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The RealReal Co-CEO Blames ‘Great Resignation Part 2’ for Sliding Sales

The RealReal saw revenue soar 47.2 percent to $154.4 million in its second quarter, but net losses of $53.2 million and a slow hiring period have led the company to cut its sales and earnings guidance for the rest of the year.

In a Nutshell: Following a common theme in line with the current macroeconomic headwinds, The RealReal is lowering its 2022 guidance. The luxury consignment firm now expects $615 million to $635 million in revenue for the full year, a downgrade from prior estimates of $635 million to $665 million.

Gross merchandise value (GMV) is now projected to be between $1.85 billion to $1.9 billion, down from initial projections of $2 billion to $2.1 billion. Adjusted EBITDA is forecasted at between a $100 million and $110 million loss, steeper than the initial $80 million to $100 million projections.

The second quarter earnings report for The RealReal is the first since founder Julie Wainwright stepped down as CEO and chairperson in June. The company retained executive search firm Spencer Stuart to find a replacement.

For the second quarter, GMV was $454.2 million, an increase of 30 percent from the $350 million GMV in the same period in 2021. GMV from repeat buyers was 84.7 percent which was roughly flat year over year.

But for the third quarter, the company is projecting GMV growth to slow down to a midpoint of 23 percent. The RealReal co-interim CEO, president and chief operating officer Rati Levesque told Wall Street analysts that GMV is seeing downward pressure largely from a labor shortage.

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“When I talk about a labor shortfall, I’m talking about people out in the field, our sales team,” Levesque said. “We saw attrition increase in Q2, we call it The Great Resignation Part Two.”

The RealReal implemented multiple strategies to address the labor shortfall, including hiring and backfilling sales roles, selectively increasing compensation in key markets and using technology for consignors to self-serve.

Levesque attributed the other major GMV depressant to the change in product mix.

“The shift [in consumer spend] was from higher-priced items, like fine jewelry and watches to lower-priced items like ready-to-wear and shoes,” Levesque said. “While high-value continues to perform, the second quarter mix more closely mirrored our pre-Covid product mix as consumers go back to the office, travel more and attend events. Therefore, the higher proportion of GMV coming from apparel and shoes resulted in improved take rates year-over-year, but also a reduction in average order value. While we expect demand to normalize across categories at some point, it occurred more quickly than anticipated.”

Trailing 12 months (TTM) active buyers reached 889,000, a 22 percent increase from last year. Orders reached 934,000 in the second quarter, an increase of 39 percent compared to the same period in 2021.

Average order value (AOV) was $486, a decrease of 7 percent compared to last year’s second quarter, when AOV was $520. Lower AOV was driven by a year-over-year decrease in average selling prices driven by a shift in demand from high-value items to more ready-to-wear items, partially offset by an increase in units per transaction.

Inventory was approximately $74 million, up 25.3 percent from the $59.1 million at the end of last year’s second quarter.

During the Covid-19 pandemic, the company relied more on owned inventory that comprises its direct revenue. But The RealReal has plans to revert to its old ways after the business model has hit the consignment marketplace’s margins. In the first quarter, the direct business amounted to 34 percent of total revenue, but has since slimmed down to 28 percent.

“By the time we get out to the end of the year, it should be in the low-20s, and eventually what we’d like to do is return back to the 15 percent to 20 percent that we saw back in 2019 and prior to that. It does have a pretty significant impact on our expected gross margin,” said Robert Julian, co-interim CEO and chief financial officer of The RealReal.

Gross margin for the second quarter was 56.8 percent, down from 60.4 percent in the year-ago period. Julian said that margins were “in the mid-60s” when the direct business was a smaller portion of revenue, and that the company will “probably recover about half of that” in the second half of the year.

For the third quarter, The RealReal expects total revenue between $145 million and $155 million, and anticipates GMV between $430 million and $450 million. Adjusted EBITDA losses are expected to range within $30 million and $26 million.

Cash and cash equivalents totaled $315.9 million as of June 30.

Net Revenue: Total revenue at The RealReal was $154.4 million, an increase of 47.2 percent compared to the same period in 2021, when the company reeled in $104.9 million.

By segment, consignment revenue was $96.9 million, a 33.8 percent boost from the year-ago period’s $72.5 million. Direct revenue was $42.6 million, skyrocketing 89.9 percent from the 2021 quarter’s $22.5 million. And revenue from the company’s shipping services rose 48.7 percent to $14.9 million from $10 million.

Net Earnings: The second-quarter net loss was $53.2 million, compared to a $71 million loss in the same period in 2021.

Basic and diluted net loss per share was 56 cents, compared to 78 cents in the prior-year period. Adjusted basic and diluted net loss per share was 40 cents compared to 50 cents in the 2021 second quarter.

Adjusted EBITDA loss was $28.8 million, slightly narrower than last year’s $32.9 million loss.

CEO’s Take: Levesque remained upbeat about the company’s brick-and-mortar presence.

“The stores continue to be quite healthy, especially as an acquisition tool on the seller side. 30 percent of our sellers continue to come in from stores. The payback or break even is in one-year,” Levesque said. “We’re opportunistic. We keep saying that about stores and about new ones. We said that next year we’d open from anywhere from one to three stores and that continues to be our thinking as of now.”