Money Rehab with Nicole Lapin - How to Flip Your Wardrobe with Rati Sahi Levesque, Co-CEO at The RealReal

Episode Date: August 25, 2022

Can you really make some extra $$$ by selling the clothes in the back of your closet? That's what Nicole sets to find out in today's episode with Rati Sahi Levesque, Co-CEO at the luxury consignment store The RealReal.  Nicole and Rati talk about the business of fashion, how clothing can be an investment, and whether the brand is on the path to profitability.

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Find a co-host at Airbnb.com slash host. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. Are you ready for some money rehab? Wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. When we think of industries that are contributing to the climate crisis, we're of course thinking of the energy industry or manufacturing.

But what about the fashion industry? The fashion industry, especially fast fashion, is a significant contributor to climate change. That's why on the show, I have been a huge advocate for selling the clothes in the back of your closet and also buying secondhand. It's good for your wallet and the environment. Win-win. So today I'm sitting down with Rati Sahilevic, president of The RealReal, the luxury goods resale brand. We're going to talk about the business of fashion, how clothing can be an investment, and whether the brand itself is on the path to profitability. Because as you business nerds know, The RealReal recently came out with earnings that got some analysts and investors out there cranky. But more on that with Rati. Rati, I'm so excited to say welcome to Money Rehab. Thank you. Thanks for having me. I'm

excited to talk to you. I am a longtime customer and seller of The RealReal. I actually just opened my app and since 2017, I've sold $90,000. It's actually gone up since I first wrote these notes. $90,250. That is awesome. And VIP status. So I'm a big fan and we can start there. I have always been rooting for the company That is awesome. of The RealReal. Can you share that story? Yes, I can. I'll say that. 11 years ago now, we started the company with Julie Wainwright, who was the original founder. And at the beginning, it was a nascent industry, I'd say. Not a lot of people... We're introducing a lot of people to consignment and resale. And I think it still had this certain stigma to it. So not everyone wanted to buy used clothes or talk about it. We even saw it in the

comments on our net promoter score. I'm going to give you a one because I don't want anyone knowing that I buy resale or I don't want anyone knowing about resale in general. I don't want anyone knowing that I buy resale or I don't want anyone knowing about resale in general. And they don't want anyone taking their size. There's only so many size sevens in their Chanel shoe or whatever it was. There were a lot of reasons why people kept it a secret. And we always said we wanted to take the top of the eBay and the bottom off of Sotheby's and Christie's and really sit in that kind of middle ground and diversify, right? When there's not a lot of places that where you can

sell ready to wear and shoes and find jewelry and watches. So, you know, we find our job is to educate our sellers every day and how they could retain resale value and what that could look like and to be a part of the circular economy. And a lot of the reasons I was so excited was just the sustainability factor. And back in the day, even 10 years ago, the stat was 2,000 items were being thrown away every second. And people thought clothing was disposable and you could literally take a top and throw it in the trash. And that continues to happen. That stat is still very similar. And our job is to educate people into

what holds its resale value, what retains its value, why items shouldn't be thrown away if you're buying well in the primary market. And I say one other thing that people always ask me, when did you know this was really going to take off? Because in the early days, we were working out of Julie's house. And then we moved into... It was a true startup story, right? And we were unpacking boxes, pickpacking and shipping, answering customer service calls.

Or like a U-Haul or something? It was like my beat up Toyota RAV4. Yeah, it was... We didn't even like a U-Haul or something. It was like my beat up Toyota RAV4. Yeah. It was, we didn't even have a U-Haul and just driving around, you know, trying to find sellers, literally cold calling and trying to find stylists that wanted to consign with us. And I knew it was going to really take off when sellers started to call us and say, Hey, I'm at Barney's back when Barney's was around or Neiman Marcus. And I am deciding between two bags, what holds its resale value? Or I'm deciding between a Louis Vuitton and a Givenchy.

