The RealReal, Inc. (REAL) Q2 2026 Earnings Report, Transcript and Summary

Good afternoon, everyone. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome you to the RealReal Second Quarter 2026 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Emily Gacka, Senior Director of Investor Relations.

Thank you, operator. Joining me today to discuss our results for the period ended June 30, 2026, 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.

Good afternoon and thank you for joining us. Q2 was another standout quarter for our business. We delivered GMV of $617 million, an all-time high for TRR, up 22% year-over-year and marking our fourth consecutive quarter of GMV growth above 20%. Revenue grew 17% to $193 million and trailing 12-month active buyers accelerated for the fourth consecutive quarter, up 11% year-over-year. Along with strong top line growth, we also delivered meaningful margin expansion. Adjusted EBITDA margin of 7% was up nearly 300 basis points versus last year. These results reflect the disciplined execution of our strategy. Quarter after quarter, we're up-leveling the customer experience, deepening trust and compounding our advantage. Our buyers are higher quality, our sellers are more engaged and the platform connecting them gets smarter every quarter. Given the strength of what we're seeing, we are confidently raising our full year outlook. The RealReal is a marketplace deliberately designed for the luxury consumer and the way they want to be served. We've developed deep expertise across the full range of luxury, establishing the trust that comes from handling our members' most valued possessions. Every part of our platform from sourcing and authentication to pricing and merchandising is built to deliver an unparalleled service, and it will continue to evolve as our customers do. As the resale market grows, trust is what separates leaders from the rest. We take possession of every item, we authenticate it, and we stand behind our work, a standard most marketplaces structurally cannot match. That's what brought a consignor to us in Q2 with a $2.5 million F.P. Journe watch, and it's the same standard that serves a member discovering luxury for the first time. That full service has enabled us to build the largest authenticated luxury data set in the world. And AI is unlocking the power of that data across pricing, search, authentication and the tools our members use to manage the value of what they own. We've seen where luxury demand is moving in real-time. When demand moves, we're positioned to secure the supply and have the data and pricing intelligence to meet it. Let's discuss the progress we're making against our strategic pillars, starting with our growth playbook. Our sales team sets us apart. We don't wait for supply to come to us. Our people go out and source it, which means our assortment is curated, not accumulated. Year-to-date, supply per sales rep is up 15% versus last year and the relationships they build deepen over time with consignors coming back and bringing more of their closet with them. The same relationships and trust that bring consignors back also bring us new ones through referrals. Our Real Partners program connects us with high-value supply through professionals like stylists and real estate agents who already have the trust of luxury consumers. Sellers referred through our Real Partners program consign 4x the value of our average new consignor. The program demonstrates the network effects in our business, and we see meaningful runway ahead. As we discussed last quarter, we're building an asset-light international supply network. In the second quarter, we onboarded 2 large Japanese vendors onto our dropship program. The success of our sales team, partnerships and our newer supply initiatives is bringing more high-quality supply every quarter. On the marketing side, we are acquiring higher-quality buyers. New buyers up double digits in the second quarter are showing stronger lifetime value and are more likely to turn into consignors, becoming RealRealers and reinforcing our flywheel. In Q2, we launched our Be a RealRealer campaign, putting flywheel messaging at the center of our brand marketing. We're investing in marketing with a healthy balance across brand building and performance channels. We see real opportunity as resale adoption accelerates and younger generations discover luxury through our platform. We are also enriching the product data we share with paid channels, helping search platforms match the right buyer to the right item. These new buyers are