Ladies and gentlemen, thank you for standing by and welcome to The RealReal fourth quarter 2019 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. It is now my pleasure to hand the conference over to Head of Investor Relations, Paul Bieber.

Thank you. Good afternoon and welcome to the RealReal's earnings call for the quarter ended December 31, 2019. I am Paul Bieber, Head of Investor Relations at The RealReal. Joining me today to discuss The RealReal's results are Founder and CEO, Julie Wainwright and CFO, Matt Gustke. Julie will provide an update on our business, including key initiatives. And then Matt will review our Q4 financial results and provide a financial outlook. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our final prospectus for our initial public offering filed with the SEC on June 27, 2019 and the Risk Factors included in our Form 10-Q that was filed with the third quarter financial results and the Form 10-K that will be filed with our fourth quarter results. In addition, our presentation will include non-GAAP financial measures and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our Investor Relations website. I would now like to turn the conference call over to The RealReal's Founder and CEO, Julie Wainwright. Julie?

Thanks Paul. Good afternoon and thank you for joining us today to discuss our fourth quarter 2019 financial results. I am happy to report that in 2019, we generated more than $1 billion in GMV. The RealReal has clearly come a long way from my early days when my COO Rati Levesque and I discussed strategy at my kitchen table while we also did all the work, including answering customer service calls, et cetera, et cetera. A long way. A big thank you to our consignors and our buyers who helped us achieve this milestone. By recirculating goods, you are creating a more sustainable world while also making money from the luxury items you no longer use. Of course, The RealReal's success is due to the dedication and diligent efforts of our employees. You have made The RealReal the safest and most service-oriented marketplace to buy pre-owned luxury goods. Thank you so much. Before discussing our financial results, let's take a moment to discuss The RealReal's authentication process. There is no other resale company doing more to remove fakes from the market every day and to put counterfeiters out of business. We believe we have the most rigorous authentication process in the marketplace as we authenticate every item we sell using a combination of technology and trained experts. On our previous calls, we discussed how automation of copywriting and pricing is changing the roles of our team. In 2020, copywriting and pricing will be mostly automated. The combined impact of automation and leveraging technology has dramatically changed our team's day-to-day activities in our operation centers. The net effect of this has allowed us to process more products daily per person while also expanding the depth of our authentication process, training and quality control procedures. Importantly, our processes will continue to…

Thanks Julie and good afternoon everyone. We had a strong Q4 highlighted by 39% year-over-year GMV growth and 17 percentage points of adjusted EBITDA margin leverage underscoring our continued focus on balancing growth with a disciplined approach to driving operating leverage. Moving on to our key operating metrics. We ended Q4 with 582,000 active buyers on a trailing 12-month basis, up 40% year-over-year. We added approximately 39,000 net new active buyers quarter-over-quarter. GMV from repeat buyers was 82.9% of total GMV in Q4, up 130 basis points year-over-year, reflecting strong buyer retention in the period. We generated $303 million in GMV, an increase of 39% year-over-year, which we are very happy with given that our marketing spend was down 14% year-over-year as planned. Trailing 12-month GMV per active buyer was approximately $173, up 1% year-over-year. Q4 orders were approximately $637,000, up 35% year-over-year. Q4 AOV was an all time record at $476. The 2% year-over-year AOV increase was driven by an increase in average selling price per item, while units per order were flat year-over-year. Returns and cancellations were 27.6% of GMV and improved 210 basis points year-over-year, driven by lower return and cancellation rates. Our Q4 consignment take rate was 36.2%, an increase of 130 basis points year-over-year, reflecting the impact of our Q1 2019 commission changes. We expect Q1 2020 take rate to increase modestly year-over-year and we expect a modest increase for the full year 2020 as we fully anniversary our February 2019 take rate adjustment. We also not that take rates can vary from quarter-to-quarter based on the mix of products sold as well as which consignors had item sales. In a steady state, we expect take rates to be highest in the second and third quarters of the year and to decrease in Q4 with…

[Operator Instructions]. And our first question comes from the line of Justin Post with Bank of America.