What should I buy? What holds its resale value? And they were really starting to make decisions in the primary market based on the resale value. And I knew it was going to be successful based on that story. And then when people just started sending us Birkins in the mail, just shipping Birkins, no one even had to pick up. And I was like, wow, the trust is pretty amazing. So it's been really fun. It's been a fun ride. It sounds like one. I think of those types of purchases, Louis Vuitton or Givenchy or, you know, the Chanel's or the Birkins that hold their value or in some cases appreciate almost

like a bond. If you're going to buy it, you got to know that you're going to get the equivalent or sometimes more in the resale market. And that's a big deal for the fashion industry. But I'd love to click on the circular economy for a moment. The environmental impact of the fashion industry is significant. And if changes are made to the industry, it could really impact fighting climate change. Can you tell listeners a little bit more about the environmental impact of the fashion industry and fast fashion? Yeah. I mean, you know, so much water, so much carbon. I mean, it's a wasteful industry. There's a McKinsey study that recently was published around revealing that if one in five garments by 2030 is recycled or recirculated,

it's key to achieving the one and a half degree climate goals. And so that alone is huge. And how do we get people to really understand that and understand the pollution around the fashion industry? We try not to be so insular because resale on a whole is good for the planet. It's not just about the real, real. And how do we get more and more people partaking in this? And I think it's important to call out the fast fashion brands or some of these mall brands that aren't thinking about fashion this way and are thinking about it as being disposable and more is more. And we're seeing a shift in our consumer behavior where they're buying... Maybe they're not buying 50 items in a year, especially with the younger

demographic. They're buying maybe 10 items a year, 15 items a year, but they're buying well, and then they're reselling it and earning some of it back so seeing that kind of change is really interesting um we launched a sustainability calculator in 2018 which i'm sure you've seen on the site if you're if you're on our site and it just shows the impact um that one person has on recirculating their goods or buying with the RealReal. So how much water and carbon is being saved? Oh, can I tell you mine? Yeah. Yes, please tell me. Well, sister, I have saved 60,890 liters of water. That's awesome. I have saved 1244 kilograms of carbon. That's awesome. Well, I know. And it's

such it's so it's, it's a feel good moment, too. Right. And it makes you realize that you can have an impact. Yeah. And it sounds like less is more and buying more expensive could actually in the long run be better for your wallet. And I know you probably don't want to call out specific fast fashion brands unless you do, by all means. But I would love to. Yeah, the forever 21s of the world. I mean, it's like disposable clothing. And ultimately, you're not going to get that value back. And especially with the carbon footprint, can you explain how shopping secondhand affects customers' own environmental footprint? I see mine calculated because I'm a customer and a seller. But how can people start thinking about that as they're shopping?

Right. Well, yeah, there's the environmental impact. But like you said, there's also the piece that's good for the pocketbook too. And I think we don't talk about that enough as well. You go into a mall and you buy a $200 cashmere sweater. And you can buy a $200 Prada dress on the site. That's our average selling price. It's about $200. And you can earn 50%, 60% of it back instead of donating it. So like you said, there is this piece that's good for the wallet as well. But as far as your personal impact on sustainability and the water and carbon savings, as a whole, we've saved 3.1 billion liters of water so that's like equivalent to 13 billion glasses of water and 59 000 metric tons of carbon and so that amount that's like 9.9 million trees to absorb in a year so So again, these numbers start to add up. And I think

the sustainability calculator took us years to put together because we wanted to make sure we weren't greenwashing and it was super scientific. And we worked with a third party to get the scientific value and credibility to develop it. I get that for sure. Well, with this being earnings season, I've been talking to entrepreneurs about some of their earnings calls. We just had John Zimmer on, president and co-founder of Lyft to decode a recent earnings call. I'd love to do the same with you, if you don't mind. What were the major updates on The RealReal's most recent earnings? Yeah. You know, the earnings, I'd say overall went really well. The second quarter was great.

We did everything we said we were going to do in the first and second quarter. So first half of the year, Q2 GMV growth 30%, revenue grew 47%. And then EBITDA improved. It was 18% of revenue versus closer to 31% last year at this time. So you're seeing our losses narrow. So overall looking really good. I mean, our focus really is profitability. Launched something called Vision 2025, Our focus really is profitability. Launched something called Vision 2025, which showed how we would get there. It's a...

Where we weren't a COVID story. A lot of some companies were. We weren't. It did set us back. So we went public in 2019. COVID hit in 2020. It kind of had... We had a lot of challenges. I'm not even going to sugarcoat it.

It was a hard time for us. We had to furlough employees. Our GMB cut in half, if not more. So we kind of had to work our way out of that. And now I'm happy to report we're in a much more predictable space. Our business is much more predictable. And a lot of that is behind us. But we still do have some challenges. The great resignation was a little in labor shortages and things like that. But the good news is we have a very solid plan to get us to profitability. And that's really our short-term focus, our short and medium-term focus. And the team's all rallied behind that.

