The RealReal, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2020. The RealReal operates an online marketplace for authenticated, consigned luxury goods, earning most revenue from consignment commissions and services, with the remainder from sales of company-owned inventory. COVID-19 disrupted operations in March.
Key financial and operating metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $78.2 million | $70.6 million | +11% |
| Consignment and service revenue | $65.3 million | $55.6 million | +17% |
| Direct revenue | $12.9 million | $15.0 million | -14% |
| GMV | $257.6 million | $224.1 million | +15% |
| Gross profit / gross margin | $49.2 million / 62.9% | $42.4 million / 60.1% | Margin +2.8 percentage points |
| Operating loss | $39.6 million | $23.2 million | Loss widened |
| Net loss | $38.3 million | $23.2 million | Loss widened |
| Adjusted EBITDA loss | $30.9 million | $18.5 million | Loss widened |
| Operating cash flow | $(55.0) million | $(22.6) million | Cash use increased |
Take rate rose to 36.2% from 35.3%. Active buyers were 602,000 versus 456,000; orders were 574,000 versus 498,000; average order value was $449 versus $450. Basic and diluted net loss per share was $0.44, compared with $3.05 in 2019; the share count increased substantially following the 2019 IPO.
At March 31, cash and cash equivalents were $134.7 million and short-term investments were $168.6 million, or $303.3 million combined. Current assets were $342.5 million and current liabilities $101.6 million. Stockholders’ equity was $306.8 million, with an accumulated deficit of $392.8 million. The company reported no term-loan balance and no debt covenants. Operating lease liabilities totaled $134.4 million, including $14.2 million current.
Material changes and management commentary
- January and February GMV growth exceeded 30% year over year; March weakness sharply reduced the quarter’s growth. From March 17 through March 31, GMV declined approximately 40%–45% year over year. The company reported a similar decline from the shelter-in-place period through mid-April, followed by modest improvement in the last two weeks of April.
- Gross margin improved, with management citing more favorable shipping-carrier terms, partly offset by a one-time inbound-shipping cost adjustment. Operating expenses rose 35% to $88.8 million, driven by growth in operations and technology and selling, general and administrative costs. The latter included $1.1 million in legal settlement charges.
- Net cash used in operations increased to $55.0 million. Management attributed major working-capital outflows to lower accrued consignor payables and other accrued liabilities. Investing cash flow was positive $32.8 million, largely because investment maturities exceeded purchases; capital expenditures were $6.5 million, plus $1.5 million of capitalized software costs.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance was provided. Management expected COVID-19 to materially adversely affect revenue, earnings, and cash flows for at least the balance of 2020. It cited fulfillment-center restrictions, temporary store and consignment-office closures, lower productivity, possible reduced discretionary spending, and economic uncertainty.
- To preserve liquidity, the company reduced marketing, deferred capital investment, instituted a hiring freeze, renegotiated vendor arrangements, deferred some vendor payments, and reduced payroll through headcount reductions, furloughs, and reduced executive salaries. It postponed the planned Chicago store opening but said it continued strategic technology investment.
- Management said cash and short-term investments at quarter-end, together with discretionary cost management, were expected to meet working-capital and capital-expenditure needs for at least 12 months. It also expected operating losses and negative operating cash flow to continue in the foreseeable future. Future financing may be needed, and availability or terms are not assured.
- The company adopted lease accounting standard ASC 842 on January 1, 2020, recording $110.3 million of right-of-use assets and $119.0 million of lease liabilities at adoption. Q1 operating lease cost was $6.0 million; prior-year rent expense was $4.1 million.
- Material litigation includes Chanel’s trademark and advertising suit and purported shareholder class actions related to the IPO. Outcomes and potential losses could not be reasonably estimated. The filing also highlights risks involving authentication accuracy, luxury resale demand and supply, fulfillment capacity, competition, and the pandemic.
Important facts for investors to verify
- Whether GMV, order volumes, and fulfillment capacity recover from the reported COVID-related declines, and how store and consignment-office restrictions evolve.
- Whether cost reductions and working-capital movements moderate operating cash burn while preserving consignor supply and buyer demand.
- Whether take-rate gains and gross-margin improvement persist, particularly as direct revenue mix and shipping costs change.
- Whether the stated 12-month liquidity expectation remains supportable given continued losses, lease obligations, and future capital needs.
- Developments in the Chanel and IPO-related litigation, including any change in the company’s ability to estimate exposure.