Great. Thank you and congrats for reaching $1 billion in GMV. I guess the first question is, it looks like you really are getting strong repeat rates, both from buyers and consignors. And I was just wondering, what are your strategies next year as you try to target new customers and bring them into the funnel? Because it looks like you do a pretty good job of retaining them. So maybe we can start with that. And then I will have a follow-up. Thanks.

Okay. I am going to answer that. We actually have a very healthy growth of new customers also and new consignors. So our strategy sort of remains the same which we use our current member base which is growing pretty aggressively to recruit buyers and then also consignors. Also our stores have turned out to be an interesting way for us to get both new buyers and consignors. Even SoHo in its third year is still attracting a very large percentage of new. But primarily, it's performance marketing to first get someone to be a member and then convert them to a buyer or a seller. And our performance marketing is still primarily driven by media, not digital. So advertising on regional, cable and also some over-the-top media.

Great. Thanks. And Matt --

And just for perspective, for the last few years, we have always been in the 80% rate from a repeat basis which speaks to the value of the business to both the consignors and the buyers.

Okay. Great. Thanks Julie. And Matt, just on the cadence of GMV. It looks like some deceleration in Q1. And then you are kind of expecting it to be flat at that level for the year. I know there could be some volatility on the comps. But just maybe dive into that a little bit and explain your thinking around the GMV growth outlook for the year. Thanks.

Yes, sure. So I am actually going to go back a little bit. You will remember that our Q3 growth rate was nearly 50% in terms of GMV. That quarter included a pretty significant bump around the IPO. Q4's growth was basically in line with what we saw prior to Q3, around 40%. Though there was some impact from having the lower marketing spend in the quarter, we are really happy with the results in terms of the leverage and delivering our first ever quarter of positive operating cash flows. But in hindsight, we may have been too aggressive in our approach because the Q4 reduction did have some carryover in terms of Q1 growth rates for our new consignment leads and new buyers, to your first question. Repeat buyer and consignor performance remains very strong including in the quarter. So while we did successfully optimize for marketing ROI in 2019, we are going to take a more balanced approach in 2020 which results in the more even year-over-year growth rate you see over the year. And to your point, there are some minor fluctuations due to the comps, but more or less an even growth rate. That will help in a number of ways including allowing us to optimize our labor planning a lot better because in our operations swings, up or down, can lead to pretty substantial inefficiencies. So we are going to just be more balanced going forward and the results are as I guided.

Okay. Thank you Matt. I appreciate it.

Thank you. And our next question comes from the line of Edward Yruma with KeyBanc Capital Markets.

Hi. Good evening and thanks and my congratulations as well. Obviously, some very well documented issues in the first-party luxury industry was the impact of Coronavirus. I guess are you seeing an impact from higher promotional levels on the first-party kind of filtering down to what you do? And then second, it sounds like some very promising signs kind of in your physical store rollout. Post Chicago, should we expect kind of a regular cadence of store openings, given some of the strong results that you are seeing? Thank you.

So I will take some and then I will let Matt jump in. So we are not seeing any impact of the Coronavirus at all, certainly not on the promotional front or any other level. And just so you know, our exposure in Asia is less than 2%. I think it's about 1.2%, to be specific. So at least now, as it's contained in the U.S., we don't expect to see any promotional impact or any impact otherwise. On the store basis, again I think you might remember, we look for a great location, good rent and key strategic cities. So right now, we still think it's about two stores a year for the next foreseeable future. That may vary by one store, plus or minus. But we expect a great performance out of San Francisco coming home. Chicago in the summer, we think, will also be fabulous for us. And we are already looking at our next stores. But again, I wouldn't expect more than two to three a year and probably closer to two.

Great. And Matt, one quick follow-up. I know you were fairly clear on the marketing spend. But just so I am crystal clear, is it literally going to be kind of even every quarter? Is there a bit of catch-up in the first quarter from the softer fourth quarter marketing spend? And just maybe help us understand the shape of that maybe a little bit more explicitly. Thank you.

