Thank you for standing by. My name is Liz, and I'll be your conference operator today. At this time, I would like to welcome everyone to The RealReal Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Caitlin Howe, Senior Vice President of Finance. Please go ahead.

Thank you, operator. Joining me today to discuss our results for the period ended June 30, 2025, are Chief Executive Officer and President, Rati Levesque; and Chief Financial Officer, Ajay Gopal. Before we begin, I would like to remind you that during today's call, we will make forward-looking statements, which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Today's presentation will also include certain non-GAAP financial measures, both historical and forward-looking. We have provided reconciliations for historical non-GAAP financial measures to the most comparable GAAP measures in our earnings press release, which is available on our Investor Relations website. I would now like to turn the call over to Rati Levesque, Chief Executive Officer of The RealReal.

Thank you, Caitlin. Good afternoon, everyone. I'm pleased to review our second quarter 2025 results. Q2 was a breakout quarter for The RealReal. We demonstrated progress while further validating the success of our strategic road map. Our strong Q2 performance was highlighted by 14% top line growth, coupled with adjusted EBITDA above expectations. These results were driven by our clear strategic vision, innovative mindset and unique position in a growing category. We are fundamentally changing the way people shop, and we are at a pivotal moment, not just as a company, but as a category leader. Before diving into this quarter's highlights, I'll take a moment to explain more about what changing the way people shop means to us. For the past 14 years, we've been ahead of the curve, making luxury resale desirable and accessible. Now the circular economy is on the rise. We are not only leading the cultural shift in luxury resale, we are also helping to define it. Our operating and consumer expertise and growing brand affinity drives our market leadership. Our operating and consumer expertise is showcased in our world- class authentication, which has been the cornerstone from day 1, creating trust with our customers. Our growth playbook centers on a scalable supply engine and helps us forge enduring relationships with our sellers. And our powerful brand attracts customers across the generational spectrum, with 53% of our customers being Millennial and Gen Z, all of these are underpinned by our data-driven intelligence from authentication to pricing to our smart sales and smart process engines. We are leveraging AI to drive efficiency, scalability and user engagement. Today's modern consumer is embracing the circular economy and approaching luxury resale as an option of first resort, not last. Our customers view their closet as an investment that retains…

Thank you, Rati. Good afternoon, everyone. I am pleased to report our financial results for Q2 2025, which demonstrate the disciplined execution and the effectiveness of our strategy to drive profitable growth. This past quarter, we delivered our highest ever quarterly GMV, revenue and new consignors. Our results reflect strong performance across the board and validate the strategic investments we are making, positioning us for continued momentum in both growth and efficiency. Now turning to our detailed second quarter results, beginning with the top line. Q2 GMV of $504 million, increased 14% compared to last year. This growth was driven primarily by healthy supply, which led to strong growth in units and to a lesser extent, from mixing into higher-value items. Our active buyer base also expanded, increasing 6% on a trailing 12-month basis to exceed 1 million active buyers. Q2 revenue of $165 million, increased 14% year-over-year. Consignment revenue grew 14%, while direct revenue increased 23% compared to Q2 of 2024 and represented 12% of total revenue in the quarter. Continuing with our second quarter results. Second quarter gross profit of $123 million, increased 14% year-over-year. Gross margin was 74.3% in the quarter, an increase of 20 basis points compared to the prior year. In second quarter, consignment gross margin was 89.3%, an improvement of 93 basis points year-over-year. Direct gross margin was 16.2% in the second quarter, within our previously communicated range of 15% to 25%. Direct gross margin fluctuates quarterly, largely based on the category mix of products sold. For instance, in a quarter when we sell more watches at high price points, direct gross margin may be lower than in a quarter with a higher mix of handbags. Overall, we are pleased with the stability and continued improvements in total gross margin. Second quarter operating expenses…

[Operator Instructions] Your first question comes from the line of Ike Boruchow with Wells Fargo.

Congrats on the quarter. Two from me. I'll start with the top line. I guess maybe, Rati, just really great revenue beat in the quarter and the guidance is pretty impressive. Any chance you could comment on kind of the cadence you've seen over the past couple of months or just something quarter-to-date? Just kind of -- it's just a pretty big inflection in the business. I would love to get more details on maybe what's underpinning that.