When I think of sustainability, I don't just think about being sustainable in the environmental way, but also sustainable as a company and making sure that we're making the right trade-offs. And we talk a lot about profitable growth and that's our vision for the company. And we cut some projects that maybe weren't showing profit or didn't have the same profitable growth signs. We're seeing a lot more leverage in our fixed and variable expenses and just making the right trade-offs and prioritizing across the board. And I think the good news, even through COVID, is that it just made us a lot stronger as a company. We gained many more efficiencies because of it. And we're seeing our margin increase now. We're seeing the flywheel effect really happening

on the buyers and consignors. We're seeing our back getting better. So it's really about now proving profitability. You're going to continue to see those losses narrow through the end of the year and into next year until we get to break even. We talked to a lot of newbie investors who listen to the show. So if somebody is like GMV, what is that? Right. So I know we use a lot of acronyms. I know I was watching this TikTok the other day where it could have been any company and it was GMV, ASP, HBR. Totally. It could have been any company.

And different industries have their own acronyms. It's a whole thing. Totally. Yeah. But GMV is gross merchandise value. And that's how we look at the demand and some of the health of our business. And then revenue is another product of that minus cancellations and returns. So that's the real meat of the number. And then EBITDA is like our net loss as a company for the quarter. Thank you for decoding that to somebody who might be a customer and then, you know, wants to become an investor because as a public company, anybody can be an investor in that company. You talked a little bit about brick and mortar. I have dropped off stuff in brick and mortar. You started more of the brick and mortar going into the pandemic.

How has that fared and what do you see the future of that being as an e-commerce first company going into brick and mortar? Yeah. Yeah. I mean, at the end of the day, brick and mortar has been an accelerator to our growth. It's been a big brand play for us because like we talked about, people didn't necessarily... There was a stigma to consignment and people didn't know what kind of condition their item was going to arrive in. What does excellent mean to us? What is good condition? What is fair condition? It was important that we kind of showcase what that means. We got a lot of slack, I would say, for opening stores because people are like, well, you're online. Why would you spend all this investment in stores? And why does that make sense? And I even had bets with people inside the company

saying, that's not going to do more than X amount. That's a waste of time or whatever it was. And we opened our first store in Soho in New York and it doubled, tripled our expectations. And it brought in a ton of supply. That's why we opened them at the end of the day. And these stores break even in about a year, which is really great for the business as well. Hold on to your wallets, boys and girls. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high

quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host, so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Now for some more money rehab. And in this

last round of earnings, we also saw some movement from analysts. For those listeners who don't know, analysts give public companies ratings that are essentially recommendations for investors. I'm curious how analysts' ratings change any of your operational strategy. There was a recent Bank of America analyst who downgraded his rating of the real-world to underperform from buy. How does that affect you, your planning or strategy, if at all? Yeah, that's a great question. You know, it's another input for us. We have a lot of inputs. And how I like to think about it is we're talking to hundreds of investors every year, many analysts. And they're seeing things on a macro level a lot of times. So they have some really interesting insights. really interesting insights. And I like to think about it as one input because there's many different opinions and you'll have one analyst say something totally different than another one and completely contradict others. And you've got analysts who are more short-term thinking versus

long-term thinking. And we kind of have to stay true to what we're doing every day. And I think that's really important. But I would say that these conversations that we have with them are valuable. I find them valuable. But again, I think as long as you can realize as someone that's operating a company that it's an input. And at the end of the day, you have to do what's right for the company, your shareholders, and whatever's right for your business, which may be more long-term versus short-term and your employees who are gonna all make this happen every day. So again, it's an input, not the decision maker,

but again, really good conversations. I don't know if we've ever changed a strategy completely, but I'd say that there's been tweaks based on conversations we've had where they have been eye-opening and interesting. I do think, you know, we were talking about this the other day because we just had an earnings call. And I do wish there was more conversation around people and planet, you know. And I think that the environmental, social governance piece is really important, especially the people side of things. And they make our company run. And anyone that's run a company knows it's all about the people internally, too.

as many questions about that. And we call that ESG, the environmental, social and governance aspect. And I think that's, I do think that's changing, which is the good news, but I know that it's more of a focus in the EU than it is in the US right now. What do you think the biggest thing investors and analysts misunderstand about the company? Is it ESG or is it beyond that? I think a lot of investors, a couple of things. Well, the P&L, I'd say is misunderstood. I think there's a lot of naysayers as far as can we get to profitability? And I know we can.

naysayers as far as can we get to profitability? And I know we can. And I think we've had some setbacks, but I know as on a whole, we can get there and feel really good about our plan go forward. And then I'd say that there's a misconception just about retail and brand and the impact that we really are having to the consumer behavior. And if I told you some of the stories from early on that we had with investors on should you invest? And they were like, why would we invest in used clothes? Like, you know, we had one investor like put his shoes on the table and say, I see these shoes.

