Ladies and gentlemen, thank you for standing by, and welcome to The RealReal First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. And to ask a question during this session, you will need to press star and the number 1 on your telephone. I would now like to hand the conference over to your speaker today, sir Pahlweber.
Thank you. Please go ahead.
Thank you. Good afternoon, and welcome to The RealReal's earnings call for the quarter ended March 31, 2020. I'm Paul Bieber, Head of Investor Relations at The RealReal. Joining me today to discuss our results are Founder and CEO, Julie Wainwright and Chief Financial Officer, Matt Guskey. Each of us is conducting a call from our homes, so we apologize for any technical difficulties.
Hopefully, you've had a chance to read our shareholder letter that we published earlier today along with our press release. Before we begin, I'd like to remind you that management will make forward looking statements during the course of this call. These forward looking statements involve known and unknown risks and uncertainties and our actual results could differ materially. You can find more information about these risks, uncertainties and other factors that could affect our operating results in our most recent periodic report on Form 10 ks and in our earnings release from earlier today. In addition, our presentation will include non GAAP financial measures and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our Investor Relations website.
With that, I'll hand the call over to Julie for introductory remarks, and then we'll go straight to Q and A. Julie?
So I want to say hello to everyone and thank you for joining the call. I would be remiss if I didn't start the call with a major thank you to all the employees of The RealReal. This has been, as I'm sure everyone is saying, an impressive time for the employees, for our customers, for our consignors, for every person we deal with all of the small businesses and large businesses as our business partners. It has been a time where strength has triumphed over fear or hard decisions have been made where there's been tremendous innovation and tremendous thanks through that innovation. But one thing is very clear, the team at The RealReal is an excellent team.
It's one of the best teams I've ever worked with in my 40 year career. I'm proud to be part of company. And we are not only going to persevere, we know we're going to end up on top. Again, a big thank you to everyone. The RealReal touches from the RealReal employees to our consignors, our buyers and everyone we do business with.
Now that's all I'm going to do to start the business. This is a crazy time. So you're going to hear the words fluid, etcetera from us a lot because it is a fluid time. With that, operator, we're ready to take some questions.
Okay. Thank you. And your first question comes from the line of Justin Post from Bank of America. Your line is now open.
Great. Thanks for taking my question. I know it's a tough time for everyone. First question, can you help us understand how much of a downturn in sales is supply related versus demand related? And maybe you could talk about the percent of items that sell through today versus pre COVID, just the sell through rates?
And then secondly, could you talk a little bit about the current capacity of the warehouses today? And how are you thinking about California's Phase 2 plan? And how do you see Brisbane maybe potentially opening up? Thank you.
All right. So this is Julie. I'll take I'll start with most of it. So as we said many, many times, we're a supply driven business. Our demand did fall off for about 10 days, but it came roaring back.
So our demand is clearly there and it's at pre COVID level. So we're excited about that. Our biggest challenge first in and the 1st 2 weeks in April was actually getting supply in, in our biggest states, in our biggest regions. And then secondarily, processing it. We do have warehouse op centers in Brisbane, California and Secaucus and Perth Amboy.
California is
a little
different. Phase 2 here, while it is a directional notion from our governor, does not mean every local town nor local county has to follow Phase 2. So it leaves us with more uncertainty. However, having said that, we were told late this weekend that we could now bring back half of our staff, 200 people in shifts of 100 per shift to work in Brisbane. And we're very excited about that.
We started unfurloughing people and then rerouting product back to the Brisbane area. So again, that's prior to COVID, we had 4 60 people. So now we're going to be able to run a shift of 100x2 every day. We're very excited about that. And we think it's going to enhance our ability to process things very quickly.
And more importantly, we started curbside pickups in many, many states in April and initiated a fleet of vans. That actually will expand as the states open up. So, we feel good about where we are. Things are picking up. Things are opening up.
Now again, I'm going to use that word, but it's still fluid. So but we are excited about what we're seeing in the measures constraints opening.