Yes, hi Ike, thanks for the question. As far as quarter-to-date is concerned, we are seeing a momentum in the business. You saw a breakout quarter in Q2. We see that momentum keep pace in Q3 with a slight, if anything, acceleration that is factored into our guidance. But what gives us confidence there, as you know, is the supply second quarter of double-digit new seller growth as well and our growth playbook, those in reinvestments there really working.

And then for Ajay, on the margins, I guess, the grosses are kind of starting to flatten out in the mid-70s, which makes sense. And the take rate, I think, was down year-over-year because of the buyer shift and the higher AOV product. Is that just something we should keep in mind going forward? Should the take rate start to go down a little bit as you're getting more AOV customers? Should the gross margin reported maybe even start to be down year-over-year, even though you're generating big growth and better EBITDA? Just kind of curious how we should think about the model in the near term going forward.

Yes. Thanks for the question, Mike. I think on take rate, you nailed it. It's really just -- ties back to the average order value, right? AOVs in Q2 were up 8%. And as you said, when we mix into higher-value items, it has an effect on our take rate as a percentage going down, but clearly, higher-value items bring in higher gross profit dollars for us. So we'll take them all day long. The second part of your question on gross margin. The anchor point for our gross margin is really our consignment gross margins. They were at 89.3% and showing really healthy growth, up 90 basis points versus year-on-year. I think you should expect us to be within the 74% to 75% range. Some of it is the mix of consignment versus other direct revenues and shipping revenues. But really, I think at the end of the day, take rate connects back to consignment gross margin, both of which are really strong.

Your next question comes from the line of Bobby Brooks with Northland Capital Markets.

Congrats on the strong quarter. In the opening remarks, Rati, I believe you were talking about expanding to, I believe the term was luxury vendors and international consignors. Just wanted to double-click on that to understand what those would look like in actuality and maybe help frame the opportunity there for driving more supply?

Yes. Hi Bobby, thanks for the question. I was referring to in the prepared remarks, our drop ship channel. We're -- this year is really about testing and learning in this area, still really early days. We are happy with some of the momentum we're seeing this year, testing, learning, like I said, but also building the capabilities at the end of the day. So we started with certain categories. We've expanded to fine jewelry, watches and handbags as well. But I do believe this could be a growth driver over the next few years, and especially if we're looking at onboarding international partners as well.

And then I just wanted to know like -- I wanted to hear more about how you're thinking about the scalability of the sales force. Obviously, a few years back, you guys made the intentional shift in the hiring process, and that really resulted in improved supply trends and combine that with the new sales force incentives that's further bolstered it. But kind of what I'm getting at is with GMV up 14%, could you give us a sense for how much did the luxury manager headcount increase?

Yes. As far as efficiencies go, when we look at the sales functions, and we look at every variable function this way, whether it's operations, retail locations or sales organizations, we always really goal them on hitting a certain amount of efficiency. So let's say, low single-digit efficiencies in each of these areas. So we saw the same here on the sales side. And a few things kind of really drove that efficiency. So one of them is appointments per day. I talk a lot about that, right? How do we increase their appointments per day, the compensation structure, driving the quality of their appointments versus the quantity of their appointments, things like the Reconsign Program, the referral program, all of these things drove supply, but also helped us find and see efficiencies in the sales force.

Your next question comes from the line of Ashley Owens with KeyBanc Capital Markets.

So Rati, I think you mentioned in the prepared remarks that the quarter had highest new consignors ever. So I just wanted to dig into that a bit. I know there's been a ton of focus on the sales team, providing them with new tools to unlock supply. But just curious if you've made any tweaks to the approach, anything you're doing differently than in years past to attract new customers, if you saw a strong response to some of the other cosigner tools that you also outlined. And then additionally, just higher number of buyers become sellers, anything to kind of highlight there?

