REAL - The RealReal Is Facing A Challenging Transition Period Ahead

2023-04-14 11:36:19 ET

Summary

• The RealReal, Inc. went public in June 2019 at a price of $20.00 per share, while the stock is now barely above $1.00.
• The firm operates a premium online apparel marketplace and retail location network.
• The RealReal has recently hired a new CEO and the company appears to be shifting its focus to consignments, a higher margin activity.
• Operating losses and cash burn remain heavy, so I'm Neutral on The RealReal, Inc. until we see material and sustained improvement in those metrics.

A Quick Take On The RealReal

The RealReal, Inc. ( REAL ) went public in June 2019, pricing its shares at $20.00 each and raising $300 million in gross proceeds.

The firm has created a website that acts as a marketplace for users wishing to buy and sell clothing and accessories with a focus on luxury and designer fashion items.

REAL has just hired a new CEO and appears to be changing its focus to higher-margin consignment activity.

I’m Neutral [Hold] on REAL until we can ascertain a clear direction and the firm starts making real progress toward operating breakeven.

The RealReal Overview

San Francisco, California-based The RealReal, Inc. was founded in 2011 to develop a second-hand online marketplace where people list their authenticated luxury goods.

Management is headed by new Chief Executive Officer John Koryl, who was previously president of Digital at Canadian Tire Corporation and president at Neiman Marcus Stores and Online.

The RealReal has developed an online luxury consignment technology and service where people send their luxury goods to be inspected and authenticated, photographed by the company’s photographers and finally, after its price has been adjusted based on previous transaction history and real-time market demand, listed on the firm’s online marketplace.

The company’s main revenue sources are orders processed through its website, mobile app as well as various retail locations.

The RealReal’s Market & Competition

According to a 2022 market research report by Grand View Research, online apparel sales was an estimated $553.1 billion in 2021 and is forecast to reach $1.16 trillion by 2030.

This growth, if achieved, would represent a CAGR of 8.6% from 2022 to 2030.

Industry growth is predicated on an increasing number of working women, changing fashion trends and continued product innovation by manufacturers and designers.

Additional factors driving market growth are rising globalization, growing internet and smartphone penetration, and a projected rise in disposable income.

The chart below shows the historical and projected future growth rate of the U.S. E-commerce apparel market from 2020 to 2030:

Major competitive or other industry participants include:

• eBay

• Mercari

• JD.com

• Poshmark

• Shopify

• Rakuten Group

• ThredUp

• Amazon

• Kohl's

• Walmart.

The RealReal’s Recent Financial Trends

• Total revenue by quarter has grown per the following chart:

• Gross profit margin by quarter has fluctuated as follows:

• Selling, G&A expenses as a percentage of total revenue by quarter have fallen in recent quarters:

• Operating income by quarter has remained heavily negative, with no meaningful or durable progress toward breakeven:

• Operating leverage has frequently been negative, improving intermittently in recent quarters:

• Earnings per share (Diluted) have also remained substantially negative:

(All data in the above charts is GAAP.)

In the past 12 months, REAL’s stock price has fallen 82.5% vs. that of ThredUp, Inc.’s ( TDUP ) drop of 67.5%, as the chart indicates below:

Management didn’t disclose any company retention rate metrics.

For the balance sheet , the firm finished the quarter with cash and equivalents of $293.8 million and $450 million in long-term debt.

Over the trailing twelve months, free cash used was ($114.5 million), of which capital expenditures accounted for $22.9 million. The company paid a hefty $46.1 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For The RealReal

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be ThredUp; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

Future Prospects For The RealReal

In its last earnings call ( Source - Seeking Alpha ), covering Q4 2022’s results, management highlighted its changing focus on higher-value items, optimizing its take rate in the process.

The firm also recently reduced its headcount by 7% and closed a total of six retail locations in order to reduce costs and cut underperforming locations.

Leadership has also attempted to further optimize the site’s dynamic pricing system, "to drive higher initial prices."

Looking ahead, management only provided guidance for Q1, as its new CEO just started. It expects $140 million in revenue, which, if achieved, would represent a revenue drop of 4.6% year-over-year.

Management has been focused on shrinking the direct-to-consumer business and increasing its consignment segment, resulting in higher gross margins.

The company's financial position is moderate, with ample cash and liquidity but significant recent use of cash in operations. The firm has around 2.5 years of runway based on existing cash and trailing twelve-month free cash use.

Regarding valuation, compared to ThredUp, a lower-end consignment site, REAL is valued at a similar EV/Revenue multiple.

The primary risk to the company’s outlook is a macroeconomic slowdown or reduced consumer credit availability as banks reduce their lending activity in the wake of the March banking failures of SVB Financial Group (SIVBQ), Signature (SBNY), and Credit Suisse Group (CS).

A potential upside catalyst to The RealReal, Inc. stock could include continued progress in its consignment business, improving margins in the process.

However, the company appears to be in a transition phase with a new CEO, so the jury will be out for some time ahead.

Until we can ascertain a clear and positive direction for The RealReal, Inc. and management makes serious progress toward operating breakeven, I’m Neutral [Hold] on REAL.

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