Mark Altschwager; Analyst; Robert W. Baird & Co., Inc.
Ashley Owens; Analyst; KeyBanc Capital Markets Inc.
Good day. Thank you for standing by. Welcome to The RealReal third-quarter 2024 financial results conference call. (Operator Instructions) Please note that today's conference is being recorded.
I will now hand the conference over to your speaker host, Caitlin Howe, Senior Vice President of Finance. Please go ahead.
Thank you, operator. Joining me today to discuss our results for the period ended September 30, 2024, are Chief Executive Officer and President, Rati Levesque; and Chief Financial Officer, Ajay Gopal.
Before we begin, I would like to remind you that during today's call, we will make forward-looking statements, which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties, and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q.
Today's presentation will also include certain non-GAAP financial measures, both historical and forward looking. We have provided reconciliations for historical non-GAAP financial measures to the most comparable GAAP measures in our earnings press release, which is available on our Investor Relations website.
I would now like to turn the call over to Rati Levesque, Chief Executive Officer of The RealReal.
Thank you, Caitlin. Good afternoon, everyone, and welcome to The RealReal third-quarter earnings conference call. I'm honored to speak with you today as the new CEO of The RealReal. I've spent the last 13 years at this company working with some of the best, most talented people in the industry. We built the world's largest online marketplace for authenticated resale luxury goods on a foundation of trust, expertise, and unmatched customer service.
Our teams are executing well against the company's vision: to change the way people shop for the better. We are creating a unique circular shopping experience built on technical expertise and high-touch human service. I've been deeply involved with the foundational changes we've made to the business, and I'm looking forward to continuing to champion our strategies, obsessing over service, operational excellence, and scaling the business through our growth playbook.
I'm proud of the progress we've made, and I'm pleased to report strong third-quarter results. GMV, revenue, and adjusted EBITDA exceeded our expectations for the third quarter, increasing confidence in the momentum of our business and enabling us to raise our full-year guidance. Third-quarter GMV grew 6% versus last year, an acceleration from the second quarter. Revenue of $148 million increased 11%, driven by strength in consignment revenue, up 14% versus last year and an increase of more than 20% on a two-year basis.
We also achieved solid progress on our path to profitability. Third-quarter adjusted EBITDA of positive $2.3 million marks our second quarter of positive adjusted EBITDA, and importantly, we delivered positive free cash flow for the quarter. Supply metrics are strong, with both units and value increasing versus last year.
As we've highlighted before, we believe there's $200 billion in untapped value for luxury resale items in the US alone. Our growth is driven by unlocking that supply for our platform. Over the years, we built a unique multi-channel approach that includes luxury managers, stores and the power of our marketing to unlock the profitable supply. We refer to this approach as our growth playbook.
We often mention that we are a supply-constrained business. Essentially, what this means is that if we can procure the supply, we can sell it. Our lifetime sell-through rate is over 90%. Success in executing against our growth playbook relies on driving supply through three key areas: sales, marketing, and our retail stores.
The first of these key areas is our sales team, comprised primarily of our luxury managers. This team is responsible for building and maintaining relationships with our consignors and providing education about selling with the RealReal. Our luxury managers also serve as trusted consultants, helping to assess the value of their clients' current assets and advising on purchases of luxury goods in the primary market.
Our top luxury managers generate up to $10 million in supply annually through their client relationships. We've been working on providing them with the tools to do their jobs efficiently and we've created an incentive structure to drive profitable supply.
Recently, we launched our smart sales tool, which leverages consumer macro and other data points. The tool enables our sales team to understand which clients are most likely to consign at a given time and helps our luxury managers direct their efforts efficiently. Our sales and merchandising teams are able to curate our platform's assortment through tech capabilities.
We are enhancing the ways we leverage trend information and historical purchase and consignment data. We identify which brands and categories are in high demand, and mobilize our sales team to proactively pursue these items. We are seeing continued success with our sales team composition and incentive structure updates.