Yes. Thanks, Ashley, for the question. We are seeing momentum in new consignors 100% as well as supply. A couple of things drove that. Number one was the marketing reinvestment that we made. It's a real full funnel approach. And so really happy with what we're seeing, the efficiencies there in marketing, and then we're able to take that money and reinvest it into new sellers and grow. The second thing I would say is our growth playbook, right? You've heard me talk about that a lot, that sales, marketing and retail really coming together, meeting the customer consignor where they are. And I can give you a couple of examples of that. On the sales side, like I said, it's the compensation structure, the referral program to bring on new sellers. We made that more rich, but still very much ROI positive. We also introduced something our customers were asking for, a reconsigned feature. So it had our buyers become consignors. And that flywheel is really important for what we do. On the retail side, a few different things. 1/4 of our new consignors come from retail. We're offering now pop-up events. I talked about that in my prepared remarks, on-demand appointments. We have 3 new stores in market this year. And I'll give you an example of one, Houston, really happy with the performance over there. We're seeing 92% increase in new sellers in Houston, almost 50% more supply in that market. So just to give you -- that's just one of the stores, right? We've got a couple of others. So it gives us confidence going into Q3 as well.

Just a follow-up. So you touched on Athena a little bit, but I would be curious how much of the assortment this has now been rolled out to and any updates to metrics and rollout process you're willing to share? I think last quarter, it was called out that about 10% of the items are processed through Athena and that you were cutting processing times by 20%.

Yes. I'll start, Ajay, feel free to step in here. So as far as operational leverage and efficiencies, AI is the cornerstone of that. But Athena is also a big one, like you said. Right now, it's at 20% coverage. By the end of the year, we'll be close to 40% there, and we're on track for that. But really, at the end of the day, the objective is to cut, right, multiple dollars in cost per unit in the medium term.

Your next question comes from the line of Marvin Fong with BTIG.

Congrats on the quarter. Yes, I would just like to kind of touch on this. I don't know if this is like related to tariffs or anything, but the strength -- the AOV was very strong. Usually, it's seasonally kind of weaker. And I think you called out good performance in higher ticket items. So do you think that, that was at all tied to tariffs and people trying to maybe get ahead of that? But just -- and the other side of that question is, if you do get some better pricing that would make transactions more profitable for you and increase the LTV of customers, would you consider reinvesting some of that into more marketing? You guys have obviously driven some really nice marketing leverage, but just wanted to get your thoughts on those 2 aspects of pricing.

Yes. Thanks, Marvin. Thanks for the question. As far as performance right now in Q2 performance, I will say all of the initiatives that we've reinvested in that I just talked about around marketing, retail sales, all of those tactics and projects directly contribute to the growth. So that's number one. And that's what we believe that it's driven out of. But you brought up tariffs, I do believe we are a tariff beneficiary for many different reasons, right? Our source is the domestic closet, there's $200 billion trapped in there. And as pricing increases in the primary market, our pricing algorithms follow and we benefit and see pricing increase as well. You also brought up average order value. And yes, that's up 8%, about 8% up year-over-year. And I would say that's half price and that's half volume. And I think that's really important to know, right? As we reinvest in marketing, we're also seeing the volume come through. You also see it in our overall growth rate, right, 14% up year-over-year. 2/3 of that is volume and 1/3 of that is price. And I think your last question was around would we invest more in marketing, 100%, right? Gaining more efficiency which we continue to test there, learn there. We continue to find efficiency and our plan is to continue and then invest there. Social being paid social, we're seeing a lot of kind of momentum there as well, and we'll continue to test new channels with this more full funnel approach, like I mentioned before.

And if I may, just to build on Ashley's question there. So getting Athena up to 30% or 40% by year-end, would that be that you're expanding Athena into other categories? Or are you just going to be covering more? I think you've then started with ready-to-wear, but how exactly is that expansion going to manifest itself?

Yes, that's exactly right, Marvin. It's going to move and cover more categories, that's right.

Yes. And Marvin, just to build on that, like we often talk about Athena as an example of our focus on AI behind Athena is an artificial intelligence model. And really, what we're doing is training it, testing it and making sure that once we're comfortable with we open it to more categories. So we started with ready-to-wear, and as the model gets more and more accurate with other categories, we will continue to expand it.

