The RealReal, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The RealReal operates an online marketplace for authenticated, consigned luxury goods, with additional revenue from services and company-owned inventory. The company completed its IPO on July 2, 2019.
Financial and operating metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $80.5 million | $51.8 million | $220.7 million | $145.3 million |
| Gross profit / margin | $52.2 million / 65% | $33.3 million / 64% | $140.7 million / 64% | $94.7 million / 65% |
| Operating loss | $(27.0) million | $(21.9) million | $(75.6) million | $(51.6) million |
| Net loss | $(25.3) million | $(21.9) million | $(75.4) million | $(53.6) million |
| Adjusted EBITDA loss (non-GAAP) | $(20.9) million | $(15.9) million | $(60.3) million | $(40.3) million |
| GMV | $252.8 million | $170.9 million | $705.4 million | $492.3 million |
| Take rate | 36.8% | 36.4% | 36.3% | 35.7% |
Revenue increased 55% year over year in Q3 and 52% for the nine-month period. GMV grew 48% and 43%, respectively. Q3 consignment and service revenue rose 53%; direct revenue rose 75%, partly because more returned goods became company-owned inventory and were resold. Active buyers reached 543,000, up 43% year over year; repeat consignors accounted for 81% of GMV and repeat buyers 82%.
Marketing expense rose 26% in Q3 but declined as a share of revenue to 17% from 20%. Operations and technology expense rose 32%; selling, general and administrative expense rose 74%, reflecting hiring, public-company costs, insurance, legal and consulting costs, and expanded facilities. Q3 gross margin improved partly because the prior-year quarter included a one-time inventory charge. Basic and diluted net loss per share was $(0.30) in Q3 and $(2.28) for the nine months; prior-year figures were $(3.00) and $(7.12), respectively, with the comparison affected by the IPO and conversion of preferred shares.
Cash, liquidity and debt
At September 30, 2019, cash and cash equivalents were $365.0 million and short-term investments were $5.3 million, for unrestricted cash, cash equivalents and investments of $370.3 million. Current assets were $406.1 million and current liabilities $88.1 million. The company reported no debt outstanding after repaying its term loans in July; the repayment also ended the associated debt covenants.
For the first nine months, operating cash use was $58.1 million, investing cash use was $1.0 million, and financing cash provided was $378.4 million. Financing included $315.5 million of net IPO proceeds and $69.8 million from preferred-stock financings, partly offset by debt repayment. Management said available cash and investments should fund working capital and capital expenditures for at least 12 months, while operating losses and negative operating cash flow could continue.
Outlook, risks and unusual items
- No specific revenue, earnings or other numerical guidance was provided. Management expects continued investment and possible operating losses and negative operating cash flow; it anticipates marketing, operations and technology, and public-company expenses, while expecting these costs to decline as a percentage of revenue over the longer term.
- Management described seasonal patterns: supply typically rises in Q3 and Q4, demand and average order value are typically stronger in Q4, and increased seasonal advertising and staffing raise costs. The company plans to continue expanding capacity, investing in automation and technology, and opening additional retail stores.
- Key business risks include attracting and retaining consignors and buyers, scaling authentication and fulfillment operations, competition, demand for luxury goods, return rates, counterfeit authentication, cybersecurity and privacy, and reliance on third-party hosting and payment providers. The company also highlighted the risk that marketing or automation investments may not produce expected returns.
- Chanel’s trademark and advertising lawsuit remains unresolved; the company said it cannot estimate possible losses. Three purported shareholder class actions allege that IPO-related statements about key financial and operating metrics were misleading; the cases were at an early stage and losses could not be estimated.
- Other notable obligations include $140.4 million of future minimum operating-lease payments. The company expects adoption of lease accounting standard Topic 842 in 2020 to significantly increase reported long-term assets and liabilities.
- The IPO raised $315.5 million net in the financial statements. The company reported using $6.5 million to repay term loans and paying a $0.3 million lender success fee; it also stated that $3.2 million would fund The RealReal Foundation. The balance was intended for general corporate purposes, including working capital, operating expenses and capital expenditures.
Important facts for investors to verify
- Whether growth in revenue and GMV translates into improved operating leverage: operating and adjusted EBITDA losses widened year over year.
- Whether the reported cash balance and management’s 12-month liquidity assessment remain adequate given operating cash burn, planned expansion and lease commitments.
- Trends in return rates, company-owned inventory, take rate and gross margin, including the effect of commission changes on consignor supply and retention.
- Developments, potential costs and disclosures concerning the Chanel litigation and IPO-related shareholder lawsuits; the filing provides no clear loss estimate.
- Execution and costs of fulfillment expansion, automation, new stores and public-company compliance, as well as the impact of seasonal Q4 demand and spending.