spending more on their first purchase. That same depth of data is why we lead when consumers turn to AI to look for pre-owned luxury. Our stores deepen consignor relationships, deliver high-quality supply and build trust in the communities we serve. We are expanding our store footprint strategically in 2026. We look forward to opening our first Boston area store this fall and an additional neighborhood store in the L.A. market, one of our largest and fastest-growing regions. These new stores, along with our San Francisco location, which opened earlier this year, brings our total store count to 20. Going forward, we'll continue to target one to three new stores per year. Turning to our second pillar, obsessed over service. On the buyer side, we recently started testing an AI-powered conversational shopping agent in partnership with Google. We have over one million one-of-a-kind listings and more than 40 million members. So we are always finding ways to make product discovery more intuitive. For example, if you're looking for a dress for a fall wedding in Upstate New York, our agent will deliver a specific and personalized set of results. We're also using AI and our proprietary data to automatically add richer detail to every listing, information like occasion, collection and trend data just to require manual input. This means items are more discoverable, both on and off platform. On the seller side, more than 2/3 of our consignors tell us they prefer a full-service experience. They are looking for a trusted partner who handles everything. This is what our full-service model delivers. You hand us the item, and we do the rest. Every day, we work to make our experience even better, faster and more transparent as well as being easier to engage with. First, our price estimator tool is now built on a centralized AI-powered pricing architecture that gives our sales team and our consignors consistent real-time visibility into the current market value of their items. Our sales team is actively using the tool, and we've launched it in a test for 20% of our consignors. We're also redesigning our digital onboarding for new consignors, removing friction from the seller funnel and making it more conversational from the first interaction. And we continue to build the feature set for MyCloset, the product manifestation of our vision to become the personal adviser of the closet. We're building the system of record for our customers' luxury assets and expect to begin rolling out the broader consumer-facing experience in the coming quarters. Turning to operational excellence. Athena, our AI-enabled intake system, continues to scale, and we remain on track for our year-end target of nearly 50% of items flowing fully through it. We're also starting to process higher-value items that previously required manual handling and attribution. A year in, Athena has shown us there's even more opportunity. We've begun experimenting with its next iteration, extending AI and automation into parts of intake that weren't in the initial phase and removing more manual steps. Ultimately, Athena and our broader technology investments are helping to remove multiple dollars per unit from our processing costs, increasing speed to sell and allowing us to scale with minimal incremental headcount investment. We're delivering growth while continuing to drive operating leverage across the business. Entering the year, we said 2026 would be the year our advantages begin to compound. That statement is starting to become reality. Each part of our platform from authentication and pricing to supply and member experience makes the other stronger. Looking at the broader landscape, we're leading a meaningful shift in how luxury consumers shop. In a recent survey of our customers, over 70% of respondents said that the RealReal elevates their personal style, allowing them to better express who they are. They're prioritizing quality, individuality and lasting value over trend cycles. The RealReal is more than a marketplace. With access to decades of fashion across thousands of designers, we help our customers discover, shop with confidence and maximize the value of their closets. Before I turn the call over to Ajay, I want to thank our team for delivering an exceptional quarter in Q2. Results like this require execution across every part of the business, and I'm incredibly proud of our team. Your dedication continues to raise the bar for how we show up for our consignors and buyers and reinforces my conviction in where we're headed. With that, I'll turn the call over to Ajay.

