Good day and thank you for standing by. Welcome to The RealReal Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. I would now like to hand the conference over to Caitlin Howe.

Please go ahead..

Thank you, operator. Joining me today to discuss our results for the period ended September 30, 2021 are Founder and CEO, Julie Wainwright; President, Rati Levesque; outgoing Chief Financial Officer, Matt Gustke; and incoming Chief Financial Officer, Robert Julian.

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 for which we had provided reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a stockholder letter earlier today, both of which are available on our Investor Relations website.

I would now like to turn the call over to Julie Wainwright, Chief Executive Officer of The RealReal for introductory remarks, and then we will go directly into a questions-and-answer session..

Thank you, Caitlin, and to everyone for joining our earnings conference call today. We're pleased to announce strong financial results for the third quarter of 2021 with continuing robust top line growth as well as solid bottom line improvement. Based on what we know today, the effects of COVID-19 are effectively behind us.

Importantly, we have a resurgence of healthy supply in our authentication centers. During the third quarter, our product supply ramps nicely, driven by at-home consignments that exceeded pre-COVID levels. Further, our retail stores continue to be an increasingly important and cost effective channel for securing supply.

Therefore, we believe we are well positioned from a supply perspective as we enter the holiday season. Additionally, we believe The RealReal's unique business model is largely insulated from the supply chain shortages and certain inflationary impacts many businesses are currently experiencing.

During the third quarter, we also managed operational pressures within the business. Like many businesses we are incurring elevated shipping costs and staffing challenges specifically in our authentication centers.

To address these issues, we developed and implemented multiple initiatives including shipping diversification, and last mile optimization for the shipping cost and expanded automation and our authentication centers to address staffing shortages. We are confident in our ability to manage these challenges.

While we are in the early innings of delivering operational expense leverage we believe the company is starting to see the benefits of previous investments. These will create significant opportunities for operating leverage as we drive toward profitability in the coming quarters.

Overall, our business is continuing to experience very positive trends, and we believe these trends will continue through the end of the year and into 2022.

And a final note, I'm providing forward-looking financial expectations, we intend to resume a more typical annual and quarterly guidance cadence in 2022 along with committing to a timeline to reach adjusted EBITDA profitability, expect that to begin with our next conference call. And with that I'm going to open it up for questions.

Caitlin, what do we have here? Operator?.

Operator, we're ready for questions..

[Operator Instructions] Your first question comes from the line of Mark Altschwager from Baird. Your line is open..

Good afternoon. Thanks for taking my question. I wanted to ask about some of the supply strategies here. So, you sound pleased with the trends with at-home appointments.

At the same time, I think the target on the number of LCO openings may have come down a bit versus what you've discussed recently? Correct me if I'm wrong there, but maybe just a little bit more on what you're seeing with kind of each of those channels.

And now with some normalization in the operations, could you give us some current thoughts on how you think the supply mix might trend in the medium term? And how that, and what the implications might be on profitability trends? Thank you..

Well that's a lot of questions. So, let me just start with LCOs are in our neighborhood stores along with - we do have one standalone in New York and Midtown. So, we actually have more luxury consignment offices than we originally planned because we did at the beginning of the year make a decision to open more neighborhood stores.

So, we actually have more, but we did shut one down and that was in San Francisco, because most people prefer to use our - what we have two now in the Bay - three in the Bay Area. We have one Larkspur, one in Palo Alto, and one in downtown San Francisco. So, the center in our - which is at the base of our office building became less and less relevant.

So, we chose to move that staffing. But in general supply 30% of our new consigners are coming from our retail stores, and coming drop-offs or appointments in the LCO. Supply across all segments fine jewelry, watches, men's fashion, women's fashion, handbags, accessories all of it is significantly up versus year ago.

The average unit selling price, which we internally call AUR is - actually on target, if not slightly higher. So, now and will be based on what people buy and that will determine the mix.

We are still - where certainly apparel has come back, and Rati can talk a little bit about that, but we're still selling a huge mixture of high value handbags and fine jewelry. So, and just one other note and then we can - you can ask further questions if you'd like, I didn't cover it.