As we've previously discussed, we've shifted our luxury manager profile towards individuals with luxury experience and deeper existing connections with consignor target. In addition, we focused our sales team's incentive structure on GMV dollars versus units, which has contributed to our gross margin expansion. The benefit is showing up in our strong supply trends, top-line growth, and historically high retention rates for our sales team.
The second key for growth is marketing. As the first mover in our space, we have spent 13 years creating the ultimate intersection of luxury and value, approaching fashion from a position of real authority and real expertise. During the turnaround, we may have been a bit quiet in asserting our role in this space.
In 2024, we started leveraging social media platforms like TikTok and Instagram to engage customers and potential consignors. We recently doubled down on social content that makes complicated topics like authentication and sustainability feel relatable. Through these efforts, we've realized some of our highest engagement rates on post.
Furthermore, we recently published our annual resale report, which uses data to educate both the press and customers about industry trends. The resale report had seven times the engagement that we've seen previously, helping to showcase the brand's leadership in the luxury resale space. While perception and awareness are up, there's still more work we can do. We view this as an exciting opportunity to talk to customers about what differentiates the RealReal.
The third key area to growth is retail. Our stores offer a curated experience and provide consignors with access to experts for on-the-spot valuations for fine jewelry and watches. We are pleased with the performance of our fleet of 16 retail locations, affirming that the neighborhood store strategy is working. We position stores in areas where our consignors live versus being solely focused on traditional prime retail areas.
A unique aspect of our retail strategy is that the store's primary intent is to generate supply and drive awareness. We continue on the path of opening one to three stores per year in key markets and are looking forward to welcoming stores in Miami and Houston to our fleet later this year. So to recap, as a supply-driven business, our growth playbook is centered on generating supply, and we are driving results through our sales team, marketing and retail stores.
Moving to operational excellence. We continue to improve our operational efficiency, leveraging our robust proprietary data assets and AI capabilities to build trust and improve the customer experience.
In 2023, through increased automation, we reduced processing time by over 10%, while keeping headcount steady and supporting top line growth. Cost savings from this important work have expanded our margins and funded current-year investments that drive operational efficiencies.
For years, The RealReal has been a leader in authentication, with proprietary tools like Vision and Shield helping build customer trust. The work we've undertaken in 2024 is reshaping how we process items. We are leveraging AI and technology to improve speed and reduce human intervention. We use our robust data sets to help route items for authentication based on risk level to automate attribution and copywriting and to determine optimal pricing levels.
The majority of our items are now priced using our proprietary algorithms. Through incorporating historical sales data along with current fashion and pricing trends, we instill confidence that items will sell quickly and for the highest, fairest price.
The combination of human expertise and our wealth of data is an important differentiator. By pivoting our focus back to our core consignment business, improving our fixed cost structure, and lowering operational costs, we've enabled our return to growth and improved our unit economics.
GMV and revenue growth accelerated as we moved through Q3, and we're headed into the important fourth quarter with ample supply. As we enter the final quarter of the year, we're encouraged by the momentum we're seeing in the business. We're planning for strong Q4 sales and positive adjusted EBITDA for the year. It's clear that our growth playbook is working, with proof points in both top and bottom line.
The RealReal is positioned as the leader in the market with lots of room to scale. I'm excited about the future, but right now, we are heads down, focused on execution to close out 2024. I'd like to thank our team for their hard work throughout the quarter. I'm looking forward to delivering on our 2024 commitments and starting our next chapter of growth.
With that, I'll turn over the call to Ajay to discuss our financial results and outlook for the remainder of 2024.
Ajay Gopal
Thank you, Rati. Our strong third-quarter results are an important step as we focus on scaling our business profitably and strengthening our balance sheet. We were encouraged by the acceleration in top-line growth throughout the third quarter.
As you heard Rati mentioned earlier, our growth playbook, which is centered on unlocking supply, is working. This growth, along with higher gross margins and our focus on driving operational efficiencies, resulted in positive adjusted EBITDA for the quarter.
