THE REALREAL, INC. The following discussion of our financial condition and results of operations
should be read together with our condensed financial statements and related
notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our
audited financial statements and related notes and our Annual Report on Form
10-K filed with the
Overview
We are the world's largest online marketplace for authenticated, consigned luxury goods. We are revolutionizing luxury resale by providing an end-to-end service that unlocks supply from consignors and creates a trusted, curated online marketplace for buyers globally. Since our inception in 2011, we have cultivated a loyal and engaged consignor and buyer base through continuous investment in our technology platform, logistics infrastructure and people. We offer a wide selection of authenticated, primarily pre-owned luxury goods on our online marketplace bearing the brands of thousands of luxury and premium designers. We offer products across multiple categories including women's, men's, kids', jewelry and watches, and home and art. We have built a vibrant online marketplace that we believe expands the overall luxury market, promotes the recirculation of luxury goods and contributes to a more sustainable world.
We have transformed the luxury consignment experience by removing the friction and pain points inherent in the traditional consignment model. For consignors, we offer concierge in-home consultation and pickup, subject to safety requirements related to the COVID pandemic, and meetings with consignors via online face-to-face platforms, or Virtual Consultations. Consignors may also drop off items at our luxury consignment offices. Our Flagship and Neighborhood Stores provide an alternative location to drop off consigned items and an opportunity to interact with our experts. Consignors may also utilize our complimentary shipping directly to our authentication centers. We leverage our proprietary transactional database and market insights from approximately 18.4 million item sales since inception to deliver optimal pricing and rapid sell-through. For buyers, we offer highly coveted and exclusive authenticated pre-owned luxury goods at attractive values, as well as a high-quality experience befitting the products we offer. Our online marketplace is powered by our proprietary technology platform, including consumer facing applications and purpose-built software that supports our complex, single-SKU inventory management system.
The substantial majority of our revenue is generated by consignment sales. We also generate revenue from other services and direct sales.
• Consignment and service revenue. When we sell goods through our online
marketplace or retail stores on behalf of our consignors, we retain a
percentage of the proceeds, which we refer to as our take rate. Take rates
vary depending on the total value of goods sold through our online
marketplace on behalf of a particular consignor as well as the category
and price point of the items. In the three months ended March 31, 2021 and
2020, our overall take rate on consigned goods was 34.3% and 36.2%,
respectively. The decrease in our take rate was due to the higher sales
mix of lower take rate categories such as handbags, fine jewelry, and
sneakers. Additionally, we earn revenue from shipping fees and from our
subscription program, First Look, in which we offer buyers early access to
the items we sell in exchange for a monthly fee.
• Direct revenue. In certain cases, such as when we accept out of policy
returns from buyers, or when we make direct purchases from businesses and
consignors, we take ownership of goods and retain 100% of the proceeds
when the goods subsequently sell through our online marketplace or retail
stores.
We generate revenue from orders processed through our website, mobile app and
retail stores located in
Through
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Impact of COVID-19 on Our Business
In the year ended
In the three months ended
While government restrictions have in many locations been removed or eased, the
future impact of the COVID-19 pandemic remains highly uncertain, and our
business and results of operations, including our net revenues, earnings and
cash flows, could be adversely impacted. We are continuing to closely monitor
the effects of the ongoing pandemic and its impact on our business. Travel and
border closures do not significantly affect our business as we operate a
Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our customers. We have enforced social distancing in our authentication centers, enabled virtual consignment appointments, implemented curbside pick-up of products from our consignors, and enabled our corporate employees to work remotely. The impact of these actions on our workforce are difficult to assess. However, we do not believe that these remote work arrangements have adversely affected our ability to maintain our financial reporting systems, internal control over financial reporting and disclosure controls and procedures. In addition, we do not expect to encounter any significant challenges to our ability to maintain these systems and controls.
We also do not expect the pandemic to affect the assets on our condensed balance sheets and our ability to timely account for those assets. We evaluate our estimates and assumptions used in preparing our financial statements on an ongoing basis. We do not anticipate any material impairments with respect to inventory, long-lived assets, right-of-use assets, or changes in accounting judgments that would have a material impact on our financial statements.