Gross margin is clearly and our take rate is clearly a key component on the path to profitability, but it's not the sole path, and it's not the sole component. So we feel good overall that everything is progressing better than we expected for the balance of this year and - we see things looking really good in 2022.

We'll give you more specific guidance in the February timeframe..

That's all really helpful. Maybe just a quick follow-up on the gross profit commentary I guess with gross profit per order, I mean, have the buyer incentives are those fully back to kind of normalized levels, or how are you thinking about that as a lever as we head into the holiday period in 2022? Thank you..

We did use it when supply was short in order to keep our cohorts engaged because we have such a high repeat rate, but that was last year. We've return to normal cadence of any kind of promotional activities earlier this year, and that means that, and we expect that to continue.

That usually means one really bounce back as we call it month and we - so we are back to normal, pre-COVID. Everything is either better than where we were pre-COVID or back to normalcy..

That's great. Thanks again..

Sure..

Next question comes from Oliver Chen with Cowen. Your line is open..

Hi, thank you. Gross profit per order was very encouraging this quarter. As we look forward, what are some key drivers to continue to increase this? And Julie as you think about supply gathering regionally and across the country.

Are you seeing pretty broad-based strength in your important markets? It sounds like you have a renewed confidence that we've entered a more stable phase? Thanks..

I'm going to answer that last your question first and then I'll turn it over to Matt and Robert for the financial numbers. So we have, yes our markets are back. We have regional strength and national strength, and I wouldn't say it's stability. I would say we've returned to - we're exceeding pre-COVID growth levels in our market.

So it looks really good very excited. And you all know at one point, New York were shut down for us that is not the case. And in case anyone hasn't been to New York lately it is vibrant that market, all markets are doing extremely well. So we're very pleased with the supply..

I'll cover the gross profit per order. Just to state what's in the letters. We are at $94 gross profit per order in the quarter, which was flat versus the prior quarter. We'd expect that to go up in the current quarter as, it will be typically is higher sequentially.

That's one of the drivers on a go-forward basis, but on a sustained basis, it's really ultimately it's going to be leveraging shipping expenses and other kinds of comps.

We do expect to see over time meaningful improvements in our shipping expense kind of once, not only because we're seeing short term headwinds there, beyond that, we have a number of initiatives overtime to drive that down meaningfully.

And then beyond that, the other just the key levers, really just our ALD and our take rate which is stable and to modestly increasing going forward as well..

Yeah. And this is Robert. The only thing I would add is the gross profit per order was up year-over-year up, $4..

Okay thank you. And last question that active buyer statistics look quite solid. What about the new buyers that you're seeing in terms of their purchasing behaviors? And what might you do to make sure that engage them and keep them on the platform? Thank you..

What keeps new buyers on our platform is the same thing that keeps repeat on our platform really good supply.

So that's coming in the new buyers looked like the other buyers, see the difference between this new buyer group, which we started seeing during COVID is we used to see an AOV that was slightly less than the repeat and in fact the new buyer AOV is strong. It's strong as strong or stronger than repeat.

So say - it's nice helping new buyer, and again it's driven by great merchandise on the site..

Thank you. Best regards..

Thank you..

Next question comes from Susan Anderson with B. Riley. Your line is open..

Hi, good evening. Thanks for taking my question. I was wondering if you can give us an update on your store plans and how many you expect to have at the end of the year, and your expectations for next year.

And if anything's changed on the rollout they’re fixed?.

Yes, sure. This is Rati Levesque. So stores, our neighborhood stores, we have 15, which includes our flagship stores as well. We'll have 17 by the end of the year. They continue to be quite healthy for us. So they continue to drive supply and high value supply.

They continue to drive about 30% of our new consigners with the supply side, again very healthy. On the demand side, AOV, average order value, higher average selling price, return rates are lower. We see a pretty big halo impact happening on a regional basis. So we're very optimistic about the stores.

This is the first season that will have our neighborhood stores open, and we're looking forward to a healthy performance there. So we'll definitely keep you all posted on next year's plan..