Thank you, Rati. Good afternoon, everyone. I am pleased to review our second quarter results, which demonstrate in the financials what Rati just described. Our strategy is delivering results, and we are beginning to see the compounding effects we've been investing towards. You can see it in the durability of our growth and the operating leverage in our model. Q2 GMV of $617 million increased 22% year-over-year and accelerated to 37% on a 2-year stacked basis. We delivered adjusted EBITDA of $13.5 million or 7% of revenue, expanding 290 basis points year-over-year. Orders increased 8% and average order value grew 13% to $659. Q2 revenue of $193 million increased 17%, with consignment revenue up 15% and direct revenue up 26%, supported by strong supply through the quarter with strength across our sales team, stores and direct channels. Beyond the top line, we saw deeper engagement across the platform. Trailing 12-month active buyers grew 11%, surpassing 1.1 million. We also saw more of our buyers become consignors. In the second quarter, 44% of our new consignors came from our active buyer base, up from 40% just 2 quarters ago. This highlights the strong network effects in our model and is a meaningful driver of long-term growth and profitability. Our second quarter take rate was 35.9%, down 200 basis points year-over-year. As we've discussed, this movement is driven by a favorable shift in product mix. In the first half of 2026, sales of items above $1,000 increased 36% versus last year as buyers increasingly trust us with higher-value items. These items carry a lower take rate percentage but generate more profit dollars per transaction and stronger unit economics. Gross margin expanded 10 basis points to 74.4%. Gross profit of $143 million was up 17% versus last year. Total operating expenses leveraged approximately 470 basis points year-over-year. Excluding stock-based compensation, OpEx leveraged 370 basis points, primarily driven by operations and technology leverage. This reflects the tangible impact of automation and our Athena initiative. As more items flow through our AI-enabled intake system, we are processing more volume with less incremental labor. Excluding stock-based compensation, SG&A also leveraged approximately 110 basis points, reflecting improved productivity and fixed cost discipline as we scale. In the second quarter, we made strategic investments, increasing our spend in both brand and performance marketing. As the leader in an attractive and growing market, we see opportunities to acquire high-quality buyers and consignors and to build more awareness as resale adoption accelerates. We expect to continue with a similar level of investment in the third quarter. Together, this brought adjusted EBITDA above our prior guidance to $13.5 million or 7% of revenue, expanding 290 basis points versus last year. We ended the quarter with $134 million in cash, cash equivalents and restricted cash. Capital expenditures on property and equipment for the quarter were $4 million. We continue to anticipate full year capital expenditures on PP&E to remain within 2% to 3% of total revenue. 2026 investments are concentrated in our operations infrastructure, including our automated storage and retrieval system, which is expected to go live in Q4 and will expand capacity at our Perth Amboy authentication center by 35%. In Q2, we generated $2 million in operating cash flow, an improvement of $5 million year-over-year. Free cash flow improved $9 million versus last year. Looking ahead, we expect to generate strong positive free cash flow in both the third and fourth quarters. Similar to last year, we expect free cash flow to outpace adjusted EBITDA in the second half, demonstrating the favorable cash dynamics of our business model as we scale. Turning to guidance. With the first half complete, continued strength in our supply trends and greater visibility into the balance of the year, we are confidently raising our full year outlook. For the third quarter, we expect GMV of $610 million to $620 million, representing 17% to 19% growth year-over-year; revenue of $194 million to $198 million or 12% to 14% growth and adjusted EBITDA of $13.5 million to $14.5 million. For the full year, we now expect GMV in the range of $2.535 billion to $2.565 billion, representing 19% to 20% growth year-over-year. Revenue is expected to be between $788 million and $797 million, translating to 14% to 15% growth. And adjusted EBITDA is expected in the range of $66 million to $69 million, which represents an 8.5% margin at the midpoint. This is an improvement of approximately 240 basis points versus 2025, and we remain on track to reach our target of 15% to 20% adjusted EBITDA margins over the medium term. In closing, Q2 demonstrates what we've been building toward: durable growth, expanding margins and a flywheel gaining real momentum. We entered the second half from a position of strength. That is a direct result of our team's outstanding execution across the business, and I want to thank them for an excellent quarter. With that, I will turn it over to the operator for questions.

