Good day and thank you for standing by. Welcome to the RealReal Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Caitlin Howe, Senior Vice President of Finance. Please go ahead.

Thank you, Operator. Joining me today to discuss our results for the period ended September 30, 2024, are Chief Executive Officer and President, Rati Levesque; and Chief Financial Officer, Ajay Gopal. 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. We have provided reconciliations for historical non-GAAP financial measures 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 call over to Rati Levesque, Chief Executive Officer of The RealReal.

Thank you, Caitlin. Good afternoon, everyone, and welcome to The RealReal third quarter earnings conference call. I'm honored to speak with you today as the new CEO of The RealReal. I've spent the last 13 years at this company, working with some of the best, most talented people in the industry. We built world's largest online marketplace for authenticated resale luxury goods on a foundation of trust, expertise and unmatched customer service. Our teams are executing well against the company's vision: to change the way people shop for the better. We are creating a unique circular shopping experience built on technical expertise and high-touch human service. I've been deeply involved with the foundational changes we've made to the business, and I'm looking forward to continuing champion our strategies, obsessing over service, operational excellence and scaling the business through our growth playbook. I'm proud of the progress we've made, and I'm pleased to report strong third quarter results. GMV, revenue and adjusted EBITDA exceeded our expectations for the third quarter, increasing confidence in the momentum of our business and enabling us to raise our full year guidance. Third quarter GMV grew 6% versus last year, an acceleration from the second quarter. Revenue of $148 million increased 11%, driven by strength in consignment revenue, up 14% versus last year and an increase of more than 20% on a 2-year basis. We also achieved solid progress on our path to profitability. Third quarter adjusted EBITDA of positive $2.3 million marks our second quarter of positive adjusted EBITDA, and importantly, we delivered positive free cash flow for the quarter. Supply metrics are strong, with both units and value increasing versus last year. As we've highlighted before, we believe there's $200 billion in untapped value for luxury resale items in the U.S. alone. Our growth…

Thank you, Rati. Our strong third quarter results are an important step as we focus on scaling our business profitably and strengthening our balance sheet. We were encouraged by the acceleration in top line growth throughout the third quarter. As you heard Rati mentioned earlier, our growth playbook, which is centered on unlocking supply, is working. This growth, along with higher gross margins and our focus on driving operational efficiencies, resulted in positive adjusted EBITDA for the quarter. Now turning to our detailed Q3 results, beginning with the top line. GMV of $433 million increased 6% versus last year. This was an acceleration from Q2, led by strength in the consignment business as strong supply trends helped to fuel increased orders and larger average basket sizes compared to the prior year period. Revenue of $148 million increased 11% in the quarter due to higher volume, lower returns and a healthy take rate of 38.6%, up 50 basis points versus last year. Consignment and shipping revenues grew 14% and 17%, respectively, in the quarter. Direct revenue was down 10% as we established a good baseline for our direct business. Active buyers as measured on a trailing three-month basis increased versus last year for the second consecutive quarter, growing 7% to 389,000. On a trailing 12-month basis, active buyers at 958,000 was stable versus last year. As a reminder, we modified our take rate percentages in late 2022. Some of those changes were designed to limit the number of lower-priced, lower profit items on our platform. We expected to see an impact to our active buyer account as we reduced the number of items available for sale under $100. As we anniversary these updates, we are beginning to see a positive inflection in the 12-month active buyer data while retaining the gross…

Thank you. [Operator Instructions] And our first question coming from the line of Mark Altschwager with Baird. Your line is now open.

Thank you. Good afternoon. So guidance implies continued acceleration in GMV in Q4. Can you give us some additional context on supply trends or other factors you're seeing quarter-to-date that give you confidence in that outlook? And then separately, Rati, just any thoughts you can share on any new strategic initiatives on the agenda or any changes you're planning now that you're in the CEO seat? Thank you.

