The RealReal, Inc. (NASDAQ:REAL) Q2 2022 Earnings Conference Call August 9, 2022 5:00 PM ET
Company Participants
Caitlin Howe – Vice President of Investor Relations
Julie Wainwright – Founder
Rati Levesque – President and Co-Chief Executive Officer
Robert Julian – Co-Chief Executive Officer and Chief Financial Officer
Conference Call Participants
Simeon Siegel – BMO Capital Markets
Irwin Boruchow – Wells Fargo Securities, LLC
Rick Patel – Raymond James
Anna Andreeva – Needham and Company
Kunal Madhukar – UBS
Susan Anderson – B. Riley FBR, Inc.
Michael Binetti – Credit Suisse
Tom Nikic – Wedbush Securities
Lauren Schenk – Morgan Stanley
Noah Zatzkin – KeyBanc Capital Markets
Ashley Helgans – Jefferies LLC
Edward Yruma – Piper Sandler
Oliver Chen – Cowen and Company, LLC
Marvin Fong – BTIG
Operator
Good afternoon, and welcome to The RealReal Second Quarter 2022 Earnings Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Caitlin Howe, VP of Investor Relations of RealReal. Please go ahead.
Caitlin Howe
Thank you, operator. Joining me today to discuss our results for the period ended June 30, 2022, our Co-Interim CEO and President, Rati Levesque; and Co-Interim CEO and Chief Financial Officer, Robert Julian.
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 for which historical financial measures we have provided reconciliations to the most comparable GAAP measures in our earnings press release. In addition to the earnings press release, we issued a stockholder letter earlier today, both of which are available on our Investor Relations website.
I would now like to turn the call over to Rati Levesque, Co-Interim CEO and President of The RealReal for introductory remarks.
Rati Levesque
Thanks, Caitlin, and thank you, everyone for joining our earnings call today, Robert and I will provide some opening remarks and commentary on the business, and then we will go into our Q&A session. During the second quarter, we announced that our Founder and CEO, Julie Wainwright, will be moving on at the end of this year. We thank Julie for her incredible vision, tireless efforts and strong leadership over the past 11 years. Robert and I are energized in our new roles as Co-Interim CEOs and we are enthusiastic about the direction of the business.
During the second quarter of 2022, we delivered solid financial results. While topline GMV growth was slightly lower than expected, we did meet our revenue projections and we exceeded our guidance on adjusted EBITDA. While our Q2 GMV growth rate was 30%, we did experience some downward pressure due to a sales labor shortfall, and a change in product mix.
First from the supply side, we entered the quarter needing more sales people, and this hiring challenge was exasperated by a higher than normal attrition in our sales force. We proactively implemented multiple strategies to address the labor shortfall, including hiring and backfilling sales roles, selectively increasing compensation in key markets and utilizing technology for consignors to self-serve. We believe these actions combined with attrition returning to normal levels at the end of Q2 are meaningful steps in addressing the underlying labor issue.
Additionally, our consignment leads and opportunities continue to remain robust. Taken together, we believe we are well positioned for a significant step-up in supply for the fourth quarter.
The second pressure on GMV in Q2 came from the demand side. Starting in the first quarter and accelerating into the second quarter, there was a shift in consumer demand. The shift was from higher priced items, like fine jewelry and watches to lower priced items like ready-to-wear and shoes.
While high value continues to perform, the second quarter mix more closely mirrored are pre-COVID product mix as consumers go back to the office, travel more and attend events. Therefore, the higher proportion of GMV coming from apparel and shoes resulted in improved take rates year-over-year, but also a reduction in average order value. While we expect demand to normalize across categories at some point, it occurred more quickly than anticipated.
Overall, we are optimistic about the direction of the business. We believe our demand remains strong as both new and repeat customers continue to grow. Furthermore, we believe our flywheel has strong momentum and is helping us to reduce our buyer acquisition cost. Finally, we are taking a close look at expenses to more effectively manage our costs, which Robert will explain further.
I’ll now pass it over to him for a brief financial update.
Robert Julian
Thanks, Rati. We are pleased with our financial results for the second quarter. Despite some pressure on GMV, as Rati mentioned, we were able to effectively manage our cost and deliver better than expected adjusted EBITDA results for the quarter. For example, we implemented a modest reduction in force in our corporate support functions, slowed hiring for open support roles and reduced discretionary spending. We will continue to monitor the broader economic environment and trends, and we will be prepared to implement further contingency actions if necessary.
In Q2, we grew GMV 30%, revenue 47% and narrowed our adjusted EBITDA loss, both sequentially and year-over-year, exceeding our guidance for the quarter. However, as a result of our supply shortfall in Q2 and the shift in consumer demand, we believe it is prudent to reduce our full-year 2022 guidance. Notably, we continue to project that The RealReal will be profitable on an adjusted EBITDA basis in 2024 and we are on track to achieve our Vision 2025 adjusted EBITDA target.
As we’ve communicated previously, these financial targets and projections are based on three primary levers; topline growth, variable cost productivity, and rigorous fixed cost discipline. We delivered on all three of these elements in the first half of 2022. As Rati mentioned, we are energized about our long-term strategy and prospects and for the opportunity to continue to lead this business toward profitability and our Vision 2025 goals.
With that, we will now go into our Q&A session.
Question-and-Answer Session
Operator
Thank you. We will now begin our question-and-answer session. [Operator Instructions] And the first question will come from Simeon Siegel from BMO Capital Markets. Please go ahead.