[Operator Instructions] Your first question comes from Irwin Boruchow with Wells Fargo.

Congrats on the quarter. Just 2 for me. Just the revenue guide for the third quarter looks great. There's a lot of chatter out there on retail and just some slowdown we've seen some during the summer. Just can you comment anything quarter-to-date? It doesn't seem like you're seeing any of that but wanted to bring it up. And then, Ajay, I think you mentioned the pull forward of some investments. The flow-through margin on the second quarter was not as high as some of the other quarters. Can you dig into that a little bit more and is that something that we should kind of model for the future? Or is this kind of a onetime initiative? Just more detail on the margins in 2Q and what it means to the back half and go forward.

Thanks for the question. I'll start, and I'll hand it over to Ajay for the second part of your question. As far as what we're seeing on the platform right now, our consumer continues to be quite resilient. We're all obviously looking at the buyer and supply coming through on the site. Supply continues to be strong, sitting at that intersection like we always say between luxury and value, where if we do see some sort of consumer confidence or that softens, it actually strengthens our case much of the time. So the buyers continue to find their value prop compelling on our platform. And I'd say one other thing that we are seeing, like you know this, but we offer that breadth and data across thousands of designers, and categories and price points. So when this consumer preference shifts, we're able to kind of shift with them pretty quickly.

Thanks, Rati. And to your other question on Q2 results, we're pleased with our results in Q2. GMV was up 22%, and we saw that translate to EBITDA of 7%, which was up 290 basis points year-on-year. As you look at that, it is in the range of what we expect to see on our path to delivering 15% to 20% adjusted EBITDA margins over the medium term. You've heard me talk about how we expect to add between 200 to 300 basis points of margin every year. Q2 was in line with that range, and our guidance for the year is also to add about 240 basis points in 2026.

Your next question comes from Bobby Brooks with Northland Capital Markets.

On the slides, it was called out AI pricing fully launched and one piece of it called out life cycle discounting. But I know you had already had a system in place that automatically cut the price as items aged. So I just wanted to get a little bit more granular on what's new there?

Bobby, thank you for the question. So what we are referring to there is really how we've extended our AI-based pricing algorithm to now manage the movement of price from when an item is initially launched on the platform. What we are doing today is slowly expanding coverage of that model to look at many more data points like page views that an item is getting, the number of buyers that are clicking on the obsessed icon when they look at an item. And we use those signals to then modulate the price of the item going forward. It's a lot more precise. Prior to this model, we still had a lot of people that could override that, and we had more merchandising team effort going into this, and now we have more precision into how we move our prices. The net effect, of course, of doing all this is we are able to capture a slightly higher price. We're able to get the best possible price on behalf of our consignors and also make sure that our sell-through rate stays strong.

Got it. Just a more precise way of doing it is essentially it relying more on data signals.

Yes. Yes.

And then active buyer growth has been strengthened in the last few quarters, and the second quarter was the strongest percentage growth in some time, and that's really impressive when you think of the nominal numbers getting higher. And obviously, a lot of large numbers make those percentage games tougher, but it's not seemingly being an issue for you guys. So if maybe we step back, what in your approach to getting new buyers might have changed over the last couple of quarters that you think is really driving this acceleration? And are there more benefits to come from the strategy?

Bobby, I'll take this one. Thanks for the question. So a couple of things. We're seeing the flywheel. We talked about the flywheel. That just becomes a more and more important mechanic in our business. And that strategy is gaining real momentum. So we're seeing the strong network effects there. 44% of now our new consignors came from our active buyer base in Q2. So the buyers we're acquiring today are just increasingly becoming consignors, and that's how we're acquiring the buyers in the first place. So just self-reinforcing that loop and what makes our business model so durable and capital efficient at the end of the day. But yes, we surpassed over 1.1 million buyers, growing, I think we said 11% year-over-year. The spend is higher. We're seeing 50% more value come in through them. And then mostly Gen Z and Millennials, those are our fastest-growing segments as well, so younger. And then we're just -- as we think about our marketing messaging and our material, you'll see us looking at messaging that is flywheel. So The RealRealer campaign was something that we launched that had really great conversion as well.

And if I could just squeeze one more in, you mentioned signing up 2 consignors for the dropship from -- Japanese consignors for the dropshipping. Just would love to hear a little bit more color there. And maybe if you could help frame, is that like kind of the of the 2 really -- 2 large new adds, or have there been prior ads before? Just trying to triangulate that.

