The RealReal, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 7, 2020. The RealReal operates an online marketplace for authenticated, consigned luxury goods. Results were materially affected by COVID-19 restrictions and related operating disruptions.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $57.4m | $72.2m | $135.6m | $142.8m |
| Gross profit / margin | $35.8m / 62.3% | $46.1m / 63.8% | $85.0m / 62.6% | $88.4m / 61.9% |
| Operating loss | $(43.0)m | $(25.3)m | $(82.5)m | $(48.6)m |
| Net loss | $(42.9)m | $(26.9)m | $(81.2)m | $(50.1)m |
| Adjusted EBITDA, non-GAAP | $(31.8)m | $(20.9)m | $(62.7)m | $(39.3)m |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $(86.6)m | $(46.2)m |
- Q2 revenue fell 21% year over year; first-half revenue fell 5%. Consignment and service revenue declined 22% in Q2 and 3% in the first half. Direct revenue declined 13% and 14%, respectively.
- Q2 gross margin was down 1.5 percentage points year over year, while first-half gross margin improved 0.7 points. Lower shipping costs helped consignment margins; direct gross margin weakened.
- Q2 GMV was $182.8m, down 20%; first-half GMV was $440.4m, down 3%. Q2 NMV was $139.8m versus $164.8m. Active buyers were 612,000 versus 492,000; AOV was $417 versus $453. Overall take rate was 36.0% in Q2 versus 36.6% and 36.1% in the first half versus 36.0%.
- Operating expenses rose to $78.7m in Q2 from $71.4m, despite lower marketing expense. Operations and technology costs increased 6% in Q2; selling, general and administrative costs increased 28%. Higher headcount, stock compensation, occupancy, and public-company costs contributed.
- Cash and cash equivalents were $304.3m and short-term investments were $105.9m at June 30, for $410.3m of unrestricted liquid resources. Total assets were $634.1m; stockholders’ equity was $267.9m; accumulated deficit was $435.7m.
- The company issued $172.5m principal of 3.00% convertible senior notes due 2025. Net carrying value was $147.0m, reflecting debt discount and issuance costs. It spent $22.5m on capped calls; the initial conversion price was approximately $17.77 per share and the cap price $27.88. Operating lease liabilities totaled $130.7m.
Material changes and management commentary
- Fulfillment facilities operated below capacity under social-distancing measures; in-person White Glove appointments were suspended, and retail stores and consignment offices were temporarily closed for varying periods. All had reopened by quarter-end, subject to local restrictions.
- Management reported that GMV declined approximately 40%–45% year over year from March through mid-April, then improved: down approximately 19% in May and 8% in June. In response, the company recalled furloughed employees, increased marketing, and resumed technology hiring.
- Management expected COVID-19 to materially adversely affect revenue, earnings, and cash flows for at least the balance of 2020, citing possible renewed restrictions, supply disruption, reduced productivity, changing customer behavior, and economic uncertainty. It also cited cost controls and strategic reinvestment in growth.
- The company stated that cash and short-term investments should cover working-capital and capital-expenditure needs for at least 12 months. It expects operating losses and negative operating cash flows to continue in the foreseeable future and may seek additional financing.
- The Chicago store opening was postponed. Management described long-term plans to invest in fulfillment capacity, automation, and technology, while noting that timing and future store openings are uncertain.
- Unusual costs included $0.4m of restructuring charges in Q2 and a $1.1m legal settlement charge in the first half. Stock-based compensation was $9.5m in the first half, compared with $2.4m a year earlier.
Risks, contingencies, and other disclosures
- Chanel litigation alleges trademark and advertising violations, including claims concerning authentication and resale of Chanel goods. The case remained at an early stage; the company said potential losses could not be estimated.
- Shareholder class actions related to the IPO allege misleading statements about key metrics and authentication. The company said potential losses could not be estimated; the state case was stayed pending the federal case.
- Principal business risks include prolonged COVID-19 disruption, dependence on consignor supply and buyer demand, authentication failures, competition, scaling fulfillment operations, consumer discretionary spending, cybersecurity and privacy, and potential inability to achieve profitability.
- Management reported disclosure controls and procedures were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the reported improvement in May and June GMV continued after quarter-end, and whether supply, order volume, and AOV recovered.
- How the pandemic affected subsequent-quarter revenue, cash burn, fulfillment capacity, returns, and the company’s ability to meet its stated 12-month liquidity horizon.
- The terms and potential dilution or cash-settlement implications of the $172.5m convertible notes, including conversion triggers and capped-call coverage.
- The status and potential financial or operational effects of the Chanel and IPO-related litigation, for which the company provided no estimable loss range.
- Whether expense growth, especially operations and technology and selling, general and administrative costs, can be controlled as revenue fluctuates.