Great, that sounds good. And if I can just add one follow-up wanted to get your thoughts around holiday with kind of now, I guess the return to much more normal supply. What are your expectations around holiday? And do you foresee any shipping issues around the holiday demand? Thanks..

Yes, we don't see any - we're not forecasting any issues on the shipping side like Julie mentioned. We don't have any supply chain issues. So our shelves are full of supply. We're very excited about that. Yes, we're excited about a healthy quarter with those two things that..

Great, thanks so much. Good luck this holiday..

Next question comes from Michael Binetti with Credit Suisse. Your line is open..

Hi, guys thanks for taking all our questions here and congrats on a nice quarter. Julie, at the time of the IPO, I think we were - I think we'd be approaching breakeven right around now obviously there is a pandemic in between there. So clearly, we are where we are.

But thinking about what do you EBITDA profitability, I think you guys were thinking for on a run rate for a year, about $2 billion was what you needed to get there? And I know you're going to give us a past profitability on the next call.

But, and I know there's a lot of numbers moving around, but at a very high level, it seems like the biggest parts of the cost structure pretty favorable today versus what we knew about back then Phoenix, it seems like it's more efficient than Brisbane? Small stores seem like you're very happy, any cost effective as we used in the prepared remarks described.

I think a lot of the automation, you talked about along the way is happened.

Are there new taste to think about to help us think about what happens profitability at $2 billion versus where we thought we were a couple of years ago?.

Michael, I will be so excited to have our CFO - walk you through our timeline in February. I think that's better well said, but I have to say we clearly lost years, so we did lose year, you're right. And that told, if we would have continued on our track of growing 40% a year, we would have been in a different situation.

I think the key takeaways from today are growing faster than they were pre-COVID supply is strong and we're going to resume to normal cadence and put out the path to profitability in February so we've got a pretty energetic team here around the table..

Okay. Let me ask you another thing, guess, I'm trying to look at I guess the model and compare the business to pre-COVID levels to 2019.

I think in the quarter, your sales were up about 46%, and excluding the stock comp, there's about 200 basis points of operating expense leverage on that kind of a sales growth rate? Is that you know until we get to February and we have to do our models before then.

Is that about the right amount of leverage to think about if we see that kind of GMV from you, or are there inflection points along the way over the next few quarters that we should think about?.

Robert?.

Yes. I'll make some comments on that one. I believe our GMV growth was 50% year-over-year, and our revenue growth was 53% year-over-year. We're evaluating the business, and the cost drivers and the unit economics, and I think when we give guidance next quarter, we'll give you a better sense of what sort of leverage that we should expect going forward.

I do think that there were incremental investments that have been made along the way. That we're starting to see some benefit from, and I would not expect that you'll continue to see investments like that, that will prevent us from showing leverage. So, I expect that we will see a fair amount of leverage.

And again I don't want to be more specific before you give actual guidance, but I don't think that the past is a good indication of the future relative to what sort of leverage, you will see in this business..

Right. And just one example we made a commitment to automate our ops centers, which meant that we really doubled down and actually doubled the budget and technology.

We started doing that by 2019, it really shows that I have - you don't have the isolated numbers, but it's a key driver of our expense structure and we are seeing the results of doing that, and both our data scientists and our technology group. But that isn't something we're going to be doubling every single year at all.

In fact we're at a really good rate, while we're getting incredible leverage in our ops centers given the work had they've doing..

Okay. That's very helpful. Thanks so much, Julie and Robert..

Next question comes from Ike Boruchow with Wells Fargo. Your line is open..

Hey, good afternoon, everyone. Two from me on the model there is clearly a lot of different things going on from a mix perspective whether more volatile than normal. Your take rate is normally takes a leg down sequentially for Q4.

Can you kind of help us with how to think about that given what's going on with from a mix perspective? And then on the marketing side, there was a very large uptick in marketing in Q4 last year, I know you guys are just starting to really reinvest, because you saw the consumer demand coming back and supply coming back, how is really marketing, is there chance of dollars come down just kind of curious - that given the - to compare the day - again? Thank you..

