Business context and reporting period
The RealReal, Inc. operates an online and retail marketplace for authenticated, primarily pre-owned luxury goods. This Form 10-K covers the fiscal year ended December 31, 2022; it is an annual report, not a standalone Q4 earnings report. Revenue is generated primarily from consignment commissions, with additional direct sales and shipping fees.
Financial and operating performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $603.5 million | $467.7 million |
| Gross profit / margin | $348.7 million / 58% | $273.5 million / 58% |
| Operating loss | $189.2 million | $214.9 million |
| Net loss | $196.4 million | $236.1 million |
| Adjusted EBITDA (non-GAAP) | $(112.5) million | $(126.9) million |
| Cash used in operating activities | $91.6 million | $142.2 million |
| Cash and cash equivalents at year-end | $293.8 million | $418.2 million |
- GMV rose 23% to $1.816 billion; orders increased 26% to approximately 3.76 million. Active buyers increased to 998,000 from 797,000.
- Take rate increased to 36.0% from 34.7%; average order value fell to $483 from $497. Returns and cancellations were 26.5% of GMV, versus 26.3%.
- Direct revenue grew 31% to $158.7 million, but its gross margin declined five percentage points amid discounted inventory liquidation. Shipping services revenue rose 34% to $59.8 million.
- Operating expenses were $537.9 million, or 90% of revenue, compared with $488.4 million, or 104%, in 2021. Lower legal settlement expense contributed to the improved operating loss.
- Year-end current assets were $372.3 million and current liabilities $207.5 million. Convertible notes had a net carrying amount of $449.8 million; their aggregate principal was $460.0 million. Operating lease liabilities were $145.9 million on the balance sheet, with $175.1 million of undiscounted future lease payments.
Changes versus the prior comparable period
- Revenue increased 29% and gross profit increased 28%, while gross margin was broadly unchanged. Net loss narrowed by $39.7 million and adjusted EBITDA loss narrowed by $14.5 million.
- Operating cash use improved by $50.6 million, partly reflecting a $28.0 million reduction in inventory as direct purchases declined. Cash nevertheless fell by $124.4 million during the year.
- Marketing expense was nearly flat in dollars but declined from 13% to 11% of revenue. Operations and technology expense rose 18% in dollars but declined from 50% to 46% of revenue; SG&A rose 11% but declined from 38% to 33%.
- Adoption of ASU 2020-06 changed convertible-note accounting from separate debt and equity components to a single liability. It increased the reported notes balance by $98.6 million at adoption and materially reduced non-cash interest expense; it did not affect cash flows.
- The company changed its shipping-services accounting presentation, separating shipping revenue and related costs from consignment revenue and costs. Prior periods were reclassified; management said the effect on operating loss was immaterial.
Outlook, commentary, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects operating losses and negative operating cash flows could continue in the foreseeable future, but stated year-end cash should cover working capital, capital expenditures and contractual obligations for at least 12 months. Additional financing may be needed and may not be available on acceptable terms.
- In February 2023, after year-end, the company announced a workforce reduction of approximately 7% (about 230 employees) and plans to close specified stores and consignment offices and reduce office space. It estimated severance and related costs of $1.7–$2.2 million; real-estate exit and impairment costs remained under evaluation, including for assets with a $41.6 million carrying value.
- The $50 million revolving credit facility was undrawn at year-end, but was scheduled to expire in April 2023. The company reported covenant compliance as of December 31, 2022.
- The company’s principal notes are $172.5 million of 3.00% notes due 2025 and $287.5 million of 1.00% notes due 2028. Holders’ conversion conditions were not met at year-end; conversion could require cash settlement and/or dilute shareholders.
- Key risks include persistent losses and cash burn, consumer discretionary weakness and inflation, competition, supply and buyer retention, returns, authentication failures, operational and shipping disruption, cybersecurity and fraud, and execution of cost reductions. The company identified the pending Chanel trademark and advertising litigation as uncertain and said it could not reasonably estimate potential losses. A securities class-action settlement was approved and paid; a related opt-out plaintiff’s case remained pending.
- The founder resigned as CEO in June 2022; John Koryl became CEO in February 2023. The auditor issued unqualified opinions on the financial statements and internal controls. Revenue-recognition IT systems were identified as a critical audit matter, requiring specialized auditor work.
Important facts for investors to verify
- Whether revenue growth and improving expense ratios can translate into sustainably lower losses and positive operating cash flow.
- Cash runway after 2022’s $124.4 million cash decline, and the status and replacement of the revolving credit facility that was due to expire in April 2023.
- Actual savings, implementation costs and operational effects from the workforce and real-estate reductions, including any impairment or lease-exit charges.
- Performance of the revised November 2022 commission structure, including its effect on take rate, consignor supply, GMV and product mix.
- Direct-inventory margins and returns/cancellations, and the remaining exposure and potential outcomes in the Chanel and opt-out shareholder litigation.
- Debt service and potential conversion or dilution under the 2025 and 2028 notes; the filing reports $488.8 million of note principal and related interest cash requirements.