Yes. Marvin, and this is Caitlin. Just one other thing to add. When we talk about the 20%, that's on total items, not yet of total value. So we really see this as not only just a 1 or 2 quarter to drive operational efficiency, but we see this as a multiyear process to getting to being much more efficient on the authentication on the processing of goods.

Your next question comes from Mark Altschwager with Baird.

On the results. Just to start, Rati, you characterized this as breakout performance. You're now guiding to low double-digit revenue growth. Just curious with the progress that you're making across many of these strategic initiatives, any update on how you're thinking about the medium-term top line algo for the platform? I guess what are the factors that would support sustained growth in this low double-digit, low teens range versus the kind of high single, low double that we were talking about entering the year?

Yes. Thanks, Mark. I was waiting for that question. I will say that 8% to 12%, you've heard me say over and over, high single-digit, low double-digit growth rate, that's optimal to plan for, I will say, it's optimal to run our business on. Could we do better most quarters? Sure, maybe. But our focus is really on profitable growth right now. So I'd say for planning purposes, that's what I would plug in.

Fair enough. And then just one on margin, Ajay, drove really nice margin leverage here in the second quarter. I guess, first, maybe help us understand where you outperformed the plan. And then as we look at the guidance for Q3 and implied for the back half, I guess it would suggest kind of less year-over-year margin expansion. So just curious, I mean, what would be different? Or what are you planning different in terms of flow-through dynamics in Q3 in the back half versus what we saw in the first half?

Yes, thank you so much for that question. We feel really good about how we are expanding EBITDA margins at the business. We -- last year -- as a reminder, last year was our first full year of adjusted EBITDA profitability. We ended the year with 1.6%. And if I look at the first half, we've slightly more than doubled that. We're kind of reporting 3.4% EBITDA margin. And our guidance for the full year 2025 implies 4% to 5% margin for the full year. So very, very pleased with the progress that we're seeing there. We expect that trajectory to continue, and it's really driven by 3 things. It's starting with the gross margin, where we have very healthy gross margins, 74% to 75%, and we see that translating nicely as we grow. You heard Rati talk about our focus on ops excellence and AI. Those initiatives are delivering good results. You can see that in our OpEx leverage in Q1 and Q2, and we expect that to continue. And finally, just our fixed cost base. We are getting good leverage on our fixed cost base, our investments in product and technology. That too will continue. And I see no structural reason why we can't be a 15% to 20% EBITDA business over the medium term.

Your next question comes from the line of Anna Glyskin with B. Riley Securities.

I'd like to circle back on the new consignor growth. I understand it just happened in the second quarter, so it's a little early to have seen repeat consigning. But just wondering if there's anything in the data about this recent cohort to suggest that this is a consumer response to tariffs or a response to increased prices in the primary market or anything to suggest that this is more of a onetime surge in nature rather than a permanent shift in consignor growth?

Hi Anna, thanks for the question. Again, we are able to kind of directly see where these new sellers are coming from, what projects and initiatives are driving these new consignors. So I mentioned our Reconsign Program, our referral program, our reinvestment in marketing. So we do believe that this is not a onetime benefit. This is now the second quarter, right, that we're seeing double-digit growth there. And then as far as the change in the cohorts, any changes, I'm not seeing any changes there. They are pretty consistent, mostly Gen Z, Millennial is almost 55%, high frequency, medium to high income. And I will say they buy and sell often. If anything, I think we're getting better at targeting this group in these cohorts and these flywheel.

And then turning to the potential benefit from Athena now taking over 30% to 40% of intake. Anything to share on what the potential savings per unit could be? I know you referenced a couple of dollars per unit, but anything you can share there incrementally as to what the opportunity could be as that's more fully rolled out?