Now turning to our detailed Q3 results, beginning with the top line. GMV of $433 million increased 6% versus last year. This was an acceleration from Q2, led by strength in the consignment business as strong supply trends helped to fuel increased orders and larger average basket sizes compared to the prior-year period. Revenue of $148 million increased 11% in the quarter due to higher volume, lower returns and a healthy take rate of 38.6%, up 50 basis points versus last year.
Consignment and shipping revenues grew 14% and 17%, respectively, in the quarter. Direct revenue was down 10% as we established a good baseline for our direct business. Active buyers, as measured on a trailing three-month basis, increased versus last year for the second consecutive quarter, growing 7% to 389,000. On a trailing 12-month basis, active buyers at 958,000 was stable versus last year.
As a reminder, we modified our take rate percentages in late 2022. Some of those changes were designed to limit the number of lower-priced, lower profit items on our platform. We expected to see an impact to our active buyer account as we reduced the number of items available for sale under $100. As we anniversary these updates, we are beginning to see a positive inflection in the 12-month active buyer data while retaining the gross margin benefits that these changes yielded.
Third-quarter gross profit of $111 million improved $17 million year over year. Gross margin of 74.9% increased 430 basis points versus the third quarter last year, driven by an increase in our higher-margin consignment business as a percentage of total revenue and the improvement in take rate.
Third-quarter operating expenses of $125 million increased $9 million year over year. As a percent of total revenue, operating expense leveraged 270 basis points as our work to drive efficiency resulted in cost leverage across our business. Adjusted EBITDA of $2.3 million increased to $9.3 million versus last year for the third quarter.
On a year-to-date basis, we have delivered a $55 million improvement in adjusted EBITDA versus last year. We ended the quarter with $168 million in cash, cash equivalents, and restricted cash, $2 million above our Q2 balance. This is a notable milestone as Q3 marks the second time we've achieved positive free cash flow in a quarter. These results demonstrate the power of our business model.
You've heard us talk about our focus on growing consignment revenues. This means that we don't tie up our cash-acquiring inventory ahead of the season. In fact, we pay our consignors after an item sells on our platform. The resulting favorable cash conversion cycle creates a positive working capital benefit to our cash flows when we grow.
Turning now to our outlook for the remainder of the year. As a result of our strong third-quarter performance, we are raising our full-year GMV, revenue, and adjusted EBITDA guidance range. We expect Q4 GMV in the range of $484 million to $500 million, which represents 9% growth versus prior year at the midpoint of our guidance, resulting in a full-year GMV range of $1.81 billion to $1.826 billion.
Fourth-quarter revenue is expected to be in the range of $158 million to $165 million, driven by GMV growth and continued take rate favorability. Our full-year revenue is now expected to be between $595 million and $602 million, growing in the high single-digit range year over year.
Fourth-quarter adjusted EBITDA is expected to be between positive $6.5 million and $9.5 million and would mark our most profitable quarter ever by a significant margin, solidifying the path to a positive full-year adjusted EBITDA currently expected to be in the range of $4.7 million to $7.7 million.
In closing, I share Rati's enthusiasm about our current performance and operational excellence. Across the organization, we are executing on our growth playbook, obsessing over service and reducing friction in the consignment process, while using technology as an accelerator to our flywheel.
I would also like to extend my thanks to the teams across our business for their dedication and work in driving our Q3 financial results. We expect to close out this year on a strong footing, with accelerating sales growth and positive adjusted EBITDA.
With that, I will turn the call back over to the operator to begin Q&A. Operator?
Operator
(Operator Instructions) Mark Altschwager, Baird.
Mark Altschwager
So guidance implies continued acceleration in GMV in Q4. Can you give us some additional context on supply trends or other factors you're seeing quarter to date that give you confidence in that outlook?
And then separately, Rati, just any thoughts you can share on any new strategic initiatives on the agenda or any changes you're planning now that you're in the CEO seat?
Rati Levesque
Thank you, Mark. Thanks for the question. So I heard two questions there. What gives us confidence in our Q4 guidance and some of the supply trends we're seeing. So I'll start with that one.
I will say supply is quite healthy right now. We're feeling really good about supply and where we're at. And we're a supply-driven business, so that's really important when looking at the following quarters. It's driven out of three main strategies, which we've talked about in the past and which we talked about in the growth playbook.
