The RealReal, Inc. — FY2019 Form 10-K
Business context and reporting period. The RealReal operates an online and omnichannel marketplace for authenticated, consigned luxury goods. This annual report covers the fiscal year ended December 31, 2019; it also provides unaudited fourth-quarter results. The company completed its IPO in July 2019, receiving $315.5 million in net proceeds.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| GMV | $1,008.3 million | $710.8 million |
| Revenue | $318.0 million | $213.7 million |
| Gross profit / margin | $203.2 million / 64% | $136.9 million / 64% |
| Operating loss | $98.4 million | $73.9 million |
| Net loss | $96.7 million | $75.8 million |
| Adjusted EBITDA (non-GAAP) | $(73.0) million | $(58.9) million |
| Cash used in operating activities | $54.5 million | $47.2 million |
Revenue grew 49% and GMV grew 42%. Consignment and service revenue was $267.4 million, up 48%; direct revenue was $50.6 million, up 53%. The take rate rose to 36.3% from 35.5%. Active buyers increased 40% to approximately 582,000; orders totaled 2.217 million, and average order value was $455. Marketing expense declined to 15% of revenue from 20%, while operations and technology was 45% and SG&A 35% of revenue. Gross margin held at 64%; operating and net losses widened in dollars.
Fourth quarter: revenue was $93.7 million, gross profit $62.5 million, net loss $21.4 million, and Adjusted EBITDA loss $12.7 million. GMV was $303.0 million, up from $218.5 million in Q4 2018; active buyers were 582,000 versus 416,000. Q4 gross margin was 67% versus 66% a year earlier.
Liquidity, debt and commitments. At year-end, cash and cash equivalents were $154.4 million and short-term investments $208.8 million, or $363.3 million combined. Total assets were $466.9 million, total liabilities $128.0 million, and stockholders’ equity $338.9 million. The company repaid its term loans in July 2019 and reported no debt at year-end. Management said available cash and investments should fund working capital and capital expenditures for at least 12 months, while operating losses and negative operating cash flow could continue. Contractual obligations included $165.7 million of operating lease payments and $7.1 million of purchase commitments; a January 2020 New York lease adds $14.7 million over eight years.
Changes, outlook and risks
- Operating expenses increased 43% to $301.6 million, outpacing revenue growth and contributing to larger operating and net losses. SG&A rose 74%, including public-company costs and a $3.2 million donation to The RealReal Foundation.
- Management expects continued investment in marketing, facilities, personnel, technology and automation, and anticipates losses and negative operating cash flows for the foreseeable future. It expects certain operating expenses to decline as a share of revenue over the longer term; no quantified revenue or earnings guidance is provided.
- Seasonality is material: supply typically increases in Q3 and Q4, with demand, average order value and sell-through generally strongest in Q4. The filing reports 94% sell-through in 2019 versus 96% in 2018; approximately 60% of listed products sold within 30 days and 80% within 90 days.
- Key risks include sustaining consignor supply and buyer growth, achieving profitability, competition and marketing efficiency, authentication failures or counterfeit allegations, operational scaling, facility dependence, returns, cybersecurity and privacy compliance, and macroeconomic or public-health disruptions. COVID-19 was identified as a potential threat to consignor home visits, facilities, stores and consumer demand.
- Chanel litigation alleges trademark and advertising violations, including misrepresenting counterfeit items as authentic; outcome and potential loss were not estimable. IPO-related securities class actions also allege misleading disclosures about operating metrics and authentication; the company said the cases were at an early stage and loss could not be estimated.
- The company corrected immaterial prior-period revenue presentation errors, reclassifying certain transactions between consignment and direct revenue and related costs. It also reported an additional immaterial correction increasing 2019 consignment revenue by $2.8 million, $2.2 million of which related to periods before 2019. The filing states prior-period financial statements were not materially misstated and did not require amendments.
Important facts for investors to verify
- Whether buyer and consignor growth, take rate and sell-through can be maintained while reducing operating losses and cash burn.
- Cash runway assumptions and the pace of spending on facilities, automation, marketing and retail expansion.
- Developments and potential financial exposure in the Chanel and IPO-related litigation.
- Returns, direct-inventory growth and margin trends: returns and cancellations equaled 27.5% of GMV in 2019; direct cost of revenue rose to 81% of direct revenue from 78%.
- Effects of lease commitments and adoption of lease accounting, which management expected to materially increase reported assets and liabilities.