Yes. Thanks for the question. I can take this one. So Athena today is about -- is touching about 20% of the items, and we expect it to touch 30% to 40% of the items by year-end. When you look at the impact it's having, I would highlight it as one of the key drivers behind the operating leverage we're seeing on the ops and tech line. In Q2, we saw 310 basis points of leverage on that particular line. And we think that Athena is behind that. It will continue to drive leverage as we go ahead. Internally, we obviously look at the cost per item. So we look at our -- whenever we look at our operations center, we look at what does it cost for us to process and authenticate each item. And Rati's reference to how we see Athena playing out is really talking about how we believe that we can take out multiple dollars of cost on a per item basis as we scale Athena across our business.

Your next question comes from the line of Jay Sole with UBS.

Can you just talk about the luxury space overall? Some of the public European luxury companies have talked about maybe a slowdown in luxury spending at a full price level. Can you talk about the interplay between that trend and how that benefits or just affects the resale market?

Yes. Thanks, Jay, for the question. As far as the luxury space and the slowdown or any kind of impact that we're seeing on resale, that's the interesting best thing about our business. It's the diversity of product, the multiple categories, multiple brands. So some things are out of favor, other things are in favor, right, in our pricing algorithms. So for example, jewelry is really hot right now. We're selling that really well. We've updated prices or increased prices on both branded and unbranded, while maybe another brand is out of favor and you have to price accordingly. So we're seeing both things there. We don't see that having a huge impact on our business. I will say when the luxury space increases, let's say, tariffs do impact their business and they have to increase their prices in the primary market, we usually also increase our prices, so we can benefit from that.

And maybe just to add to that, you hear us talk about the $200 billion TAM that drives our business. As a supply-driven business, we get excited about the fact that we see about $200 billion of items that are already in people's closets. Our growth playbook excels at unlocking that supply and bringing it on to our platform, which is a source of growth for us. So as the primary market goes through its ups and downs, the effect on us is hard to sort of tease out because we have enough TAM to go after.

Maybe just one more, if I could. Just on the direct revenue segment gross margin, a little bit different from last quarter. Can you just talk about what the differences were? Is that seasonal? And where do you expect the margins in that segment to trend for the second half of the year?

On direct, was that your question?

Yes. Yes.

Thanks for that question. Yes, direct, we've rebuilt our direct business to be a much more attractive and more profitable part of our portfolio today. You've heard us talk about how we expect margins -- gross margins in that revenue stream to be between 15% to 25%, which I acknowledge is a pretty wide range. And really, it comes back to -- it comes down to the mix of what we sell of the items being sold through that revenue stream. For example, when we sell higher-priced items like watches or high-end jewelry, our percentage margin on those products is going to be lower, but the dollars are very attractive.

Your last question comes from the line of Bobby Brooks with Northland Capital Markets.

And just circling back on Athena, I was just curious where in your inbound process do you see the most opportunity to cut dollars out? And then I feel like it would be helpful for investors to maybe draw a bridge of how applying Athena to those areas could drive those costs lower.

Thanks, Bobby. Athena as a project, as we've spoken about it, is really touching the -- what happens to an item from the moment it arrives in our fulfillment centers until it's made available, right? So think about it as a project that is driving efficiencies into how we set up an item, how we create that listing and just make sure that it's an authenticated item. That's sort of the core of what Athena is looking at right now. I would -- I'd say Athena is an example of what we're doing in artificial intelligence. You've heard about us talk about how AI is really focused on our core strategic moats, right? So it's pretty pervasive, right? When you look at how we acquire supply, initiatives like smart sales and smart prospects are driving efficiencies, leveraging our data to make our sales team more efficient. AI is also driving our pricing, which is at the core of how we help our sellers find the best value for what they're selling. It's in multiple places. And I think what you're seeing in our OpEx leverage is really a result of how we brought that to bear on the areas where we can make massive differences in our business.

And at this time, I will now turn the call back over to Rati Levesque, CEO, for closing remarks.

Thank you. First of all, I just want to thank you all for your questions, and we appreciate you joining us today. I want to extend a sincere thank you to every member of The RealReal team. These impressive results we've shared today are a direct reflection of your hard work and disciplined execution across our strategic pillars. I couldn't be more proud of your dedication to our mission and what we've accomplished together. The momentum we have is real, and it's fueled by your commitment to operational excellence and to defining the next era of luxury resale. Thank you all, and we'll speak to you again soon.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.