robert take that one.

Yes. And maybe the other thing I would say, these low-value items, Anna, they were overrepresented in terms of unit volume and much less so in terms of GMV and revenue. And so I do think that that's a benefit to our business overall to -- is we're managing our cost structure to have further units going through our system in driving cost, which drives less GMV and revenue than what the units would suggest. On the guidance side, it's a very good question that I was wondering if somebody -- how closely people are paying attention to our ranges and the conversions. But you're absolutely right that there's a larger range in revenue than normal versus the range we provided in GMV. It is partially impacted by what you suggested at the high-end versus the low-end impact, only because of what I was attempting to explain earlier about the mix impact on our nominal take rate. And so there is a little more uncertainty in terms of what we would expect of our take rate in Q4 and the conversion from GMV to revenue, and that is reflected in this wider range. The other thing that's reflected in the wider range is the impact on the direct revenue as percent of total revenue. And again, that has a very large impact on the conversion from GMV to revenue because direct revenue converts dollar for dollar between GMV and revenue, whereas consigned business only converts, at our take rate, 35% or 36%, or whatever it is, per dollar. And so that creates some uncertainty as well in the conversion from GMV to revenue. And so that's why you're seeing a little bit of a wider range in revenue than you would normally expect to see from us.

That concludes today's question-and-answer session. I'd like to turn the call back to Rati Levesque for closing remarks.

All right. Thank you for joining us today. Before we close the call, I just want to take a moment to express our gratitude to The RealReal team. Thank you for your dedication to bring our vision and values to light every single day. Our team is comprised of some of the most passionate, data-driven and curious people I have encountered. They're willing to take risks, hold each other accountable and debate, align and commit to do what's right for the business. Their dedication to our plan, strategy, vision and values is admirable. To our people at The RealReal, thank you. Finally, I'd like to thank our more than 30 million members who are joining us on our mission to extend the lifecycle of luxury goods and make fashion more sustainable. Thank you.

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