The RealReal Readies $270 Million IPO Plan

Jun. 20, 2019 2:00 PM ETThe RealReal, Inc. (REAL)EBAY12 Comments

Summary

  • The RealReal has filed updated terms for its U.S. IPO.
  • The company operates an online consignment service for luxury apparel and accessory products.
  • REAL is growing impressively, has promising industry trends in its favor, and an enviable market position. The IPO is worth considering.
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Quick Take

The RealReal (NASDAQ:REAL) has filed to raise gross proceeds of up to $270 million from a U.S. IPO, according to an S-1/A registration statement.

The firm has developed an online marketplace where people to list their unwanted luxury goods.

REAL has an impressive growth trajectory, enviable market position, and strong industry growth prospects, so the IPO is a potentially enticing investment opportunity.

Company & Technology

San Francisco, California-based REAL was founded in 2011 to develop a second-hand online marketplace where people list their authenticated luxury goods with a user base of about 1.4 million members as of the end of March, 2019.

Management is headed by founder, CEO and Director Julie Wainwright, who was previously Consulting CEO/Mentor at Springboard Enterprises.

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.

Below is a brief overview video of the company’s latest marketing campaign:

Source: RealReal

The company’s main revenue source are orders processed through its website, mobile app as well as three retail stores located in New York and Los Angeles.

Management states that the company processed 1.6 million orders in 2018, a year-over-year growth of 42%, with an average order value of $446, an increase of 2% over 2017.

For 2018, RealReal's gross and net merchandise values were $710.8 million and $506.6 million, a year-over-year growth of 44% and 45%, respectively.

Investors in The RealReal included Great Hill Partners, Canaan Partners, PWP Growth Equity, InterWest Partners X, Greenspring Associates, Greycroft, and e.ventures. Source: Crunchbase

Customer/User Acquisition

The company leverages a data-centric, omni-channel approach to marketing, including through direct mail and other direct response marketing channels, television, and digital, such as social media, emails, push notifications and text messages.

The RealReal attracts product consignors through lead generation campaigns and targeted email communications, behavior targeting, referrals, and promotional incentives.

Selling, G&A expenses as a percentage of revenue have been uneven, per the table below:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

To March 31, 2019

32.2%

2018

30.7%

2017

32.9%

Sources: Company registration statement and IPO Edge

The selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of selling, G&A spend, was 1.0x in the most recent year, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

To March 31, 2019

1.0

2018

1.2

Sources: Company registration statement and IPO Edge

Market & Competition

According to a recent market research report by Shopify, the global ecommerce fashion industry was valued at $481 billion in 2018 and is projected to reach $713 billion by 2022.

The main factors driving market growth are rising globalization and changing consumer spending habits, digital innovation, growing internet and smartphone penetration, and a projected rise in disposable income.

Additionally, the number of potential customers is projected to grow to more than 1.2 billion by 2020.

Major competitors that provide or are developing online luxury consignment services include:

  • eBay Authenticate (EBAY)

  • Poshmark

  • LePrix

  • Vestiaire Collective

Source: Sentieo

Financial Performance

REAL’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Increased gross profit and fluctuating gross margin

  • Increased operating losses but reduced negative operating margin

  • Growing cash used in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

To March 31, 2019

$ 69,255,000

49.1%

2018

$ 207,376,000

54.9%

2017

$ 133,871,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

To March 31, 2019

$ 42,382,000

38.5%

2018

$ 136,918,000

56.2%

2017

$ 87,642,000

Gross Margin

Period

Gross Margin

To March 31, 2019

61.20%

2018

66.02%

2017

65.47%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

To March 31, 2019

$ (23,214,000)

-33.5%

2018

$ (73,904,000)

-35.6%

2017

$ (51,784,000)

-38.7%

Net Income (Loss)

Period

Net Income (Loss)

To March 31, 2019

$ (26,577,000)

2018

$ (84,687,000)

2017

$ (54,918,000)

Cash Flow From Operations

Period

Cash Flow From Operations

To March 31, 2019

$ (22,571,000)

2018

$ (47,195,000)

2017

$ (38,574,000)

Sources: Company registration statement and IPO Edge

As of March 31, 2019, the company had $103 million in cash and equivalents and $100.7 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended March 31, 2019, was a negative ($69.5 million).

IPO Details

REAL intends to raise $270 million in gross proceeds from an IPO of 15 million shares of its common stock at a midpoint price of $18.00 per share, not including customary underwriter options.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $1.4 billion.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. In addition, 1% of the net proceeds will be used to fund The RealReal Foundation, a Delaware non-profit organization formed to engage in charitable activities. We will also use a portion of the net proceeds to pay a $0.3 million success fee to the lender under our term loan facility payable upon completion of this offering. We may also use a portion of the net proceeds to acquire, invest in or obtain rights to complementary technologies, products, services or businesses. There are no such transactions under consideration at this time.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Credit Suisse, BofA Merrill Lynch, UBS Investment Bank, KeyBanc Capital Markets, Stifel, Cowen, and Raymond James.

Commentary

The RealReal is an eight-year-old firm backed by well-regarded venture capital firms and it occupies a unique market space by providing an online consignment marketplace for luxury goods.

REAL’s financials show strong growth in total revenue and gross profit but the firm is still losing money and using increasing cash in operations to maintain that growth rate.

Selling, G&A expenses as a percentage of total revenue are relatively stable and the firm has a rather high average order value.

The market opportunity for luxury ecommerce fashion items is large and growing as younger demographics seek unique apparel items to distinguish themselves and express their personal tastes.

REALs revenue growth is high at around 50% per year and the site serves a coveted demographic.

So, while the IPO appears highly priced, given the firm’s revenue growth trajectory, market position, and future growth prospects, REAL is a real opportunity.

Expected IPO Pricing Date: June 27, 2019.

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