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Why The RealReal’s Backing Off These 3 Categories

The RealReal reported a total revenue increase of 20.1 percent to $142.7 million on net losses of $47.3 million, but the luxury consignment company is under pressure to start making money.

For the fourth quarter, the resale player expects revenue of $145 million to $165 million (a 0.1 decline to a 13.7 percent increase) and gross merchandise value (GMV) of $480 million to $510 million (a 9.8 percent to 16.7 percent increase), both missing FactSet consensus targets anticipating sales of $174.8 million and GMV of $543.6 million. 

The Bay Area firm also projects fourth-quarter adjusted EBITDA to range from a loss of $27 million to $23 million, but still projects to be profitable on an adjusted EBITDA basis in 2024.

In a Nutshell: To kick off the third-quarter earnings call, Rati Levesque, The RealReal’s co-interim CEO, president and chief operating officer, said that the company is trying to become profitable. It expects top-line growth will be lower than previous projections.

Levesque said the first of four strategic initiatives to achieve profitability included overhauling The RealReal’s seller commission structure as of Nov. 1.

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“We believe the update to rates will incentivize the consignment of higher-value items and limit the consignment of low-value items, which are unprofitable,” Levesque noted, also indicating that the luxury consignment firm is in the process of deemphasizing categories like home, art and kids.

The RealReal also wants to optimize its pricing algorithm, take a more aggressive approach on costs and capitalize on potential new revenue streams. The company completed what it called a “modest reduction in our workforce” as part of the cost cuts, with Levesque saying it remains “highly selective” in adding new positions and filling open roles.

Levesque did not specify how many employees have been laid off, or which departments were impacted.

The new revenue streams at The RealReal include a warranty program, advertising technology and other data monetization opportunities.

GMV sold across the marketplace was $440.6 million, an increase of 19.8 percent compared to $367.9 million in the 2021 period. GMV from repeat buyers was 84.2 percent, which was stable year-over-year.

At the end of the quarter, The RealReal had $63 million of company-owned inventory on hand, a 1.4 percent decline in inventory from the $63.8 million as of Sept. 30, 2021. On a sequential basis, inventory is down 14.9 percent from $74 million.

The company expects to see the owned inventory decline again in the fourth quarter, roughly similar to the third quarter drop.

Gross margin was 60.1 percent in the third quarter, inching up from the quarter approximately 30 basis points (0.3 percentage points) from the 59.8 percent rate a year ago. According to co-interim CEO and chief financial officer Robert Julian, gross margin improved every quarter this year from 53.5 percent to nearly 57 percent to cracking 60 percent. But Julian expects a holiday slowdown.

“In normal circumstances, that I would expect that trend to continue in Q4, but I think what you’re going to see in Q4 is a flattish maybe a very slight improvement in gross margin in Q4 versus Q3, only because we continue to discount some of this owned inventory,” Julian said. “They were trying to clear out and lower our overall inventory balance. We do see some discounting that has been projected in Q4, it is preventing a further continuation of that sequential improvement in gross margin.”

Julian expects the company to return to its pre-Covid margins of the “low to mid 60s” in 2023 or 2024.

Trailing 12 months (TTM) active buyers reached 950,000, an increase of 23 percent compared to the same period in 2021, while orders increased 26 percent to 952,000 in the same time frame.

Average order value (AOV) was $463, a decrease of 4.7 percent compared to the 2021 period, when AOV was $486. AOV peaked in last year’s second quarter at $520 per order.

Lower AOV was driven by a year-over-year decrease in average selling prices (ASPs) driven by a shift in demand from high-value items to more ready-to-wear items, partially offset by higher units per transaction (UPT).

Net Revenue: Revenue at The RealReal totaled $142.7 million, a 20.1 percent jump over the $118.8 million in the year-ago period.

Consignment revenue was $93.9 million, up 19.8 percent from $78.4 million in the 2021 third quarter. Direct revenue was $34 million, a 15.7 percent improvement from the $29.4 million generated in last year’s quarter. The quarter marks the third-straight period of deceleration for the direct revenue category.

Shipping services revenue increased 33.8 percent to $14.8 million, a bump from the prior-year period’s $11.1 million.

Net Earnings: Net loss was $47.3 million, increasing from the $57.2 million loss the company incurred in the 2021 third quarter. Basic and diluted net loss per share was 49 cents compared to 62 cents in the prior-year period.

Adjusted EBITDA came in at a loss of $28.2 million, a slight bump up from the $31.5 million loss in the year-ago period. Adjusted basic and diluted net loss per share was 38 cents compared to a 47-cent loss a year ago.

CEO’s Take: Levesque discussed home, art and kids.

“It’s a really small percentage of GMV from these categories, but I will say it’s not unmeaningful in the amount of units. So what I mean by that is it’s a lot of operational expense for some of these areas for not a lot of revenue,” Levesque said. “I will say that we’ll work through selling through these items in the first half of the year. Again, you keep hearing us say this, but you’ll see meaningful impact from our changes in the back half of next year.”

He later added, “to be honest with you, it’s quite expensive to ship these large items like home and art. And these items like kids’ are so low value that our high-touch business model is not set up to take these items.”