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The RealReal Sees Q1 Margin Uptick, But $38 Million Losses Mount

Luxury resale marketplace The RealReal has hit a snag in its quest for profitability as shoppers shift their priorities away from high-end apparel and accessories during the COVID-19 pandemic, with the company seeing net losses of $38.3 million in the first quarter.

But amid major cutbacks, the luxury goods platform is still investing in different ways to keep its stay-at-home buyers and sellers engaged. In a letter to shareholders, CEO Julie Wainwright and CFO Matt Gustke revealed that the company plans to launch consignor self-scheduling, and also has rolled out contactless curbside pickup in eight cities.

In a Nutshell: Upon initially announcing its preliminary first-quarter results three weeks ago, The RealReal revealed it was cutting back on expenses and headcount amid the COVID-19 pandemic, laying off approximately 10 percent of its workforce and furloughing another 15 percent as part of the cutbacks.

The company is cutting this year’s expenses by approximately $70 million and reducing capital expenditure by approximately $15 million. Another part of the company’s cutbacks has come from advertising spend, which saw an “approximately two-thirds” reduction in April.

The RealReal has conducted “thousands” of virtual consignment consultations since launching the service and will integrate virtual appointments into its supply acquisition strategy going forward. The service is a replacement for the retailer’s in-person White Glove appointments that have been suspended due to COVID-19.

Before withdrawing guidance as a result of the pandemic, The RealReal said it would focus on revenue growth in 2020 by increasing operational and marketing leverage, expanding its retail footprint and sustainability. A planned retail footprint expansion is no longer a focus for the immediate future.

The RealReal’s four warehouses are all currently open, but operate in a significantly reduced capacity. Operations in the Brisbane, Calif., warehouse are severely limited by local mandates to a “small fraction” of the more than 460 people employed there prior to the coronavirus outbreak. The three New Jersey warehouses are also limited due to social distancing and state-mandated curfews that required the company to suspend its evening shift. The company initially had to temporarily close the Brisbane warehouse before reopening.

The marketplace already had closed its four brick-and-mortar stores and 10 luxury consignment offices, including its most recently opened location in San Francisco, and is postponing the opening of its Chicago store.

The RealReal B2B vendor program, where the company sources supply from brands and retailers seeking distribution and demand, appears to be a bright spot for the company during the pandemic, with interest from business sellers increasing 10 times compared to pre-COVID levels.

At the end of the quarter, the company had a $303.2 million financial cushion in cash, cash equivalents and short-term investments.

Net Sales: Total first-quarter revenue increased 11 percent to $78.2 million, with the majority of sales coming through The RealReal’s consignment and service business, jumping 17 percent to $65.3 million.

Gross merchandise value (GMV) was right in line with the company’s preliminary estimates reported in April, with the company seeing gains of $257.6 million—up 15 percent year over year. And similar to GMV, orders reached 574,215, up 15 percent year over year.

Since March 17, when Bay Area shelter-in-place directives went into effect, and continuing through mid-April, GMV declined approximately 40 percent to 45 percent year over year. During the last two weeks of April, GMV trends improved “modestly,” the company said.

While active buyers increased 32 percent to 601,766 on a year-over-year basis, they are essentially buying at the same rate as they did last year, with average order value (AOV) at $449 compared to $450 in the first quarter of 2019. The company added approximately 20,000 net new active buyers in the first quarter.

Repeat buyers accounted for 84 percent of GMV, up both sequentially and year over year, signaling that The RealReal has a highly engaged core audience.

Earnings: Net losses totaled $38.3 million, a slight improvement from the preliminary expected range of $38.9 million to $39.9 million, though a wider gap from $23 million a year earlier.

The company’s gross profit was $49.2 million, up 16 percent year over year, but this figure doesn’t take into account operating expenses including marketing, operations and technology, and selling, general and administrative costs, which together tallied $88.8 million.

First-quarter non-adjusted earnings per share (EPS) losses of 39 cents beat Wall Street estimates by 4 cents.

CEO’s Take: Wainwright and Gustke remained positive in the face of the cutbacks and appear to be betting on the potential that the COVID-19 pandemic will begin to level out in the summer. In the joint letter, they indicated that The RealReal’s internal planning scenario relies on some degree of normalization of COVID-19 in June.

“While the lifting of restrictions on our operations are out of our control, to the extent that they do happen progressively beginning in June, we would anticipate a recovery in our business trends commensurate with new guidelines,” they said. “Our current assumptions would result in a gradual recovery in business trends in Q2 and Q3, such that in Q4 we could potentially exit the quarter at approximately 2019 GMV levels. While we anticipate gradually improving GMV trends as the year progresses, Q3 GMV has a difficult Y/Y comparison so growth rate improvements are not likely to be linear.”

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