Simeon Siegel
Thanks, everyone. Hope you’re all doing well. I was hoping we could talk through the supply versus demand factors that you mentioned. So I think you talked about the drop in ASP and the improved take rate, which sounded like that was a shift in demand from the items. And then on the other hand, we had the supply-driven shortfall that you talked about. So can you just maybe help us think through that slight miss in GMV versus the in line revs broken down into the supply versus demand dynamic? Thank you.
Rati Levesque
Sure. I mean – so as most of you know, we’re a supply-driven company, so I will say that. And the miss in supply, like we talked about, came out of a couple different factors. Early in Q2, we saw kind of the Great Resignation Part Two, and that brought down growth. It brought down some of the GMV miss that we’re seeing in Q3, specifically. And what – though I separate those two things that is the supply side and we saw that effect on GMV.
And then the second thing that happened, like we mentioned was AOV and ASP came down. And so we saw that consumer shift really back to pre-COVID numbers back in 2019 where that shift of ready-to-wear increased.
Simeon Siegel
Okay. All right. Thanks. And then maybe any – obviously not intentional at the beginning, but any good learnings from the technology for consignors to self-serve, does that maybe help with how you’re approaching labor going forward?
Rati Levesque
Yes, for sure. During COVID, it was kind of forced upon us and that was the silver lining I would say. And what we saw there was stores, van pickup, virtual, all of those self-serve channels really helped our luxury managers. That’s what we call our sales force become more productive. So we saw productivity go up. And really what we’ve been focused on is making sure there’s the least amount of friction through that channel so our luxury manager can pick up more items per day. So we’ve seen that go up overall over the last few years, driven out of our self-service technology. So some really good learnings there and we continue to optimize.
Robert Julian
So Simeon, also one thing – this is Robert. I’ll add a little context about the GMV and our expected growth rates. So in the first half of the year, we grew GMV roughly 30% and it was pretty consistent both in Q1, Q2, pretty close to 30%. We’ve talked about some pressure on supply due to labor and in some changes in average selling price and everything, but at the midpoint of our guidance, our GMV growth rate is still sort of in the mid-20s, 23% or so about at the midpoint. So we’re still growing quite rapidly. We’re growing north of 20%, just not the same 30% that we grew in the first half. So while it’s slow and we’ve had some headwinds, it’s still not a bad growth rate at 23-plus percent growth.
Simeon Siegel
Perfect. All right. Thanks a lot. Everyone have best of luck for the rest of the year.
Rati Levesque
Thank you.
Operator
And the next question will come from Ike Boruchow from Wells Fargo. Please go ahead.
Irwin Boruchow
Hey, thanks. Robert two questions for you. Just I’m trying to do the math real quick before I get my question. But it looks like you’re looking for a decent amount of adjusted EBITDA improvement year-over-year in the fourth quarter based on what’s implied. I guess I’m just curious, am I looking at that right? And is there something – some levers that you’re pulling that are impacting 4Q more than 3Q. And then back to the AOV question, I guess, when we assume AOVs into the back half of the year, should we assume that this mixed dynamic kind of continues and then we’re going to kind of run rate negative maybe mid single-digit year-over-year growth rate on the AOVs as we move through Q3 and Q4? Any help there would be great.
Robert Julian
Yes. Sure. I suspect that part of what you’re doing is kind of triangulating our year-to-date results and our Q3 guidance, and you can sort of get into the Q4, what that suggests of the adjusted EBITDA. So addressing that directly, the midpoint of our adjusted EBITDA for Q3 is $28 million loss, which is a 19%, is a percent of revenue. And if you triangulate to the middle of our guidance for Q4, you do get to $13 million of adjusted EBITDA for Q4 and roughly 7.5%. So single-digit adjusted EBITDA margin loss in Q4.
And the logical question is why so much improvement and what drives that. Part of it is volume. And we continue to be a seasonal business in our largest quarter in terms of GMV and revenue is always Q4. And there’s a significant step up in GMV between Q3 and Q4 at the midpoint of our guidance, call it a $100 million. That has a flow through. I would say that the take rates and the gross margin that is assumed in Q4 is not that different in Q3 where you get a lot of this leverage is in our support functions and our fixed cost.
And what we’re projecting is those costs will stay relatively flat from Q3 to Q4 on a 100 million more dollars of GMV. And that creates tremendous leverage. We’ll also continue to experience good productivity in our variable cost in Q4. And so that’s what leads us to that result in Q4 that’s implied in our full-year forecast and into Q3 guidance that we gave specifically.
Rati Levesque
And we do expect mix to continue. So we do expect – I think that was the last part of your question, ready-to-wear, this is the new normal we believe for us, back to pre-COVID numbers.
Robert Julian
Yes. Not a continued shift or degradation sort of consistent that maybe we’ve reached this new normal quicker than we previously anticipated, but what probably at a level that will stay fairly stable going forward.
Irwin Boruchow
Thank you very much.
Rati Levesque
Thank you.
Operator
And the next question is from Rick Patel from Raymond James. Please go ahead.
Rick Patel
Thanks. Good afternoon, everyone. Question on the labor-related supply shortfall. Does this pertain to any particular categories or price points? And in the past I think when you’ve had supply constraints, you’ve leaned on branded partners to cushion the negative impact. I’m curious if you see the opportunity to do the same this time around.