You heard that in the script. And it's really the sales, marketing, and retail coming together, working together really nicely. And so the sales side, we're seeing all-time lows or highs on retention. We're seeing the compensation structure really work for them, the referral program that we launched really working there as well.
We're expanding to other key markets. On the marketing front, personalization, really targeting that mid- and high-value consignor. And on the retail side, we've talked about this in the past, we're seeing this halo effect. Some of these stores bring in up to $40 million a year, and so we're also seeing that high average selling price even up to 5 times higher.
So we have a lot of confidence in supply right now. We're seeing people want to monetize their closet. We know the TAM is really big, $200 million in people's closets. And these three things really coming together that we're calling our growth playbook as we operationalize that and scale that, seeing some really good momentum there in our business.
And then as far as my strategic initiative, the strategy is working. So I'd say two years ago, when I came in as co-interim CEO, I made some changes. We looked at our take rates, and we rightsized our take rate, making sure that everything is now profitable.
We moved out the direct business. That's the product that we're buying, got rid of unprofitable categories. I see that sticky and not changing, right? So feeling really good about that strategy.
You're seeing it work. You're seeing it in Q3. You're seeing it in Q4 of an implied guidance of 9% in Q4. So all of those things are great, working.
Return to growth is a big kind of talking point for us internally, and we'll continue to change the way people shop. And then as far as innovation goes, we'll expand on that with the idea that we'll continue to be supply-driven when we think about new ways to also acquire supply.
Mark Altschwager
That's all super helpful. Maybe a quick follow-up for Ajay. Just on gross margin, you continue to see some nice gains in consignment gross margin. Is there further opportunity there as we look beyond 2024?
Ajay Gopal
Thanks for the question, Mark. We feel really good about our results in Q3 on gross margin. I know you pointed out consignment margins coming in at 86.5% to 86.6%. A couple of things I would say that really drove our gross margin performance as a business in Q3, 74.9%, nearly 75%. It was the highest we've reported as a business.
One big driver there really is the mix of consignment revenues. When you look sequentially, we had a strong quarter with a lot more of our revenues coming from consignment revenues, and that drove the aggregate gross margin of our business higher.
To your point on what you should expect going forward, I think we're sort of in the right place right now. Mix may have a small impact on our margins on a go-forward basis, but we feel really good about where we stand today and expect that to be in that same range.
Operator
Ashley Owens, KeyBanc Capital Markets.
Ashley Owens
I just wanted to start on the price sensitivity within the consumer, circle back on this last quarter, just given it was called out as a makeup in volume to offset some of this. We saw a slight improvement in the AOV year-over-year growth from 2Q. So maybe just an update there. And if you could help us on how we should be thinking about growth in volume versus AOV in the fourth quarter.
Rati Levesque
Yeah. So I'll start, and Ajay, please add on as necessary. So as far as macro and price sensitivity, I will say that our business has been quite resilient. I think that's the most important thing.
We talked about supply being strong, but demand is also strong. This intersection of value and luxury is really resonating with our consumer. And as we continue to focus on trust and our three pillars around our growth playbook, operational excellence, and obsessing over service, really giving that seller and that buyer what they want. So we're going in heavy on making sure people understand that we are a value play.
And that goes -- I can give you some tactics on that, but that's making sure that every item shows the primary list price. So you can really see that value come in on the product listing detail.
Ashley Owens
Okay. Great. And then just one follow-up. With marketing leveraging a little bit more in the quarter, I wanted to click down a bit on the strategy there heading into holiday. Just how we should be thinking about that as a percent of sales on a go-forward basis and what the right level should be?
Rati Levesque
Yeah. So the marketing piece, this goes back to the three-legged stool with marketing. We'll continue to see efficiencies. You should expect some seasonality there.
Q3 is a lower spend quarter based on the summer months, Q4 being the holiday, you'll see a higher spend quarter. That said, we continue to feel confident in continuing to drive efficiencies. We've invested in talents there, our acquisition costs going down, SEO, better attribution, really understanding where that dollar is going and is it incremental to our P&L.
