The RealReal, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The RealReal operates an online and retail marketplace for authenticated, consigned luxury goods. Comparisons are with Q1 2020 unless stated otherwise. Dollar amounts are in millions.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $98.8 | $78.0 | +27% |
| Consignment and service revenue | $75.1 | $65.1 | +15% |
| Direct revenue | $23.7 | $12.9 | +83%; 24% of revenue versus 17% |
| Gross profit / gross margin | $58.3 / 59.0% | $49.0 / 62.8% | Profit +19%; margin down 3.8 percentage points |
| Operating expenses | $111.1 | $88.8 | +25% |
| Operating loss | $(52.8) | $(39.8) | Operating margin -53.4% versus -51.0% |
| Net loss | $(56.0) | $(38.5) | Net loss per share $(0.62) versus $(0.44) |
| Adjusted EBITDA | $(35.6) | $(31.1) | Non-GAAP measure; loss widened |
| Cash used in operating activities | $(47.8) | $(55.0) | Improved by $7.2 |
| Cash and cash equivalents | $547.9 | $350.8 at Dec. 31, 2020 | No short-term investments at quarter-end |
- Marketplace GMV was $327.3, up 27%; NMV was $244.2, up 32%. Orders increased 20% to 690,000; active buyers increased to 687,000 from 602,000. AOV was $474, up 6%.
- Take rate fell to 34.3% from 36.2%, reflecting a greater sales mix of lower-take-rate categories. Management also cited buyer incentives, which increased $4.1 million, as a partial offset to consignment revenue growth.
- Direct revenue rose with more company-owned inventory, including direct purchases and aged inventory from out-of-policy returns. Lower margins on aged inventory contributed to weaker direct gross margin.
- Investing cash outflow was $4.3; purchases of property and equipment were $5.9 and capitalized software costs were $2.4. Financing cash inflow was $249.2, mainly from the 2028 notes issuance, net of capped-call costs.
Liquidity, debt and material changes
At March 31, 2021, cash and cash equivalents were $547.9, current assets were $618.6 and current liabilities were $142.4. The company reported $460.0 of convertible notes principal: $172.5 of 3.00% notes due 2025 and $287.5 of 1.00% notes due 2028. Their combined net carrying amount was $336.1, reflecting debt discounts and issuance costs. Operating lease liabilities totaled $156.1. The company purchased capped calls for $33.7 in connection with the 2028 notes, intended to reduce potential dilution or offset certain conversion payments, subject to contractual caps.
In April 2021, after quarter-end, the company entered a revolving credit facility of up to $50 million, expiring April 2023. Advances bear a variable rate equal to the greater of prime plus 0.50% or 4.25%. Management said existing cash should cover working capital and capital expenditure needs for at least 12 months; it also expects operating losses and negative operating cash flow could continue.
Outlook, commentary and risks
- No specific revenue, earnings or quarterly guidance was provided. Management expects continued investment in operations, technology, automation and capacity, and anticipates operating losses and negative cash flow may persist.
- COVID-19 restrictions had eased in many locations and in-person consignment appointments resumed in various areas. The company reported improved GMV and active-buyer trends, but said the pandemic’s future effects on operations, demand and financial results remain uncertain.
- Expansion included three neighborhood stores opened in Q1 and development of an Arizona authentication center. Management expects operating and technology costs to rise to support growth, while aiming for these expenses and marketing to decline as a percentage of revenue over the longer term.
- Material risks include continued losses and cash burn; reliance on attracting consignors and buyers; take-rate and inventory-margin pressure; scaling stores and authentication operations; authentication accuracy, shipping and cybersecurity; and possible dilution or cash obligations related to convertible notes.
- Chanel litigation over alleged counterfeit authentication and advertising claims remained unresolved; the parties were attempting mediation. Securities class actions and derivative litigation related to the IPO also remained pending. The company said it could not estimate possible losses for these matters.
- After quarter-end, the company disclosed that CFO Matt Gustke would leave; he was expected to remain through year-end or until a successor was appointed. The board also approved executive severance and change-in-control agreements.
Important facts for investors to verify
- Whether revenue growth can continue without further deterioration in take rate, gross margin or direct-inventory profitability.
- Operating cash burn, planned investment needs and the adequacy of cash liquidity, including the terms and availability of the new revolving facility.
- Potential cash settlement, conversion dilution and other obligations under the $460 million principal amount of convertible notes.
- Developments and potential financial exposure in the Chanel and IPO-related litigation, for which the filing provides no clear estimate of possible losses.
- Execution of the Arizona facility and retail expansion, COVID-19 operating impacts, and the CFO transition.