Yes, sure. I'll take that one, Bobby. So I'd say we're making deliberate measured progress on dropship, our kind of way into international. Yes, I talked about in Q2, we onboarded 2 pretty large Japanese vendors onto our dropship program and other significant partners as well in Europe, France and Italy specifically. I believe they have the potential to become some of our larger sellers on the platform. Still really early days. We talked about this year being very much in the test and learn phase. But I'd say the early results are encouraging. And in the medium term, I continue to believe that the opportunity is real. What I like about dropship is that the supply is largely incremental, a supply that wouldn't necessarily come via some of our other consignment channels. And then July marked our highest volume month in dropship. So again, you're seeing strong effects there. So we're excited about that.

Your next question comes from Marvin Fong with U.S. Bancorp BTIG.

And let me add my congratulations on the great performance. Maybe on AOV, obviously doing really well there. Could you just break that down between ASP and UPT? And just secondarily, it's obviously rising pretty rapidly in value. Do you see any sort of limitations on that as the ASP potentially kind of reaches out the reach of some of your buyer population? Just kind of help us understand how to think about that. Or is it just that luxury in general is just price appreciation there makes it so that they'll still continue to buy on your platform?

Thanks for that question, Marvin. We've seen a healthy balance between units and price in our growth rate. In recent quarters, you're right, that balance has indexed more towards price, and we see that being driven primarily by consumers shifting their mix towards more high-value items. I think when you step back from that dynamic, we cover a wide range in the category of luxury fashion, right? We have multiple categories, and we have a wide range of price points. And as a marketplace, we're largely agnostic to any shifts within that mix because our monetization and our unit economics are strong across our assortment. I think it really points to the beauty of our marketplace and how we can quickly move to capitalize on any shifts in trends in luxury fashion. And it's really that flexibility that we would highlight as translating to the durable growth that we've seen in the last few quarters.

Okay. Great. And my second question, just on the AI shopping assistant. With most platforms, that would be viewed as positive for conversion. But since you guys already have such high sell-through, can you just kind of help us understand how that might benefit your P&L perhaps just by higher consignor satisfaction and faster product velocity? But however you think about it, just help us with how that might manifest itself financially.

Yes, sure. I'll start, and then Ajay, feel free to add on. So how we're thinking about this is first of all, it's about transforming the customer experience, thinking about where they're headed. In general, for us, just more broadly, we're thinking about optimizing TRR for agentic search, for example, AEO. I'm confident we are keeping pace and moving with the customer in a lot of ways. So you heard us say that we're launching a test around conversational shopping in partnership with Google. That personalized test set of results gets you the most personalized listing and gets it to the buyer even faster. So that could mean less discounting, discoverability, right? So we're using AI automatically to enrich the listing for whether it's occasion, collection, trend data. And so making our inventory more discoverable, both on and off platform. And so looking at conversion to see what that KPI looks like. But to your point, our sell-through is good, but does that mean less discounting when you're getting the product, the right product to the right buyer even faster.

Yes. And maybe to add to that in terms of impact to the P&L, right, it is really about conversion. We have over one million items on our website at any given point in time. And tools like conversational search really help that buyer find what they're looking for. You've heard us talk about the strong network effects on our platform. As we bring in more buyers onto the platform through investments in helping demand move quicker, we can then convert them into becoming consignors and increase the LTV that they represent to the RealReal.

Your next question comes from Matt Koranda with ROTH Capital.

This is [ Joseph ] on for Matt. Just wanted to see if you guys could touch on guidance here. A pretty big uptick if you look on year-over-year growth trends for GMV versus the prior back half prior comps. Just could you talk about what trends you're seeing either the supply or demand side that gives the team confidence in the second half outlook or if there's any notable consumer behavior changes just given the recent months with geopolitical and market volatility?

