The RealReal Reels From Retail Retrenchment

Summary

• The RealReal went public in June 2019, raising $300 million in a U.S. IPO.
• The firm operates on online luxury goods consignment website and a few retail stores.
• REAL planned to expand its retail footprint in 2020, but with the Covid19 pandemic those plans have likely been set aside.
• My bias on the stock is Neutral.
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Quick Take

The RealReal (NASDAQ: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 consign their clothing and buyers looking for already used apparel and accessories with a focus on luxury and fashion items.

REAL will need to recast its plans now that its retail operation and related hopes for growth have been paused due to the Covid19 pandemic.

My bias on the stock is Neutral until management can prove its ability to make a serious move toward operating breakeven while still growing the business in a pandemic environment.

Company

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 sources are orders processed through its website, mobile app as well as three retail stores located in New York and Los Angeles.

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

Recent Performance

REAL’s topline revenue by quarter has grown markedly, with Q4 2019’s results more than 42% above Q4 2018:

Gross profit by quarter has achieved a similar trajectory:

Operating results by quarter have unfortunately made little headway, with REAL continuing to generate significant operating losses:

Earnings per share (Diluted) have moved toward breakeven but are still a significant distance:

Source for chart data: Seeking Alpha

Since its IPO, REAL’s stock price has dropped more than 40 percent vs. the U.S. Online Retail index’ rise of 11.1 percent and the overall U.S. market’s drop of 3.8 percent in the past 12 months, as the chart below indicates:

Source: Simply Wall Street

Valuation Metrics

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

Measure	Amount
Market Capitalization	$1,010,000,000
Enterprise Value	$649,710,000
Price / Sales	1.74
Enterprise Value / Sales	2.04
Enterprise Value / EBITDA	-7.91
Free Cash Flow [TTM]	-$55,450,000
Revenue Growth Rate	48.80%
Earnings Per Share	-$1.31

Click to enlarge

Source: Company Financials

As a reference, a relevant public comparable to REAL would be eBay (EBAY); shown below is a comparison of their primary valuation metrics:

Metric	eBay (EBAY)	The RealReal (REAL)	Variance
Price / Sales	3.01	1.74	-42.2%
Enterprise Value / Sales	3.04	2.04	-32.9%
Enterprise Value / EBITDA	10.64	-7.91	-174.3%
Free Cash Flow [TTM]	$3,290,000,000	-$55,450,000	-101.7%
Revenue Growth Rate	1.7%	48.8%	2737.2%

Click to enlarge

Source: Seeking Alpha

Commentary

In its last earnings call, management highlighted that it continues to work to minimize fake goods being consigned to its platform and intends to invest in and integrate more technological solutions in this regard in 2020.

In Q4 2019, the firm saw the highest growth in women’s handbags and men’s products.

As to its financial results, Q4 saw a 39% GMV (Gross Merchandise Value) growth over the same quarter in 2018.

Additionally, EBITDA margin grew by 17 percentage points, mostly due to a reduction in marketing spend and results of its operations and technology expense leverage.

For 2020, and before the firm withdrew its forward guidance as a result of the Covid19 pandemic, management said it would focus on the four areas of revenue growth, increasing operational and marketing leverage, expanding its retail footprint, and sustainability.

Obviously, with the pandemic, the retail footprint expansion is no longer a focus for the immediate future.

The question is whether retail expansion was intended to be a major component of REAL’s growth strategy going forward. Also, the firm’s existing small store footprint will likely generate losses in 2020, acting as a drag on operating results due to their current closure.

In any event, management has made little progress toward operating breakeven since going public, so it isn’t much surprise that the stock has performed poorly since its flotation in June 2019.

With its retail expansion plans thrown into disarray from the effects of the pandemic, the question is whether management can rejigger its plans in a post-Covid19 world.

Count me in the ‘wait-and-see’ crowd as management previously couldn’t make a serious turn to operating breakeven without the added challenges of a global pandemic.

While the firm has recently announced operational cuts, my bias on the stock at its current level is Neutral.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[cp-wise]

Brick and Mortar is not going to be a big part of their business. I think the retail presence is mainly for brand building, loyalty, and eventually driving more business to the website. I think this will be a tough year for them because people might not be spending on luxury, but the delays in their retail footprint is not going to be their biggest issue. This company has lots of cash and no debt, should be able to weather the storm. If you believe in the fundamental thesis that consignment and the circular economy is here to stay, then I think RealReal is positioned well to capture a good amount of that share. If you don’t believe it is the future, then I think it is best to stay away.