Rati Levesque
So, no, this is not specific to price point or a category supply. When I talk about a labor shortfall, I’m talking about people out in the field, our sales team. So like I mentioned, sorry if I’m repeating myself, I just want to make sure it’s crystal clear. We saw attrition increase in Q2, we call it The Great Resignation Part Two. And that’s what had the biggest effect to our numbers into supply. So it wasn’t category or pricing specific. As far as branded partners, that is more of a brand play for us. We have not used that for as a supply lever, but it is a big branded and awareness play for us. So we’ll continue to do those like we have been. And we’re really focused in general on profitable growth.
I think it’s important to say that a part of the mix was a lot of this direct revenue that we’ve had in the past, which was maybe 30%, 30% of our inventory in Q1 – sorry, as a percentage of revenue was about 30%. That’s reduced to 28% this month, this quarter. And that’s because again, we are focused on profitable growth. Direct revenue, just as a reminder to everyone is our items that we purchased, especially in the vendor channel. We did that during hard times in COVID, and needed the inventory as we couldn’t go back into people’s home. And we’re really limited that category again, focused on profitable growth.
Rick Patel
And on that point, can you help us think about the magnitude of growth in the direct segment and back half [indiscernible] how we should think about gross margins? I believe your gross margin comparisons get a little bit more difficult there, particularly in fourth quarter. So just curious what that trend line looks like?
Robert Julian
So Rick, let me talk about sequentially how much of this direct revenue, the owned inventory, what percentage that is of our total revenue. And if you go back to 2019, or before, that percentage tended to be between 15% and 20%, and that is our lower margin business. In Q1 of this year, that percentage had risen to 34%. In Q2, we had reduced it, and we started talking about deemphasizing that, and sequentially reduced from 34% to 28% of our total revenue. By the time we get out to the end of the year, it should be in the low-20s. And eventually what we’d like to do is return back to the 15% to 20% that we saw back in 2019 and prior to that, it does have a pretty significant impact on our expected gross margin.
So again, gross margin in the first half of the year was 55%, back in 2018, 2019 and so on when we had a smaller proportion of our revenue coming from direct, our gross margin was in the mid-60s. Now we’ll probably recover about half of that roughly in the second half of the year. And we’ll continue to improve as that proportion comes more back in line, but hopefully that answers your question.
Rick Patel
Thank you. Good luck in the back half.
Robert Julian
Thank you.
Rati Levesque
Thank you.
Operator
And the next question is from Anna Andreeva from Needham and Company. Please go ahead.
Anna Andreeva
Great. Thank you so much, and good afternoon, guys.
Robert Julian
Hi, Anna.
Anna Andreeva
Hi. Have you quantified how much of the shortfall in GMV was the result of this labor supply-related shortages? Curious if you’re tracking in line of the 3Q GMV guidance currently, or do you guys need trends to accelerate to get there? And secondly, I just wanted to make sure, I think in the shareholder letter, you’re referring to continued topline growth as one of the levers to reach the profitability goals. Are they no longer based on 30% plus growth rate you guys talked about previously and if not, is there a topline target that we should think about that you’re basing the longer-term outlooks on? Thank you so much.
Robert Julian
So Anna, let me take the second part of the question because I think it’s a good one relative to our projected growth rates. And one of the questions that came up when we had Investor Day and we talked about Vision 2025 was a growth rate that was 35% is assumed in our projections. And I think what we’re demonstrating and what we feel confident in is that we can actually achieve our adjusted EBITDA goals and our cash flow goals, in fact, at a lower growth rate. And we haven’t – we’re not providing a new update on what the topline might look like or what the growth rate might look like. But what we’re hopefully demonstrating is we will address our cost base and we will find productivity and we will focus on more profitable growth as opposed to less profitable growth. And our order of priority in terms of importance in our Vision 2025 was first adjusted EBITDA, then revenue, then GMV.
And so again, I think that our full-year forecast and our re-guide demonstrates that, admittedly, it’s a fairly large reduction in GMV at the midpoint, but a much, much smaller miss on the adjusted EBITDA line. And I think that it’s something that we can close that gap and we feel confident we will make up in our Vision 2025 path. But it is true that we will feel like we can make our goals even at a less aggressive growth rate than what we had before by the means that I just described.
Rati Levesque
Yes. I agree with that. And I’d say one, to answer the first part of your question more directly, I’d say the GMV miss was 75% driven to supply – driven by supply and about a quarter driven out of the shift in consumer spend. I do believe we’re tracking the Vision 2025. It’s important to remember that. And even the back half of the year, what we’re focused on right now is getting that labor all hired up and trained up in Q3 to set us up for great Q4. And that’s really the name of the game right now.
Anna Andreeva
Very helpful. Thank you so much, guys.
Rati Levesque
Thank you.
Operator
The next question is from Mark Altschwager from Baird. Please go ahead.
Unidentified Analyst
Hi. This is [indiscernible] for Mark today. Just to follow-up on the supply issues that we’ve been talking about. Can you parse out is there any effects coming from competitive factors, not just the salesforce disruptions that we’ve talked about as we’ve seen more platforms and brands themselves going after these categories?
Rati Levesque
Yes. Thanks for that question. I mean, I think that’s the good news. That’s the silver lining. The opportunities on new and repeat sellers are very strong. The engagement is there. The growth is there. All looking good. It really was a factor of labor. There was no other hidden issues. It was just getting hired up. And like I mentioned, we already needed to grow that team by 20%, 25% and the combination of not being able to grow that team fast enough and the attrition volume was tough for us.
