The RealReal, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. The RealReal operates an online and retail marketplace for authenticated luxury resale, primarily through consignment.
Key financial and operating metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $104.9 million | $57.3 million | $203.7 million | $135.3 million |
| Gross profit / margin | $63.4 million / 60.4% | $35.7 million / 62.3% | $121.8 million / 59.8% | $84.7 million / 62.6% |
| Operating loss | $64.8 million | $43.1 million | $117.6 million | $82.8 million |
| Net loss | $70.7 million | $43.0 million | $126.7 million | $81.5 million |
| Adjusted EBITDA loss | $32.9 million | $31.9 million | $68.5 million | $63.0 million |
| GMV | $350.0 million | $182.8 million | $677.3 million | $440.4 million |
| NMV | $256.5 million | $139.8 million | $500.7 million | $324.4 million |
- Q2 revenue rose 83% year over year; six-month revenue rose 51%. Consignment and service revenue grew 76% in Q2 and 41% for the half. Direct revenue grew 113% and 97%, respectively.
- Q2 marketplace orders increased 54% and average order value rose 25%; active buyers reached 730,000, up from 612,000. Take rate fell to 34.5% from 36.0%, largely due to greater sales mix in lower-take-rate categories.
- Q2 gross margin declined 1.9 percentage points year over year. Management cited lower product margins on aged and higher-value company-owned inventory; consignment/service margin improved compared with the prior-year period.
- Operating expenses were $128.2 million in Q2, including an $11.0 million legal settlement accrual. Interest expense increased with the convertible notes. Q2 diluted and basic loss per share was $0.78, versus $0.49.
- Cash and cash equivalents were $491.6 million at June 30, up from $350.8 million at year-end 2020. Current assets were $574.2 million and current liabilities $160.8 million. Accumulated deficit was $658.7 million.
- Six-month operating cash outflow was $88.3 million, compared with $86.6 million in 2020; investing cash outflow was $21.5 million. Financing provided $250.6 million, chiefly from the 2028 notes. Cash increased $140.8 million over the half.
- 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 $340.2 million, reflecting debt discounts and issuance costs. No note conversion conditions were met at quarter-end.
- A $50 million revolving credit facility was established in April 2021, expires in April 2023, and had no borrowings at June 30. The company was in compliance with its covenants.
Changes, outlook and material matters
- Revenue and marketplace volume rebounded substantially from the COVID-affected prior-year quarter. However, the company remained loss-making and cash-flow negative; management expects operating losses and negative operating cash flows could continue as it invests in growth.
- Management said cash on hand should cover working capital and capital expenditure needs for at least 12 months. Future capital needs depend on growth and investment timing; additional financing may be sought, but may not be available on acceptable terms.
- The Arizona authentication center began operations in June; the company ceased operations at its California center in July. Three neighborhood stores opened in Dallas, Austin and Atlanta during Q2. Management expected one or two more store openings, then a pause to assess performance. It also expects continued investment in operations, technology and automation.
- COVID-19 effects remained uncertain, including possible renewed operating restrictions, staffing and fulfillment disruption, and changes in consumer demand. The company reported that in-person concierge appointments had resumed in various areas.
- On July 27, 2021, the company reached an agreement in principle to settle the shareholder class action for $11.0 million, subject to formal documentation and court approval. It accrued the amount in Q2 and expects to pay from available resources. Chanel litigation remained unresolved and was stayed while the parties pursued mediation; the company said the outcome and potential loss could not be estimated.
- Other notable risks include sustained losses, competition, consignor supply and buyer retention, authentication failures, inventory and returns, scaling facilities and retail, reliance on a shipping vendor, cybersecurity and privacy, and potential dilution or cash demands from convertible notes. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting.
- No numerical revenue, earnings or cash-flow guidance was provided in the filing. Management’s expectations are qualitative and subject to significant uncertainty.
Important facts for investors to verify
- Whether the shareholder settlement receives court approval and is paid on the stated terms, and how the Chanel case develops.
- Whether revenue and GMV growth can be sustained while take rate and gross margin remain under pressure from product mix and direct inventory sales.
- Whether operating cash burn, inventory growth and capital spending remain manageable relative to available cash and the company’s stated 12-month liquidity outlook.
- The potential cash repayment and share dilution implications of $460.0 million principal amount of convertible notes, including the terms and limitations of the capped calls.
- Execution and returns from the new Arizona facility and retail locations, and the effects of any renewed COVID-related disruption.
- Share count and equity compensation overhang: 91.46 million shares were outstanding at June 30, and 91.57 million at July 31, 2021.