This is Matt. I'll hit a couple of pieces. Obviously, we're not going to start going down the path of giving all the components of that would add up to guidance, but directionally with respect to take rate, you're right, there is an inverse correlation between AOV and take rate and typically AOVs at its high point in Q4.

We had a really unusual Q2 this year with our highest ever AOV. So I wouldn't say that's necessarily a likely outcome, but sequentially up is very likely. So you should expect to see take rate be somewhat down sequentially. And with respect to marketing, I don't think you can look at 2020 as a guide post for anything, frankly.

But we know obviously what our intent is for marketing in this quarter, which reflects more typical seasonal investment levels, which means it will be up versus Q3, but not in a particularly significant line..

Got it. Thanks Matt..

Next question comes from Simeon Siegel with BMO Capital Markets. Your line is open..

Thanks. Good evening, everyone. Sorry if I missed it.

I know it's a little tougher, but any way to frame how some form of like-for-like ASP did, just to try and neutralize the product mix? I'm basically just wondering if you guys have an opportunity to capture the benefit of broadly higher industry prices without absorbing most of the inflationary cost inputs.

So just trying to think through how you think about prices, if you exclude mix?.

Sure, I'll take that, and Rati feel free to jump in. Over time there is an industry, kind of environmental component, if there is also an operational and execution story.

So our like-for-like ASPs today are significantly higher than they were years ago what that really ties back to our efforts over time to leverage technology to optimize pricing in an increasing granular level the overlay and the environment is very favorable from a promotional perspective. And certainly there is kind of a knock on effect for us.

I follow your train of thought and concur that makes sense that to the extent that you see robust prices across the industry, that's true, there is no incremental cost to us to process. So ASP upside would be a pretty powerful lever throughout the P&L now..

Okay, great.

And maybe could you elaborate at all me comment the vendor transactions to secure additional product for holiday anything there worth flagging?.

Go ahead, Rati. She had vendor under her..

I don't see any I mean the vendor is a driver for high value for us so again fine jewelry, watches, handbags, and we'll continue to see that trend for the holiday..

But there is, but because we have a really robust supply coming in from our consigner base, which we didn't have before. It's not going to be an unusual activity. It will can just be business as normal..

And we've seen an increase in the channel, because of the purchases that we are making during COVID. So we have inventory, which is selling through which have some impact until that inventory has been sold..

Great, congrats on the progress and good luck on the next chapter Rob and Caitlin congrats on the new roles, thanks, guys..

Thank you..

Thank you..

The next question comes from Erinn Murphy with Piper Sandler. Your line is open..

Great, thanks. Good afternoon. A couple from me first, I wanted to go back to the neighborhood store conversation. You talked about 30% of supply coming from neighborhood stores today.

What percent of your consignors in these retail stores are also buyer and then?.

It's actually 30% of new consigners are coming from our retail locations..

Of new consigners, but I'm sorry not supply what percent of your overall supply comes from the retail locations then?.

Yes, I'm sorry, we don't give out that number at this time..

Your question how are new consigners, are they becoming buyers like the old --like our current, yes. So as you guys may recall, we do have a really great flywheel effect for over 50%, about 57% of our consigners end up being buyers. We're seeing that trend continue across all new consignor base..

Okay, understood. And then a question for the CFOs on ops and tech that was better than expectations.

Should we expect this type of leverage moving forward now that Phoenix is operational, and Brisbane is rolling off? Or is there anything else we need to be mindful of, particularly in the fourth quarter as we round out our models on the ops and tech bucket there? Thanks..

Robert?.

Yeah, well, one thing I would say there were certainly some redundant costs in the move from California, Arizona, that I think is largely behind us and you should not continue to see that..

That's absolutely true. I think in the quarter, if you're looking back at Q3 OpEx in general include certainly inclusive of ops and tech was somewhat lower than we expected and that's largely due to the difficulties that everyone's experience in hiring hourly labor.

So we do expect to get caught up with our hiring, so in the near term we would expect to see ops and techs go up somewhat sequentially, and it's really around supporting our growth, but the fixed components of ops and tech you should see very little growth going forward. So the leverage that you're seeing now is really just the beginning..