Robert Julian
And I will add to that, there is a little bit of a tail to being under hired in the salesforce and trying to catch up. And then as Rati mentioned, those folks do have to go through training and there is some learning curve and they’re not a 100% productive immediately. And so there is a little bit of a tail that even when we do get fully hired, we do have to have a little bit of time for folks to get fully trained and be fully productive, like somebody who’s been on the job longer. And so that’s all – that’s what’s reflected in our current projections and forecast.
Unidentified Analyst
Okay. Thank you. And then just as a follow-up there. So we’ve talked about how – there’s been a shift into apparel. Are you seeing any differences in the new customers that you were bringing online versus your existing customer base, maybe as people are attracted to resale because of inflationary pressures?
Rati Levesque
No difference in the cohort. It really is just about the consumer pattern that’s shifted to pre-COVID numbers.
Unidentified Analyst
Okay. Thank you.
Rati Levesque
Thank you.
Operator
The next question is from Kunal Madhukar with UBS. Please go ahead.
Kunal Madhukar
Hi. Thanks for taking my questions. A couple, if I may. One, what is the risk that – there is a Great Resignation Part Three, and how would you address that? That would be one. And the second would be, in terms of the supply mix, so Rati, you talked about, GMV being impacted 75% because of supply issues. So how much did you know having stores kind of help with the supply versus if you didn’t have stores? Thank you.
Rati Levesque
Thank you. Yes. As far as The Great Resignation Part Three, this is not a part of what we’re looking at every day. The compensation, we’ve done multiple things to right size supply and to kind of get ahead of that. We’ve right sized compensation, the self-service piece so that we’re not so labor dependent is really important. And then we’ve added leadership across the board on the sales side, bringing in a new CRO and making sure that we have the right people on the ground. So it’s interesting, we saw this happen in the back half of 2022 on the op side. And we did all of these things to make sure culture career growth, to make sure that it didn’t happen the second time. And the good news is all those things that we had implemented worked during The Great Resignation Part Two. So this is now the sales piece of it.
Robert Julian
And we’re starting to see it recover already, right. Rati, we’re starting to catch up. And so we’ve seen the trend improve from when we have the biggest issue, we are starting to recover.
Rati Levesque
Right. And I think the market is shifting. As I’m sure as a lot of you are seeing, we are seeing that happen. We’re seeing retention numbers getting better. And again, our focus now is getting all of those new hires up to speed to execute on Q4. And then I think your second question was how did the stores perform? The stores continue to be quite healthy, especially as an acquisition tool on the seller side. 30% of our sellers continue to come in from stores. The payback or break even is in one-year. So that is also really great. But we focus on supply and that piece, it has made the sales team more productive because of the self-service channel. And we’ll continue to optimize. And we’re opportunistic. We keep saying that about stores and about new ones. We said that next year we’d open from anywhere from one to three stores and that continues to be our thinking as of now.
Kunal Madhukar
Okay, great. And one more, if I could, and this is with regard to – on the economic or the macro fears and consumer discretionary spend and what have you, concerns around that? Are you seeing a trade down in consumer spend? So the AOV that maybe attributed to mixshift, but even within apparel, are you seeing people kind of buying low? Thank you so much.
Rati Levesque
When we are not, it really is just mirroring our pre-COVID numbers back to 2019. So we aren’t seeing anything trade down within the category. It’s just more category mix specific.
Operator
Thank you. And the next question will be from Susan Anderson from B. Riley. Please go ahead.
Susan Anderson
Hi, good evening. Thank you for taking my question. I guess just to follow-up on the guidance. So the lower EBITDA sales with EBITDA being lowered less, I guess I’m curious what expense areas you think you’re able to flex more, I guess now to get to that bottom line, even though that you brought the topline down?
Rati Levesque
We’re looking at multiple things. We’re looking at everything from tech leverage to variable and fixed leverage, marketing spend. And the good news is we’re seeing that flywheel effect. I’ll let Robert add on here, but we are – there are many expense areas that we’ve tackled already, and that we’ll continue to tackle both on a project, people and leverage basis.
Robert Julian
Yes. And we’ve gone through a couple exercises to examine our cost structure, to put in cost reduction actions, which I mentioned earlier in further contingency plans. But I will say Susan, that largely the benefit to this Q4 result that’s implied in our full-year guidance really is maintaining the cost structure as we have put it in place the fixed cost structure for Q3 to continue into Q4 essentially flat on a $100 million more of GMV. But we’ll continue to monitor it. And we’re always looking for places to be more productive and more efficient. I didn’t really talk that much about our variable costs, but we continued to look at the productivity of our sales force and the efficiency of our retail footprint, and our entire operations, inbound and outbound and authentication. We’re constantly looking at ways to continue to become more productive and efficient.
Caitlin Howe
Hey, Susan, this is Caitlin. The other thing I would just add in and outside of the operating expense and the good cost controls is really gross margin improvement in the back half is direct, becomes a smaller percentage of total revenue. We’re going to see some pickup on the gross margin line too.
Susan Anderson
Okay, great. That’s really helpful. And then also, I just also wanted ask about the AOV and take rates, I guess now with the mix shift kind of going back to pre-COVID. How should we think about that going forward? Should we think about this quarter as kind of being the right percentage levels now?
