All right, guys. We're a little tight on time after that last transition, but we'll try to keep the trains moving on time here. Very pleased to have The RealReal here for a fireside chat. We got the CFO of The RealReal with us, Ajay Gopal. I guess we'll just jump right into the questions.
Yeah.
What I wanted to start out with is just level setting everybody in the room who are maybe less familiar with the model of resale and luxury, how you fit into the overall luxury resale ecosystem, how you fit into the ecosystem of luxury in general, how you think about the total addressable market, and how you guys play and differentiate versus other players that are out there.
Cool. Yeah. It's a great place to start.
Yeah.
Yeah. We're good? Awesome. Great place to start. The RealReal, I mean, we see ourselves playing in a very attractive market. It's large. You know, we've quantified it at north of $200 billion in TAM. It's fast growing, outpacing primary resale two-three times, depending on what source you look at. And it's got really strong secular tailwinds. You know, there's demographic tailwinds that we see continuing to drive the market going forward as well. What we've learned about luxury resale as a market is that growth in this market is determined by supply. You know, when you think about us as a two-sided marketplace, our ability to bring new items onto the platform to unlock that supply, that's what drives the market.
To that extent, you know, our business model is a managed marketplace model like you, yeah, like you highlighted. On the seller side, we've built a model that eliminates friction from the process of selling. The $200 billion of supply that I mentioned earlier, we see that as trapped in people's closets, and The RealReal is effectively unlocking that supply, bringing it onto our platform from where it sells very quickly. 50% of what we launch is gone in 30 days in terms of sell-through rate. That's our approach to the marketplace. On the buyer side, it is about expertise, it is about curation, and it's about trust. You know, our average order value is north of $600.
People are routinely buying bags or watches, you know, more than $20,000, $30,000, $50,000 at a time. Really high trust in the platform, and that comes from the expertise, that comes from how we authenticate items. We see this solution as being a great fit for this space, right? Where things like trust and expertise are so important, and being able to bring that supply online, price it, and then get it into the hands of consumers that are looking for it.
Great. I guess the recent trends in the business have been pretty impressive. You guys have talked about sort of a low double-digit growth algorithm for gross merchandise value. You've been eclipsing that by quite a bit into the high teens.
Mm-hmm
Low 20s. Curious how to think about the recent inflection that you've seen in GMV growth and what's precipitated that, what's enabled you to sort of unlock additional supply, bringing more buyers to the platform, maybe a little bit more about sort of what's precipitated the recent acceleration in the business.
Yeah, yeah. Thanks for that question. You're right, we've had a really strong run. Q4, we just reported results not too long ago. GMV was up 22%, and our guidance from Q1 has a midpoint of 21%. We're at the high end of our range, if you think about it that way, right? We think the growth is driven by a few things. The first one I would highlight is our execution against our growth strategy. Just going back to one of the comments I made earlier on how everything comes down to unlocking supply, we've made changes, and we've driven efficiencies in our approach to unlocking supply, and we often describe that as being a three-legged stool.
You've got sales, which is our team of luxury managers that build relationships across the field. Then you have marketing, which is another leg of that supply, and that's about seeding demand, creating brand awareness, and just, you know, getting those leads in, and then our approach to stores. When I look at the growth rate that we are experiencing right now, a lot of it goes back to changes that we've driven in each of these areas. If I talk about sales, we've made changes to the profile of the reps we bring in. We have people coming from the industry, and they have a rich book of clients that they already bring with them. That has brought more supply.
We've made changes to their compensation structure, incentivizing them to bring in more value over units, and that has led to us getting more desirable supply, as well as you know you see that increasing the mix of our items being sold towards the mid-value and the high value, and you see that in the average order value growth. On marketing, we've similarly made investments. We've improved the ROI on our spend. We've got new tactics in place. We opened a few more stores last year as well, and we see great results from those. Those things have really helped get us to the results that we're seeing right now, good growth in consignors, good growth in buyers, just a strong story.
Okay, great. Wanted to drill down into the luxury manager side of things, the sales force that you bring to bear, to unlock supply. Maybe, you've shared some interesting stats around productivity of those.
Mm-hmm
Luxury managers in recent quarters. Sort of what are the tools that you're deploying for those luxury managers to enable that unlock for them, beyond just the incentives that you're putting in place? What are you doing to make them more productive over time here?
Yeah. Great question. I mean, when we think about our sales team, and I mentioned how it's one of the three-legged stools to get supply, it is a strategic and very important asset for us, I think one of the key differentiators that The RealReal has versus other players in this space. You know, we've got about 400 reps across the country in most major markets. These reps are building relationships with consignors. They're helping, well, they're literally in their closets finding things that they know are in high demand on the platform. If they have a sense for the fact that they haven't used those items and getting them to think about reselling that and taking that money and putting it back into something different.
