Good day, and welcome to The RealReal's Q1 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Caitlin Howe, Senior Vice President of Investor Relations. Your line is open.

Thank you, operator. Joining me today to discuss our results for the period ended March 31, 2023, our Chief Executive Officer, John Koryl, President and Chief Operating Officer; Rati Levesque; 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 and 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 John Koryl, Chief Executive Officer of The RealReal.

Thanks, Caitlin, and welcome to our Q1 2023 earnings call. Today, we reported financial results for the first quarter with revenue exceeding the midpoint of our guidance and adjusted EBITDA exceeding the high end of our guidance range. The improvement in profitability was largely driven by our ability to continue to grow the higher-margin consignment business. During the first quarter, consignment revenue grew 22%, and direct revenue declined 49% year-over-year. This resulted in our gross margin improving 980 basis points compared to the prior year. In addition, during the quarter, we increased take rate, reduced our company-owned inventory balance and narrowed our adjusted EBITDA loss in both dollars and percentage compared to the prior year. We also took steps to reduce our cost base during the quarter. Beyond our financial metrics, we saw positive trends with total active buyers reaching over 1 million for the first time in The RealReal’s history. We are also making progress on our customer satisfaction and consignor experience, which is critical to the long-term health of the business. Let me provide more details on our key initiatives. First, we made updates to our commission structure late last year, which are now starting to deliver results. If you remember, the goals of updating our commission structure were to optimize our take rate, limit consignment of lower-value items and increased consignment of higher value items. We believe the updates are mostly working exactly as we planned. Our Q1 take rate increased to 170 basis points. Lower value supply has decreased and higher value supply has increased year-over-year. Therefore, the commission structure changes are doing well overall. One area we have more work to do is in the mid-value supply. We are currently testing commission rates for different consignor cohorts at various price points to optimize our mid-value…

[Operator Instructions] And our first question will come from the line of Kunal Madhukar with UBS.

One, on the order volume. So the order volumes increased 1.5% year-over-year. And then in conjunction with that, can you talk about what you're seeing in the market perspective? And what are you seeing in the market from a consignor perspective?

Sorry, Kunal. Were you asking about the order, the number of orders?

No, I was initially within the context of like order volume increasing 1.1% year-over-year -- 1.5% year-over-year. I wanted to understand what you're seeing in the market as far as demand is concerned and as far as supply is concerned.

Got it. Yes. So a couple of different things as buyers are concerned and as well as sellers, I'd say that we are seeing -- we always look -- I always talk about the top of the funnel and the engagement to the site, whether that's opportunities or leads on the consignor side. And on the buyer side, that sell-through that is average selling price, average order value, and then unit per transaction. Both of those are pretty healthy. On the buyer side, we are seeing sell-through stay pretty consistent, average selling price going up, active buyers have gone up year-over-year pretty significantly. And on the seller side, same thing, we're really focused. I know that you listened and we're talking many times before, really focused on value and quality versus quantity. So that's what we're seeing on the consignor side as well. So pretty good and healthy engagement across the board.

And as a quick follow-up, are trends in April, any different from the trends that you saw in 1Q?

Yes. We're not -- Kunal, this is Robert. We're not really going to give inter-quarter results for Q2, but our full Q2 guidance certainly incorporates anything that we've seen in April already, which is actuals at this point.

But I would say the trend has been pretty consistent on the seller’s engagement for buyers and consignors.

[Operator Instructions] And that will come from the line of Ike Boruchow with Wells Fargo.

I was just wondering from a demographic standpoint or income cohort, are you noticing any the volatility or weakness at the higher tier part of the customer base. There's been some commentary out there from some of the luxury brands, just that the U.S. consumer is becoming a little bit more pressured, they're shifting their purchases elsewhere. Just kind of curious if you guys are seeing that in the business and how you think about that.

Yes. So we are not seeing that right now. There’s a few different ways that we look at that. We look at that obviously because we’re in market space, both on the buyer and seller side. On the buyer side, like I mentioned, we’re seeing average selling price and average order value going up. We’re really focused on that mid- and high-value product. As you know, Ike, and as far as the consignor is concerned and those sellers that are giving us that product, those VIPs, as far as high and mid retail value is concerned, we are seeing pretty consistent across the board over the last few months. So it goes back to the health of the consumer in my mind. And we’re cautiously optimistic that we’ll see what happens over the next few months with recession? Are we in one? Are we not? But we can report on our own metrics. And again, we’re cautiously optimistic that we’re not seeing the trade down or average selling price decrease at this time.

