The RealReal, Inc. (NASDAQ: REAL)

The RealReal's Q1 2025 financial performance showed strong improvement across key metrics. Total revenue increased 11% year-over-year to $160 million, driven by a combination of consignment revenue growth and increased direct revenue. Consignment revenue, which represents the company's core business, grew 7% to $123.8 million, while direct revenue increased significantly by 61% to $20.5 million. Shipping services revenue also contributed $15.8 million, a 2% increase from the prior year.

Gross Merchandise Value (GMV) grew 9% year-over-year to $490 million, reflecting increased transaction volume and higher average order values. The company's take rate improved to 38.6% in Q1 2025 from 38.4% in Q1 2024, demonstrating improved monetization of the platform's transactions.

Net income for the quarter was $62 million (39.0% of revenue), a significant improvement from a net loss of $31 million in Q1 2024. However, it's important to note that this includes approximately $80 million of non-cash gains, primarily from the change in fair value of warrant liability ($42.5 million) and gain on extinguishment of debt ($37.1 million). These non-cash gains mask the company's underlying operational performance, making Adjusted EBITDA a more relevant metric for evaluating core business performance.

Adjusted EBITDA improved to $4.1 million (2.6% of revenue) from $(2.3) million (negative 1.6% of revenue) in the prior year period, representing a $6.4 million year-over-year improvement. This positive shift in profitability reflects the company's successful implementation of its strategic initiatives focused on operational efficiency and cost management.

Gross profit increased by $13 million to $120 million, with gross margin expanding 40 basis points to 75.0%. This margin improvement reflects the company's enhanced operational efficiency and successful implementation of its Profit Recovery and Growth Plan. The company's non-GAAP basic and diluted net loss per share improved to $(0.08) compared to $(0.12) in the prior year period, indicating progress toward sustainable profitability.

Active Buyers increased 7% year-over-year to 985,000 in Q1 2025, reversing the declining trend seen throughout 2023. This growth indicates increased customer engagement and successful customer acquisition strategies. The company's focus on creating exceptional experiences for both consignors and buyers has contributed to this positive momentum in customer metrics.

Average Order Value (AOV) increased 5% year-over-year to $564 in Q1 2025, reflecting the company's ability to attract higher-value transactions and optimize its product mix. This improvement in AOV, combined with the increase in the number of orders (up 3% to 869,000), drove the 9% growth in GMV.

Take Rate, which measures the percentage of GMV that The RealReal recognizes as revenue, improved to 38.6% in Q1 2025 from 38.4% in Q1 2024. This improvement reflects the company's enhanced monetization capabilities and optimized commission structure. The consistent take rate improvement over the past several quarters (increasing from 37.4% in Q1 2023) demonstrates the company's ability to capture more value from each transaction.

Net Merchandise Value (NMV), which represents the value of merchandise sold after returns and cancellations, increased 11% year-over-year to $370.8 million. The faster growth in NMV compared to GMV indicates improved operational efficiency in managing returns and cancellations.

The company's key business metrics collectively show positive momentum, with growth across all important indicators. The combination of increased active buyers, higher AOV, and improved take rate positions The RealReal for continued revenue growth and margin expansion. Management highlighted that Q1 2025 saw the highest number of new consignors in over two years, which should support future supply growth and transaction volume.

Consignment Revenue, which constitutes the majority of The RealReal's business at 77.4% of total revenue, increased 7% year-over-year to $123.8 million in Q1 2025. This growth was driven by increased transaction volume and an improved take rate. Consignment revenue represents the commission earned by The RealReal when items from consignors are sold on the platform. The cost of consignment revenue decreased 2% to $13.0 million, resulting in improved gross profit for this segment.

Direct Revenue showed exceptional growth, increasing 61% year-over-year to $20.5 million from $12.7 million in Q1 2024. Direct revenue represents sales of inventory owned by The RealReal. This significant growth in direct revenue indicates the company's successful expansion of its owned-inventory business model. The cost of direct revenue increased by 24% to $15.2 million, resulting in a gross profit of $5.2 million for this segment, compared to just $0.4 million in Q1 2024. This improvement indicates enhanced efficiency in the company's direct sales channel.

Shipping Services Revenue increased 2% year-over-year to $15.8 million. This category includes shipping fees collected from buyers. The cost of shipping services revenue increased 8% to $11.8 million, due to increased shipping volumes and higher shipping rates. The gross margin for shipping services decreased slightly to 25.0% from 29.1% in the prior year period.

Overall, the company's revenue mix is showing healthy diversification, with the direct revenue segment growing faster than other segments. This trend could help reduce the company's reliance on consignment revenue and provide additional growth avenues. The impressive growth in direct revenue gross margin (from 3.3% to 25.5% year-over-year) suggests potential for further margin expansion as this segment continues to scale.