Excellent thank you so much..

Next question comes from Marvin Fong with BTIG. Your line is open..

Fantastic thank you for taking my question. Most have been asked, but two, if I could. So, congratulations. It's great to hear that the at-home business is above pre-COVID level, but maybe we could just ask about some additional color like how -- what's the mix now between at-home versus virtual -- as the virtual channel kin of gone down quite a bit.

Any color there would be great. And secondarily, just on the return rate. Is that improved yet again this quarter? Just curious if that's a function of the policy on handbags and jewelry, or is there actual kind of like-for-like decrease in the return rate? Thanks..

Yeah, I can take that. At-home, yes, has increased, but mostly back to pre-COVID numbers like we mentioned, virtual still a component. I will say that our sales organization, becoming more efficient, I think that where you're going with the virtual question.

They have become more efficient and that's driven out of our stores, and our van pickup that we launched during COVID. So we feel good about their productivity. Return rate, yes, a slightly lower and that's driven out of two things the stores, becoming a larger component as well as product mix.

So those items that are not returnable like handbags are growing new contribution..

So kind of sequential basis, on a year-over-year basis returns are going up, and that's just reflective of how low they were in the middle of COVID. So they're starting to get closer to what they were historically. But to Rati's point, it's really just a function of category mix at this point..

Right, and they were in all time low because people don't leave their house. You can't really compare versus year ago. We're still significantly better than we were in 2019 for return driven out of what Rati said..

Great well, thank you congratulations, and best of luck Matt on your next move and welcome aboard Caitlin and Robert..

Thank you..

Thank you..

Next question comes from Michael McGovern with Bank of America. Your line is open..

Hey, thanks for taking my question. Two if I can. The first is just for the - AOV in-store versus online. I think you've given some commentary on that in the past. I was curious if you have any commentary this quarter or two.

So if you could comment on like the AOV at neighborhood stores versus more legacy stores in urban markets?.

So AOV in stores we track average selling price. They are a bit higher or much higher in the stores versus online. And that's driven again on a fine jewelry, watches, and handbags.

And I'm sorry, what was your second question?.

Flagship per se?.

And we're not seeing any differences between neighborhood and flagship stores in product mix, or value. They are driving the same amount of value on the demand side as well as the supply side..

So, I think of the past AOV in the stores is about two times greater than when it is online, and I think that still holds..

Got it, thanks. I was just, one more.

I was curious on if you have any commentary on like in store GMV maybe in core legacy stores from international travelers given the restrictions are lifted today, I was curious if like you think there could be some pent-up demand from international travelers that are coming to stay in New York and shopping for luxury goods?.

We don't know. I mean, we really driven and when we track international in the past it's been and the people in the store, it's been a pretty small percentage. Hence we were heavily impacted by having no international travellers. I would say all of our stores, and Rati can get a little bit more commentary.

All of our stores are - while we opened one right before shutdown in COVID that was San Francisco and Chicago, we opened up during COVID in October of 2020 every single flagship store except San Francisco is exceeding pre-COVID revenue and doing really well.

San Francisco in case you all haven't been there, it's been a little slower to come back to life. So we're expecting that it does have a longer tail, but the neighborhood stores are also on fire. So the store is there.

I think were never dependent on international, so those planes, I know the ocean liners, the tour ships or cruise ships are lining here, so we'll see. Well, - on Union Square in San Francisco..

Got it, thanks so much..

Next question comes from Anna Andreeva with Needham. Your line is open..

Great thanks so much, and good afternoon and welcome to Robert and Caitlin..

Thank you, Anna..

Couple of questions for us so and apologies if I missed this I was hopping from another call, but in the past you talked about approaching $100 in gross profit per order in the fourth quarter. Is that still the case? And I know pulling back on buyer incentives is a big part of the story here.

So our incentives now back to 2019 levels, or do you think there is room to cut back a bit further there? And then secondly, curious if you could talk about the get paid now program.

I know it's early days, but what has been the initial traction? How big do you think this could get for real down the road? And how do you think about the working capital component of this new initiative? Thanks so much..

