The RealReal, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
Business context
The RealReal operates an online marketplace for authenticated, consigned luxury goods, with additional direct sales of company-owned inventory. Consignment and service revenue is reported net of consignor commissions. At quarter-end the company had approximately 12.7 million members and three retail stores; its four merchandising and fulfillment facilities comprised approximately 1 million square feet.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Total revenue | $71.0 | $47.0 | $140.2 | $93.4 |
| Gross profit | $46.1 | $30.8 | $88.4 | $61.4 |
| Gross margin | 65% | 66% | 63% | 66% |
| Operating loss | $(25.3) | $(15.9) | $(48.6) | $(29.8) |
| Net loss | $(26.9) | $(17.6) | $(50.1) | $(31.7) |
| Adjusted EBITDA loss | $(20.9) | $(13.1) | $(39.3) | $(24.4) |
- Q2 revenue grew 51%; H1 revenue grew 50%. Consignment and service revenue rose 44% in Q2 and 41% in H1, supported by GMV growth and higher take rates. Direct revenue more than doubled in both periods, partly reflecting resale of returned items that became company-owned inventory.
- Q2 GMV was $228.5 million, up 40%; H1 GMV was $452.6 million, up 41%. Q2 orders were approximately 505,000, active buyers 492,000, and AOV $453. Take rate increased to 36.6% in Q2 from 35.5%.
- Operating expenses grew faster than gross profit in dollars: Q2 operating expenses were $71.4 million, up from $46.7 million. SG&A rose 76% in Q2, including higher staffing, public-company preparation, legal and consulting costs. H1 includes $0.8 million of compensation expense related to a secondary share sale by executives.
- Q2 net loss attributable to common stockholders was $26.9 million, or $2.83 per share; H1 was $53.5 million, or $5.87 per share. The H1 common-stockholder loss includes $3.4 million of preferred-stock accretion.
- Cash used in operating activities was $46.2 million in H1, versus $28.7 million a year earlier. Capital expenditures and capitalized software costs were $13.9 million combined. Financing activities provided $65.7 million, primarily from preferred-stock issuance.
Liquidity, debt, and capital changes
- At June 30, cash and cash equivalents were $53.3 million, short-term investments $13.4 million, and restricted cash $11.7 million. Unrestricted cash, cash equivalents, and short-term investments totaled $66.7 million. Accumulated deficit was $307.9 million.
- Current liabilities were $86.8 million, including $33.4 million of accrued consignor payables. Debt was $6.5 million, all classified as current at quarter-end; the company repaid the term loans in full on July 26, 2019.
- The IPO closed July 2, after quarter-end: 17.25 million shares were sold at $20 per share for net proceeds of approximately $320.9 million. The company said proceeds would fund general corporate purposes and may support acquisitions or investments; it also planned a $3.2 million contribution to The RealReal Foundation. Preferred shares converted into approximately 58.4 million common shares in connection with the IPO.
- Future minimum operating lease payments were $128.8 million as of June 30. Management stated existing liquidity, including the IPO proceeds, was expected to meet working-capital and capital-expenditure needs for at least 12 months, while losses and negative operating cash flow could continue.
Outlook, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided. Management expects continued investment in marketing, facilities, personnel, automation, and technology; it expects related expense categories to decline as a percentage of revenue over the longer term, but does not assure profitability.
- The business is seasonal: supply typically rises in Q3 and Q4, while demand and AOV tend to be stronger in Q4. Higher seasonal marketing, staffing, and shipping costs can affect results.
- Chanel’s November 2018 lawsuit alleges trademark and advertising violations, including claims involving counterfeit goods and consumer confusion. The company disputes the claims, intends to defend itself, and says it cannot reasonably estimate potential losses.
- Other notable items include a $2.1 million H1 expense from remeasuring preferred-stock warrant liabilities and a $0.3 million term-loan success fee recorded in Q2 interest expense. The warrant liability was reclassified to equity upon its conversion in connection with the IPO.
- Key disclosed risks include continued losses, ability to attract consignors and buyers, authentication errors and returns, operational scaling and automation, competition, seasonality, cybersecurity and privacy compliance, and litigation. Management reported disclosure controls were effective at a reasonable-assurance level.
Investor verification priorities
- Confirm post-IPO cash, share count, preferred-stock conversion, and dilution from outstanding options and other awards; the filing reported 85.3 million common shares outstanding as of August 5, 2019.
- Assess whether revenue and GMV growth can translate into improving gross margins and operating leverage, given rising operating losses and cash burn.
- Review the composition and persistence of direct revenue, returns, and the returns reserve; direct revenue growth was partly tied to a higher-than-usual volume of returns after consignors had been paid.
- Monitor the Chanel litigation, potential related claims, and any resulting costs or restrictions; the filing does not provide a clear estimate of possible loss.
- Evaluate liquidity needs against ongoing negative operating cash flow, lease commitments, planned investments, and the company’s stated use of IPO proceeds.