Thank you, Mark. Thanks for the question. So I heard two questions there. What gives us confidence in our Q4 guidance and some of the supply trends we're seeing? So I'll start with that one. I will say supply is quite healthy right now. We're feeling really good about supply and where we're at. And we're a supply-driven business, so that's really important when looking at the following quarters. It's driven out of three main strategies, which we've talked about in the past and which we talked about in the growth playbook. You heard that in the script. And it's really the sales, marketing and retail coming together, working together really nicely. And so the sales side, we're seeing all-time lows or highs on retention. We're seeing the compensation structure really work for them, the referral program that we launched really working there as well. We're expanding to other key markets. On the marketing front, personalization, really targeting that mid and high-value consignor. And on the retail side, we've talked about this in the past, we're seeing this halo effect. Some of these stores bring in up to $40 million a year, and so we're also seeing that high average selling price, even up to five times higher. So we have a lot of confidence in supply right now. We're seeing people want to monetize their closet. We know the TAM is really big, $200 million in people's closets. And these three things really coming together that we're calling our growth playbook as we operationalize that and scale that, seeing some really good momentum there in our business. And then as far as my strategic initiative, the strategy is working. So I'd say two years ago, when I came in as co-interim CEO, I made some changes. We looked at our take rates, and we rightsized our take rate, making sure that everything is now profitable. We moved out the direct business. That's the product that we're buying, got rid of unprofitable categories. I see that sticky and not changing, right? So, feeling really good about that strategy. You're seeing it work. You're seeing it in Q3. You're seeing it in Q4 of an implied guidance of 9% in Q4. So, all of those things are great, working. Return to growth is a big kind of talking point for us internally, and we'll continue to change the way people shop. And then as far as innovation goes, we'll expand on that with the idea that we'll continue to be supply-driven when we think about new ways to also acquire supply.

That's all super helpful. Thank you. Maybe a quick follow-up for Ajay. Just on gross margin, you continue to see some nice gains in consignment gross margin. Is there further opportunity there as we look beyond 2024?

Thanks for the question, Mark. We feel really good about our results in Q3 on gross margin. I know you pointed out consignment margins coming in at 86.5% to 86.6%. A couple of things I would say that really drove our gross margin performance as a business in Q3, 74.9%, nearly 75%. It was the highest we've reported as a business. One big driver there really is the mix of consignment revenues. When you look sequentially, we had a strong quarter with a lot more of our revenues coming from consignment revenues, and that drove the aggregate gross margin of our business higher. To your point on what you should expect going forward, I think we're sort of in the right place right now. Mix may have a small impact on our margins on a go-forward basis, but we feel really good about where we stand today and expect that to be in that same range.

Great. Thanks for taking my questions.

Thank you. Our next question coming from the line Ashley Owens with KeyBanc Capital Markets. Your line is now open.

Hey, good afternoon, and thanks for taking our questions. I just wanted to start on the price sensitivity within the consumer, circle back on this last quarter, just given it was called out as a makeup in volume to offset some of this. We saw slight improvement in the AOV year-over-year growth from 2Q, so maybe just an update there, and if you could help us on how we should be thinking about growth in volume versus AOV in the fourth quarter?

Yes. So I'll start, and Ajay, please add on as necessary. So as far as macro and price sensitivity, I will say that our business has been quite resilient. I think that's the most important thing. We talked about supply being strong, but demand is also strong. This intersection of value and luxury is really resonating with our consumer, and as we continue to focus on trust and our three pillars around our growth playbook, operational excellence and obsessing over service, really giving that seller and that buyer what they want. So we're going in heavy on making sure people understand that we are a value play. And that goes -- I can give you some tactics on that, but that's making sure that every item shows the primary list price. So you can really see that value come in on the product listing detail.

Okay. Great. And then just one follow-up. With marketing leveraging a little bit more in the quarter, I wanted to click down a bit on the strategy there heading into holiday, just how we should be thinking about that as percent of sales on a go-forward basis and what the right level should be?

Yeah. So the marketing piece, this goes back to three-legged stool with marketing. We'll continue to see efficiencies. You should expect some seasonality there. Q3 is a lower spend quarter based on the summer months, Q4 being the holiday, you'll see a higher spend quarter. That said, we continue to feel confident in continuing to drive efficiencies. We've invested in talents there, our acquisition costs going down, SEO, better attribution, really understanding where that dollar is going and is it incremental to our P&L. They're also launching some look-alike campaigns and personalization and marketing. So we're excited about the opportunities there over the next years.