Robert Julian
Yes. I’ll start on take rate, which has been pretty consistent. I’m going to say, it’s been between 35% and 36% in the first half of the year. I think that it’s roughly in that range in the second half of the year. So even with all the shifts and movements and so on, on average, it’s sort of modeling out to be fairly consistent throughout the entire year.
Susan Anderson
Okay, great. Thanks so much. Go ahead.
Rati Levesque
Sorry, go ahead. Was there another part of your question?
Susan Anderson
Just the AOV and the take rate levels.
Robert Julian
Yes. So AOV has had some pressure on it. As we said, average selling prices are down slightly. I think units per order are fairly consistent, maybe slightly up. Net-net, it’s a small decline in average order value. We’ll say that there was a very unusual result that’s worth mentioning in prior year as a comparison from Q2 of this year to prior year. I think our average order value last year was $520, which is really an outlier. The full-year was under $500 prior year, but Q2 was $520. So we had a very strange compare. And what we’re seeing now is AOV in the $485 to $490 range. I think we see a little drop off in Q2, but kind of a return to that level maybe a little higher in Q4. But on average, somewhere in the $480 range for the full-year.
Rati Levesque
And it’s important to note I think the take rate – take rate usually goes up and down based on product mix and commission changes. We did make a commission change in Q4 of last year in unbranded jewelry and items under $100. We also made a commission change this quarter in Q3 for items under $50. So you do see those move with again, product mix of being the biggest factor and then, of course, our commission changes.
Robert Julian
Yes. That’s a good point, Rati. By category, we’ve been consistent or maybe a little more aggressive in terms of take rate, it’s being offset by some reduction due to mix. And I think the net of all that is what I described before that it’s a wash more or less in terms of our expected take rates in the second half of the year versus the first half of the year.
Susan Anderson
Got it. Okay. Great. Thanks for all the details guys.
Rati Levesque
Thank you.
Operator
And the next question will come from Michael Binetti from Credit Suisse. Please go ahead.
Michael Binetti
Hey. Thanks for taking our questions here. So Robert last quarter, I think you told us that the 1,900 basis points of OpEx leverage. I think you said 1,600 basis points of it was on those fixed costs that you focused us on at the Investor Day and about 250 on variable. Can you update us on what that was in the second quarter you had roughly the same OpEx leverage about 1,850 I think?
Robert Julian
Yes. So what I have is our total OpEx leverage excluding stock-based compensation was roughly 2,900 basis points year-over-year, and about 2,400 was support OpEx and roughly 500 was from variable cost or productivity on our authentication center in our sales organization.
Michael Binetti
Would you help us roll that forward into the back half a little bit that 500 was – that 500 variable was up quite a bit from the first quarter when you said it was 250, maybe some of the puts and takes, and does that continue to improve as you go into the back half?
Robert Julian
Frankly, the back half productivity is mostly from the support functions. I think what we’re experiencing with the reduction in the topline projections and lower GMV and revenue, it’s harder to get as much productivity in our authentication centers and on our variable expenses because there are some fixed elements to that and it’s just tougher on lower volume. So I would say what we’re projecting and expecting to see in terms of operating cost productivity in the second half of the year is primarily coming from the support functions.
Michael Binetti
Okay. And then I guess just walking forward the comment that you think you can get to the EBITDA target, the multi-year targets on – even if the GMV flies a little bit lower than what you thought. Maybe what are some of the – can you help us bridge maybe where you held back or showed a little bit of conservatism in the Investor Day numbers on the leverage profile that you think you can go after and capture at this point?
Robert Julian
Sure. And there’s so many variables, Michael, that goes into our projections in the LRP model that we use to create the Vision 2025 numbers in our projection to break even – not just break even, but to be positive adjusted EBITDA in 2024. And I will tell you that in that modeling, I never really did count on a completely linear path. And I understood that there would be some ebbs and flows along the way. And so we built in some accommodation for that variability along the way. And I would admit that I didn’t run a full Monte Carlo analysis on all the – possibilities of all these different variables moving up and down over the next several years. But I will tell you that I did build in enough of a safety net or a cushion if you will, that I could still say confidently that we feel good about being positive adjusted EBITDA in 2024 and that we can achieve our Vision 2025 target of at least $100 of positive EBITDA. But I don’t know if that’s enough of an answer to your question, but I wanted to make sure that I would allow for some variability and some potential bumps in a road. And because some of the bumps that we described, we feel as transitory, it was a labor shortfall that we’re addressing and that we can catch up on that. And so that’s what gives me confidence to be able to reaffirm the Vision 2025 numbers.
Michael Binetti
Okay. Thanks a lot for all the help guys.
Rati Levesque
Thank you.
Operator
And the next question is from Tom Nikic from Wedbush. Please go ahead.
Tom Nikic
Hey everybody. Thanks for taking my question. Robert, sorry, if this was addressed already in all the discussion around guidance, so when I look at the Q3 guide relative to what you did in Q2, you’re essentially saying that revenues – total net revenues will be flattish to down versus Q2, but the adjusted EBITDA will be a lot better. So something like $14 million to $18 million better than the loss of Q2. Like how does that happen on less revenue? Is it that like the OpEx dollars will actually decline quarter-over-quarter? Is it like a huge increase in gross margin? Can you just kind of help me reconcile that?
