Prepared remarks
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. 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 the 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 to 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 is driven by unlocking that supply for our platform. Over the years, we built a unique multi-channel approach that includes luxury managers, stores, and the power of our marketing to unlock the profitable supply. We refer to this approach as our growth playbook. We often mention that we are a supply-constrained business. Essentially, what this means is that if we can procure the supply, we can sell it. Our lifetime sell-through rate is over 90%. Success in executing against our growth playbook relies on driving supply through three key areas: sales, marketing, and our retail stores. The first of these key areas is our sales team, comprised primarily of our luxury managers. This team is responsible for building and maintaining relationships with our consignors and providing education about selling with The RealReal. Our luxury managers also serve as trusted consultants, helping to assess the value of their clients' current assets and advising on purchases of luxury goods in the primary market.
Our top luxury managers generate up to $10 million supply annually through their client relationships. We've been working on providing them with the tools to do their jobs efficiently, and we've created an incentive structure to drive profitable supply. Recently, we launched our smart sales tool, which leverages consumer macro and other data points. The tool enables our sales team to understand which clients are most likely to consign at a given time and helps our luxury managers direct their efforts efficiently. Our sales and merchandising teams are able to curate our platform's assortment through tech capabilities. We are enhancing the ways we leverage trend information and historical purchase and consignment data. We identify which brands and categories are in high demand and mobilize our sales team to proactively pursue these items. We are seeing continued success with our sales team composition and incentive structure updates.
As we've previously discussed, we shifted our luxury manager profile towards individuals with luxury experience and deeper existing connections with consignor targets. In addition, we focused our sales team's incentive structure on GMV dollars versus units, which has contributed to our gross margin expansion. The benefit is showing up in strong supply trends, top line growth, and historically high retention rates for our sales team. The second key to growth is marketing. As the first mover in the space, we have spent 13 years creating the ultimate intersection of luxury and value, approaching fashion from a position of real authority and expertise. During the turnaround, we may have been a bit quiet in asserting our role in this space. In 2024, we started leveraging social media platforms like TikTok and Instagram to engage customers and potential consignors. We recently doubled down on social content that makes complicated topics like authentication and sustainability feel relatable.
Through these efforts, we've realized some of our highest engagement rates on posts. Furthermore, we recently published our annual resale report, which uses data to educate both the press and customers about industry trends. The resale report had 7 times the engagement that we've seen previously, helping to showcase the brand's leadership in the luxury resale space. While perception and awareness are up, there's still more work we can do. We view this as an exciting opportunity to talk to customers about what differentiates The RealReal. The third key area to growth is retail. Our stores offer a curated experience and provide consignors with access to experts for on-the-spot valuations for fine jewelry and watches. We are pleased with the performance of our fleet of 16 retail locations, affirming that the neighborhood store strategy is working. We position stores in areas where our consignors live versus being solely focused on traditional prime retail areas.
A unique aspect of our retail strategy is that the store's primary intent is to generate supply and drive awareness. We continue on the path of opening one to three stores per year in key markets and are looking forward to welcoming stores in Miami and Houston to our fleet later this year. So to recap, as a supply-driven business, our growth playbook is centered on generating supply, and we are driving results through our sales team, marketing, and retail stores. Moving to operational excellence. We continue to improve our operational efficiency, leveraging our robust proprietary data assets and AI capabilities to build trust and improve the customer experience. In 2023, through increased automation, we reduced processing time by over 10% while keeping headcount steady and supporting top line growth. Cost savings from this important work have expanded our margins and funded current year investments that drive operational efficiencies.
For years, The RealReal has been a leader in authentication, with proprietary tools like Vision and Shield helping build customer trust. The work we've undertaken in 2024 is reshaping how we process items. We are leveraging AI and technology to improve speed and reduce human intervention. We use our robust data sets to help route items for authentication based on risk level, automate attribution and copywriting, and determine optimal pricing levels. The majority of our items are now priced using our proprietary algorithms. Through incorporating historical sales data, along with current fashion and pricing trends, we instill confidence that items will sell quickly and for the highest, fairest price. The combination of human expertise and our wealth of data is an important differentiator. By pivoting our focus back to our core consignment business, improving our fixed cost structure, and lowering operational costs, we've enabled our return to growth and improved our unit economics.