They play a really important role in our ability to unlock supply. We've been putting tools in their hands that help make them more effective, right? Some of the tools to your question, one that we've spoken about is Smart Sales. This is effectively an AI-powered algorithm that helps them figure out who they should call on next. It takes the data we have in our platform. It takes the data on the consignors, looks at their buying pattern, selling pattern, and really helps maximize their time. That helps them. We're right now piloting a price estimation tool, which effectively would allow them to give a consignor a sense for what something is likely to be sold for.
That's another way that they can get more effective at their jobs. All of that combines with the incentive structure that I mentioned earlier that helps them get better supply.
Yeah. Okay. I assume that threads into, I guess, your ability to dial up and down the assortment in certain periods of time. How quickly can you know, sort of when you spot a trend, how quickly can you dial up supply to meet that demand, you know, that you're seeing in real time on the marketplace?
Yeah. Okay. Love that question. Almost instantaneously. You know, we are a two-sided marketplace, but you know, we do curate upfront. We control what comes in. The way we can do that is, you know, we have a team that monitors trends, that looks at what people are searching for, as well as have a good sense for the industry in terms of what is popular out there. We can effectively on nearly a real time basis tell our reps what is highly in demand and what we need. We can incentivize them more to bring items that they perhaps have not been bringing in the past, as well as, you know, dial it up and down. Very quickly.
Okay. You've also been deploying more marketing dollars, I guess, into the channel to acquire new sellers. Maybe talk a little bit about the initiative there and how we're acquiring new sellers. I know there's a lot of buyers that eventually become sellers as well, so there's some cross-pollination there. Maybe talk about sort of the synergies you see in terms of folks that turn into buyers that become consignors.
Yeah. Yeah. Totally. So you've seen us in the last few quarters lean more into marketing as you know to drive growth and we've seen good results from that. If I go back a bit in time, we did invest in improving the capability set in marketing, so resources as well as tools and technology. Today we feel we're at a place where we have high conviction on the ROI against our spend, and that's giving us the confidence to spend into that growth. Tactics that I would highlight last year that we've found particularly successful, one, social marketing.
You know, you could say that The RealReal was a little late to the social marketing game, but our category is such a good fit for that tactic. We've seen that give us good results in being able to bring on new sellers as well as new buyers onto the platform. We're tapping into referrals through two different programs. We have a program called Real Friends, which is effectively people recommending their friends to use the service to sell on The RealReal. We have a program called Real Partners, which goes after people in the industry. Think of those as a stylist, for example, that has a list of clients, and then that stylist can recommend their current clients to the platform. Good success from programs like that.
The last point you made, network effects on our platform are really strong. About 50% of the people that sold on the platform are also buyers, and 16% of the people that bought are sellers on the platform. We disclose these numbers on an annual basis. We've also seen that about 40% of our new consignors come from buyers in our platform. We call individuals that participate on both sides flywheelers, and their LTV is two-three times higher than somebody that participates on just one side. We've got tactics in the works to tap into that inherent strength in our ecosystem from the marketing team to get people in to participate on the other side.
Great. I guess the last leg of the stool in terms of acquiring supply comes from stores. I wanted to hear you maybe talk a little bit about. It sounds to me like the value of items that you're acquiring through the store channel is much higher. Average transaction values are much higher than, you know, sort of the core site. Why not open more stores? Why not lean a little bit more into that channel if that can help with your unit economics and drive AOV higher?
Great question. You know, we spoke about sales, marketing. Stores is that third leg of the three-legged stool. When we look at a market, you know, take L.A. as a market, right? We would look at getting the right mix of reps, marketing dollars, as well as the question of whether we have a store or not. What we've seen with stores is they really amplify the effectiveness of those other two channels. It helps sales reps bring on more supply, more consignors, and it also takes our marketing dollars further. You've got a big billboard effectively on when we drop in a store. We have 18 stores and, you know, we shared some stats around Houston, which was a store we opened last year.
Once we opened the store, if you compare the number of new consignors pre and post, we saw nearly a 75% increase in the number of new consignors. That's an example where we got the balance just right and the returns on the stores paid off. We're gonna open one-three stores in any given year. You know, we're not a business that is trying to get to 500 stores across the country. Think more in the range of 50 stores, thereabout. It really is around where is the key market? Where can it complement the other two effective channels we have between sales and marketing to unlock more supply?
Okay, great. I want to ask this like from a historical perspective, but obviously there's been a lot of geopolitical and macro disruption in the news as of late. From a historical perspective, though, I'm curious how you see economic headwinds or disruption macroeconomically show up in purchasing behaviors or seller behaviors on the marketplace, maybe using past periods as an example for are you seeing more supply come onto the marketplace event like in certain scenarios or do transaction values change in some material way? Maybe just a little bit about historical precedent periods where you've seen sort of macro disruption.