Other Factors Affecting Our Performance
Other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, impact our business. To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we focus on the factors described below. While each of these factors presents significant opportunity for our business, collectively, they also pose important challenges that we must successfully address in order to sustain our growth, improve our operating results and achieve and maintain our profitability.
Consignor growth and retention. We grow our sales by increasing the supply of luxury goods offered through our consignment online marketplace. We grow our supply both by attracting new consignors and by creating lasting engagement with existing consignors. We generate leads for new consignors principally through our advertising activity. We convert those leads into active consignors through the activities of our sales professionals, who are trained and incentivized to identify and source high-quality, coveted luxury goods from consignors. Our sales professionals form a consultative relationship with consignors and deliver a high-quality, rapid consigning experience. Our existing relationships with consignors allow us to unlock valuable supply across multiple categories within the home, including women's, men's, kids', jewelry and watches, and home and art. We leverage our proprietary transactional database and market insights based on more than 18.4 million item sales since inception to deliver consignors optimal pricing and rapid sell-through.
Our growth has been driven in significant part by repeat sales by existing
consignors concurrent with growth of our consignor base. The percentage of GMV
from repeat consignors in the three months ended
Buyer growth and retention. We grow our business by attracting and retaining buyers. We attract and retain buyers by offering highly coveted, authenticated, pre-owned luxury goods at attractive values and delivering a high-quality, luxury experience. We measure our success in attracting and retaining buyers by tracking buyer satisfaction and purchasing activity over time. We have experienced high buyer satisfaction, as evidenced by our buyer net promoter score of 71 in 2020.
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We believe there is substantial opportunity to grow our business by having
buyers also become consignors and vice versa. As of
Scaling operations and technology. To support the future growth of our business,
we are expanding our capacity through investments in physical infrastructure,
talent and technology. We principally conduct our intake, authentication,
merchandising and fulfillment operations in our four leased authentication
centers located in
Seasonality. Before the COVID-19 pandemic, we have observed trends in seasonality of supply and demand in our business. Specifically, our supply increases in the third and fourth quarters, and our demand increases in the fourth quarter. As a result of this seasonality, we typically see stronger AOV and more rapid sell-through in the fourth quarter. We also incur higher operating expenses in the last four months of the year as we increase advertising spend to attract consignors and buyers and increase headcount in sales and operations to handle the higher volumes. However, the adverse impacts of COVID-19 on our business have made it difficult to evaluate the impact of seasonality in our business.
Key Financial and Operating Metrics
The key operating and financial metrics that we use to assess the performance of our business are set forth below for the three months endedMarch 31, 2021 and 2020. Three Months Ended March 31, 2021 March 31, 2020 (In thousands, except AOV and percentages) GMV $ 327,327 $ 257,606 NMV $ 244,162 $ 184,625 Number of Orders 690 574 Take Rate 34.3 % 36.2 % Active Buyers 687 602 AOV $ 474 $ 449 GMV
GMV, or gross merchandise value, represents the total amount paid for goods across our online marketplace in a given period. We do not reduce GMV to reflect product returns or order cancellations. GMV includes amounts paid for both consigned goods and our inventory net of platform-wide discounts and excludes the effect of buyer incentives, shipping fees and sales tax. Platform-wide discounts are made available to all buyers on the online marketplace, and impact commissions paid to consignors. Buyer incentives apply to specific buyers and consist of coupons or promotions that offer credits in connection with purchases on our platform. We believe this is the primary measure of the scale and growth of our online marketplace and the key indicator of the health of our consignor ecosystem. We monitor trends in GMV to inform budgeting and operational decisions to support and promote growth in our business and to monitor our success in adapting our business to meet the needs of our consignors and buyers. While GMV is the primary driver of our revenue, it is not a proxy for revenue or revenue growth. See Note 2 - Summary of Significant Accounting Policies -Revenue Recognition - Consignment and Service Revenue.