Yes. Without getting too granular, so Q1 quarter-over-quarter is a fairly substantial increase in dollars. And then fast forward to the fourth quarter, so in 2019, the biggest things we pulled forward a decent amount of our Q4 spend into earlier quarters, mostly into Q3 but even a little bit into the first quarter. In Q4 of 2020, we do expect to see year-over-year growth in marketing dollars, but perhaps not as high. Some are in between what we did in 2019 and 2018. So it's a moderation of the strategy. The strategy was successful, but we just feel we should kind of stretch it or smooth it out a little bit.

Great. Thanks so much.

Thank you. And our next question comes from the line of Michael Binetti with Credit Suisse.

Hi guys. Sorry, I had to redial there. And so I apologize if I missed anything on Q&A. But Matt, I just wanted to clarify, I think earlier, you said you expect the take rate guidance to be modestly higher year-over-year, but only in the first quarter, right? I think you said later that you expect it to be flat, flattish?

Yes. Well, that's actually not what I said, but actually I also misspoke earlier. So take rate in Q1 will be up fairly substantially between 50 and 100 basis points year-over-year. For the full year, it will be up modestly. So obviously then beyond Q1, you are talking about roughly flat year-over-year wading out to tens of basis points on the full year.

Okay. So that's basically the wraparound of the price increase from last year in the first quarter and then no planned rate increases for the rest of the year, I think is how to think about it.

That's right.

Okay. And then I heard you answering a question there on GMV at the end. But I will just ask a little bit differently. I mean Julie pointed out the SoHo stores in year three is trending at 36% in your biggest market. I mean these are some of the more mature businesses that you would think would be on the front end of any kind of normalization in the growth rate. But then you are guiding for GMV in the first quarter to slow pretty meaningfully from what we have seen in the last two quarters. How much conservatism would you say is in that number versus something you are seeing in the trends in the business today that led to the guidance?

The guidance reflects the trend. I mean, we are nearly two months into the quarter, right? So the guidance reflects the trends that we have seen quarter-to-date. And it's largely due to the marketing spend we have been talking a lot about. A substantial reduction in marketing spend had a little of impact in Q4, a little bit bigger impact in Q1. We have since ramped up our marketing spend substantially quarter-over-quarter. Therefore, our confidence that we will sustain these growth rates as we get into the second quarter and beyond.

Okay. And if I could just ask one last one. You mentioned a couple of times through the prepared remarks the leverage in the year on shipping would be a major call out this year. Could you just walk us through in reality what are some of the changes in the shipping that's driving some confidence in the leverage there please?

Yes. There's a lot of things, but there's a couple of major ones that I will call out. First is renegotiating our contract with our primary shipping carrier, which is UPS. That took place right at the very end of 2019. So we already started seeing some benefits as we came out of the year. So we will have a full year benefit of lower rates. Second, as you recall, we opened our Perth Amboy warehouse and we started shipping in roughly May of 2019. As that facility started ramping up, we saw an increase in the percent of our orders that have split shipments. So that continued to increase and frankly has kind of yet to peak, but it's getting there. But we anticipate that as we get into this year, that the split shipments will peak and start coming back down. So you will have kind of a two-fold benefit on shipping.

Okay. Thanks a lot. Congrats on the first $1 billion, guys. Great job.

Thank you.

Thank you. And our next question comes from the line of Oliver Chen with Cowen.

Hi. Thank you. Regarding average order value, what are your thoughts about how that may trend going forward as you think about both the interplay and the product mix? And what does your guidance assume for what you are seeing in the promotional environment as well?

Yes. Thanks. So AOV in Q4 was a record high. And actually it was quite high given a higher mix of gifting products. There was a lot of jewelry, a lot of handbags, in particular, that sort of drove our record high AOV in Q4. Q1 is going to come back down, as it always is. So our guide for the year essentially assumes basically flat full year AOV. Maybe it's up about a point, but flat to up a few dollars, in essence. And our expectation for the promotional environment is that it's much like it was in 2019 which means that we will see a Q3 decrease quarter-over-quarter in AOV and a substantial increase again in Q4.

Okay. Thank you. And another modeling question is, when we look over longer term for marketing as a percentage of sales and shipping as a percentage of sales, we have made some really great progress so far. Where do you see that going over time?

