RealReal : First Quarter 2021 Transcript

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EDITED TRANSCRIPT

REAL.OQ - Q1 2021 RealReal Inc Earnings Call

EVENT DATE/TIME: MAY 10, 2021 / 9:00PM GMT

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MAY 10, 2021 / 9:00PM, REAL.OQ - Q1 2021 RealReal Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Julie Wainwright The RealReal, Inc. - Founder, CEO & Chairperson

Matthew Gustke The RealReal, Inc. - CFO & Treasurer

Paul Judd Bieber The RealReal, Inc. - Head of IR

C O N F E R E N C E C A L L P A R T I C I P A N T S

Aaron Michael Kessler Raymond James & Associates, Inc., Research Division - Senior Internet Analyst

Alec Edward Legg B. Riley Securities, Inc., Research Division - Associate

Edward James Yruma KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst

Erinn Elisabeth Murphy Piper Sandler & Co., Research Division - MD & Senior Research Analyst

Irwin Bernard Boruchow Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst Justin Post BofA Securities, Research Division - MD

Lauren Elizabeth Cassel Schenk Morgan Stanley, Research Division - Equity Analyst

Mark R. Altschwager Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Marvin Milton Fong BTIG, LLC, Research Division - Director & E-commerce Analyst

Michael Charles Binetti Crédit Suisse AG, Research Division - Research Analyst

Oliver Chen Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

Simeon Avram Siegel BMO Capital Markets Equity Research - Analyst

P R E S E N T A T I O N

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the RealReal First Quarter 2021 Financial Results Conference Call. (Operator Instructions) I would now like to hand the conference over to your host today, Mr. Paul Bieber. Sir, please go ahead.

Paul Judd Bieber - The RealReal, Inc. - Head of IR

Thank you, Mel. Good afternoon, and welcome to the RealReal's Earnings Call for the Quarter Ended March 31, 2021. I'm Paul Bieber, Head of Investor Relations and Capital Markets at the RealReal. Joining me today to discuss our results are Founder and CEO, Julie Wainwright; and Chief Financial Officer, Matt Gustke.

Hopefully you had a chance to read our press release and stockholder letter that we distributed earlier today, both of which are available on our Investor Relations website. Before we begin, I'd like to remind you that we will make forward-looking statements during the course of this call. These forward-looking statements involve known and unknown risks and uncertainties, and our actual results could differ materially. You can find more information about these risks, uncertainties and other factors that could affect our operating results in our most recent periodic report on Form 10-Q, subsequent quarterly reports on Form 10 -- excuse me, in our most recent periodic report on Form 10-K and subsequent quarterly reports on Form 10-Q and in our earnings release earlier today.

In addition, our presentation will include certain non-GAAP financial measures for which we have provided reconciliations to the most comparable GAAP measures in our earnings press release.

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MAY 10, 2021 / 9:00PM, REAL.OQ - Q1 2021 RealReal Inc Earnings Call

With that, I'll hand the call over to Julie for introductory remarks, and then we'll go straight to Q&A. Julie?

Julie Wainwright - The RealReal, Inc. - Founder, CEO & Chairperson

Thanks, Paul. Well, after more than a year of navigating the challenges created by COVID, it is great to say that we returned to growth in Q1 and also achieved our highest quarterly GMV in the company's history. Q1 GMV increased 27% year-on-year, a significant improvement from the 1% year-on-year decline in Q4. Our members increased by 1.5 million in Q1. We also added the greatest quarterly number of new consignors to date in Q1. And as of April, we have surpassed $2 billion in cumulative consignor commission payouts. For perspective, it took us 8 years to pay out the first $1 billion in commissions, but the second $1 billion happened in less than 2 years.

Tackling the challenges of the past year led to numerous innovations and strategic initiatives, which have us well positioned to build on our momentum and support long-term growth. Specifically, we have significantly diversified our supply acquisition, expanded our retail footprint and brought millions of new members into the circular economy. We thank our entire team for their dedication to delivering a superior experience to our community throughout these unprecedented times. As we build on our recent momentum and march toward profitability, we remain focused on driving scale and operation efficiency gains. The pandemic still limits our forward visibility. However, our return to growth, combined with the widespread vaccination distribution, leaves us optimistic about the balance of 2021.

Importantly, I want to thank Matt. He has been my partner managing the company for the last 8 years, raising over $1 billion in capital and taking us public. Matt will be with the RealReal until we find his replacement, and he will ensure we have a successful transition with the next CFO.

Now back to the quarterly results. Now we're ready for the questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) First question comes from the line of Justin Post.

Justin Post - BofA Securities, Research Division - MD

I guess I want to talk about GMV kind of flat quarter-over-quarter in the guidance. How do you think about 2Q seasonality? Of course, we can look back at prior years, but how are you thinking about that? And then specifically, we know how important in-home visits are. Are those going to be kind of ramping in 2Q? Or is the real benefit to that going to be in the back half?

Matthew Gustke - The RealReal, Inc. - CFO & Treasurer

Yes. I'll take the first and start the second -- hand to Julie. So the GMV guide for the second quarter of $320 million to $330 million, as you point out, is roughly flat. That's basically consistent with the non-COVID period. We typically see sequential flatness in the Q2 over Q1 as well as Q3 over Q2 with a kind of more hockey stick-like inflection in the fourth quarter each year.

With respect to in-home, yes, I mean, your question was asked and answered basically. We began reintroducing in-home in March and then nationwide in April. Still very early days, but we're seeing good indications that there's a lot of pent-up supply. So we'd expect to see that continue ramping throughout the balance of this year and beyond, frankly.