GMV and revenue growth accelerated as we moved through Q3, and we're headed into the important fourth quarter with ample supply. As we enter the final quarter of the year, we're encouraged by the momentum we're seeing in the business. We're planning for strong Q4 sales and positive adjusted EBITDA for the year. It's clear that our growth playbook is working, with proof points in both top and bottom line. The RealReal is positioned as the leader in the market with lots of room to scale. I'm excited about the future, but right now, we are heads down, focused on execution to close out 2024. I'd like to thank our team for their hard work throughout the quarter. I'm looking forward to delivering on our 2024 commitments and starting our next chapter of growth. With that, I'll turn over the call to Ajay to discuss our financial results and outlook for the remainder of 2024.
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 mention 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 margin benefits that these changes yielded. Third quarter gross profit of $111 million improved $17 million year-over-year.
Gross margin of 74.9% increased 430 basis points versus the third quarter last year, driven by an increase in our higher-margin consignment business as a percentage of total revenue and the improvement in take rate. Third quarter operating expenses of $125 million increased $9 million year-over-year. As a percent of total revenue, operating expense leveraged 270 basis points as our work to drive efficiency resulted in cost leverage across our business. Adjusted EBITDA of $2.3 million increased to $9.3 million versus last year for the third quarter. On a year-to-date basis, we have delivered a $55 million improvement in adjusted EBITDA versus last year. We ended the quarter with $168 million in cash, cash equivalents, and restricted cash, $2 million above our Q2 balance. This is a notable milestone, as Q3 marks the second time we've achieved positive free cash flow in a quarter. These results demonstrate the power of our business model.
You've heard us talk about our focus on growing consignment revenues. This means that we don't tie up our cash acquiring inventory ahead of the season. In fact, we pay our consigners after an item sells on our platform. The resulting favorable cash conversion cycle creates a positive working capital benefit to our cash flows when we grow. Turning now to our outlook for the remainder of the year. As a result of our strong third quarter performance, we are raising our full year GMV, revenue, and adjusted EBITDA guidance range. We expect Q4 GMV in the range of $484 million to $500 million, which represents 9% growth versus prior year at the midpoint of our guidance, resulting in a full year GMV range of $1.81 billion to $1.826 billion. Fourth-quarter revenue is expected to be in the range of $158 million to $165 million, driven by GMV growth and continued take-rate favorability. Our full-year revenue is now expected to be between $595 million and $602 million, growing in the high single-digit range year-over-year.
Fourth-quarter adjusted EBITDA is expected to be between positive $6.5 million and $9.5 million and would mark our most profitable quarter ever by a significant margin, solidifying the path to a positive full-year adjusted EBITDA, currently expected to be in the range of $4.7 million to $7.7 million. In closing, I share Rati's enthusiasm about our current performance and operational excellence. Across the organization, we are executing on our growth playbook, obsessing over service, and reducing friction in the consignment process while using technology as an accelerator to our flywheel. I would also like to extend my thanks to the teams across our business for their dedication and work in driving our Q3 financial results. We expect to close out this year on a strong footing, with accelerating sales growth and positive adjusted EBITDA.
Questions and answers
Thank you. Our first question comes from 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 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, I'll begin, and Ajay can add if needed. Regarding macro conditions and price sensitivity, our business has proven to be quite resilient. This is the key takeaway. We have discussed that supply remains robust, and demand is strong as well. The fusion of value and luxury is clearly resonating with our consumers. Our ongoing focus on building trust and our three main strategies of operational excellence and prioritizing service are designed to meet the needs of both sellers and buyers. We're emphasizing our value proposition, ensuring that every item displays the primary list price so that customers can clearly recognize the value offered in the product listings.