They're also launching some look-alike campaigns and personalization and marketing. So we're excited about the opportunities there over the next years.
Ajay Gopal
Yes. And maybe just to add to that, I would say that what you're seeing in our Q3 results in marketing is a combination of the investments that Rati just highlighted and them being funded by our ability to find efficiencies in productivity and how we've been spending our money compared to the past.
You might remember we brought a new CMO fairly recently, and we were just -- our investments in improving the technology behind it and how we think about approaching marketing is really helping pay for some of the investments that are driving the total volume.
Operator
Bobby Brooks, Northland Capital Markets.
Robert Brooks
So first question is some luxury houses whose products fill yourselves have seen weaker results recently, and that's really a strong contrast to your great 3Q results and the guidance raise for the year. So obviously, a big difference between those brands. They have a large exposure to Chinese consumer, which RealReal does not.
But outside of that, could you maybe just remind us all how Real can still grow despite headwinds being faced in the first handle?
Rati Levesque
Yeah. Thank you, Bobby. Thanks for the question. I will just double down on we really do have a resilient business model. We're very different from the primary market. And you heard me say this, and I'm going to say it again, the intersection between value and luxury and even sustainability is really resonating with our consumer.
We're in a really great place with supply. The supply growth book is working. We've grown the business in the past. We know what this playbook looks like.
And then the demand piece we talked about, that value play, the consumer is really -- you look at our average order value, you look at our average selling price, quite strong conversion, all of these metrics and KPIs from top to bottom. So it gives -- we have a lot of momentum in the business and we're feeling excited about that, and I think that's what you're hearing.
What we're really focused on to continue to drive that is those three pillars, right? It's the growth playbook that you heard me talk about, sales, marketing and retail all coming together. It's operational excellence, and it's obsessing over service and really delivering product that resonates with our consumer base, making the service fast, easy, where they can earn more. We're doubling down there as well. And the idea that we have a diversified product mix also really works in our favor as well.
Operator
Marvin Fong, BTIG.
Marvin Fong
Congratulations, Rati, on the new role. Most of my questions have been asked here, but we get a lot of questions from investors more looking kind of long term. So perhaps a question for Ajay, but goes out to anyone.
Just about sort of the algorithm we should think about in terms of sort of like flow through or you might want to call it incremental margin as we sort of think about 2026 or beyond. So it looks like, for instance, incremental margins in the third quarter were over 60%, but dropping off a bit here in the fourth quarter based on your guidance. But just what's a good incremental margin to kind of use once we sort of hit like 2026 and beyond?
Ajay Gopal
Thanks for the question, Marvin. Here's how I think about margins over the long term.
I think it's helpful to frame where we are today. We made a number of business changes starting back in late 2022. These changes were primarily directed as a first step of getting the business to being EBITDA breakeven, adjusted EBITDA breakeven. And I'm really pleased with how that has played out.
You've seen the proof points in our results so far, and that positions us really well looking forward. I think going forward, we have a clear path to growing both dollars and margins at The RealReal. We're going to see strong flow-through on growth.
Our gross margin is at 74.9% for the total business and in particular, 88.6% for consignment revenues, that being the focus areas of our growth, combined with unit economics, are going to give us strong flow-throughs on incremental growth from here.
Rati highlighted our focus on operational excellence. We believe there's opportunities to further improve on our unit economics, and we continue to work on those areas. We continue to work on finding efficiencies in sales and marketing, in logistics, in authentication. And we think our rich data set really gives us a competitive advantage in how we can drive efficiencies across our business. So we expect that to further improve the flow-through going forward.
And the last thing I would say, Marvin, in terms of where we get leverage from, it's our operating expenses. We've got the right -- we feel like we've got the right investments in product and technology, in our fixed cost facilities footprint, and we expect to see strong operating leverage from incremental growth on that line as well.
Marvin Fong
Great. And my follow-up question, I think it was called out that the return rate was improved, and by my math, it seems like it was a lot better in the third quarter. What kind of drove that? And is that sustainable?