So I will start with marketing. So we expect and our model assumes that every year for the next few years, we continue to get leverage in marketing. First and foremost, that's driven by our high repeat rates. And that we expect to see the percent of GMV from repeat buyers and consignors to continue to increase consistently and modestly every year. So the amount of money that we need to spend on growth decreases. And then furthermore, we expect our BAC to continue to decline this year and beyond, though at more modest rates than we saw in 2019. Certainly, we don't expect to see 20% year-over-year decreases every year. And the second was around shipping. So we haven't really built in substantial improvements beyond this year's guide into our thinking. Though certainly, we are going to continue optimizing our shipping expenses, though every time we open a new warehouse you are going to see the phenomenon of split shipments increasing. And that will kind of peak and then drop down over the course of about a year. But outside of that, you should expect to see relatively steady, maybe modest improvements year-over-year each year.

Thank you. And Julie, as a follow-up, you made a lot of really impressive progress with partnerships with various brands. What do you think is ahead for how you are thinking about partnerships, whether that be with specific brands and/or retailers as well?

We actually continue to having continued discussions with multiple brands. And you will know as soon as we know if it comes into something more than a partnership. But again, as you know, Oliver, it's not critical for us to have the brands as a partner. But we are always in discussions and some brands are more open and more positively inclined to work with us than others. So discussions are ongoing.

Thank you. Best regards.

Thank you.

Thank you. And our next question comes from the line of Eric Sheridan with UBS.

Thanks. Maybe two, if I can. When you think about the marketing spend or investments in the business, how is the split between trying to continue to incent more goods and inventory on the supply side of the marketplace versus driving new buyer growth? Is there a split we can get in terms of the way you think about where you need to stimulate more activity in the marketplace and how we think about that exiting 2019 and how that will evolve as it goes through 2020? And the second question would be, from the outside looking in, what signs can you help investors and folks like us in terms of understanding how you might gain additional leverage over the authentication process, especially automation, the machine learning tools over time? Julie, you talked about it a little bit in your prepared remarks. Just wondering if you could go a little bit deeper there and give a little bit more color as we progress through 2020 and beyond in what we should be watching for there? Thanks so much.

I am going to take the last part and then I will kick it over to Matt to talk about leverage in marketing and new. So look, the key for us, as you know, because we do take possession, we receive, we write copy, we price, we take photographs and we authenticate. So the good news is we have made tremendous strides on actually auto-copywriting, pricing and photo editing. So that, by focusing more in that area which are increasingly easier for us to automate, it actually allows us to free up more time for more throughput and deeper authentication. We have also employed machine learning in our warehouse in our ops. So we route products differently based on the counterfeiting trends that we are seeing and also high-risk consignors. So we have employed machine learning and rules-based technology to route product differently which makes our process more clean, I would say. But at the end of the day, everything we are doing is both to automate the tasks that can be automated which gives us scalability and then make sure that we are doing the right things on authentication at all times. So we feel really good. Last year was a monumental year where tests we have put in place in 2018 became a practice in 2019. I would say, in general, we are probably, if you just think of getting to the genesis of this and recognizing the potential, I would say we have got a lot more in front of us than what we have actually realized so far. So we are pretty excited about it. Because secondarily, we do pick, pack and ship and that area has actually had the least automation. So when you look at total ops, from receiving the product to shipping it out, we have a long way to go there. And our model show conservative, really a conservative cost of the impact of technology and we are not going to stop there. I think that's the clearest way to say that. And on the other, Matt?

Yes. So on the marketing question. Given that the majority, at this point, of our total ad spend is in TV and that growth as part of our mix continues, our TV ads tend to be buyer-focused and we have tested seller-focused messaging. And the buyer messages just work better and they resonate better. So we are not specifically trying to drive more buyers than consignors, but it's just the most effective marketing that we can run. The effect of that is that it brings in generally everyone that comes in and becomes a member first and then we use different levers to convert them typically into buyers first, but we try to convert them from a member into some sort of value-creating activity through email marketing and various other means. So expect that to continue. What we have seen is a consistent growth in buyers versus consignors. So we have always had a ratio of about four buyers for every one consignor. So when we ramp up our marketing, we see that happen. The buyer growth tends to go faster with the consignors catch-up and vice versa.

