The RealReal, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Comparisons are with Q1 2021 unless otherwise noted. The RealReal operates an online marketplace and retail stores for authenticated, primarily pre-owned luxury goods, earning consignment commissions and revenue from company-owned inventory.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $146.7 million | $98.8 million | +48% |
| Consignment and service revenue | $97.9 million | $75.1 million | +30% |
| Direct revenue | $48.8 million | $23.7 million | +106% |
| Gross profit / margin | $78.6 million / 53.6% | $58.3 million / 59.0% | Margin down 5.4 percentage points |
| Operating loss | $54.7 million | $52.8 million | Loss widened $1.9 million |
| Net loss | $57.4 million | $56.0 million | Loss widened $1.4 million |
| Adjusted EBITDA loss | $35.3 million | $35.6 million | Improved $0.3 million |
| Operating cash flow | $(49.4) million | $(47.8) million | Cash use increased $1.5 million |
| Capital expenditures and software development | $8.4 million | $8.3 million | Cash used in investing activities |
Revenue growth reflected GMV up 31% to $428.2 million, orders up 27%, average order value up 3% to $487, and take rate rising to 35.7% from 34.3%. NMV increased 27% to $310.5 million, partly offset by higher returns and cancellations. Returns and cancellations were 27.5% of GMV versus 25.4%.
Direct revenue grew to 33.3% of total revenue from 24.0%, largely reflecting sales of company-owned inventory. Its margin profile is lower than consignment revenue; this shift contributed to the decline in total gross margin. Consignment and service gross margin fell about 2 percentage points; direct gross margin improved about 4 points.
Cash and cash equivalents were $361.0 million at March 31, down from $418.2 million at year-end. Current assets were $464.3 million and current liabilities $179.8 million. The company had $447.7 million of convertible notes, net of issuance costs, and no borrowings under its $50 million revolving credit facility. Accumulated deficit was $812.1 million.
Material changes and unusual items
- Direct revenue more than doubled, while management said it intends to limit direct purchases from businesses and expects direct revenue to decline as a share of revenue over the longer term.
- Operating expenses rose to $133.3 million from $111.1 million. Marketing, operations and technology, and selling, general and administrative expenses increased in dollars, but each declined as a percentage of revenue.
- Adoption of ASU 2020-06 on January 1, 2022 changed convertible-note accounting: notes are now recorded as a single liability rather than separate debt and equity components. Adoption increased reported note liabilities by $98.6 million, reduced additional paid-in capital by $112.1 million, and reduced accumulated deficit by $13.4 million. It was an accounting change, not new borrowing, and reduced future non-cash interest expense.
- The company paid an $11.0 million shareholder class-action settlement in March 2022; the expense had been recorded in 2021. It also paid $0.5 million in January 2022 for a derivative-action settlement, likewise recorded in 2021.
Outlook, commentary and risks
Management said existing cash should fund working capital and capital expenditure needs for at least 12 months, while warning that operating losses and negative operating cash flow may continue for the foreseeable future. Future capital needs depend on revenue growth and investments, including authentication-center capacity and, to a lesser extent, retail stores; additional financing may be sought, but may not be available on acceptable terms.
Management expects marketing, operations and technology, and SG&A expenses to decline as a percentage of revenue over the longer term, while continuing to invest in automation and technology. The filing provides no specific revenue, earnings, or cash-flow guidance for the next quarter or full year. Management reported that COVID-related absences and difficulty hiring at authentication centers delayed processing and product launches, negatively affecting GMV.
- Key operating risks: labor availability and processing capacity, ability to attract consignors and buyers, returns, seasonality, competition, and consumer discretionary spending.
- Other material risks: authentication errors and reputational damage, cybersecurity and privacy incidents, shipping or facility disruptions, and inability to scale automation effectively.
- Legal contingency: Chanel litigation over trademark infringement, false advertising and unfair competition remains unresolved; the company says outcome and potential liability are uncertain. An unfavorable outcome could adversely affect the business.
- The company reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting during the period.
Investor verification points
- Verify whether GMV and revenue growth can continue while returns and cancellations remain elevated and processing constraints are addressed.
- Track the mix and margin contribution of company-owned inventory against consignment revenue and management’s plan to limit direct purchases.
- Assess cash burn, capital spending, liquidity runway, and the cash servicing requirements and conversion terms of the 2025 and 2028 notes.
- Monitor authentication-center staffing, throughput, and product-launch delays, along with the planned benefits and costs of automation investments.
- Follow developments in the Chanel litigation and confirm the status and final terms of the shareholder and derivative settlements.