NMV
NMV, or net merchandise value, represents the value of sales from both consigned goods and our inventory net of platform-wide discounts less product returns and order cancellations and excludes the effect of buyer incentives, shipping fees and sales tax. We believe NMV is a supplemental measure of the scale and growth of our online marketplace. Like GMV, NMV is not a proxy for revenue or revenue growth.
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Number of Orders
Number of orders means the total number of orders placed across our online marketplace and retail stores in a given period. We do not reduce number of orders to reflect product returns or order cancellations.
Take Rate
Take rate is a key driver of our revenue and provides comparability to other marketplaces. The numerator used to calculate our take rate is equal to net consignment sales and the denominator is equal to the numerator plus consignor commissions. Net consignment sales represent the value of sales from consigned goods net of platform-wide discounts less consignor commission, product returns and order cancellations. We exclude direct revenue from our calculation of take rate because direct revenue represents the sale of inventory owned by us, which costs are included in cost of direct revenue. Our take rate reflects the high level of service that we provide to our consignors across multiple touch points and the consistently high velocity of sales for their goods. Our take rate structure is a tiered commission structure for consignors, where the more they sell the higher percent commission they earn. Consignors start at a 55% commission (which equals a 45% take rate for us) and can earn up to a 70% commission. This tiered structure applies unless it is overridden by a commission exception.
Commission exceptions from the tiered commission structure optimize supply and
drive take rate changes. Examples of current commission exceptions include a
flat 40% commission on all items under
Active Buyers
Active buyers include buyers who purchased goods through our online marketplace during the 12 months ended on the last day of the period presented, irrespective of returns or cancellations. We believe this metric reflects scale, brand awareness, buyer acquisition and engagement.
Average Order Value ("AOV")
Average order value ("AOV") means the average value of all orders placed across our online marketplace and retail stores, excluding shipping fees and sales taxes. Our focus on luxury goods across multiple categories drives a consistently high AOV. Our AOV reflects both the average price of items sold as well as the number of items per order. Our high AOV is a key driver of our operating leverage.
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Adjusted EBITDA
Adjusted EBITDA means net loss before interest income, interest expense, other (income) expense net, provision for income taxes, and depreciation and amortization, further adjusted to exclude stock-based compensation, employer payroll tax on employee stock transactions, and certain one-time expenses. The employer payroll tax expense related to employee stock transactions are tied to the vesting or exercise of underlying equity awards and the price of our common stock at the time of vesting, which may vary from period to period independent of the operating performance of our business. Adjusted EBITDA provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA is a non-GAAP measure. The following table provides a reconciliation of net loss to Adjusted EBITDA (in thousands):
Three Months Ended
March 31,
2021 2020
Adjusted EBITDA Reconciliation:
Net loss $ (55,993 ) $ (38,503 )
Depreciation and amortization 5,435 4,145
Stock-based compensation 10,919 3,410
Payroll taxes expense on employee stock transactions(1) 506 -
Legal settlement 288 1,110
Interest income (87 ) (1,286 )
Interest expense 3,296 20
Other (income) expense, net (17 ) (8 )
Provision for income taxes 28 -
Adjusted EBITDA $ (35,625 ) $ (31,112 ) (1) We exclude employer payroll tax expense related to employee stock-based transactions because we believe that excluding this item provides meaningful supplemental information regarding our operating results. In particular, this expense is dependent on the price of our common stock at the time of vesting or exercise, which may vary from period to period, and other factors that are beyond our control and do not correlate to the operation of the business. When evaluating the performance of our business and making operating plans, we do not consider these items. Similar charges were not adjusted in prior periods as they were not material.
Components of our Operating Results
Revenue
Our revenue is comprised of consignment and service revenue and direct revenue.
• Consignment and service revenue. We generate the substantial majority of
our revenue from the sale of pre-owned luxury goods through our online
marketplace and retail stores on behalf of consignors. For consignment
sales, we retain a percentage of the proceeds received, which we refer to
as our take rate. We recognize consignment revenue, net of allowances for
product returns, order cancellations, buyer incentives and adjustments.