[Operator Instructions] That will come from the line of Rick Patel with Raymond James.

I was hoping you could help us understand the assumptions going forward for gross margin, very strong performance in the first quarter. I'm hoping you can help with the puts and takes going forward as we think about the sustainability of the improvement you had in the first quarter .

Sure, Rick, this is Robert. I'll take that one. So we did see tremendous year-over-year improvement in our gross margins, almost 1,000 basis points. And I would say that it was primarily impacted by the shift in mix. You may recall that our direct revenue as a percent of total revenue peaked last year. In Q1, it was about 34% of our total revenue came from that lower margin direct business. And in Q1 of this year, we reduced that all the way down to 17%, 18%, which was our strategy in how we were -- if you chose to proceed with our business and our path to profitability. So that had a tremendous impact on our gross margin. We also had the benefit of commission structure change. So we -- that went into effect in the beginning of November last year. And we did across the board net-net increase our take rate. And so -- and that also had the impact of deemphasizing and having us have less of the items under $100, which was also unprofitable. So those things definitely were part of our strategy, and I would describe those 2 changes as more structural and permanent and even maybe a little bit more opportunity as we continue to reduce our direct revenue. Now our direct -- as we increase our direct gross margin. Now there is actually in that improvement of 1,000 basis points, there are some headwinds in there. There is a transitory headwind as we discount some of the old inventory and get rid of the things that were harder to move. We have taken a tremendous hit on gross margin for the direct piece of our business. You saw it on our reported results, it was actually slightly negative in Q1. That's transitory. There is still some of that left. I'm going to call it $5 million to $10 million of inventory of that type of inventory that may require some discounting. But once we get through that, you'll actually see our gross margins continue to improve. And so we are projecting, going forward, that we're going to continue to see improvement in gross margin, maybe not 1,000 basis points, but sequentially, you might see another couple of hundred basis points a quarter, getting to potentially high 60s by the end of the year.

Very helpful. And can you also talk about supply procurement as you make changes to your take rate and the retail strategy how do you feel about the flow of new product coming on to the platform? And anything to call out in terms of getting more mid-level sellers on board?

Yes. Sure, Rick. I can speak to that. So as you know, we’re focused on quality and value of products. So really focused again on that high to mid-value tier. As far as how we think about our supply coming in for the rest of the year and so forth, we’re really focused on the same strategies that we’ve talked about before and seeing some upside there. So we always joke that everything old is new again. Really, the relationships and the profile of our luxury managers. We know that these more relationship-based sales team brings in better retail value to really focused on that. Our referral program, we launched that a couple of months ago now having a meaningful impact on Q1. We’ll continue that. And then just a more personalized view on who we’re acquiring on the marketing side. So again, VIP strategy, more of lifetime value -- focused on lifetime value as far as our marketing dollars and bringing in the right sellers. And so a continued targeted approach there and focused on quality, not quantity, and then kind of our partnerships and affiliate programs as well.

[Operator Instructions] And that will come from the line of Anna Andreeva with Needham.

Great. I wanted to follow up on the annual GMV guide from flat to down, which assumes a kind of similar flattish to down trend in the back half. I was just hoping you could talk a bit more what are you seeing with demand out there for your customer? And then secondly, John, I think you mentioned there are additional opportunities to reduce costs that you guys are finding in the business. Could you extrapolate on that? Are there additional buckets of opportunity that you're seeing? And what's the timing on how those are expected to flow through the P&L?

So Anna, this is Robert. I'll just start with the numbers, just sort of reinforcing what you said. We see a very unusual pattern in our projected GMV this year that is not typical for our business, and it has been done quite purposefully. And so it's important to remember that the reduction in our direct business, which was a reduction of 50% year-over-year, will continue for some time. Now direct business did peak in Q1. It started to flatten out maybe in Q2, and it really started to decline in Q3 and Q4. And so we're anniversarying that in terms of the headwind on overall GMV. And we talked about deemphasizing items under $100. So we very intentionally reset the baseline. And we've talked about this being a reset year, but it's quite unusual to see our GMV and revenue declined from Q1 to Q2. Usually, each quarter sequentially is a little better than the quarter before, ending with Q4 being the highest quarter. And so I think we'll get back to flattish in Q4, although, again, we haven't given guidance for the out quarters. But we are going to see this unusual trends of GMV and revenue going down instead of up from Q1, and it is quite purposeful and intentional. It's what's driving our higher gross margin. It creates what happened in Q1, where you see higher gross profit dollars on lower revenue dollars. And then I'll let the rest of the team talk to what we're expecting in terms of supply and demand and how that all washes out.