So we did cover most of your first question earlier on, Anna. So I'll just reiterate, very briefly. Yeah, we would expect AOV to be up sequentially in Q4, buyer incentives are back to pre-COVID levels and they are very steady.

So you should expect higher GP per order in Q4 with respect to get P&L - Rati?.

Sure, I can take get paid now. We launched the program to our consigners and our sales team is going quite well. It's another offering to get high value good. But, we still pay more on the consignor side to an offered when a consignor is offered both the cash up-front, and to sell via consignment.

They usually go with the consignment offerings because that's how they are earning more money. So great way to bring someone in our door and get them interested in TRR and then consignment usually what's get them converted..

The second part, just around working capital, and the answer there is no impact really. This is a relatively small use of capital, so there is no meaningful impact..

Got it all right, well thank you so much, guys. Good luck for the holidays..

Thank you..

Thank you..

Thank you. Next question comes from Edward Yruma with KeyBanc Capital. Your line is open..

Hey guys, thanks for taking the questions. I guess first, and I think this is more a cope to Ike's question.

As these - as pricing a good kind of continues to escalate and can measure it kind of the price in the secondary market? Does it your sense that you also have to chase and kind of pay more for - on the sourcing side from your consigners, or are you able to kind of hold that steady? And then second, I know it's kind of early days, but any initial commentary from Mytheresa? And maybe helping us dimensionalize how big this handbags program could be? Thank you..

So look, we don't buy a lot of things. So we don't really have any impact on the consignment side of our business. So we're - for us it's more about we have - do we have enough product flowing into our shelves, flowing - time do we have tend to product are.

We are inflationary forces are hitting us are which we mentioned at the beginning on our shipping cost, and we've offset that by last mile, last mile diversification, shipping optimization and diversification of carrier.

So we feel good about our shipping expenses being to keep those miles going into the holiday and going forward, even if they creep up we have other methods we can employ.

Other than that it really comes down to, and we are - we buy so much of lots of things like hardware boxes that we don't have a real impact on our pick, pack and ship side on supply. So we're really untouched at this point. And it doesn't - and how it impacts the consigners, in theory and in practice, those things are going to sell faster.

They've always sold faster, as always looking to get optimal prices in 90 days, but you know, we have a healthy sell-through as we always do, which means they get paid faster. So it's right now think we don't have the same issues that other retailers have. And Mytheresa early day, good press from both of us.

Supply is coming, and they're smaller in the US, but it's so good relationship and we're happy, we have it. So, still early days. These things take a lot to get going..

So, operator, I think we out of time. Thank you. I think we have time for one more question..

Sure. Your last question comes from Lauren Schenk with Morgan Stanley. Your line is open..

Hey, [Nathan] on for Lauren. Understanding it's early, but until the new categories you've launched recently like sporting goods, collectibles, and tech, if you can find an update on what you're seeing there. Very helpful.

And is there any difference in the types of buyers you are attracting from those categories? And then there's have been more of a new buyer driver, and more also helping increase revenue? Thank you..

Yes, sure. This is Rati. I can take that question. Our new categories that we launched in trading card collectibles, as well as yes, sporting goods are doing quite well.

How we launch these categories as our consigners asked us to launch these categories it's what in their homes now, and they have this extra piece that they wanted to also give to their luxury manager or drop off in stores. I will say, especially in the trading cards and collectible space, we're seeing quite healthy consignments as well as demand.

So feeling really good about that and it also say that they are do skew more male in general..

Okay. Thank you..

Hey, thanks to everyone for joining us. In closing, we want to thank the entire team at The RealReal for their hard work and dedication for delivering these strong Q3 results. We want to thank Matt for his last call. You did a little happy dance, you can dance, but everybody's commitment to excellence helped drive our business forward every day.

We now have over 24 million members. So, thank you very much, members who are joining us on this mission to extend the life of luxury, and make fashion more sustainable. So, thank you all, and we'll be back in the New Year. Have a wonderful holiday, and just leaving one final note, we are ready. So we're going to have a good one.

Thanks so much everybody..

This concludes today's conference call. Thank you for participating. You may now disconnect..