One last comment. We are going to roll out some technology in the next couple of months that actually should help remove even more friction away from the consignors. So ideally, we are supply constrained and we can sell everything we bring in by design. So the more friction we remove from the consigning process, the more it accelerates our growth. And we have been working on some technologies that we will roll out in the next couple of months.

Great. Thanks for the color.

Thank you. And our next question comes from the line of Aaron Kessler with Raymond James.

Great. Thanks guys. A couple of questions. Maybe first just on the brand awareness kind of. How much room do you think you have left to go there? Kind of our recent survey was showing about 20% brand awareness, up nicely year-over-year, but still kind of seems like a lot of opportunity. And then, are there any geographic regions of strength you would call out or new growth areas you are seeing? Thank you.

On the brand awareness, we do the study annually. So you are absolutely right, that's the last numbers that we have seen. We have a long way to go before we become ubiquitous. So I am looking, we have always field that study in the April, May time frame and we do it annually. So we will let you know as we know. But we have a lot of headroom there. So we are excited about that. What was the second part?

Geographic areas that you are seeing.

You know what, the truth is this is sort of like the shoemaker's children have no shoes. The Bay Area actually was a latent growth market for us. We are seeing an acceleration of growth in the Bay Area and we expect that to really go even further once the store opens which will be sometime this quarter. But having said that, the regions are all growing. They are all growing. We are happy about that. But the Bay Area sort of surprised us. Its growth has been accelerating the last six months.

Got it. Great. Thank you.

Thank you. And our next question comes from the line of Ike Boruchow with Wells Fargo.

Hi. It's actually Tom Nikic, on for Ike. Matt, I wanted to get some clarification on the gross margin outlook for the year. You kind of lost me for a second there. I think you said something about 500 basis points of expansion. Did I hear that correctly? That kind of sounds like a lot.

Yes. You did hear correctly and it is a lot. The two drivers are again the shipping expense levers that we talked about a lot at this point and then having less direct revenue which has gross margins in the teens, high teens, less of that as a percent of overall revenue and more consignment revenue which has gross margins in the low 70% range.

Okay. Got it. And then just another clarification. I know the marketing expense has been a big topic here. But when you talk about more consistent across the quarters this year, do you mean like the dollars, like the actual dollar spend is more consistent across the quarters than it was last year? Or do you mean that the growth rates are more consistent across the quarters?

Yes. All right. The growth rates will be more steady. Said more specifically, we will have year-over-year growth in marketing spend in Q4 and whereas in the last Q4, it was down 14% year-over-year.

Right.

Got it. Understood. Thanks very much and congrats on a good quarter and as well as this year.

Thank you.

Thanks.

Thank you. And our next question comes from the line of Rick Patel with Needham & Company.

Well, I will add my congrats on the strong execution as well. Can you update us on the opportunity to convert buyers from your large membership base? I am just curious if there's any way to contextualize the progress you made in 2019 and what you think works best in terms of driving that conversion?

Yes. I will start and if you want to chime in, Julie. So we have about 15 million members in our database. So it's a great pool for us to convert from. In any given period, nearly half of our new buyers and consignors are coming out of that membership base, i.e. they weren't added to the membership base in that period. So that's been very consistent in terms of converting folks. But again, everything kind of comes back to product. And the more product that we bring in, product feeds not only our repeat business, but it converts members into buyers. It's our best lever to convert. Certainly, our marketing helps quite a bit. And there are certain other technology initiatives that we work on to inch forward the conversion of members into consignors or to buyers. And that's always getting progressively better and I would expect to see that continue for this year and beyond.

Yes. I mentioned before that we are actually rolling out some new technology to remove friction for the consignors. The focus on technology for the buyers this year is more personalization and that's an ongoing project. We are excited about it, we have made some strides last year, but you can expect that to be a key focus for the buyer demand. So technology has been very successful at driving better conversion all the way along the way for both our buyers and sellers and this year is going to be another good year for us.

Great. And can you also provide some more color on category performance. I believe you touched on handbags. But curious if you saw any changes in trend in other categories? And to what extent you see category mix playing into AOV as we think about the outlook?