Robert Julian
Yes. And Tom, I hate to contradict you on the numbers, but what we’re projecting for midpoint of our guidance is a loss of $28 million versus a loss of $28.8 million in Q2. So it’s about an $800,000 improvement. Let’s call it, in round numbers, it’s about a $1 million improvement on adjusted EBITDA sequentially and roughly $15 million less in GMV and about $4 million to $5 million less in revenue. So the way I would describe it, Tom, is that Q3 looks an awful lot, like Q2, a little bit less GMV in revenue, a little bit better adjusted EBITDA dollars on a EBITDA margin basis – adjusted to EBITDA margin basis, exactly flat, both of them minus 18.7% at the midpoint of our guidance. So I see Q3 is very, very similar to Q2.
Tom Nikic
Got it. Yes, apologies for that. I think I’ve got a mistake in my model for Q2. Thank you for the clarification. I appreciate it.
Robert Julian
Sure. Thanks.
Operator
And the next question will be from Lauren Schenk from Morgan Stanley. Please go ahead.
Lauren Schenk
Great. Thanks. I wanted to ask about supply again. The pullback in vendor inventory, I just guess given the lack of supply, particularly, it sounds like maybe around the higher end items, why decide to pull back on that now? Is it just really an EBITDA trade off and is that sort of a trade off that you’ll continue to make going forward? Thanks.
Rati Levesque
That’s exactly right. It is an EBITDA trade off. I think you heard us talk earlier about profitable growth and that is our focus. EBITDA being the priority when we take a look at EBITDA, adjusted EBITDA, revenue and GMV. So it was important for us as we flowed through some of this product that it wasn’t profitable when you flow through. So it was important for us to kind of – and we’re a consigned business. We’re really going back to our core of what we do and that’s on the consigned side. We’re seeing the high value come in from the consigned as well. And again, getting that team all hired up and trained to set us up for a great Q4.
Robert Julian
Right. And this is part of our strategy that maybe a little bit less growth leads to a better result, especially when you’re talking about the direct business, which is very cash flow intensive requires us to put cash out upfront, it requires us to hold inventory. And if you look at – nobody asked us about there’s a little bit of a change in our accounting presentation, where we have separated consigned business and margin versus direct business and margin. We kind of stripped out the shipping so that you can see the margins of those three parts of our business in a clean way.
And so the consigned part of our business is reported is in round numbers, 85% gross margin while the direct business is 15% gross margin and it is very cash intensive. And so our decision is to deemphasize that, focus more on the consigned business, as Rati said, focus on profitable growth and frankly also to conserve our cash. And so for all those reasons, we’re willing to accept a little bit lower of a growth rate, which we think will give us better gross margins and ultimately a better adjusted EBITDA results.
Lauren Schenk
Very clear. I guess, just one follow-up on the 75% of kind of the GMV miss that you attributed to supply. I guess how much of that 75% would you say is labor shortage versus the pull back of vendor supply?
Rati Levesque
Oh, it’s all labor shortage. So labor shortage, as far as – again, we’re a supply constrained business, so that was the number one reason obviously there. I mean, I kind of – I separate those two things, direct as a percentage of business and the supply-related miss. So again, the GMV miss is driven out of the supply piece.
Lauren Schenk
Okay. Thanks.
Rati Levesque
Thank you.
Operator
And the next question is from Noah Zatzkin from KeyBanc. Please go ahead.
Noah Zatzkin
Thanks for taking my question. Just on the marketing rate, it ticked down in the first half versus last year, and then sequentially in the second quarter versus the first quarter, was the step down in the second quarter related to the supply shortfall and kind of how should we think about that rate more long-term? And then also any color on how you’re thinking about marketing mix as well as the flexibility of media plans as we move through the back half will be helpful. Thank you.
Rati Levesque
Sure. The marketing change in the back half of the year has nothing to do with supply. I’ll say that first. It really is about driving efficiencies. I think I mentioned earlier the flywheel that’s the little bit of gold nugget there, the flywheel effect in the back continuing to decrease, we see it in Q2 and we continue to see those marketing efficiencies. And as far as marketing mix goes, I’d say we’re getting smarter. We’re optimizing our channels. We’re getting smarter about our objectives and we’re using different channels differently go forward. We just have better data and you’ll continue to see that through this year.
Noah Zatzkin
Thank you.
Operator
And the next question will come from Ashley Helgans of Jefferies. Please go ahead.
Ashley Helgans
Hey, thanks for taking our question. Just one quick one from us. We were wondering if you could give us some color on the cadence of consumer spend on the platform throughout the quarter?
Rati Levesque
Sure. In Q2, the consumer spend was just what we said it was. So we saw a shift from higher value goods, fine jewelry, watches, handbags. And even now I’d say that continues to be healthy, we see it mixed shift into ready-to-wear and shoes. Is that what you’re asking?
Ashley Helgans
I guess, in terms of like the months, like April, May versus June, if there was any variances between the three months in the quarter?
Rati Levesque
I’d say we saw it kind of accelerate in the back half of the year more closer to the summer months.
Ashley Helgans
Okay. Super helpful.
Rati Levesque
And we do see seasonality in general in our business during the summer months as well.
Ashley Helgans
Wonderful.
Operator
Thank you. And the next question is from Ed Yruma from Piper Sandler. Please go ahead.