Yes. And maybe just to add to that, I would say that what you're seeing in our Q3 results in marketing is a combination of the investments that Rati just highlighted and them being funded by our ability to find efficiencies in productivity and how we've been spending our money compared to the past. You might remember, we brought a new CMO fairly recently, and we were just -- our investments in improving the technology behind it and how we think about approaching marketing is really helping pay for some of the investments that are driving the total volume.

Great. I’ll pass it along. Thank you.

Thanks, Ashley.

Thanks, Ashley.

Thank you. Our next question coming from the line of Bobby Brooks with Northland Capital Markets. Your line is now open.

Hey, good afternoon everyone. Thanks for taking the call. So first question is some luxury houses whose products fill yourselves have seen weaker results recently, and that's really a strong contrast to your great 3Q results and the guidance raise for the year. So obviously, a big difference between those brands. They have a large exposure to Chinese consumer, which RealReal does not. But outside of that, could you maybe just remind us all how Real can still grow despite headwinds being faced in the first handle?

Yes. Thank you, Bobby. Thanks for the question. I will just double down on we really do have a resilient business model. We're very different from the primary market. And you heard me say this, and I'm going to say it again, the intersection between value and luxury and even sustainability is really resonating with our consumer. We're in a really great place with supply. The supply growth book is working. We've grown the business in the past. We know what this playbook looks like. And then the demand piece we talked about, that value play, the consumer is really -- you look at our average order value, you look at our average selling price, quite strong conversion, all of these metrics and KPIs from top to bottom. So it gives -- we have a lot of momentum in the business, and we're feeling excited about that, and I think that's what you're hearing. What we're really focused on to continue drive that is those three pillars, right? It's the growth playbook that you heard me talk about, sales, marketing and retail all coming together. It's operational excellence, and it's obsessing over service and really delivering product that resonates with our consumer base, making the service fast, easy, where they can earn more. We're doubling down there as well. So -- and the idea that we have a diversified product mix also really works in our favor as well.

Thank you. And our next question coming from the line of Marvin Fong with BTIG. Your line is now open.

Good evening. Thanks for taking my questions and congratulations, Rati, on the new role. Most of my questions have been asked here, but we get a lot of questions from investors more looking kind of long-term, so perhaps a question for Ajay, but goes out to anyone. Just about sort of the algorithm we should think about in terms of sort of like flow through or you might want to call it incremental margin as we sort of think about 2026 or beyond. So it looks like, for instance, incremental margins in the third quarter were over 60%, but dropping off a bit here in the fourth quarter based on your guidance. But just what's a good incremental margin to kind of use once they sort of like 2026 and beyond?

Thanks for the question, Marvin. Here's how I think about margins over the long term. I think it's helpful to frame where we are today. We made a number of business changes starting back in late 2022. These changes were primarily directed as a first step of getting the business to being EBITDA breakeven, adjusted EBITDA breakeven. And I'm really pleased with how that has played out. You've seen the proof points in our results so far, and that positions us really well looking forward. I think going forward, we have a clear path to growing both dollars and margins at The RealReal. We're going to see strong flow-through on growth. Our gross margin is at 74.9% for the total business and in particular, 88.6% for consignment revenues, that being the focus areas of our growth, combined with unit economics, are going to give us strong flow-throughs on incremental growth from here. Rati highlighted our focus on operational excellence. We believe there's opportunities to further improve on our unit economics, and we continue to work on those areas. We continue to work on finding efficiencies in sales and marketing, in logistics, in authentication. And we think our rich data set really gives us a competitive advantage in how we can drive efficiencies across our business. So we expect that to further improve the flow-through going forward. And the last thing I would say, Marvin, in terms of where we get leverage from, it's our operating expenses. We've got the right -- we feel like we've got the right investments in product and technology, in our fixed cost facilities footprint, and we expect to see strong operating leverage from incremental growth on that line as well.

Great. And my follow-up question, I think it was called out that the return rate was improved, and by my math, it seems like it was a lot better in the third quarter. What kind of drove that? And is that sustainable? And then as a corollary to that, I believe you're now allowing people to pay a fee to return items that are like final sale. Could you maybe comment on uptake of that and some of your other monetization initiatives? Thanks.

