The RealReal, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The RealReal operates an online marketplace for authenticated, consigned luxury goods, with revenue primarily from consignment commissions and services, supplemented by sales of company-owned inventory. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $78.1 | $81.5 | $213.7 | $224.3 |
| Gross profit | $49.8 | $52.2 | $134.8 | $140.7 |
| Gross margin | 63.8% | 64.1% | 63.1% | 62.7% |
| Operating loss | $(41.4) | $(27.0) | $(123.9) | $(75.6) |
| Net loss | $(43.3) | $(25.3) | $(124.5) | $(75.4) |
| Adjusted EBITDA (non-GAAP) | $(29.0) | $(20.9) | $(91.7) | $(60.3) |
| Net loss per share, basic and diluted | $(0.49) | $(0.30) | $(1.43) | $(2.28) |
- Q3 gross margin was nearly flat year over year; the filing attributes improvement in consignment-service margin to better shipping terms, offset by lower direct-sales margins on aged inventory.
- Operating expenses were $91.1 million in Q3, up from $79.2 million, and $258.7 million for the first nine months, up from $216.2 million. Higher compensation, occupancy, technology, marketing, legal and COVID-related costs contributed to the increase.
- Operating cash outflow was $96.0 million for the first nine months, versus $58.1 million in 2019. Investing activities provided $134.5 million, primarily reflecting maturities and sales of short-term investments; financing provided $150.1 million, including convertible-note proceeds and the capped-call purchase.
- At September 30, cash and cash equivalents were $343.1 million and short-term investments were $52.2 million, or $395.2 million combined. Current assets were $437.3 million and current liabilities $120.9 million.
- Debt consisted of $172.5 million face amount of 3.00% convertible senior notes due 2025, carried at $148.1 million net of discounts and issuance costs. Operating lease liabilities totaled $126.9 million. Stockholders’ equity was $234.3 million; accumulated deficit was $479.0 million.
Business trends and changes versus prior period
- Q3 revenue declined 4% year over year; nine-month revenue declined 5%. Management attributed the decreases primarily to lower GMV and take rate, with COVID-19 disrupting operations and supply earlier in the year.
- GMV fell 3% in both Q3 ($245.4 million) and the first nine months ($685.7 million). Management said year-over-year GMV declines were approximately 40%–45% from March through mid-April, improving to approximately 3% in Q3. NMV increased slightly year over year in both periods, which the company attributed primarily to fewer returns.
- Q3 consignment and service revenue declined 7% to $64.4 million; direct revenue rose 11% to $13.6 million, reflecting a higher mix of company-owned and aged inventory. For the first nine months, consignment and service revenue fell 4% and direct revenue fell 6%.
- Take rate declined to 35.4% from 36.8% in Q3 and to 35.9% from 36.3% for the first nine months. The company cited a greater mix of lower-take-rate categories and consignors earning higher commissions.
- Active buyers increased to 617,000 from 543,000. Repeat consignors generated 83% of GMV, compared with 81% a year earlier. The company reported more than 19.3 million members at quarter-end.
Outlook, risks, contingencies and unusual items
- No numerical revenue, earnings or other formal forward guidance is provided. Management expects COVID-19 to continue to materially adversely affect operations and results, including through renewed restrictions, disruptions to supply and fulfillment, changes in customer behavior, and economic weakness. It said GMV trends had improved and the company had resumed strategic investment in marketing and hiring.
- Management expects operating losses and negative operating cash flows could continue as it responds to the pandemic and invests for growth. It believes cash and short-term investments at September 30 will cover working capital and capital expenditure needs for at least 12 months, while noting future financing may be needed and may not be available on acceptable terms.
- The company issued $172.5 million of 3.00% convertible notes due 2025 and paid approximately $22.5 million for capped calls intended to reduce dilution or offset certain conversion costs, subject to a cap. Conversion may dilute shareholders or require cash settlement, depending on circumstances and the company’s election.
- Operating lease accounting was adopted January 1, 2020, adding right-of-use assets and lease liabilities to the balance sheet. In November 2020, after quarter-end, the company signed a lease for a fifth warehouse in Arizona through May 2031; minimum payments for the initial term total $31.0 million.
- Material unresolved litigation includes Chanel’s trademark and advertising claims and shareholder securities litigation related to the IPO, as well as a derivative action. The company says outcomes are uncertain and losses cannot currently be estimated. It intends to defend the matters.
- Other key risks include authentication failures and counterfeit claims, reliance on consignor supply and specialized labor, competition, consumer discretionary spending, seasonal volatility, fulfillment capacity, cybersecurity and privacy, and the company’s history of losses. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the GMV recovery and improvement in NMV persist, and whether supply constraints in major markets ease.
- Whether take rate, returns, direct-inventory margins and gross margin stabilize or improve.
- Operating cash burn, capital spending and liquidity runway relative to management’s 12-month assessment.
- Convertible-note conversion, cash-settlement and dilution exposure, including the limits of the capped-call protection.
- Developments and potential financial or operational effects of the Chanel and IPO-related litigation.
- The financial impact of the Arizona warehouse lease and the company’s broader capacity and automation investments.