So I will start off and Matt can jump in. Yes. We had amazing growth across all of our categories. And handbags and men's really exceeded the overall revenue growth, followed very closely by jewelry. The only category that didn't really just skyrocket out is our beauty which I bet you didn't even know we did beauty. That's because that's mostly located in our brick-and-mortar stores as a convenience add-on sale. But all categories grew. Handbags grew faster. Men's grew faster than our business. But our women's was still incredibly up. So we really love the fact that we have a balanced category mix. Fine jewelry and handbags and watches actually have a higher AOV and they contribute to our overall business and that's what you saw. Especially during the holiday season, we always sell a lot more of those. And it is a gifting site. But having these balanced categories allow us both to have a higher AOV, get greater gross margin dollars, but also offset. If there is promotional pricing in one category, we can usually offset that by growth in other categories. So we just had a good year all the way around across all categories.

And operator, we have time for may be one more question.

Certainly. Our last question comes from the line of Susan Anderson with B. Riley.

Hi. Good evening. Thanks for taking my question. I was wondering if you could maybe elaborate a little bit more on what you have in the pipeline this year in terms of automation in operations and technology? And are you expecting to get more efficiencies this year versus last? And should we think of it like a rollout throughout the year?

I will start and Matt can pick up. Look, the model's built in efficiencies more versus last year. There's a lot going on, a lot of moving parts. So I would say, it's better just to say that we expect continued efficiencies in our operation. And as you have seen, technology has played a part, not just our media buying, for reducing our BAC. So the combination are actually working hand in glove and we expect it to continue. At some point, it's going to stabilize, but not this year. I think that's a fair statement. Do you want to elaborate?

Yes. I will just add a little bit more specifically. So in the areas of photo retouching and in copywriting, you should expect to see steady increases in penetration as a percent of our unit volume throughout the year. And then in our fulfillment operations, not so much automation. There's a little bit there but the application of technology in process, we expect to see steady improvements in our operating efficiencies there as well. And with growth of the business, we would expect to see some pretty decent fixed expense leverage allowing for overall leverage of the ops and tech line on a full year basis.

Got it. And then just curious with I guess the introduction of some new technology for authentication out there available for consumers and even maybe consignment shops. I am just curious like how you think about your competitive advantage in terms of authentication and kind of as you automate that process also?

So a couple of things. First of all, we operate in a really big space. Secondarily, no one's focusing on luxury including Nordstrom. They are actually focusing on contemporary. And thirdly, we have looked at, there's a product out there that's been cited in the press, that's been around for about 10 years. We constantly talk to that company. It's as good as the database that they have and our database is bigger than anyone. So we are sort of light years ahead of everyone on this level. But that doesn't mean we are not looking at outside solutions on a regular basis to make sure that if there's a better solution outside, we then play it. We are not a not-invented-here company. It's just every time we look at it, we are faster, better and more thorough than what else is out there. We do have a really exclusive relationship. We don't spend a lot of time talking about our fine jewelry and watch technology, but we have a long term strategic relationship with the University of Arizona for gems and they are the premier gemology school in the U.S., where we can actually measure the depth of diamonds very, very accurately and so the estimation that's being done in other auction houses. And that technology, we are also using it to identify the origin of those gems and different stones. And we think we can apply that in other really creative ways. So that's actually saved our gemologists a lot of time. It's made accuracy rate go up beyond an estimation. And secondarily, we think it has application beyond just gem because it does get into origins and metal types. So we are excited about that.

Great. That's interesting. Very helpful. Nice job in the quarter and good luck this year.

Thank you.

Thank you.

And now I would like to turn the conference back over to CEO, Julie Wainwright, for closing remarks.

All right. So thank you very much for dialing in. We had a great year last year. Certainly, we are not resting on our laurels. We are going to have a great year this coming year. If any of you are in the Bay Area, San Francisco, specifically after mid-March, we would invite you to visit our brick-and-mortar store which will open on Post Street with also a door into Maiden Lane. So please stop by. We would love to see you there. And again, thanks for dialing in today and asking the questions.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.