Yes. Let me just pick up on the call around on the question around sort of sell through rates. I think Julie alluded to the fact that demand has held up quite well or has bounced back quite well after the initial post COVID shock. So we continue to see traffic being up year over year despite our marketing spend being down 2 thirds or more. And the result of that is that our sell through rates, we measure them over multiple periods of time, 4 days being the first marker, 4 days sell through has held has bounced back remarkably well and is now at
sell.
Great. Thanks, Matt. Thanks, Julie. Appreciate it.
Sure.
All right. Thank you for your next question from the line of Oliver Chen from Cowen. Your line is now open.
Thanks a lot. Hi, Julie. Hi, Matt. Thanks a lot, Paul. Regarding the last 2 weeks of April, that was encouraging with GMV improving modestly.
Could you speak to why that may be happening? And also it was also encouraging what you mentioned on net promoter scores in April. Would love your thoughts on that. And then the virtual consignment, you've quickly and agilely pivoted to that. What do you think that means in terms of step changes in the way customers interact and unit economics as well?
So Oliver, let's just go through a couple of things. So the reason April, the end of April picked up is because we rolled out virtual and we also rolled out a fleet of vans for curbside pickup. So our demand had the people coming to the site had a lot more product to get into. So this is really a new initiative for us.
Our
life for a while. And we're hoping in the near term, meaning in the next few weeks, we'll also have curbside drop offs in our retail locations. So we're really, really excited about that. But really the pickup in demand was due to this. The whole company innovating now.
In terms of unit economics and where that goes, it's too early to tell. I think we're still going to have a blended rate. People love the face to face meetings, but we are getting a lot of units per when we do the virtual appointment. So it looks very encouraging now, but again, it's early days. We don't even have a full month of data in from that.
Okay. And our last question, Julie, is about as you look at context for the industry and the things we're seeing with frankly bankruptcies and promotions and other people who have to unlock inventory. What are your thoughts for how you'll be prepared for that kind of that promotional environment and how your business model will be flexible? Thank you.
So in the past, we've seen price compression when people deeply promote, we are not seeing that now at all. So again, that may change, but we're not seeing price compression. And what we mean by price compression is we have to lower our prices in response to department stores, in particular, lowering their prices. So we aren't seeing that. Any of our discounting is due to just older inventory selling because the newer inventory is slower to go on the site.
Thank you. Best regards.
Okay. Thank you for your next question from the line of Michael Binetti from Credit Suisse. Your line is now open.
Hey, guys. Thanks for taking our questions here and thanks for the detail in the letter today. I just want to square a couple of things. I think you said in mid April with the pre release that you're seeing traffic about flat year over year despite marketing down significantly. Today you're seeing traffic up slightly year over year, but marketing was down 66%, 2 thirds there.
But given what we've heard in broader retail about e commerce accelerating significantly with other online retailers pointing to trends now back above pre corona levels, I guess do you feel like you've left any business on the table by restricting advertising this much, Julie?
Operator, I think we may have lost Julie. Can we just hold on for a minute?
Okay. But I still see her line here.
She's probably giving me the best answer ever right now, Paul.
She's going to call back in. So, operator, can you have someone expedite her entry back into a call when she calls back in?
All right. Okay.
And actually, Matt is dialing back in as well. He's having difficulties as well. So if you could expedite his entry back in. Thanks. Operator, both Julie and Matt are on hold now.
Okay. Excuse me, Michael DeNetti.
Sure.
All right. One moment.
Matt?
Yes. Hey, Julie, I can hear you.
Hey, Paul, can you hear
us? Yes, you're back on.
All right. Great.
Well, let's hope we don't
this hasn't go through this again. Yay.
Okay. So I'm trying to now remember the question that we were going through. Oh, marketing spend and are we leaving things in the tables. So in abstract, yes. Go ahead, Julie.
Yes. I mean, we are leaving here's what we waited for in marketing. We weren't going to be running marketing against quasi empty shelves. So now that everything is loosening up, we will be revising our marketing budget and being adding more money back in to drive our normal business. So again, the worst thing we could have done is spend a lot of money when the product was harder to get in.