The RealReal's profitability metrics for Q1 2025 showed significant improvement compared to Q1 2024, though operating income remained negative:

• Operating Loss: Improved to $(12.8) million (negative 8.0% margin) from $(17.9) million (negative 12.5% margin) in Q1 2024, a 29% improvement
• Net Income: $62.4 million (39.0% margin) compared to $(31.1) million (negative 21.6% margin) in Q1 2024, primarily due to non-cash gains
• Adjusted EBITDA: $4.1 million (2.6% margin) compared to $(2.3) million (negative 1.6% margin) in the prior year period
• Gross Margin: 75.0% compared to 74.6% in Q1 2024, a 40 basis point improvement

The substantial difference between operating loss and net income in Q1 2025 was primarily due to two significant non-cash gains: a $42.5 million gain from the change in fair value of warrant liability and a $37.1 million gain on extinguishment of debt related to the February 2025 Exchanged Notes. These non-operating items significantly impacted reported net income but do not reflect the company's core operational performance.

Adjusted EBITDA provides a clearer picture of the company's underlying operational improvement. The $6.4 million year-over-year increase in Adjusted EBITDA reflects the company's progress in enhancing operational efficiency and implementing cost control measures. This is the first time The RealReal has reported positive Adjusted EBITDA in a first quarter, which is historically the company's weakest quarter due to seasonality.

Operating expenses increased 6% year-over-year to $132.8 million, growing at a slower rate than revenue (11%). Marketing expenses increased modestly by 4% to $15.9 million, while operations and technology expenses grew 6% to $67.0 million. Selling, general, and administrative expenses increased 7% to $50.0 million. The slower growth in operating expenses relative to revenue demonstrates the company's focus on operational discipline and efficiency.

Free cash flow for Q1 2025 was $(35.8) million, compared to $(8.8) million in Q1 2024. The decrease was primarily due to a larger net cash outflow from operating activities of $(28.3) million, compared to $(3.5) million in the prior year period. Capital expenditures, including purchases of property and equipment and capitalized proprietary software development costs, increased to $7.6 million from $5.3 million in Q1 2024, reflecting ongoing investments in technology and infrastructure.

The RealReal has been executing on several strategic initiatives that contributed to its strong Q1 2025 performance and position the company for sustainable growth:

Growth Playbook Implementation

• Supply Growth: The company reported its highest number of new consignors in over two years in Q1 2025, driven by the effective integration of sales, marketing, and store operations
• Store Expansion: Continued focus on leveraging physical retail locations to acquire consignors and provide in-person authentication services
• Marketing Optimization: Refined marketing strategies to target high-value consignors and buyers, contributing to the 7% increase in active buyers

Operational Efficiency

The company has been focused on driving operational efficiency through several initiatives:

• AI Integration: Successfully applying artificial intelligence to various aspects of operations, from authentication to pricing optimization and inventory management
• Process Improvements: Streamlining operations across the supply chain, resulting in faster processing times and improved consignor/buyer experiences
• Cost Management: Disciplined approach to operating expenses, with costs growing at a slower rate than revenue

Service Enhancement

The RealReal has emphasized its commitment to service excellence for both consignors and buyers:

• Consignor Experience: Improved processes for virtual appointments, in-home pickup, drop-off, and direct shipping, making consignment more accessible and convenient
• Authentication Expertise: Continued investment in authentication capabilities, with hundreds of in-house gemologists, horologists, and brand authenticators inspecting thousands of items daily
• Digital Platform Enhancement: Ongoing improvements to the website and mobile app to enhance the user experience and drive engagement

CEO Rati Levesque emphasized that the company's strategy is working, stating: "Our results demonstrate consistent execution on our strategic pillars: unlocking profitable supply through our growth playbook, driving operational efficiency, and obsessing over service to create exceptional experiences for our consignors and buyers." The company's unique position at the intersection of luxury and value, coupled with its sourcing model predominantly from domestic closets, provides resilience in the current economic environment, including potential benefits from tariff uncertainties.

The RealReal reaffirmed its full-year 2025 guidance and provided the following outlook for Q2 2025:

Q2 2025 Guidance:

• GMV expected to be in the range of $476-486 million, representing year-over-year growth of approximately 8-10%
• Total Revenue expected to be in the range of $157-161 million, representing year-over-year growth of approximately 10-13%
• Adjusted EBITDA expected to be in the range of $3.0-4.0 million, compared to $2.6 million in Q2 2024

Full Year 2025 Guidance (Reaffirmed):

• GMV expected to be in the range of $1.96-1.99 billion, representing year-over-year growth of approximately 8-10%
• Total Revenue expected to be in the range of $645-660 million, representing year-over-year growth of approximately 10-13%
• Adjusted EBITDA expected to be in the range of $20-30 million, a significant improvement from $4.9 million in 2024

Management expressed confidence in maintaining these targets despite macroeconomic uncertainties, including potential impacts from tariffs and a less predictable economic backdrop. The company believes its unique position at the intersection of luxury and value, combined with its domestic supply sourcing model, may provide resilience and even potential benefits in the current environment.

CEO Rati Levesque stated, "We are reaffirming our full year 2025 guidance despite the uncertainties from tariffs and a less predictable backdrop. We occupy a unique position at the intersection of luxury and value, and we source our supply primarily from domestic closets, so there is potential to realize benefits in the current environment."

The guidance reflects management's confidence in the continued execution of the company's strategic initiatives and its ability to deliver sustainable growth and improved profitability. The company's focus on operational efficiency, combined with its growth playbook, positions it well to navigate potential macroeconomic challenges while continuing to improve financial performance.