Yes. Thanks for the question. Q2 was a standout quarter. We delivered an all-time high in GMV. And I think more importantly, it was our fourth consecutive quarter above 20% growth. And as we look at sort of what's behind that growth, I would point to a lot of fundamentals, right? Our supply is strong. Our strategy towards unlocking supply is working well, and we are seeing our advantages compound and drive that growth. Our buyer base is also growing. We reported 11% trailing 12-month buyers, and we are seeing more of those buyers convert into sellers, 44% versus 40% just a couple of quarters ago. As we look at the second half, these trends from Q2 and the fact that we have strong line of sight into Q3 give us the confidence to raise our guidance for the year. And that's why you see us taking it up from a midpoint of 15% growth on GMV to now 20% growth for 2026.

To add to that a little bit. As far as supply grows and what gives us confidence in the back half of the year, we talk about consignors being our key component for our supply engine. We're seeing the momentum being quite strong there. But what's exciting is that the growth is coming from now multiple channels simultaneously, right? And so they're reinforcing each other. And that's, like I just said, what makes our business so durable. You've got the sales team, our most powerful supply channel. They've got the deep relationships. Supply per sales rep is up 15% per year. And then you've got the professional network through our Real Partners program, which we talked about and their consigned values up 4x per average new consignor. And then you've got the flywheel working as well as some of these other things that we're testing like dropship and then 1/4 of our new consignors coming from stores. So we have the multiple channels working simultaneously just to really unlock more supply and kind of reinforcing each other.

Got it. And then just to, I guess, double-click on that. Are there any new channels where you're finding more sellers? And can you guys talk about a little bit more on the flywheel there? I know you touched on it just previously, but just want to see what you're thinking about new channels to supply and if there's anything to note there.

Yes. So I touched on a couple of them, but to get into a little more information there, again, when we talk about channels, we've got our sales team. They also operate trust in the states, right? They're managing relationships that bring us some of the highest value supply. We've got our professional network through our Real Partners program. So think stylists, real estate agents, closet organizers and others who have already have the trust of luxury consumers, and that's where we're seeing the consign 4x the value of our average new consignor. You've got our flywheel. So now 44% of our new consignors are coming from our active buyer base in Q2. So you see that go up from 40% just a couple of quarters ago. So our marketing team is working hard and being very successful to acquire buyers who are becoming consignors. The retail locations, like I mentioned, this is the in-person relationship that builds and unlocks through the kind of trust and community that we have that really unlocks that high-value product again. And then dropship, we talked about that briefly as well. It's that asset-light way to bring in supply, find jewelry, watches, handbags, some of that higher value, some of them from international partners as well, and we like that because of the incremental value that's coming in through there. And we're also opening a couple of new stores, which we discussed as well. So that will bring our count up to 20 by the end of the year.

Your next question comes from Mark Altschwager with Baird.

Curious how you're thinking about luxury manager headcount growth from here? Is the plan to increase the growth there or lean on productivity per manager as the Athena intake kind of takes work off their plate? And relatedly, just what does the ramp curve look like on a new hire? And how much of the high-value supplier that you're winning is coming from your most senior managers versus some of the newer cohort?

Yes, I can take that one. Thank you for the question. So we plan to grow luxury managers. They grow less than the business does, of course. We're pushing on both things. We're growing the team, but you're also seeing efficiencies come through. And this is some of the things that we talked about agentic on the sales side that we're testing, some of the pricing transparency that we're using smart sales, which we've talked about in the past. So you're seeing more value come in. Supply sales rep is up 15% year-to-date. So you see us doing both kind of onboarding new but also finding efficiencies within the team now. The tenure has also increased pretty significantly. So we're happy about that. You're getting more value there. And then as far as ramp goes, it was a few months, I'd say a year ago. It's come down a lot because of the tools and now training that we have. So I'd give it about 60 days before they're fully ramped.

A follow-up for Ajay, we have kind of a modeling nuance here. But the NMV grew a bit faster than the GMV and implying the return rate or the cancellation rate improved year-over-year, I think, close to 100 basis points. What drove that? Is that purely the mix effect that we're seeing with the higher value? Or are there other things going on with better imagery on the site or the pricing accuracy with the AI tools? Just anything more on that return rate and where you see that going?