But again, things are starting to loosen up. So everything is fluid, everything changing, and we will be revising our marketing budget up.
So you lost everybody else. So, operator, did you say there's no more questions?
Yes. For our next question from the line of Ed Yruma from KeyBanc Capital. Your line is now open.
Hi, this is Abby on the line on behalf of Ed. We just wanted to know when do you think you'll see the effects? You said half the employees are going back to the Brisbane Center. Do you think that will immediately increase supply? Or what do you think like the timeline is in regards to this quarter?
Abby, this is Julie, obviously. Hey, Abby, look, we're going to that's about processing the product coming in. So there's 2 components. 1, as the our ability to do curbside pickups increases across the U. S, we're going to be there and that's starting.
It already started in May. So we believe it's going to pick up even more in some key regions like the Western States and also the Northeast Corridor. So we're excited about that. And the good news is when we get the products and we can then process them. We do process them.
We do have a backlog now, and we expect that backlog to diminish in the next few weeks with Brisbane opening up. So like I said, right now, it feels not like we're getting back to normal, but things are loosening up and it looks more promising than it has in the last few weeks.
Great. Thank you.
All right. Thank you. Our next question from the line of Michael Gianetti from Credit Suisse.
Hey, guys. Thanks for taking my questions. So I just wanted to make sure I just wanted to calibrate a few comments earlier. I think, Julie, you also said that demand came back quickly after 10 days. We've heard that in other places in resale as well.
I think you said it's back to pre corona levels or maybe where you were trending at on a daily basis in February. But I think the commentary you gave on forward guidance paints a little bit more of a ramp back to year over year levels in Q4. Can you help me try to calibrate a couple of those comments, please?
Sure. They certainly sound conflicting. I'll invite Matt to jump in here too. The way we measure our demand is our sell through without price reduction in a 4 day period. So but we clearly need more product in.
So our overall GMV is still down, but of the product we have, it is selling at without a price reduction at a very fast clip. So our focus is really about getting more supply in and supply is limiting our growth not consumers wishing to buy on our site. Matt, do you want to give more color than that?
Yes. That's mostly what I was going to say. I guess I'll just add that traffic is another way to think about interest or demand. Traffic is up modestly year over year, which is really similar to what we were immediately post super COVID shock. So in the 2nd week of March or I guess the 3rd week of March, so up modestly right now on a slower marketing spend.
Okay.
And then I wanted to ask about your comment that some of the virtual appointments are seeing good yields there, good conversion rates. Is there any kind of metrics you can tell? I mean, if we have to think about that as being a bigger part of the business going forward, it might be good to hear a little bit more about some of the metrics you're seeing. And I don't know, Julie, you're dealing with a fairly limited timeframe of data,
but would you want to say a little bit more about that? Sure. It's so limited. It's so scary. Let me just give you a couple of data points.
So we've done 10,000 virtual appointments and that's great. So we're sort of excited about that. We're doing something new today actually it's launching, which is giving consignors the ability to self schedule, which we also think will be pretty exciting. Right now, it's in beta form, but it will be rolled out very shortly. We were worried when we started doing the curbside pickups with the virtual appointments that we wouldn't get a lot of units.
In fact, we're getting pretty much the same equivalent units as if we were coming to your house. And I think it's because, again, we removed friction. It's a combination of a virtual appointment with a curbside pickup with the van is great. What we don't but we only have 10 vans running. And so that's really not a lot.
We're immediately expanding those to 15 and we'll add them on a necessary basis. So I don't we're testing a lot of different things, but it looks promising. It doesn't look like a one to one replacement for our LMs visiting, but in some areas it may end up being that. So let's we'll have a lot more information by the time we get through the end of June and then we can really give strong guidance on that, including what the economics are looking like.
Okay, great.
And for our next question from the line of Aaron Kessler from Raymond James. Your line is now open.
Great. Thanks, guys. Worried I might
have missed a question, but I don't think I did.
On the you mentioned the business vendors opportunity, I think interest up 10x. How should we think about that longer term opportunity there? Do you think this changes that? Or is it just more of a near term phenomenon? And then do you think that resets a little bit lower as we get past this?