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MAY 10, 2021 / 9:00PM, REAL.OQ - Q1 2021 RealReal Inc Earnings Call

Justin Post - BofA Securities, Research Division - MD

Got it. And maybe one follow-up. So the impact of that, I mean, is it going to be additive once you get that back up and running? And could we look for better-than-normal sequential trends in the second half?

Julie Wainwright - The RealReal, Inc. - Founder, CEO & Chairperson

Well, we don't -- this is Julie, obviously. We don't know what normal is as we come out of COVID. So I would say early indicators show that we're picking up more units than we did prior to COVID when we do our in-home visits, but that could be temporary and could go on the balance of the year. It's just hard to project right now, and we tend to make more conservative projections. All we can say is that we're encouraged by the early signs.

Justin Post - BofA Securities, Research Division - MD

Got it. Good to see you back at growth rates again.

Matthew Gustke - The RealReal, Inc. - CFO & Treasurer

Thanks.

Julie Wainwright - The RealReal, Inc. - Founder, CEO & Chairperson

Thanks.

Operator

Next question comes from the line of Oliver Chen from Cowen.

Oliver Chen - Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

The vendor program has been impressive. What do you see ahead in terms of the vendor program momentum and also capabilities, whether that be human capabilities or infrastructure that you're building, and how might that manifest? Would just love your view on New York, L.A. as well. And as we reopen, what is your hypothesis for acquiring goods in those regions as well?

Julie Wainwright - The RealReal, Inc. - Founder, CEO & Chairperson

The multi-question. Look, vendor is -- has -- it is an alternate channel for us, and we have both upgraded our management there and are improving our technology, where we can add SKU depth, which we'll launch on time in the summer. Vendor is important, but it's still relatively small as a percent of our total business. And we don't expect it to grow that much more as our in-home visits start taking up -- they're getting very aggressive.

L.A. and New York, we're not reporting on them separately, but I could say we're very pleased with the progress and growth we're seeing in both of those 2 critical regions. So vendor is a great channel for us. Just to close the loop, it's still not as strategic as getting back in-home and working with our individual consignors.

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MAY 10, 2021 / 9:00PM, REAL.OQ - Q1 2021 RealReal Inc Earnings Call

Matthew Gustke - The RealReal, Inc. - CFO & Treasurer

Yes and the capabilities with respect to vendor are tracking, and we continue to work on them. And over the course of the next quarter or so, we expect to enhance our capabilities that would really be more customer-facing.

Oliver Chen - Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

Okay. And as we look forward to the reopening, what do you see happening with product mix? Do you anticipate that apparel and UPTs will accelerate? And do you -- it looks like buyers' incentives will normalize based on your comments. Are there any thoughts around seller incentives as well in the marketplace?

Julie Wainwright - The RealReal, Inc. - Founder, CEO & Chairperson

Well, all incentives actually are decelerating or normalized as we speak for the buyers and the consignors. The buyers are back to pre-COVID time. The same with consignors. We're using consignor incentives only when we open neighborhood stores to introduce the idea of drop-offs now going forward. That doesn't mean occasionally we wouldn't run small promotions that are normal with the business that we see where we need more of some type of product, but those have been normalized. So we're excited about that.

The question about when will apparel return, apparel did show growth in Q1. It's just not growing -- it's still not part of the mix as it was prior to COVID. And also, shoes are down but showing growth. So we don't know when it's going to return to normal. We have a hypothesis, which could be totally wrong, that it will return in the fall. But in the meantime, our AOVs are at an all-time high. It's just the mix in the baskets change.

Operator

We have the next question that comes from the line of Michael Binetti from Credit Suisse.

Michael Charles Binetti - Crédit Suisse AG, Research Division - Research Analyst

Congrats on the return to growth. Can you -- I guess, the gross profit per order was around flat, even though you saw a nice -- you did see a nice acceleration in GMV. So I'm just trying to think for the model here, maybe a little bit more clarity on the road map to $100 per order in gross profit that you pointed to in the shareholder letter by the end of '22. Anything beyond what you mentioned in the shareholder letter as far as the biggest points of leverage from here. I know you did -- got a lot of the automation that you've been talking about over the last 2 years is in place now.

And then, I guess, just backing up bigger picture. Matt, we've talked about this a lot. Can you help us revisit the path to profitability? I think the early framework that you were thinking about to get the company to break even on EBITDA with, rough math, $2 billion of GMV and $100 of gross profit per order. Is that still the right framework? Or have some of the investments below the gross margin line changed those dynamics?

Matthew Gustke - The RealReal, Inc. - CFO & Treasurer

Sure. So on the gross profit per order, there's a decent amount of disclosure in the shareholder letter. So yes, roughly flat. We do expect that to increase this quarter modestly mostly due to buyer incentives coming down. We don't know, as Julie mentioned, exactly what the AOV trend is going to look like longer term. But roughly speaking, AOVs and take rates are nearly perfectly inversely correlated. As AOV goes up, it's a little bit additive to gross profit per order. So we think that's not going to be a major driver getting towards $100. Continuing shipping leverage, getting the buyer incentives down and leverage over some fixed cost is mostly what gets us there by the end of '22, as you point out.

With respect to the path to profitability, we're not in a position to update any longer-term projections because we're still in so much -- so fluid an environment with COVID. But no fundamental changes. I think to the extent that you saw forever elevated mix in terms of high-priced goods and

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