Anna, thanks for the question. From a cost perspective, as you'd have any new CEO, you'd expect them to have their own perspective as they come to the table and have help from a third party to review everything. And the good news is, Rati and Robert had done a great job before I got here. And we just had tweaking quite honestly. And some of it has to do also with the nature of our business. We're moving from a hyper growth maybe not as profitable as we needed to be, to a huge emphasis on profitability. And with that, it's coming to some lower volumes. So we had to optimize some pools not only on the support side but on the operations side. So we're constantly trying to maintain flexibility. And you don't want to cut bone and muscle, but at the same time, you need to really optimize your costs to make sure that we can be profitable in the near term. And we're seeing a lot of benefits. Sometimes the costs can't change as quickly as the revenue is changing or the GMV is changing, but we're trying to keep pace as quickly as we can, and you'll see further optimizations in future quarters on that.

[Operator Instructions] And that will come from the line of Noah Zatzkin with KeyBanc Capital Markets.

This is actually Ashley on for Noah. Just with the ongoing macro pressure. I wanted to see how you're thinking about that trade-down effect you previously called out for the remainder of 2023? And then any opportunities you're currently seeing around new buyers?

Yes, sure, Ashley. As far as the trade down effect that we saw earlier in the year and say that – we’re not seeing that right now. We are seeing an average selling price, if anything, go up for like-for-like items. The good thing about our business, as you know, consigned business. So if we do need to discount, our margins don’t get squeezed. So we aren’t seeing that. And as our mix starts to change as far as higher-value goods, more mid and high value, the AOV, ASP, all continued upside. And we do see a little bit more upside throughout the year there.

[Operator Instructions] And that will come from the line of Marvin Fong with BTIG.

I guess I'd just like to try to understand better. So -- and sorry if I missed this, I joined the call late, but are you, in fact, seeing the number of transactions for low-value goods coming down because the supply is coming down? And what -- are we seeing that impact both in the numbers for the first quarter and for your full year guidance? Or how much of the guidance for the back half of the year is related to the direct revenue coming down and some of the other things. So I'm just trying to isolate how much of what's going on is due to just having fewer low-priced goods on the platform. So maybe just kind of speak to that.

Yes. Marvin, this is Robert. So as we mentioned earlier, it is true that we have intentionally reduced volume on low-priced items, and we have intentionally deemphasized and, for the most part, stopped buying vendor in wholesale or inventory. So we do expect that to continue and that is reflected in our full year guidance. But again, it is totally done as a strategic initiative to increase profitability and to focus on the things that are better for our business and our path to profitability. So it is reflected in our guidance, and it is expected to continue. It's part of the reason that I had mentioned earlier, why our gross margin is expected to continue to increase. And again, we are going to be generating more gross profit dollars and higher gross margin on lower revenue. And that makes our business less complex. There's less things to go wrong. It allows us to get a cost structure that matches that level of activity. All of that is very intentional and part of our focus on profitable growth and the path to profitability.

Got you. Great. Robert, I guess maybe another question for you or John. But as I look at your guidance, if I just look at the consolidated take rate, it looks like it's coming down a little bit compared to the first quarter. So should I just think of that as primarily driven by direct revenue coming down quarter-over-quarter and the marketplace take rate climbing? Or is the marketplace take rate increases kind of gone through the system and we should...

Yes. Thanks for the question, Marvin. Just one thing. Direct business has no impact whatsoever on take rate. Take rate is entirely associated with our consigned business. Now typically, what we’ve said in the past is when you see a move in our take rate, in the past, it’s always been strictly a question of mix. When we sell higher price point, lower take rate items, proportionally more of that, take rate goes down. When we sell lower price point items with higher take rate, take rate goes up on average. And so it’s not necessarily a bad thing to see take rate decline. It may just be an indication we’re selling more high-value goods at lower take rate. Now the exception to that, unfortunately, there’s always something weird in our results to explain. You saw a tremendous increase in take rate in Q1. And that was not mix. That was the commission change. So we had 2 variables moving at the same time in Q1. We had made this commission structure change in November. And that did have an impact to raise take rates sort of across the board at every price point more or less. Now more so on low-value items and less so and high-value items, but we did see a change in take rate due to a structural change in our commission structure. And what you’ll see from this new normal of mix, then you’ll see take rate moving just based on are we selling more high-value goods or low-value goods with the associated lower or higher take rates. So that’s what you’re seeing going forward. Q1 is a little bit of an anomaly because it also had that onetime change of raising take rate across the board on average.

