The RealReal, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The RealReal operates an online and retail marketplace for authenticated pre-owned luxury goods, primarily on consignment. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions unless stated otherwise.
Key financial and operating metrics
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $154.4 | $104.9 | $301.1 | $203.7 |
| Gross profit | $87.7 | $63.4 | $166.3 | $121.8 |
| Gross margin | 56.8% | 60.4% | 55.2% | 59.8% |
| Operating loss | $(51.0) | $(64.8) | $(105.7) | $(117.6) |
| Net loss | $(53.2) | $(70.7) | $(110.6) | $(126.7) |
| Adjusted EBITDA (non-GAAP) | $(28.8) | $(32.9) | $(64.1) | $(68.5) |
| Net loss per share, diluted | $(0.56) | $(0.78) | $(1.17) | $(1.40) |
Q2 revenue grew 47%; first-half revenue grew 48%. Consignment revenue rose 34% in Q2 and 32% in the first half. Direct revenue rose 90% and 98%, respectively, while shipping services revenue rose 49% and 42%. Gross profit increased, but gross margin contracted as direct revenue—a lower-margin mix—grew faster. Shipping services had negative margins, although shipping gross margin improved year over year.
Q2 GMV increased 30% to $454.2 million and NMV increased 30% to $332.5 million. Orders rose 39%, while average order value fell 7% to $486. Take rate improved to 36.1% from 34.5%, which management attributed partly to a greater mix of higher-take-rate categories. Active buyers were 889,000 versus 730,000.
Cash flow and liquidity. First-half operating cash use was $87.9 million, versus $88.3 million in 2021; investing cash use was $16.2 million versus $21.5 million. Cash and cash equivalents fell to $315.9 million at June 30 from $418.2 million at year-end. The company reported an accumulated deficit of $865.3 million and stockholders’ deficit of $107.1 million. Management said existing cash should cover working capital and capital expenditure needs for at least 12 months, while noting that operating losses and negative operating cash flow could continue.
Debt. Convertible notes had $460.0 million total principal: $172.5 million of 3.00% notes due 2025 and $287.5 million of 1.00% notes due 2028. Their combined net carrying value was $448.3 million. The $50 million revolving credit facility was undrawn at June 30, 2022, and the company was compliant with its covenants; the facility expires in April 2023. Lease liabilities totaled $153.0 million.
Material changes and unusual items
- Compared with Q2 2021, operating and net losses narrowed. Adjusted EBITDA also improved, but the company remained loss-making and used substantial cash in operations.
- The company adopted ASU 2020-06 on January 1, 2022, accounting for convertible notes as single liabilities rather than separating debt and equity components. Adoption increased the notes balance by $98.6 million, reduced additional paid-in capital by $112.1 million, and reduced accumulated deficit by $13.4 million. It also lowered reported non-cash interest expense; it did not affect cash flows.
- Shipping and handling was reclassified as a separate performance obligation and shipping revenue/cost line. Prior periods were recast for presentation; the company said the change had an immaterial effect on operating loss.
- Founder and CEO Julie Wainwright resigned on June 6, 2022. The filing reports co-interim CEOs, and Q2 included CEO separation and transition costs and related stock-award expense.
- The Q2 2021 comparison included an $11.0 million legal-settlement expense. The related shareholder class-action settlement was finally approved and the case dismissed on July 28, 2022; the company had paid the $11.0 million in March 2022.
Outlook, management commentary and risks
No specific revenue, earnings, or full-year numerical guidance is provided in the filing. Management expects operating losses and negative operating cash flows may continue in the foreseeable future. It expects marketing, operations and technology, and selling, general and administrative expenses to decline as a percentage of revenue over the longer term, while continuing investment in operations, automation and technology. The company intends to limit direct purchases from businesses and anticipates direct revenue will decline as a share of revenue over the longer term.
Management cited labor shortages affecting authentication centers and sales, hiring and retention challenges, and higher shipping costs linked to macroeconomic conditions, inflation and geopolitical factors. Other risks include shifts in consumer discretionary spending, competition, supply and demand for consigned goods, returns, execution of operational scaling, authentication and technology risks, and the ongoing effects of COVID-19. The Chanel trademark and advertising litigation remains unresolved; the filing says its outcome and any liability are uncertain and an unfavorable result could adversely affect the business.
The board and management concluded disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2022; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether revenue and GMV growth can continue while gross margin remains pressured by the higher direct-revenue mix and shipping economics.
- Cash burn, cash runway, and funding needs against the company’s stated expectation of at least 12 months of liquidity.
- Debt terms, conversion conditions, potential cash settlement obligations, and the April 2023 expiration of the undrawn credit facility.
- Progress on cost efficiency and operational capacity amid labor shortages, shipping cost pressure, and continued technology investment.
- Developments in the Chanel litigation and any other material legal contingencies.
- Effects of the CEO transition, stock-based compensation and potential dilution; the filing lists 34.5 million potentially dilutive securities excluded from diluted loss per share as anti-dilutive.