The RealReal, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. The RealReal operates an online marketplace for authenticated luxury resale, primarily through consignment.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $133.2 million | $142.7 million | $405.9 million | $443.8 million |
| Gross profit | $94.1 million | $85.8 million | $270.2 million | $252.1 million |
| Gross margin | 70.6% | 60.1% | 66.6% | 56.8% |
| Operating loss | $22.5 million | $45.5 million | $145.2 million | $151.2 million |
| Net loss | $22.9 million | $47.3 million | $146.8 million | $157.8 million |
| Adjusted EBITDA | $(7.0) million | $(28.2) million | $(56.6) million | $(92.3) million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(71.8) million | $(95.3) million |
Q3 revenue fell 7% year over year; nine-month revenue fell 9%. Q3 diluted loss per share was $0.22 versus $0.49; nine-month loss per share was $1.45 versus $1.66. Adjusted EBITDA is a non-GAAP measure and excludes specified costs, including stock-based compensation and restructuring.
Business and operating trends
- Q3 GMV declined 8% to $407.6 million and NMV declined 7% to $302.9 million. Nine-month GMV declined 4% to $1.275 billion and NMV declined 3% to $934.6 million.
- Consignment revenue rose 10% in both comparison periods: to $102.9 million in Q3 and $302.1 million for nine months. Take rate increased to 38.1% in Q3 from 36.0%, and to 37.4% for nine months from 36.0%.
- Direct revenue dropped 49% in Q3 and 50% for nine months, reflecting the planned reduction of lower-margin company-owned inventory. Shipping revenue declined 13% in Q3 and 7% for nine months.
- Management attributed stronger gross margin primarily to higher take rates, a greater consignment mix, and shipping-cost savings. Direct-revenue margin weakened due to discounted liquidation of inventory previously reserved.
- Q3 orders fell to 794,000 from 952,000; average order value increased to $513 from $463. Active buyers were 954,000 versus 950,000.
Liquidity, debt and unusual items
- At September 30, cash and cash equivalents were $170.8 million; restricted cash was $15.8 million. Combined cash, cash equivalents and restricted cash declined $107.2 million during the first nine months. Management said existing cash should cover working capital and capital expenditure needs for at least 12 months.
- Convertible notes had $460.0 million principal outstanding: $172.5 million due 2025 and $287.5 million due 2028. Net carrying amount was $451.8 million. The $50 million revolving credit facility expired in June 2023 without renewal; no balance was drawn at expiry.
- Stockholders’ deficit was $290.0 million, and accumulated deficit was $1.098 billion. Capital expenditures and capitalized software costs used $35.4 million in the first nine months.
- The February 2023 savings plan included approximately 230 job cuts, about 7% of the workforce, and real-estate reductions. Nine-month restructuring expense was $37.4 million, including $26.3 million of lease-asset impairments, $7.5 million of fixed-asset impairments, $3.0 million severance, and other charges, partly offset by lease-termination gains. Management expected implementation to be substantially complete by year-end 2023.
- Inventory write-downs and shrinkage provisions were $8.8 million for the first nine months, versus $1.8 million a year earlier.
Outlook, commentary and risks
- The company stated it expects fiscal 2023 revenue to be lower than 2022. No specific numerical revenue, earnings or cash-flow guidance is provided in the filing.
- Management expects continued operating losses and negative operating cash flows in the foreseeable future; it may seek additional financing and cautions financing may not be available on acceptable terms.
- Key exposures include discretionary luxury demand, inflation and macroeconomic uncertainty, supply and buyer retention, seasonality (typically stronger Q4 demand), returns, competition, authentication and operational execution, and the ability to realize savings from the restructuring.
- Chanel litigation remains stayed to permit renewed mediation, expected to be scheduled for early 2024; the company cannot reasonably estimate potential loss. An opt-out shareholder securities claim remains pending, with a class-certification hearing set for May 7, 2024; potential loss is not estimable.
- The company reported effective disclosure controls at a reasonable-assurance level. The CFO was scheduled to depart effective January 31, 2024, or earlier upon a successor taking the role.
Important facts for investors to verify
- Whether consignment growth and higher take rates can offset falling GMV, order volume and direct revenue without weakening supply or customer demand.
- Whether cost reductions improve recurring operating results after one-time restructuring charges, and whether further cash burn remains consistent with management’s 12-month liquidity assessment.
- Cash availability and obligations under the 2025 notes, including principal maturity, and the company’s plans for refinancing or repayment.
- Fourth-quarter sales, returns and cancellations, given stated seasonality and the risk that returns exceed reserves.
- Developments and potential financial consequences of the Chanel and opt-out shareholder litigation, neither of which has a clear loss estimate in the filing.
- Whether the CFO transition, store closures and reduced workforce affect execution, consignor acquisition, buyer experience or planned savings.