[Operator Instructions] That will come from the line of Edward Yruma with Piper Sandler.

I guess just first from a nomenclature perspective, could you maybe better define this mid-value? It's a kind of a new term that you guys haven't used in the past, is specific brands? Is it price points? And then in relation to trying to encourage more mid-value inventory, was there something in the pricing -- or excuse me, in the grid change that maybe deemphasized those products. And then finally, John, would love any observations, and you talked about costs. You've talked about some of the other initiatives that were already in flight. Any other observations operationally, the UI, the customer process that you can take from your previous experiences and bring to RealReal?

Yes. Thanks for the question. Mid-value is a newer terminology that we're using right now. So going back to the commission structure, we did -- we made that change in November, really testing the elasticity of our service there. Good news is it did what we thought it would on the high value, bringing in more high value, low value, less low-value. Great news there. Mid-value, we needed to tweak a little bit. So that's exactly right. We did have to -- we made -- I think we went a little too far in the mid-value area, and we're tweaking that kind of range, and you see those numbers getting better as we tweak. But what mid-value means for us is about $200 million to $750 million, high value is $750 million plus. So we always said this would be a very dynamic strategy and we kind of continue to tweak this commission structure. And that's kind of where we are optimizing at this moment. And then I'll let you...

And I would say -- under definitions, between $100 and $200 million is kind of low value and under $100 million is very low value. And for us, we've primarily, we've effectively tried to eliminate very low value. We do have some low value between $100 million and $200 million. It's going to be in our offering for a variety of reasons. But hopefully, that gives you the definition you were looking for, Edward, on the price tranches. We think about it in terms of price tranches is how we're defining it.

Exactly. And as we tweak and kind of test is mid value based on different commission structures, we're seeing some upside there. So we're getting that just right in that area. And then I think you asked John about the other thing.

From an observation perspective, a lot of marketplaces, obviously, it’s supply and demand, right? Supply is king here. So I’ve spent a lot of my time learning and doing anything I can to contribute to help increase the amount of supply that we can bring to this marketplace. A lot of it’s taking care of your consignors and forming emotional connections with them. A lot of my luxury background is really built around that. How do we form the relationship between the luxury manager and the consignor so that there's a great lifetime value there. We're not churning out these customers. But it’s not just the sales team or the retail team that directly interacts with the first consignment or subsequent consignments. It’s actually how are the goods handled and processed through the pipeline? So we’ve gotten a lot better at operational efficiency, getting things on the site from an SLA perspective, making sure any pricing discrepancies, things like that are addressed in a timely manner. It was a very minor highlight of my speech, but this concierge pod that works directly with the consignors and the luxury managers, now you actually basically have a team working together to resolve any issues. And normal retail businesses, you buy things from a company and sell them to a person. This as a person at both ends. But there’s different levels of sophistication, different levels of complexity. We have to work through all that together, and we’re getting so much better at it and having those teams work together. I think the word that Rati just used in her answer with more testing and testing on commission structure changes and things like that. I think that’s another thing that I’m going to bring from my background. We made a dramatic change to commission structure in Q4 last year. My goal is to not do as many dramatic things because they have big risk to them. You can’t really do that and reaffirm the belief that we’re going to be profitable in 2024 if we make – take a dramatic swing in miss. So what you’re going to see is a lot more tweaking, a lot more testing. From the day I got here, we need – we talked about the registration gate on the site. You can go to 1 page, but you can’t go to any subsequent pages. That’s the type of thing that we need to test. But again, that’s more on the demand orientation. All my initial focus has been based on supply. And quite frankly, with some of the customers, improve the experience and build a better business. That’s what it comes down to.

[Operator Instructions] And that will come from the line of Tom Nikic with Wedbush Securities.

I apologize if this has been asked already. I'm bouncing between a couple of different earnings calls. The average order value, I think, was up something like 2%. And I guess I would think like with the concerted effort to reduce lower priced items on the -- I guess I would have thought that there would have been a bigger increase in AOV. Is that mix shift is not as meaningful as I think it is? Or was there something else within the rest of the assortment that maybe there were category shifts or anything like that, that were affecting the AOV?

