The RealReal, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The RealReal operates an online and retail marketplace for authenticated luxury resale, primarily through consignment. All financial figures below are in U.S. dollars; figures are rounded.
Financial and operating performance
- Revenue: Q3 revenue was $142.7 million, up 20% year over year. Consignment revenue was $93.9 million (+20%), direct revenue $34.0 million (+16%), and shipping services revenue $14.8 million (+34%). For the first nine months, revenue was $443.8 million, up 38%.
- Marketplace indicators: Q3 GMV increased 20% to $440.7 million and NMV increased 19% to $325.1 million. Orders grew 26%, while average order value declined 5% to $463. Take rate rose to 36.0% from 34.9%. Returns and cancellations were 26.2% of GMV versus 25.7%.
- Profit and margins: Q3 gross profit was $85.8 million, with gross margin of about 60%, broadly flat year over year. Operating loss narrowed to $45.5 million from $51.2 million, and net loss narrowed to $47.3 million from $57.2 million; diluted loss per share was $0.49 versus $0.62. Nine-month net loss was $157.8 million versus $183.9 million. Adjusted EBITDA, a non-GAAP measure, was negative $28.2 million in Q3 and negative $92.3 million for the nine months.
- Cash flow and liquidity: Cash and cash equivalents were $300.4 million at September 30, down from $418.2 million at year-end 2021. Nine-month operating cash use was $95.3 million; investing cash use was $26.3 million. Management said existing cash should cover working capital and capital expenditure needs for at least 12 months, while noting operating losses and negative operating cash flows could continue.
- Debt and balance sheet: Convertible notes totaled $460.0 million principal: $172.5 million due 2025 and $287.5 million due 2028; net carrying value was $449.0 million. No revolving-credit borrowings were outstanding, and the company reported compliance with facility covenants. Current assets were $399.3 million and current liabilities $194.1 million. Stockholders’ deficit was $141.3 million.
Changes versus the prior comparable period
- Q3 revenue and GMV grew 20%, but growth in orders was partly offset by lower AOV. Repeat consignors represented 80% of GMV, down from 84% in Q3 2021; repeat buyers generated about 84% of GMV in both periods.
- Q3 operating expenses rose 7% to $131.3 million, but fell as a share of revenue. Marketing expense declined 14%; operations and technology expense rose 16%, reflecting higher compensation and inbound shipping costs.
- Nine-month gross margin declined to about 57% from 60%, principally as direct revenue—a lower-margin business—grew to a larger share of revenue. Direct revenue increased 66% for the nine months; management said it intended to limit direct purchases and expected direct revenue to decline as a share of revenue over the longer term.
- Operating cash use improved from $123.4 million to $95.3 million for the nine months, while cash fell by $117.7 million. The prior-year period included significant proceeds from the 2028 notes issuance.
- Adoption of ASU 2020-06 on January 1, 2022 changed convertible-note accounting, increasing reported debt and reducing non-cash interest expense. It did not affect cash flows. The company also changed shipping accounting to present shipping as a separate performance obligation; prior periods were reclassified, with an immaterial effect on operating loss.
Outlook, commentary, risks and unusual items
- No numerical revenue, earnings or cash-flow guidance is provided. Management expects continued operating losses and negative operating cash flows in the foreseeable future, while stating that September cash is sufficient for at least 12 months. Future capital needs depend on growth and investment plans; additional financing may be sought, but may not be available on acceptable terms.
- Management cited inflation, macroeconomic uncertainty, geopolitical instability, labor shortages at authentication centers and shipping costs as potential pressures on consumer demand, costs and operations. The business is seasonal, with typically higher demand in Q4 and increased seasonal marketing and staffing costs.
- In November 2022, after quarter-end, the company changed its take-rate structure to focus mainly on product category and price, alongside an added tiered commission component. Management said the aims were to increase higher-value supply, limit lower-value consignments and optimize take rate.
- Founder and CEO Julie Wainwright resigned in June 2022; the filing describes transition and separation costs. At filing, Rati Sahi Levesque and Robert Julian were co-interim CEOs. The nine-month results include $1.0 million of stock-compensation expense tied to award modifications and $0.9 million of CEO separation benefits.
- The Chanel trademark, false-advertising and unfair-competition case remained in discovery; the outcome and any liability are uncertain. The $11.0 million shareholder class-action settlement was finally approved and paid, but an opt-out plaintiff filed an amended complaint on October 31, 2022. The filing does not provide a clear estimate of potential loss for these pending matters.
- The company 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 revenue and GMV growth can continue while AOV declines and returns and cancellations remain elevated.
- Whether improvements in operating loss and adjusted EBITDA translate into lower cash burn and a path to profitability; adjusted EBITDA excludes items and is not a GAAP measure.
- How the revised take-rate structure affects consignor supply, take rate, sales mix and margins.
- Cash runway, future financing requirements, and the timing and terms of the $460.0 million principal amount of convertible notes.
- Developments and possible financial exposure in the Chanel litigation and the renewed opt-out shareholder case.