And then as a corollary to that, I believe you're now allowing people to pay a fee to return items that are like final sale. Could you maybe comment on uptake of that and some of your other monetization initiatives?
Rati Levesque
Thank you, Marvin. So churn rates are lower. It really is driven out of mix. That's the primary reason that they're lower.
Operational efficiencies is also a factor. So that's the obsessing over service, making sure that the attribution that are driven by AI faster, not only does it make it faster, but it makes the listing more efficient. So we're happy about that. But again, it's driven out of mix, so it depends on what the mix looks like within the quarter.
As far as return insurance goes, that is something that we are testing our way into. Super early days. We'll definitely have a read over the next couple of quarters, and it's mostly on final sale items as well as handbags. So happy to give you more information as we continue to test to this initiative.
Operator
Ike Boruchow, Wells Fargo.
This is Robert on for Ike. Most of mine have been asked already. But just maybe you could talk a little bit about the consumer trends you saw through the quarter, particularly last quarter, you were talking about it slowing a little bit, you're a little bit more promotional, but you kind of blew it out the park this quarter. So any color you can give on that and how it looks exiting?
Rati Levesque
Yeah. Sure, Robert. I can answer that. I take this back to the consumer health and our business model being quite resilient. So I'm going to double down on that message there.
We are seeing -- we've said this before, we're a supply-driven company, and it's all about supply. Supply is in a very good place because of the initiatives that we've been running over the last couple of years. Sales, the retention numbers of the sales team, the referral program is really working around marketing and our personalized promotion strategy as well as retail, meeting the seller where they are.
We're offering now pickups for supply. So if supply is in a good place, we'll see the demands follow. And even in a harder environment, we found that to be true, because people are looking for that value play. So for us, it's really about doubling down on our core business, our moat, building trust with our consumer, focusing on the growth playbook, operational excellence and obsessing over service, and meeting the seller where they are. So we're going to continue down that path, yeah.
Ajay Gopal
Hi, Robert. Thanks for the question. Let me add a couple of points to Rati's answer. We did see acceleration through Q3. I think the very beginning was a little soft, and then we saw gradual improvements from there.
And we feel really good about how that momentum has continued into Q4. We look at average order values as an indication of consumer sort of preference, to your question. And our average order values in Q3 at $522 were strong. They were resilient. They've stayed above $500 for us on a consistent basis, and they were actually up when you compare versus prior year by about 2%.
So I think all in, we feel really good about how the quarter played out and what that means for us going forward.
Operator
Jason, UBS.
My question is if you could just really clarify what's driven the upside to the guidance. Of all the different growth initiatives that you talked about, what is it that's really changed from not just last quarter to this quarter, but really from the beginning of the year until now? Thank you.
Ajay Gopal
Thanks for the question, Jay. I think on Q3, in particular, the story versus expectations for us was driven by a few things.
First and foremost, I would point out to volume. Rati mentioned our growth playbook. We've always described our business as being driven by supply, and we're really feeling good about how that combination of sales and marketing and stores is unlocking supply. And once we find the supply in our business, our sell-through rate is really strong.
We have over 90% lifetime supply. So volume driven by our growth playbook unlocking supply was one big factor in expectations in Q3.
The other point I would make on Q3 is gross margin. You noticed that sequentially, we were up on gross margins and at 74.9%, this was our highest ever gross margin as a company. That was driven by a favorable shift in mix towards consignment revenues. When that happens, it lifts the overall gross margin for our business, and that was another source of upside for us in Q3.
And the last thing I would say is our focus on operational excellence. We continue to look at opportunities where we can drive efficiencies in the business, and that resulted in strong bottom-line performance. We reported positive $2.3 million in EBITDA, which was also the second time we've done that.
And more notably, I think in Q3, it's particularly pleasing because it's not a seasonal high quarter for us. We managed to do that at a point which is -- which we would -- previously, I would say we were probably not quite there yet.
Operator
Thank you. Ladies and gentlemen, at this time, we have no further questions in the queue. This will conclude the conference call. Thank you, all, for your participation, and you may now disconnect.