And then just how has demand changed maybe among existing buyers versus new buyers? Thank you.
Hey, Matt, do you want to take that? Go ahead.
Yes, sure.
Okay. So our vendor business has historically been small and we've used it to kind of historically been small and we've used it to kind of fill in product strategically in key categories, typically higher value categories. You correctly state that interest in for new vendors or vendors by vendors we just mean businesses of any form. This could be a boutique. It could be a store.
It could be a brand. It could be any form of reseller. Interest from new vendors is up 10x versus pre COVID levels. So but we're going to continue with our pre existing strategy that we're only going to bring in product that we know we can sell, high value, high demand, coveted products. So historically, we're running about 5% of our GMV coming from the vendor business.
That will tick up a few percentage points in the near term. And frankly, it's anybody's guess how long that goes, but I would say so long as there are difficulties in the retail environment, I would expect to see an elevated level of vendor business, but we're not going to compromise our standards for quality and value going forward. So we'd expect anytime soon. And then remind me of your Yes,
second question is just maybe how demand has changed maybe among maybe existing buyers and new buyers. And maybe additionally just on the supply front, are you seeing what kind of shelter at home that people are kind of cleaning out their closets more and looking to sell more once they're able to or once some
of these restrictions are lifted?
Yes. I guess I'll take the first one on new and repeat buyers. It's going to be a broken record, Aaron, where supply is really driving all of these trends. New buyers and repeat buyers are both kind of impacted by a more limited selection available on the site. I'd say those trends are they're tracking more or less in parallel.
And as supply rebounds, we'd expect to see both an increase in new buyer growth and an increase in repeat buyer purchase volume. And then This interest in I don't think we have much more to add to the question around supply and if there's sort of pent up demand for it. We're seeing certainly that there's strong interest in consignment. Again, our constraint has just been our ability to handle that volume either doing pickups or through any one of our other means. So we'd anticipate as restrictions are loosened primarily in Brisbane here in California that we will start resuming not typical, but increased marketing activities, which we'd expect to start generating more interest in consignment, consignment leads, which we're well positioned to convert and start increasing supply
question from the line of Ike Boruchow from Wells Fargo. Your line is now open.
Hey, good afternoon, everyone. Hope everyone in your families are safe and doing well. I think this question might be for Matt. Know there's no specific guidance, but you talked about a normalization potentially by June and gradual improvement from there. So I guess my questions would be, are there any puts and takes or details you can give that kind of go behind the assumptions that you're kind of making for the rebuild of GMV?
And then 2 quick ones on what you say in the shareholder letter. You talk about the growth rates gradually improving, but then you make a comment about Q3. What I wanted to understand is, are you saying that the Q3 growth rate could be worse than Q2? Or are you just saying that the growth is not going to be linear in the sense that like the growth rate improves meaningfully much more for Q4 versus Q3?
Sure. I'll take both of those. So, yes, we'll go back to the I think Julie's introductory comment that things are very fluid. We don't know more than any of you do about what's going to happen as states begin to reopen and therefore restrictions on our business that loosen beyond what we know today. We just made the point to lay out the set of assumptions that we're using to offer as much of an outlook as we can given the information that we have.
So that is based on the assumption that we do see a progressive opening of the economy beginning in June. And therefore, our business trends would start to follow that and our growth rates would start increasing from that basis. By Q3, what we mean, so Q3 of 2019 was essentially our IPO quarter where we had a significant acceleration in the business and came back down to more normal levels in the Q4 of 2019. So what we mean specifically specifically is that the improvement in growth rates as we go quarter to quarter is not likely to be linear, not
Got it. And then, Matt, just when you say potentially exit the quarter in Q4 at 2019 levels, I just wanted to clarify, do you mean the quarter itself could be comparable to the Q4 of 2019 or that you're by the time you're exiting the quarter? Sorry to get so granular.
Yes. Well, it's overly precise for what we're able to foresee. We can't accurately predict what's going to happen for Q2, no less in the months of Q4. I think the spirit of that is just to say that we think that by the end of the peak holiday season, think of it as kind of November, December, that our internal models and our resource builds and the staffing that we are planning for in our e commerce centers and our sales team would support growth that's approaching 2019 levels in peak holiday season.