I've been wearing these shoes for the last seven years. Why would I ever sell them? Why would I get rid of them? When I done with them, I'm going to throw them out. And so it's just, it's not intuitive to people. Wow.

And then we had some really great investors who totally got it. And, you know, some of our, our early ones were women, I will say. And so it was a bit more intuitive because that's the way they're shopping and buying and they can see this kind of change. So it is really interesting, but I will say that I do think it's changing in a big way.

I want more of those stories over drinks. This brings me to my next question that I also asked John Zimmer. If you do a Google News search, you'll see praiseworthy and scathing articles on all public companies. It's just the way it goes, yours included. Does it suck being a public company? Do you wish you didn't have this extra layer of scrutiny that really doesn't exist with private companies? You know, I don't think it sucks to be a public company. I think it's hard. I think it's challenging. I think it's really fun, too. I would say it's rewarding. At the end of the day, I would say these articles are noise. And internally, we know that and we keep our eye on the ball. I'd say that our investors on a whole, I'm more optimistic by all of it. And I actually think it makes us better. And I think, like I said, having these conversations with our investors, our board,

our shareholders out there, they all have a piece of the company they believe in the real real they're excited to see it um turn and you know they'll they'll stop us and say you know when they find out they're real real it's like i invested x amount when you first went public and i believe in this company and here's what I like. And it's, it's fun. And that is really, really much, that is very much rewarding. And they'll also give us feedback and they'll say, you know, I wish you could do X, Y, and Z a little better, or I have this experience and I want to be better. And that again, makes us better. And we take all of those really seriously. And it has been a challenging time via all the

labor shortages and COVID and all of that. But I'd say, like I said, we've come out stronger. I really do believe that. And we're starting to see it in the data and our NPS score and our numbers. And we're continuing to do that work for our shareholders. How often do you check your stock price? I know you try to put blinders on, but I'm sure. Yeah. You know, I don't check it very often, to be honest with you. I'll say I'll check it about every week. I will check it when it comes up in conversation with our employees and all of that. I have learned over the last couple of years that there's some things we can do to move the stock price and there's some things we don't do. And the stock price and there's some things we don't do.

And the stock price just moves up or down and it's nothing we did or said. And so it really is, you really do learn that it's this volatile and especially ours being in the retail space, the tech space, and right now being unprofitable, it is this thing that goes up and down. And we kind of have to, again, just really focus on what we can control, which is, you know, our seller experience, our NPS score, profitability, efficiencies, and all of that. So that sounds like a lesson to to investors who refresh their whatever Schwab or E-Trade account constantly. Would you tell them, what kind of advice would you tell them to try and put their blinders on and chill? It's hard. It's hard. I totally get it.

I mean, there's a, you know, for a lot of these people, there's a lot riding on it, but for me and the real, real, we're in this for the long run. And we are, you know, I feel like one of my responsibilities is long-term shareholder value and not short-term. And that's really how I think about, you know, every decision we make and every project we're doing and how we are thinking about new projects and onboarding our employees and talking to our investors. So and I think, you know, if we stay focused on long term shareholder value, I think the rest of it will work itself out. I guess that's the only way you can go down this bumpy road of Wall Street. Well, I am rooting for it in a way I couldn't say when I was on other business networks like CNBC and Bloomberg. But I think the core of the business is good for people's wallets and the environment. And that is a win-win for me.

Thanks, Nicole. For today's tip, you can take straight to the bank. Get in the habit of asking yourself two very important questions before you buy that new sweater you've had your eye on. Number one, what's the resale cost of this item? And number two, is the brand taking steps toward offsetting their carbon footprint? We can make such a big difference to our wallets and the world if we're more mindful of the environmental impact of the clothing brands we support and more thoughtful about the investment we're making in our wardrobes. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin.

Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.