Yeah, very topical question these days. We are well positioned to ride ups and downs on a macroeconomic basis. I think it comes from the combination of two unique attributes in our business, right? One, we cater to an affluent, more resilient consumer. That gives us a level of protection. The other thing I would point out is in this world of luxury fashion, we are the value play. People come to us because, you know, they can get something that on a primary market would cost significantly more if they were to go look for it. Those two things put us in a unique position when it comes to macroeconomic shifts. You know, if I just think back to 2024, to your point on history, right, it was a pretty turbulent year, lots of ups and downs.
Our performance through the year was fairly consistent, right? We saw accelerating GMV. We saw strong growth in new consignors, strong growth in new buyers. We exited the year with 22% GMV growth, acceleration in buyers, as well as orders. A nice combination of sort of elements that played out to help with that. I think broadly speaking, if you look at a situation where people are under pressure, there's a good argument to say that it increases consideration for our platform because we are the value play. It also increases willingness on people's parts to sell what's in their closet in order to finance their next purchase.
Anything that you can share in terms of the price gaps versus primary luxury? I guess there's been a lot of players that have taken price over the last couple of years. Maybe how does that improve or help the attractiveness of your value proposition relative to sort of primary luxury?
Yeah, that's a great question. I think one of the key points you'll hear us talk about as it relates to pricing is the market sets the price. Part of our service is to help a consignor find what we believe is the best possible price they can get for their item. Over the years, we've built a very sophisticated pricing algorithm, takes over 100 different data points into account, and then it computes what is the likely price for an item going to be. You'll see that when we launch an item on the platform, it's being launched for the highest possible price. We get more signals by people looking at the item, clicking on the obsess icon, and then we can move the price once we start to get those additional data points.
If you zoom into how has our platform performed, you'll see both ends. You'll see items where things on the resale market are selling for more than the primary market because they are so hard to get or they're very scarce and they represent a designer or a vintage that is just not possible to find anywhere else. On the other hand, you'll also see occasions where sometimes the people on the secondary market are unwilling to pay as much as the primary market has taken prices up. We let the market determine the price and help our consignors get that optimal combination of price and sell-through rate.
Okay, great. I wanted to touch on one of the metrics I look at and I think is important, which is engagement. Looking at the GMV per active buyer that you have in the marketplace, that's been increasing. I wanted to hear a little bit about sort of the drivers that are underpinning that engagement in terms of higher average order value, higher frequency. Maybe talk a little bit about the purchasing behavior that you're seeing from your buyers that seem to be engaging with you more often.
Yeah, thanks for that question. I think one of the key driving factors for our business and the market for resale luxury as a whole is just this shift that has taken place where people are increasingly considering resale as an option, right? There's two things at play over here. One thing that you'll hear us talk about is how we are changing the way people shop. This is a behavior that is very common when you think about, say, luxury automobiles. When someone buys a car these days, they are thinking about what is this car going to be worth three-five years down the line? Because at that point in time, I'm going to be ready to sell it and purchase something new.
47% of our consumers, the people we surveyed today, tell us that that is how they think about buying on the luxury market as well. That is changing the buying behavior in terms of people coming into the platform. The other thing that is changing is, you know, all of the 47% or any other metric on that dimension is going to score higher when you look at Gen Z and Millennials, so younger buyers. As we see that demographic shift play out at The RealReal, over 50% of our customer base today is Gen Z or Millennial. We get more of those. We see them being highly engaged. We see them more interested in the category. In fact, about 60% of them will tell you that they prefer shopping on the secondhand market first before they go to the primary.
These are the things that we see playing out in terms of driving buyer growth as well as buyer engagement on the platform.
Okay. The other big kind of theme or through line that I want to pick up on beyond just the demand inflection you guys have experienced is the AI implementation that you're going through and how you're a beneficiary there. You've got Athena AI that you've talked about over the last few quarters implemented, I think, on like 35% of items that you're ingesting into the marketplace. Wanted to hear about sort of maybe some real world examples of how that plays out. I think this year, you talked about implementing Athena AI into higher value items.
Mm-hmm
over the next, you know, several quarters. Maybe talk about sort of where we're moving implementation of that, in the assortment.
Yeah. Totally. You know, we're not new to AI. As a company that grew up in Silicon Valley, we've always been pushing the envelope on how we can use technology to make our service better. One of the key enablers for our ability to tap into AI is our data. Over the course of the lifetime of the business, we've sold about 50 million items. For each of these items, we've captured images, a long list of attributes, and transactional data. We've been able to use that information in a variety of different cases. We use it to drive our pricing algorithm, what I mentioned earlier. We use it to drive authentication.