You stole part of my answer there. But yes, we have been working on things to bring down our return rate. Better attribution is key. Better imagery also helps with buyers getting exactly what they're looking for. So those things have been driving, I would say, a modest improvement in our return rate, modest downward improvement in our return rate. In Q2, in particular, there's also a lapping effect from what played out last year. So that's sort of adding to what you called out, which is the growth in NMV for Q2 being stronger than what you would expected.

Your next question comes from Marni Shapiro with The Retail Tracker.

Congrats on a great quarter. The site is great. It's a fun place to doom scroll all night. Can you talk a little bit about are people spending more time on the site directionally? Is that going up or down? And a couple of questions even within that. Are you seeing them move from segment to segment, maybe starting in handbags, but moving to dresses or jewelry and things like that? And then I have one more follow-up.

Yes, sure. Marni, thanks for the question. Yes, so we do see customers more engaged, especially on the app or more than 40 hours a year is what they're spending on the app. We do get that comment quite often where they're scrolling a RealReal versus social media. And so we kind of took a look at that. And what we're seeing is more of those buyers becoming consignors like we talked about. High value is driving a lot of the growth from a lot of our categories. So fine jewelry, watches, handbags, ready-to-wear. And then high value was actually up pretty significantly in the first half of the year. So I'm just even thinking items over $1,000 sold, I think, almost up 40% year-on-year as well. And then we talked a little bit about the Gen Z and Millennials growing and just kind of our fastest-growing segments there.

I'm curious, do you have the ability once somebody adds something to obsessions, do you have the ability to market to them to increase conversion because it would seem that that would be the easiest place to kind of pick them off for lack of a better word. Do you have the ability to do that? Like what is the conversion rate on obsessions for you guys?

Yes, for sure. So we can see a lot of that, what the customer is doing, kind of how they're behaving, the views, what they're adding to cart, what they may also like, for example. And this really is, at the end of the day, kind of going from being a transactional -- having a transactional relationship on our marketplace with our customer to more of an emotional or relational one, right? So becoming that personal adviser for our customers' closets through tools like well, you're really kind of hinting at is MyCloset, right? So that price estimator, a seller experience that really deepens over time, the education that we can give them to help them make decisions in the primary market. For example, what is selling well, what is hot, what does hold this resale value, what doesn't. But we're set up really well to do this. We're using AI, we're using data to get smarter every quarter. So you've got 15 years of proprietary data on over 50 million items, powering our pricing, our authentication, search, just the member tools that we have, and we'll continue to evolve this.

Your next question comes from Ashley Owens with KeyBanc Capital Markets.

This is Victoria on for Ashley. I just wanted to double-click on Athena and the AI pricing now. So with Athena on track for 50% by year-end and AI pricing now fully launched, can you just paint a picture of how the platform is getting smarter every quarter? And what changes you're expecting to see with the technology over the balance of the year? I also wanted to ask how it's determining the prices. So if it's looking at a pre-used item versus a dropshipping item in terms of condition, the year, et cetera.

Yes. I can take that question. So let me first talk about Athena. So Athena is our proprietary item or it's our AI-powered intake process. And last year, we started from 0, and we ended the year with Athena processing about 35% of our items, and we continue to expand that model to now cover up to 50% of items by the end of this year. It really drives efficiencies. It's a key driver behind operating efficiencies in our ops and tech line. And what's key for us to expand that this year is to extend it from low-value items, which is where we originally built the models to now going into mid-value and high-value items. We see the results as being multiple dollars per unit coming out from processing costs. It also affects speed, speed to sell, which is very valuable for customer satisfaction. On pricing, just to make sure I got your question, our pricing algorithm is being applied to all the items on the site. So it covers consignment, it covers items that are coming from dropship as well. What it does is it looks at over 100 different data points to compute what the price is likely to be. And we use information like what's the item category, what is the history that we have on that. There was a question on obsessions. That's a great input into that, right? We know how many people looked at it as well and what kind of popularity it has. So we use all that information to come up with the pricing. We've been building this algorithm to first focus on launching price, and now it's been extended into managing discounting going forward as well.