Edward Yruma
Hey guys. Thanks for taking the question. Two for me. I guess first, I know that you’ve emphasized direct as part of the business, but we are seeing some actual deflationary pressures on hard goods, particularly watches and jewelry and handbags. Are you seeing any impact and is there any potential risk to inventory that you do have? And then as a follow-up, I appreciate all the commentary on supply and the readjusted GMV guide for the back half of the year. Have you taken any consideration for macro or the potential weakening or is the GMV adjustment simply driven by the lack of supply driven by staffing? Thank you.
Rati Levesque
So I answer the first part of the question as far as risk to higher value goods, watches, and jewelry in the direct business. The good news is we’re seeing higher value goods come in from our consigned business specifically. So we are seeing – whereas before I would say, we didn’t have the proper tools to bring in the high value through our consigned channel. One of the reasons that we use direct as a crutch of it, I will say. We were able to kind of offset that with the supply coming in, again, the high value supply coming in on the consigned side. So there’s more levers that we can pull specifically these high value events that we’ve been having to drive the value. And then as far as guidance, I’ll let Robert take that one.
Robert Julian
Yes. So in terms of the guidance in the second half of the year, it’s really reflective of what we saw in terms of the supply shortfall due to the labor issue that we described. And it’s also a reflection of a lot of inputs on both the supply and demand side, whether it’s opportunities or conversions or mix for high to low value, take rates on the demand side, consumer mix and in average selling prices and in units per order. And so it’s really a reflection of those things. We are not economists and we don’t have a crystal ball. And so we don’t know really what to expect in the second half of the year. Certainly, there’s some uncertainty just broadly. But that’s not really the primary reason that we have adjusted our topline. It’s more related to these inputs and also very much related to the deemphasizing of the direct business in the past that would have boosted back half growth and we’ve turned away from it just because we feel that we want to really focus on the profitable growth.
Edward Yruma
Thanks so much.
Operator
The next question is from Albert Chen from Cowen and Company. Please go ahead.
Oliver Chen
Hi. Thank you. It’s Oliver Chen. Hi, Robert, hi, Rati. Regarding the profitability guidance that you’re giving Robert, what are your thoughts on the fixed versus variable components in terms of how you see that evolving? And I think you answered it earlier, but do you lowered guidance, you kept the 2024 view of profitability, would love comments on that. Second, we’re definitely seeing more innovation at competitors and other competitors do some things to really accelerate, gathering supply as well. How do you feel about your take rate and what might happen to that longer term as a potential risk factor? And third point, the labor market is really tight still and luxury sales people regarding compensation and turnover, I’m just curious about strategies you’ll take to retain and inspire and also higher, and what still is a really tight labor market in certain segments? Thanks a lot.
Robert Julian
So Albert, I’ll start with your first question about the 2024 and 2025 projections, considering that we’ve lowered our guidance for 2022. And as I mentioned before, there’s a lot of different paths and there’s a lot of different variables that go into that Vision 2025 financial projections. And when you choose one of those elements to be the primary focus, the most important, and in our case, we’ve described that as being adjusted EBITDA, there are many ways to achieve that goal.
And as I mentioned earlier, we’ve allowed ourselves some variability in those projections. We expected ebbs and flows along the way. It looks like the most at risk in terms of the 2025 projections is GMV. What you’ve actually described as the least important of the three main elements that we are guiding towards, the most important being adjusted EBITDA. So I think that we continue, as I said, to look at our cost base, to find productivity to manage the other inputs to ensure that we can get to our adjusted EBITDA and our cash flow projections. And again, even with some slower growth, we believe that we’re still on track to hit the adjusted EBITDA and cash flow numbers.
Rati Levesque
And again, some of those problems that we saw are transitory. So we feel like it’s more of a bump versus [indiscernible] exactly. And then your other two questions, I think the second one was about competitors and take rate pressure. We win on service and earnings and value and pricing. We’re always looking at take rate and we’re always looking to see where we can optimize. We haven’t seen us to hit any kind of thresholds yet. We look at pricing regularly, as far as what – how we pay versus our competitors. We have almost 30 million luxury shoppers, and our pricing algorithm is pretty sophisticated to kind of offer our seller that best price.
So we’ll continue to look at that. And we continue to look at take rate. We look at it about a couple of times a year, again, with pricing to make sure that our values are still there, especially on the pricing and earning side. And then on the labor market, I think someone asked this earlier as well, what are we doing as far as, if we continue to see some headwinds here on the comp and we’re continuing to look at compensation, our leadership strategy and we’ll continue to monitor. We’re really making sure that we’re staying on the hiring piece and the compensation side, we’ve been really looking at a couple of key markets. I’d say we needed to right size there. And we have done that and we are seeing progress in a big way going into Q3.
Oliver Chen
Okay. Very helpful. And your letter mentioned preservation as a key priority. Which actions are you prioritizing to do that and how do you do that in a strategic way to retain all the innovation and core competencies and data as well?
Robert Julian
Albert, you broke up there just when you were getting to the good part of the – main part of your question, and we didn’t catch it. I’m sorry.
Oliver Chen
I was just curious about prioritizing cash and decisions that you’re going to make to – make sure to do that and balancing tough decisions about innovation and investment relative to cash and cash flow?