Yes. So AOV is about $500 -- almost $500 in Q1. And I will say a couple of different things about that. As we continue this new strategy around deemphasizing low value and more in the mid and high value, I do think you'll see more upside throughout the quarters there. And then the other thing that you'll see is ASP goes up, sometimes you'll see units per transaction go slightly down. There is an inverse relationship there. But I think what we will see throughout the quarters is some continued upside in AOV.

Yes. The $500 is not so bad, either Tom, as you think about it as an absolute number. I know it didn't change much year-over-year or sequentially. But I think it's moving in the right direction. It's a pretty healthy number. We saw average order value peak, I think, around 2, 3 of last year in is when we were really seeing people, especially during COVID, buying higher price point items like watches, and handbags, and jewelry. And so there was an expectation that average order value and average selling price would go down if that normalized. And what we've seen is a pretty decent result in Q1 at nearly $500 average order value. And again, the average selling price is increasing, not decreasing. And as Rati said, we expect that trend to continue.

Okay. If I could just follow up there. When we think about getting to EBITDA profitability next year, is there more benefit that you expect to see next year from the elimination of low-value items? Or will the improvement in profitability next year be more driven by topline growth?

Yes. I think it’s going to – this is Robert. I think it’s going to be both, Tom. At some point, we will anniversary the effect of reducing our direct business down to, call it, 15% to 18% of total revenue, and really eliminating as much as possible items under $100. That will anniversary itself at some point. There will be a, what I would call, a rollover effect into next year as you get a full year impact of us being at that better mix level versus what’s coming down during the course of this year. But I think you’ll see benefit from both. We do expect to continue to grow this consigned business, as I said, in a very wide range we’re providing at the moment, 10% to 20%. And so that will have benefits, it will create leverage and it will be more profitable revenue and growth. And so all of those things come into effect in our projection that we’re going to be positive adjusted EBITDA in 2024. You’re also going to – by the way, you’re going to get a full year effect of some of the cost-cutting actions that we have more recently taken. Again, there’ll be some point – some rollover effect of getting a full year impact of that in 2024 versus a partial order impact in 2023.

[Operator Instructions] One moment for our next question. That will come from the line of Lauren Schenk with Morgan Stanley.

I just had two, if I can. The first was whether or not the shift away from some of the lower value items has impacted fire retention at all? And then the second is, if there's anything more you can share on the new revenue opportunities that you've identified and whether or not there's any upside from that contemplated in the full year guide.

Lauren, I'll take the first one, and I'll let John take the second part of your question. As far as low value and deemphasizing the brands and items there, we're not seeing much of an impact on the retention side. We were pretty surgical when we went in and looked at which items or brands we were going to deemphasize there and make sure -- and then we also looked at the seller basket and the buyer basket as well to make sure that there was high infinity with the brands that we were cutting or low infinity in this case. So nothing alarming on the retention side there.

Yes. And from an advertising perspective, there’s minimal impact to 2023. A lot of it is – back to the testing comment that I just made a moment ago, some of it is listening to our customers. We need to offer products where we don’t take returns on handbags right now. What if we actually offered return insurance, right? Those are the type of things that the market is asking for, we’re going to bring those forward. At the same time, we have 32 million members, and we have a lot of active members, and we have a lot of page views, and we haven’t monetized that from an advertising point of view. So I don’t want to talk about things that we haven’t done yet. We’ve done enough that we have plenty to talk about there. But you will see a big commitment from us to turn on those type of things and bring those to green from a testing perspective and then hopefully have an outsized impact in 2024 when we’re doing it in a conscious and judicious way in the back half of this year.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to The RealReal CEO, Mr. John Koryl, for any closing remarks. .

SP9Yes. Thank you for joining us today. Before we close the call, I want to take a moment to thank The RealReal team. You have all welcoming into the organization have already taught me a lot about the business. Thank you for your openness and enthusiasm and commitment to our mission. We are excited about the direction of the business and look forward to partnering with you to keep making a difference in luxury resale and for the planet. Finally, I’d like to thank our more than 32 million members that are joining us on our mission to extend the life of luxury and make fashion more sustainable. Thank you very much.

Thank you all for participating. This concludes today's program. You may now disconnect.