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 the holiday, just how we should be thinking about that as a 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 talent 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. To add to that, I would say that our Q3 marketing results reflect a blend of the investments Rati mentioned and the efficiencies we've found in our productivity and spending compared to the past. You might recall that we recently appointed a new CMO, and our efforts to enhance the technology behind our marketing strategy are effectively funding some of the investments that are increasing our overall 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 your sales 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 the 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?
Thank you, Bobby, for the question. I want to emphasize that we have a resilient business model that stands apart from the primary market. The intersection of value, luxury, and sustainability is truly resonating with our consumers. Our supply situation is strong, and our growth strategies have proven effective in the past; we understand what it takes to succeed. On the demand side, our focus on value is paying off, reflected in our average order value and selling price, alongside strong conversion rates across all metrics. We have significant momentum, and that’s evident in our excitement about the business. Our strategy focuses on three pillars: executing our growth playbook, which integrates sales, marketing, and retail; achieving operational excellence; and prioritizing service, ensuring that our offerings resonate with consumers while making the experience fast and easy. We're also leveraging our diversified product mix effectively.
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?
Thank you for the question, Marvin. I’d like to share my thoughts on margins in the long term. It's important to consider our current position. We implemented several business changes starting in late 2022, aimed at achieving adjusted EBITDA breakeven. I'm very pleased with the progress we've made, as reflected in our results, which position us well for the future. Looking ahead, we have a clear strategy to increase both revenue and margins at The RealReal. We expect to see strong flow-through as we achieve growth. Our gross margin currently stands at 74.9% for the entire business, with consignment revenues specifically at 88.6%. These focus areas, along with our unit economics, will drive robust flow-through on future growth. Rati pointed out our commitment to operational excellence; we see opportunities to enhance our unit economics, and we are actively working on this. We are continually seeking efficiencies in sales and marketing, logistics, and authentication. Our extensive data set provides a competitive edge in driving efficiencies across our operations, which we believe will further enhance flow-through moving forward. Lastly, regarding where we derive leverage from, we are confident in the investments we have made in product and technology, as well as our fixed cost facilities. We expect to see strong operating leverage from incremental growth in this area 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 are also a factor. So that's the obsessing over service, making sure that the attribution that are driven by AI is 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, I can address that. I want to emphasize the resilience of our consumer health and business model. We have consistently stated that we are a supply-driven company, and supply is currently in a good position due to the initiatives we've implemented over the past few years. The performance of our sales team, the effectiveness of our referral program, our marketing efforts, and our personalized promotion strategy are all functioning well, along with our approach to retail. We are now providing supply pickups, enhancing our availability. When supply is strong, we expect demand to follow, and we've observed this pattern even in challenging environments where consumers are seeking value. Our focus remains on strengthening our core business, building trust with our consumers, following our growth playbook, maintaining operational excellence, and prioritizing service while meeting sellers where they are. We will continue on this path.
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. In Q3, our performance exceeded expectations for several reasons. First, I want to highlight volume. Rati mentioned our growth playbook. We’ve always stated that our business is supply-driven, and we are pleased with how our sales, marketing, and store strategies are enhancing supply. Once we tap into the supply within our business, our sell-through rate improves significantly, achieving over 90% lifetime supply. So, the volume spurred by our growth playbook unlocking supply was a major factor in Q3. Another key aspect of Q3 was our gross margin. We experienced a sequential increase in gross margins, reaching 74.9%, our highest ever. This improvement was due to a favorable mix shift toward consignment revenues which positively impacted our overall gross margin. Additionally, we maintained our focus on operational excellence, constantly seeking efficiencies, which led to robust bottom line performance. We reported positive $2.3 million in EBITDA, marking the second time we've achieved this. Notably, this result is particularly gratifying since Q3 is not typically our strongest quarter, and we managed to reach this milestone while historically we might not have been able to.
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.