Business context and reporting period
The RealReal, Inc. operates an online and retail marketplace for authenticated consigned luxury goods, supplemented by sales of company-owned inventory. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. The company reported that operations had largely resumed after pandemic-related restrictions, while COVID-19 effects remained uncertain.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $118.8 million | $77.8 million | $322.6 million | $213.1 million |
| Gross profit | $71.1 million | $49.5 million | $192.9 million | $134.2 million |
| Gross margin | 59.8% | 63.7% | 59.8% | 63.0% |
| Operating loss | $51.2 million | $41.6 million | $168.7 million | $124.5 million |
| Net loss | $57.2 million | $43.6 million | $183.9 million | $125.1 million |
| Adjusted EBITDA loss | $31.5 million | $29.3 million | $100.0 million | $92.3 million |
Q3 consignment and service revenue was $89.5 million, up 39%; direct revenue was $29.4 million, up 115%. For the nine months, those categories were $247.0 million and $75.6 million, up 40% and 104%, respectively. Direct sales grew as company-owned inventory became a larger share of sales.
Q3 gross merchandise value (GMV) rose 50% to $367.9 million and net merchandise value (NMV) rose 45% to $273.4 million. Orders increased 38% and average order value rose 9% to $486. The take rate declined to 34.9% from 35.4%; management attributed the decline to a higher mix of lower-take-rate products. Returns and cancellations were 25.7% of GMV versus 22.9%.
At September 30, cash and cash equivalents were $444.8 million, with no short-term investments. Current assets were $537.8 million and current liabilities $168.8 million. The company had an accumulated deficit of $715.9 million and stockholders’ equity of $110.7 million. Inventory was $63.9 million, up from $42.3 million at year-end 2020.
Nine-month operating cash use was $123.4 million, compared with $96.0 million in 2020. Investing activities used $33.8 million, including $30.3 million for property and equipment and $7.5 million for software development. Financing provided $251.1 million, principally from the 2028 convertible notes. Cash increased by $94.0 million over the period.
Convertible notes had $460.0 million aggregate principal outstanding: $172.5 million of 3.00% notes due 2025 and $287.5 million of 1.00% notes due 2028. Their combined net carrying amount was $344.2 million. The company had a $50 million revolving credit facility, with no borrowings outstanding, and reported covenant compliance. Operating lease liabilities totaled $161.0 million.
Material changes versus prior periods
- Revenue and marketplace activity grew substantially, but net loss and adjusted EBITDA loss widened year over year.
- Gross margin fell 3.9 percentage points in Q3, reflecting a greater direct-revenue mix and lower direct margins in some periods; the nine-month gross margin declined 3.2 points.
- Nine-month cash used in operations increased by $27.4 million, including a $21.6 million inventory cash outflow associated with increased direct purchases.
- Operating expenses rose, particularly operations and technology, reflecting increased headcount, facilities, retail expansion and transition costs. Marketing and SG&A decreased as a share of revenue.
- Debt increased following the March 2021 issuance of $287.5 million principal amount of 2028 convertible notes. Interest expense also rose, partly due to amortization of debt discounts and issuance costs.
Outlook, risks and unusual items
- Management stated that existing cash was expected to cover working capital and capital expenditure needs for at least 12 months, while acknowledging operating losses and negative operating cash flows could continue. No quantitative revenue or earnings guidance was provided.
- Management expected continued investment in operations, automation and technology, and anticipated opening one additional retail store in Q4 2021. It expects certain operating expenses to decline as a percentage of revenue over the longer term.
- Management cited seasonality: supply typically rises in Q3 and Q4, while demand and operating expenses typically rise in Q4. COVID-19 restrictions, consumer demand, shipping and staffing remain uncertainties.
- The company recorded $11.0 million for an IPO-related shareholder class-action settlement in Q2 and $0.5 million of derivative-action legal costs in Q3. Settlement stipulations filed November 5, 2021 were subject to court approval.
- Chanel litigation over trademark, advertising and authentication allegations remained unresolved; the company said the outcome and any potential loss could not be reasonably estimated.
- Key risks include persistent losses and cash burn, ability to secure consignor supply and retain buyers, inventory and return exposure, execution of retail and authentication-center expansion, competition, authentication accuracy, and potential dilution or cash obligations upon note conversion. Management reported disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether GMV growth converts into durable revenue and improved margins, given the lower take rate and higher returns and cancellations.
- How direct inventory purchases, inventory levels and aged-inventory sales affect cash requirements and gross margins.
- Operating cash burn relative to the stated 12-month liquidity outlook, including planned capital spending and lease commitments.
- The notes’ conversion, settlement and dilution implications, and continued compliance with revolving-credit covenants.
- Court approval and final payment terms for the shareholder and derivative settlements, and developments in the Chanel case.