Thank you, Marvin. So churn rates are lower. It really is driven out of mix. That's the primary reason that they're lower. Operational efficiencies is also a factor. So that's the obsessing over service, making sure that the attribution that are driven by AI faster, not only does it make it faster, but it makes the listing more efficient. So we're happy about that. But again, it's driven out of mix, so it depends on what the mix looks like within the quarter. As far as return insurance goes, that is something that we are testing our way into. Super early days. We'll definitely have a read over the next couple of quarters, and it's mostly on final sale items as well as handbags. So happy to give you more information as we continue to test this initiative.

Got it. Thanks so much. Appreciate it.

Thanks, Marvin.

Thank you.

Our next question coming from the line Ike Boruchow with Wells Fargo. Your line is now open.

Hey. This is Robert on for Ike. Thanks for taking the question. Most of mine have been asked already. But just maybe you could talk a little bit about the consumer trends you saw through the quarter, particularly last quarter, you were talking about it slowing a little bit, you're a little bit more promotional, but you kind of blew it out the park this quarter. So any color you can give on that and how it looks exiting?

Yes. Sure, Robert. I can answer that. I take this back to the consumer health and our business model being quite resilient. So I'm going to double down on that message there. We are seeing -- we've said this before, we're a supply-driven company, and it's all about supply. Supply is in a very good place because of the initiatives that we've been running over the last couple of years, sales, the retention numbers of the sales team, the referral program is really working around marketing and our personalized promotion strategy as well as retail meeting the seller where they are. We offer -- we're offering then now pickups for supply. So if supply is in a good place, we'll see the demands follow. And even in a harder environment, we found that to be true, because people are looking for that value play. So for us, it's really about doubling down on our core business, our moat, building trust with our consumer, focusing on the growth playbook, operational excellence and obsessing over service, and meeting the seller where they are. So we're going to continue down that path, yes.

Hi, Robert, thanks for the question. Let me add a couple of points to Rati's answer. We did see acceleration through Q3. I think the very beginning was a little soft, and then we saw gradual improvements from there. And we feel really good about how that momentum has continued into Q4. We look at average order values as an indication of consumer sort of preference, to your question, and our average order values in Q3 at $522 were strong. They were resilient. They've stayed above $500 for us on a consistent basis, and they were actually up when you compare versus prior year by about 2%. So I think all in, we feel really good about how the quarter played out and what that means for us going forward.

Yes. Really appreciate it.

Thanks, Robert.

Thank you. Our next question coming from the line of Jay Sole with UBS. Your line is now open.

Great. Thank you so much. My question is if you could just really clarify what's driven the upside to the guidance. Of all the different growth initiatives that you talked about, what is it that's really changed from not just last quarter to this quarter, but really from the beginning of the year until now? Thank you.

Thanks for the question, Jay. I think on Q3, in particular, the story versus expectations for us was driven by a few things. First and foremost, I would point out to volume. Rati mentioned our growth playbook. We've always described our business as being driven by supply, and we're really feeling good about how that combination of sales and marketing and stores is unlocking supply. And once we find the supply in our business, our sell-through rate is really strong. We have over 90% lifetime supply. So volume driven by our growth playbook unlocking supply was one big factor in expectations in Q3. The other point I would make on Q3 is gross margin. You noticed that sequentially, we were up on gross margins and at 74.9%, this was our highest ever gross margin as a company. That was driven by a favorable shift in mix towards consignment revenues. When that happens, it lifts the overall gross margin for our business, and that was another source of upside for us in Q3. And the last thing I would say is our focus on operational excellence. We continue to look at opportunities where we can drive efficiencies in the business, and that resulted in strong bottom line performance. We reported positive $2.3 million in EBITDA, which was also the second time we've done that. And more notably, I think in Q3, it's particularly pleased because it's not a seasonal high quarter for us. We managed to do that at a point which is -- which we would -- previously, I would say, we were probably not quite there yet.

Got it. Okay. Very helpful. Thank you so much.

Thanks, Jay.

Thank you. Ladies and gentlemen, at this time, we have no further questions in the queue. This will conclude today's conference call. Thank you all for your participation and you may now disconnect.