Additionally, we generate revenue from shipping fees we charge to buyers.
We also generate service revenue from subscription fees paid by buyers for
early access to products, but to date our subscription revenue has not
been material.
• Direct revenue. We generate direct revenue from the sale of items that we
own, which we refer to as our inventory. We generally acquire inventory
when we accept out of policy returns from buyers. Additionally, we make
direct purchases from businesses and consignors. We recognize direct
revenue upon shipment based on the gross purchase price paid by buyers,
net of allowances for product returns, buyer incentives and adjustments.
Cost of Revenue
Cost of consignment and services revenue consists of shipping costs, credit card fees, packaging, customer service personnel-related costs, website hosting services, and consignor inventory adjustments related to lost or damaged products. Cost of direct revenue consists of the cost of goods sold, credit card fees, packaging, customer service personnel-related costs, website hosting services, and inventory adjustments.
Marketing
Marketing expense comprises the cost of acquiring and retaining consignors and buyers, including the cost of television, digital and direct mail advertising. Marketing expense also includes personnel-related costs for employees engaged in these activities. We expect these expenses to decrease as a percentage of revenue over the longer term.
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Operations and Technology
Operations and technology expense principally includes personnel-related costs for employees involved with the authentication, merchandising and fulfillment of goods sold through our online marketplace and retail stores, as well as our general information technology expense. Operations and technology expense also includes allocated facility and overhead costs, costs related to our retail stores, facility supplies and depreciation of hardware and equipment, as well as research and development expense for technology associated with managing and improving our operations. We capitalize a portion of our proprietary software and technology development costs. As such, operations and technology expense also includes amortization of capitalized technology development costs. While we have implemented cost saving measures to address the challenges from the COVID-19 pandemic, we expect operations and technology expense to increase in future periods to support our growth, including bringing on additional authentication centers and continuing to invest in automation and other technology improvements to support and drive efficiency in our operations. These expenses may vary from year to year as a percentage of revenue, depending primarily upon when we choose to make more significant investments. We expect these expenses to decrease as a percentage of revenue over the longer term.
Selling, General and Administrative
Selling, general and administrative expense is principally comprised of personnel-related costs for our sales professionals and employees involved in finance and administration. Selling, general and administrative expense also includes allocated facilities and overhead costs and professional services, including accounting and legal advisors. While these expenses may vary from year to year as a percentage of revenue, we expect these expenses to decrease as a percentage of revenue over the longer term.
Provision for Income Taxes
Our provision for income taxes consists primarily of state minimum taxes in
Results of Operations
The following tables set forth our results of operations (in thousands) and such data as a percentage of revenue for the periods presented:
Three Months Ended
March 31,
2021 2020
Revenue:
Consignment and service revenue $ 75,082 $ 65,086
Direct revenue 23,735 12,942
Total revenue 98,817 78,028
Cost of revenue:
Cost of consignment and service revenue 20,114 18,088
Cost of direct revenue 20,365 10,954
Total cost of revenue 40,479 29,042
Gross profit 58,338 48,986
Operating expenses:
Marketing 15,561 12,922
Operations and technology 51,934 40,737
Selling, general and administrative 43,616 35,104
Total operating expenses 111,111 88,763
Loss from operations (52,773 ) (39,777 )
Interest income 87 1,286
Interest expense (3,296 ) (20 )
Other income (expense), net 17 8Loss before provision for income taxes (55,965 ) (38,503 ) Provision (benefit) for income taxes
28 -
Net loss $ (55,993 ) $ (38,503 )
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Three Months Ended
March 31,
2021 2020
Revenue:
Consignment and service revenue 76.0 % 83.4 %
Direct revenue 24.0 16.6
Total revenue 100.0 100.0
Cost of revenue:
Cost of consignment and service revenue 20.4 23.2
Cost of direct revenue 20.6 14.0
Total cost of revenue 41.0 37.2
Gross profit 59.0 62.8
Operating expenses:
Marketing 15.7 16.6
Operations and technology 52.6 52.2
Selling, general and administrative 44.1 45.0
Total operating expenses 112.4 113.8
Loss from operations (53.4 ) (51.0 )
Interest income 0.1 1.6
