Executive Summary / Key Takeaways

• The RealReal (NASDAQ: REAL) is executing a strategic pivot focused on profitable growth, leveraging its position as the largest online marketplace for authenticated luxury resale.
• Recent financial results, including an 11% revenue increase and positive Adjusted EBITDA of $4.1 million in Q1 2025, demonstrate momentum driven by increased supply, higher average order values, and significantly improved direct channel profitability.
• Proprietary technology, including AI-powered authentication (Athena) and pricing algorithms, is a key differentiator, driving operational efficiency, enhancing trust, and improving unit economics.
• The company's "growth playbook," combining targeted sales efforts, refined marketing, and supply-generating retail stores, is successfully unlocking profitable supply, evidenced by the highest new consignor growth in over two years in Q1 2025.
• Management reaffirmed full-year 2025 guidance, projecting 8-9% GMV/Revenue growth and Adjusted EBITDA expansion, signaling confidence in continued execution despite macroeconomic uncertainties and competitive pressures.

The Luxury Resale Landscape and The RealReal's Strategic Evolution

The RealReal stands at the forefront of the burgeoning luxury resale market, a dynamic intersection of value, sustainability, and aspirational consumption. Founded in 2011, the company set out to revolutionize the traditional consignment model by creating a trusted, authenticated online marketplace for pre-owned luxury goods. This vision, built on the pillars of expertise and a frictionless end-to-end service, aimed to tap into the vast, underutilized value held within consumers' closets – a market opportunity estimated to be over $200 billion in the U.S. alone.

While early years saw rapid growth fueled by investments and capital raises, including a 2019 IPO and subsequent convertible debt issuances, the path to profitability proved challenging, marked by historical net losses and accumulated deficits. Recognizing the need for a more sustainable model, The RealReal embarked on a strategic transformation around late 2022. This involved foundational changes, notably a recalibration of its take rate structure to incentivize higher-value consignments and a significant reimagining of its direct revenue business to focus on more profitable inventory sources like out-of-policy returns and strategic direct purchases. These shifts were designed to improve unit economics and accelerate the company's trajectory towards profitability.

In the competitive arena, The RealReal faces a diverse set of players. Direct competitors include broad marketplaces like eBay (EBAY), social commerce platforms like Poshmark (POSH), mass-market resale sites like ThredUp (TDUP), and vintage/handmade marketplaces like Etsy (ETSY). While eBay boasts immense scale and operational efficiency, its authentication processes are less specialized for luxury goods compared to The RealReal. Poshmark excels in community engagement but lacks the rigorous, centralized authentication that is The RealReal's hallmark. ThredUp and Etsy primarily operate outside the high-end luxury segment. The RealReal differentiates itself through its deep expertise in authentication, its curated luxury inventory, and its multi-channel approach combining online, retail, and personalized service. However, historically, The RealReal has lagged some competitors in overall financial health, particularly in achieving consistent profitability and positive cash flow, and has faced higher operational costs associated with its high-touch model. Its revenue growth has also been more volatile compared to some larger, more diversified platforms.

Technological Moats and Operational Efficiency

A critical component of The RealReal's strategy and a key differentiator in the competitive landscape is its investment in proprietary technology and operational processes. The company leverages a wealth of data from over 40 million item sales since inception to power its platform and drive efficiency.

Core to its competitive moat is its authentication technology, including tools like Vision and Shield. This expertise is crucial in building trust, a paramount factor in the luxury resale market, and directly addresses a key vulnerability for less specialized platforms like eBay or Poshmark when dealing with high-value items. While specific quantifiable accuracy rates compared to competitors are not detailed, management emphasizes the rigor of their process.

Recent technological advancements are directly targeting operational efficiency and improved unit economics. The AI-enabled product intake process, "Athena," launched in Q1 2025, is designed to automate and streamline the journey of an item from arrival at the authentication center to being listed on the site. Early indications show promising results, with units processed via Athena experiencing an estimated 20% reduction in processing times. This speed improvement is not just an operational gain; it enhances the consignor experience by getting items listed faster and contributes to faster sell-through. Athena is currently focused on ready-to-wear but is planned for expansion to other categories like shoes and handbags.

Furthermore, The RealReal utilizes sophisticated algorithms for item pricing, with the majority of units now launched with algorithmic pricing. These algorithms incorporate internal data (historical sales, page views, obsession counts) and external signals (primary market pricing, search trends) to determine optimal market prices, aiming for rapid sell-through at the highest possible value for consignors and the company. The next phase involves applying AI to the discounting cadence, moving beyond manual, rules-based approaches to potentially drive a better balance between price and sell-through.

These technological initiatives are central to The RealReal's strategy to drive operational leverage. By automating processes, improving accuracy, and optimizing pricing, the company aims to reduce human intervention, lower costs per unit, and improve overall profitability, directly addressing historical operational cost challenges relative to more automated competitors.

Performance Reflecting Strategic Execution

The strategic shifts and operational focus are beginning to yield tangible results, signaling a potential turning point for the company. Q1 2025 results demonstrated continued momentum, building on the significant progress made in 2024.