And then I just wanted to double-click on the variance between GMV and total revenue. The gap widened this quarter when I think the guide implied that it would be similar or down from 1Q. I just wanted to ask what's changed relative to your expectations in the quarter? And should we still expect this gap to narrow in the second half of the year?

Yes. Thanks for that question. So the gap between GMV and revenue growth for us is primarily about take rate. And you heard us talk about how we've seen a favorable shift in mix towards higher-value items. And when we sell more high-value items, those come with a lower percentage take rate, but they have strong unit economics, they generate more profit dollars. I mean to put that in context, you heard Rati talk about how items above $1,000, sales of those items has increased 36% in the first half. That gives you a sense for how that mix is shifting. Our guidance contemplates the relationship in the second half to be similar to what we are seeing right now, and that's what's implied in the go-forward guidance for 2026.

Your next question comes from Jay Sole with UBS.

My question is just about what's your updated thinking on the convertible notes, warrant liability, dilution management and just capital allocation priorities in general as the free cash flow continues to improve?

Yes. Thanks for that question. We continue to operate a very cash-efficient business model. And our priority to keep strengthening our balance sheet by deleveraging is still a focus for us. If you look at the last couple of years, we have reduced our total debt by slightly over $80 million, and we will continue to pursue all options to do that going forward.

Your next question comes from Anna Glaessgen with B. Riley Securities.

Just one for me. I wanted to get a little bit more perspective on the growth in above $1,000 items. It sounds like it's a mix of both category as well as mixing up within category. Just any additional perspective would be great.

Anna, yes, thanks for the question. We're seeing it across the board actually. So fine jewelry, watches, handbags and ready-to-wear, all kind of in that category. I'd say it's driven by some of even the unbranded jewelry that we sell on our site.

Your last question comes from Dylan Carden with William Blair.

I was curious kind of looking at the guide for the next 2 quarters, it looks like you're into that longer term algorithm you speak to low double-digit top line, 150, 200 basis points of margin improvement. And I'm just wondering, is part of that -- obviously, that's what you've spoken to, but is some of the low-hanging fruit on the efficiency side behind you at this point? Because I kind of hear different things on the body language like there's still a lot ahead from an efficiency standpoint. But should we expect maybe a slower pace of margin improvement as you work towards kind of what you expect structural top line to that extent?

Yes. Thank you for the question. Yes, when you think about our path to expanding EBITDA margins to 15% to 20%, we do see our goal as balancing growth with profitability. We want to make sure that we strike the optimal balance between the 2. For us, that represents margin accretion of roughly between 200 to 300 basis points in any given year. Our guidance for this year would imply accretion of 240 basis points, which is right in the middle of that range. We will continue to manage the business to make sure that we're delivering on both fronts, capitalizing the opportunity in front of us, a $250 billion TAM with us being the market leader in this space and making sure that we're flowing more of that down to EBITDA.

Okay. And then on the marketing efficiency side, I know it's getting better from just the conversion going after more LTV, higher LTV customers. But are you able to toggle in a way to where your capacity to sort of stimulate buyers to become consignors and vice versa? Is that a muscle that you're able to flex more in the market just from the acquisition side?

Yes. Yes, Dylan. So we are definitely seeing more levers that we can pull on the marketing side. So flywheel and buyers becoming consignors for sure, getting smarter about going out to the right consignors, quality consignors with higher conversion that is going to have that mid- and high-value product. So we're definitely making a deliberate investment here, and we see real opportunity in front of us as resale adoption is accelerating, that younger consumer are discovering luxury or graduating to our platform. When you see that kind of opportunity, we're leaning into that as the ROI is there.

That concludes today's call. You may now disconnect.