Robert Julian
Yes, so one of the main elements of cash in prioritizing cash and improving cash actually is related to our inventory. And we’re holding $74 million roughly of inventory. Now, some of that comes from out of policy or from other get paid now programs and so on. But about $40 million of it was inventory associated with this direct business. Inventory that came to us through vendors and wholesalers and we have really cut that off completely in terms of bringing in any new inventory in those categories. And so as that sells through, we do expect to generate significant amount of cash. And you’ll see that reflected in a pretty significant reduction in our overall inventory balance between the end of Q2 and the end of this year.
And so that’s part of our prioritization of cash. Also just the focus on this higher margin, less cash intensive consignment business versus direct, of course, there is no cash out for us. When we take items on a consignment basis and the consigners themselves get paid more or less after we get paid. So that could be very positive on a cash flow basis. So those are a couple of things that will allow us to prioritize cash and some things that we’re doing a little bit differently than in the past to generate cash.
In terms of investment, now there’s a little bit of a trade off there because we talked about the three elements in our path to profitability. One of them is continued variable cost productivity. And so we do have to invest in some innovation, in AI and other ways to get more efficient in authenticating items and so on. And so we just look at each one of those decisions on a case-by-case basis and find the ones with the best return and you will see us continue to invest in technology, in automation, in innovation, it is fundamental to our path.
Oliver Chen
Thank you very much. Very helpful.
Rati Levesque
Thank you.
Operator
The next question is from Marvin Fong of BTIG. Please go ahead.
Marvin Fong
Great. Thanks for squeezing me in here. Two questions. First one on, on active buyers. It seemed like one of the better performances in recent memory. Just wondering what you attribute that quarter-over-quarter growth to, do you think it’s people because of the macro looking for a deal or good value, was there any programs you guys instituted or were you able to activate some [indiscernible]? If any commentary on that would be great. And then my second question, on the new disclosure, I just noticed, you guys have broken up shipping revenue and it looks like it’s been continuously operating at a small loss. And I know that in the past, you guys had done some – renegotiate some deals around shipping. Just wondering if we can expect shipping to eventually reach break even, that’d be great. Thanks.
Rati Levesque
I’ll take the first one. As far as marketing is concerned and our customer base – and our active customer base, our buyers have gone up. 84% are coming from our existing – our buyers are coming from our existing buyers. Our revenue are coming from our existing buyers. And I would say it’s contributed to a couple different factors. Like I said, we’re getting more efficient on the marketing side, specifically driven out of our marketing model mix and our attribution channel. So that means more attribution through the journey of the customer and the buyer having us, or enabling us to optimize more efficiencies there. So we’re getting smarter there. And then sometimes what we see is we see when we have lower value goods, we’ll see buyers go up as well and active buyers go up. So we’ve been able to really dig in, dig deeper and into our lapsed buyer base and some of the things – and some of the tools that we’re using to get into our lapsed space is working really well for us. And then your second question was on…
Robert Julian
Yes. So the second question around on shipping in our presentation, in our GAAP financials, which we modified a little bit, and I’ll talk a little bit about what the motivation was behind that. And then I’ll answer your question directly about the net shipping margin. In the past, we were reporting two business segments direct and then consigned and other services and lumped into that consigned and other services was the net shipping.
And after our last earnings call, we started to get a lot of questions from shareholders and analysts about the movement in that reported gross margin of the second category consigned and services, it was getting polluted in a way by what was happening in shipping and people were reaching the wrong conclusions. They were saying, why did your consignment margin go down? And the answer was well, it’s actually the other services part of that category it was causing confusion. So we felt like that it would be a better disclosure and more useful to shareholders and analysts to break out the three elements and to show consignment as its own category in a pure way, and then break out shipping in other is its own line. That resulted in – now we do show consigned margin in sort of the mid-80s range, the direct margin mid-teens, and a small negative margin on the shipping.
And so there has been pressure on shipping. Shipping costs have gone up. We have done things to try to mitigate that there is some more complicated aspects. We do charge for shipping to customers. One-time, if folks get a one-time charge 1295, but it is possible that we are shipping from multiple locations. These mixed shipments that naturally the consumer will not pay for. And we’re a single SKU unit and we have some units in our retail organization, some in, in Phoenix, some in New Jersey. And so we only charge one shipping expense to a consumer, but there might be multiple shipments, which makes it harder for us to turn that positive. And Rati, do you want to add to that?
Rati Levesque
Yes, I would say that overall shipping margin is flat year-over-year and that’s because of some of the things we do that Robert talked about. We pass some of that cost to our customers that doesn’t seem to affect, and hasn’t seem to affect convergent. We’ve diversified our shipping carriers, also working for us. But it’s always been a headwind for us because of the nature of our business and because of the rate increases that we saw earlier in the quarter. Those rate increases have seemed to slow down. That’s the good news, but we’ll continue to optimize. We have some other levers that we’re pulling at the end of this year. And really our goal is to stay flat over the next few years when we think about shipping margin.
Robert Julian
Right. If we can narrow that gap, we would certainly like to, that’s been a goal in the past. It’s just – frankly, it’s not easy given the nature of our business.
Marvin Fong
Okay. That makes perfect sense. Thank you.
Rati Levesque
Thank you.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Rati Levesque for any closing remarks.
Rati Levesque
Thank you for joining us today on our earnings call. In closing, I want to thank The RealReal team for their continued dedicated to moving our business forward every day. During our next earnings call, we look forward to sharing results and further progress on our path to profitability. Finally, I’d like to thank our more than 28 million members who are joining us on our mission to extend the lifecycle of luxury goods and make passion more sustainable. Thank you.
Operator
Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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