Interest expense (3.3 ) -
Other income (expense), net - -Loss before provision for income taxes (56.7 ) (49.3 ) Provision (benefit) for income taxes
- -
Net loss (56.7 )% (49.3 )%
Comparison of the Three Months Ended
Consignment and Service Revenue
Consignment and service revenue increased by
Direct Revenue
Direct revenue increased by
Cost of Consignment and Service Revenue
Cost of consignment and service revenue increased by
Cost of Direct Revenue
Cost of direct revenue increased by
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Marketing
Marketing expense increased by
As a percent of revenue, marketing expense decreased to 15.7% from 16.6% in the
three months ended
Operations and Technology
Operations and technology expense increased by
As a percent of revenue, operations and technology expense increased to 52.6%
from 52.2% in the three months ended
Selling, General and Administrative
Selling, general and administrative expense increased by
As a percent of revenue, selling, general and administrative expense decreased
to 44.1% from 45.0% in the three months ended
Interest Income
Interest income decreased
Interest Expense
Interest expense increased
Other Income (Expense), Net
Other income (expense), net was flat in the three months ended
Liquidity and Capital Resources
As of
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We expect that operating losses and negative cash flows from operations could
continue in the foreseeable future as we navigate the challenges presented by
COVID-19 and invest in expansion activities in the longer term. We believe our
existing cash and cash equivalents as of
Our future capital requirements will depend on many factors, including, but not limited to, our ability to grow our revenues and the timing of investments to support growth in our business, such as the build-out of new authentication centers and, to a lesser extent, the opening of new retail stores. We may seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods indicated.
Three Months Ended
March 31,
2021 2020
Net cash provided by (used in):
Operating activities $ (47,808 ) $ (54,971 )
Investing activities (4,330 ) 32,774
Financing activities 249,151 2,413
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 197,013 $ (19,784 )
During the three months ended
During the three months ended
During the three months ended
During the three months ended
Net Cash Provided by Financing Activities
During the three months ended
During the three months ended
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Convertible Senior Notes
As of
The 2025 Notes are convertible into cash, shares of our common stock or a
combination of cash and shares of our common stock, at the Company's election,
at an initial conversion rate of 56.2635 shares of our common stock per
In connection with the convertible senior notes, we entered into privately
negotiated capped call transactions, with certain of the initial purchasers or
their affiliates. The capped call transactions cover, subject to anti-dilution
adjustments, the number of shares of common stock underlying the convertible
senior notes sold in the offering. The capped call transactions are generally
expected to reduce potential dilution to our common stock upon any conversion of
the notes and/or offset any cash payments we are required to make in excess of
the principal amount of converted notes, as the case may be, with such reduction
and/or offset subject to a cap. The cap price of the capped call transactions
related to the 2025 Notes was initially
For additional details related to our convertible senior notes, please see "Note 6 - Convertible Senior Notes, net" to the condensed financial statements included in this report.
Contractual Obligations and Commitments
As of
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with
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Revenue Recognition
Consignment and Service Revenue
We generate the majority of our revenue from consignment services for the sale of pre-owned luxury goods on behalf of consignors through our online consignment marketplace and retail stores. For consignment sales, we retain a portion of the proceeds received, which we refer to as our take rate, and remit the balance to the consignors. We recognize consignment revenue upon purchase of the goods by the buyer based on our take rate, net of allowances for product returns, order cancellations, buyer incentives and adjustments.
Direct Revenue
We also generate revenue from the sales of company-owned inventory. We recognize direct revenue upon shipment of the goods sold through our online marketplace and retail stores, based on the gross purchase price net of allowances for product returns, buyer incentives and adjustments.
Recent Accounting Pronouncements
For more information on recently issued accounting pronouncements, see Note 2 to our unaudited condensed financial statements "Summary of Significant Accounting Policies" in this Quarterly Report on Form 10-Q.
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