This is effectively looking at the image library and comparing it with what we've seen as the original item in the past and being able to instantly assess if an item is authentic. It's image-driven. There's also proprietary technology that we've developed, scanning technology in the business that helps us quickly identify things like jewelry or even in the case of handbags, looking at the construction, et cetera, to authenticate. Going to Athena, this is an initiative that we launched last year. At the beginning of the year, we started looking at changing our workflow such that an item, once we take pictures of it could be instantly identified, we could write up the description, we could price it, we could score its condition, and we could release it for sale.
That's the 35% that we ended the year with. In the year we started this, we went from 0% to 35%. 35% of the items went through that intake process and went through really quickly. We started with lower-price ready-to-wear as a category, and we are now moving that into mid-value and then over time into high value as well. The process is fairly similar. We've got to train the algorithm. It's being trained on our own data, and then we effectively run it, compare it with our performance using manual authenticators, and then see if it matches or exceeds, and then we sort of expand the category.
Yeah. I think you guys have said already, you know, sort of on the lower value items, able to remove at least a couple of dollars.
Mm-hmm
Out of your variable costs in terms of units that you process.
Yeah.
How do you think about the improvement as you move into the higher value items, if you move into handbags and some of the higher price point jewelry and stuff like that? I'd imagine that's removing even more of the variable cost as you ingest those items into the marketplace.
Yeah. Directionally, you're right. I mean, the cost required to do something like this for a handbag is more than doing for a dress. Yes, on a per unit basis, we do expect Athena to yield savings that are higher on a per unit cost saving basis. Volume numbers are sort of the offset to that, right? We're gonna have less of the more expensive items. There is a balance, but in terms of how it plays out, I think broadly speaking, when you think about our EBITDA journey, we closed last year at 6%. We've sort of messaged that we see the business getting to 15%-20% adjusted EBITDA over the medium term. Think of that as five years.
Operational efficiencies and being able to take cost out of every item that we process using things like Athena is a key driver. It's a key element of how we're going to get that margin expansion.
Yeah. At the same time, I guess there's also a fixed cost of the platform that you're leveraging. Can you talk about how that's built into the guidance this year? I think you're at the midpoint somewhere, like 180 basis points of improvement for this full year on EBITDA margin. Maybe just talk about how you built in fixed cost leverage into the expectations for the year.
The fixed cost leverage we get really comes from the fact that we've got a fixed cost base in G&A and in the fulfillment center, et cetera, that we're able to leverage our way into, right? These investments have been made where we don't need to continue adding to those. If anything, this is an area where you don't hear us talk much about, but you know, obviously, we're using AI in customer service as an enabler to take cost out of that. You know, we think in G&A functions, we have added line of sight to getting more efficient in how we do that.
That's one of the drivers behind the efficiencies that you've seen this year, and it will continue to be a contributor towards margin expansion going forward.
Okay, great. Well, we have another maybe minute or so here. Wanted to hear a little bit about capital deployment for the business. I know you sort of talked about PP&E spend being 2%-3% of sales. That's a relatively low rate for a company growing as fast as you are. I mean, maybe just talk about capacity utilization at the existing distribution centers, where we need to spend in to add capacity over time, how you think about that as the next couple of years unfold.
Thanks for that question. We are a very cash-efficient, capital-light business model, right? We don't. All our inventory is consigned, so we're not using up any cash to buy inventory unlike another retailer. As a marketplace, you know, we get a benefit in our cash conversion cycle. We get paid by our buyers much sooner than we pay our consignors. Our working capital is a net positive benefit to us as the business grows. That's why you see us being very capital efficient. The 2%-3% CapEx really refers to things we put into the fulfillment centers to drive automation, and just known technology. This year, we've spoken about implementing an automated storage and retrieval system in one of our two fulfillment centers.
That'll help us get more from that capacity footprint. It'll densify storage, go vertical, and, you know, I think, you know, yield more benefits on top of just how we utilize capacity in terms of variable cost too.
Okay, great. I think you've also mentioned deleveraging priority. How do we think about the incremental dollars from free cash flow being deployed toward that?
Deleveraging is definitely a priority. We've made strong progress strengthening the balance sheet. If you go back to the beginning of 2024, we've taken slightly more than $80 million of debt out of the capital structure. It will continue to be a focus for us. You know, we're still higher than we would like to be. The good news is we've pushed out maturities. The business is in a great place. We're growing well. We're generating cash. We feel good about our ability to service that debt, but we still wanna bring it down over time.
Okay, great. With that, we're out of time. Ajay, appreciate you being here. Thank you.
Thank you.