Got it. Thanks a lot.
All right. Thank you for our next question from the line of Susan Anderson from B. Riley FBR. Your line is now open.
Hi, thanks for taking my question. Thanks for all the details in the shareholder letter. I had a quick question on the $70,000,000 in cost saves. Is that meant to just be in this or how is that supposed to be spread out over the year? Then also, can you talk a little bit about where the savings are coming from?
Thanks.
Sure. So $70,000,000 just to be clear, is the intent of the reductions that we've made that would impact this fiscal year? The cuts were broad based. The largest was marketing. So think of approximately $20,000,000 $25,000,000 of that $70,000,000 was intended to be marketing.
And the rest of it is broadly speaking headcount related, including things like hiring freezes, layoffs unfortunately and furloughs that made up the bulk of the rest of it. In terms of the sequencing of the cuts, we took action pretty early, which is serving us well. The cuts began toward the end of March. But of course, we were paying people into the early part of April. So we'll have a pretty good and lower run rate in the second quarter that's more or less tracking the our expected GMV profile and then building kind of back up from there as we get to the rest of the year.
Great. That's helpful. And then just on the technology front, it looks like you're still investing there, I think as planned. But I guess have you cut any of the investments slated for this year on the tech front to make the operations more efficient?
This is we did put a hold on some hires in tech, but that was the least there were 2 areas that were the least touched, tech and then also our sales team. So, the sales relationship with our consignors, new and repeat, is really important. So both of those were left mostly intact. I would say that the tech team had to shuffle their priorities. We weren't doing virtual consignments prior to the COVID situation.
So it's they're really more focused. Their focus changed and they have they were least affected, but they also were affected.
Yes. And I would add to that, that the pre existing priorities are largely untouched, right? So we've talked a lot about focusing on operations efficiencies and automation. And we continue to make good progress there. We made progress in the Q1 and expect to see continuing progress throughout the year such that the three key areas that are impacted by automation copywriting, photo retouching and pricing could all approach 75% of unit volume.
Great. That's helpful. Thanks so much. I hope everyone stays safe and healthy and good luck next quarter.
Thank you. Thank
you. Okay. Thank you. Your next question comes from the line of Simeon Sejal from BMO Capital. Your line is now open.
Hi, this is Atish on for Simeon. Thanks for taking the question. In terms of new buyer acquisition, does the current environment change the go forward strategy when things normalize? Meaning, are there any learnings from the media mix and SEO optimization?
Well, let me tell you that whatever we learned, we're not resting our we're not assuming it's going to be that interesting or applicable going forward. Everything we do is test and learn. Now having said that, a while ago, we went into OTT more aggressively than digital. And during this time of shelter in place, it's really served us well. But I mean that doesn't mean that we're going to continue that strategy going forward.
But even when we cut budgets, we kept a very small budget running on such properties like Hulu, which has done very, very well. SZL, we always continue to work out in the background and that's actually been driving our cost down. Our cost of acquisition is so low that pre COVID that we really we're in good shape in any case. We've really got some great performance marketing people on our team that know how to drive efficiencies and effectiveness at the same time.
Great.
Thanks. And operator, I think we'll take one more question, if there are any. Okay, great.
Listen, I want to thank you all. I do want to I think I was cut off with Oliver's question on retail and it's going to be a it's going to be carnage out there. We are dependent on retail. I think that's going to be our gain during this period of time. And it does make me sad to think the retailers that are primarily a retail company are going to have such a hard time.
But we're in a unique position to get stronger due to that. It's not a position I necessarily want to be in, but it's an opportunistic position for us to go from strength to strength. So I want to thank you all for your time. Hopefully, we can do this again without technical errors the next time we might even be in a real office instead of working out in our various homes. I hope you're all staying healthy.
And please remember, we're open for consignment, virtual. You can do self scheduling and virtual appointment. We'd love to work with you. Thanks so much.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.