For the three months ended March 31, 2025:

• Total Revenue: $160.0 million, an 11% increase compared to $143.8 million in Q1 2024.
• GMV: $490.4 million, a 9% increase compared to $451.9 million in Q1 2024.
• Consignment Revenue: Increased 7% to $123.8 million, driven by higher consignment GMV (5% AOV increase, 3% order increase) and a slight take rate improvement (38.6% vs 38.4%).
• Direct Revenue: Surged 61% to $20.5 million. This significant growth was attributed to higher sell-through of inventory from out-of-policy returns and the "Get Paid Now" program. Crucially, the direct revenue gross margin dramatically improved to 25.5% from 3.3% in the prior year, reflecting the success of the reimagined direct business focused on high-value inventory. Management expects direct revenue to remain in the 10-15% range of total revenue going forward, with margins around 20%.
• Shipping Services Revenue: Increased 2% to $15.8 million, primarily due to higher order volume.
• Gross Profit: $120.0 million, up 12% year-over-year, resulting in a gross margin of 75.0%, a 40 basis point improvement. This reflects operational efficiencies and the improved direct margin, partially offset by a decrease in shipping services margin.

• Operating Expenses: Increased 6% to $132.8 million but leveraged significantly as a percentage of revenue, improving by 410 basis points. This leverage was attributed to AI-led efficiency efforts, marketing ROI improvements, and increased automation.
• Adjusted EBITDA: Positive $4.1 million, a substantial $6.4 million improvement from negative $2.3 million in Q1 2024. Adjusted EBITDA margin expanded over 400 basis points.
• Net Income: $62.4 million, compared to a net loss of $31.1 million in Q1 2024. This was significantly impacted by non-cash items, including a $42.5 million unrealized gain on the change in fair value of warrant liability and a $37.1 million gain on extinguishment of debt related to the 2025 Note Exchange.

These results underscore the effectiveness of the company's focus on profitable supply and operational efficiency. The significant improvement in direct gross margin is a direct outcome of the strategic decision to refine that business. The leverage in operating expenses points to the early benefits of technology and automation.

Liquidity remains a key area of focus. As of March 31, 2025, The RealReal held $139.6 million in cash and cash equivalents, alongside an accumulated deficit of $1,191.4 million. Operating cash flow was negative $28.3 million in Q1 2025, influenced by working capital seasonality and timing of incentive payments. The company expects operating and free cash flow to be back-half weighted in 2025. A notable development was the February 2025 debt exchange, which reduced total indebtedness by $36.7 million and extended maturities, enhancing the capital structure. The remaining $26.7 million principal of the 2025 Convertible Senior Notes matures in June 2025. The company believes existing cash is sufficient for at least the next 12 months, and was in compliance with its debt covenants as of March 31, 2025.

Outlook and Risks

Looking ahead, The RealReal reaffirmed its full-year 2025 guidance, signaling confidence in its strategic direction and execution capabilities.

For the full year 2025:

• GMV: Expected in the range of $1.96 billion to $1.99 billion, representing 8% growth year-over-year at the midpoint.
• Revenue: Expected in the range of $645 million to $660 million, representing 9% growth year-over-year at the midpoint.
• Adjusted EBITDA: Expected in the range of $20 million to $30 million, implying 200 to 300 basis points of margin expansion year-over-year.
• Capital Expenditures: Expected to be roughly 2% to 3% of total revenue.

For the second quarter 2025:

• GMV: Expected in the range of $476 million to $486 million, representing 9% growth year-over-year at the midpoint.
• Revenue: Expected in the range of $157 million to $161 million, representing 10% growth year-over-year at the midpoint.
• Adjusted EBITDA: Expected between $3 million and $4 million, representing 350 basis points of margin expansion year-over-year at the midpoint.

Management anticipates a more consistent Adjusted EBITDA margin across the first three quarters of 2025, with a typical seasonal step-up in Q4. They acknowledge potential challenges from a more uncertain macroeconomic environment but believe their model's flexibility and domestic supply base position them favorably.

Despite the positive momentum and outlook, several risks warrant investor attention. The company's history of losses means there is no guarantee of sustained profitability. Reliance on consumer discretionary spending makes the business susceptible to economic downturns. Competition remains intense, with larger players potentially leveraging greater resources. The accuracy of authentication is paramount, and any perceived failure could severely damage trust and reputation. Ongoing litigation, including the lawsuit with Chanel and a shareholder class action, presents potential financial and operational burdens. The May 2024 warehouse fire, while partially covered by insurance, is expected to result in liabilities exceeding coverage amounts. Furthermore, the accounting treatment for warrant liabilities and convertible notes can introduce volatility to reported financial results.

Conclusion

The RealReal appears to be in the midst of a strategic renaissance, moving beyond its growth-at-all-costs phase to a more disciplined pursuit of profitable expansion. The Q1 2025 results, building on the achievement of full-year positive Adjusted EBITDA and Free Cash Flow in 2024, provide tangible evidence that the foundational changes and focus on operational efficiency are yielding results.

The company's core investment thesis is increasingly centered on its ability to leverage its unique position in the luxury resale market, powered by differentiated technology and a multi-channel approach to unlocking profitable supply. The success of initiatives like the reimagined direct business, the "growth playbook," and AI-driven operational improvements are critical indicators to watch. While macroeconomic uncertainty and competitive pressures persist, The RealReal's reaffirmed guidance suggests confidence in its ability to execute and continue its path towards sustainable profitability, making it a compelling, albeit still higher-risk, opportunity in the evolving luxury landscape.