Company Reports

A dour consumer spending outlook suggests that the e-commerce industry is in for a challenging 2024-25, with top-line growth set to slow again in 2024 before a gradual return to 10%-plus annual growth by 2028. Despite the pressure, we continue to see investable opportunities for long-term investors, with wide-moat Allegro and narrow-moat Chewy representing our top picks. Overall, our thesis regarding online marketplaces remains intact: the largest, competitively advantaged players should continue to consolidate market share, with deeper expansion into advertising, financial services, and fulfillment set to strengthen their competitive edge. Our forecasts call for the average online marketplace in our coverage to expand take rate by 240 basis points between 2023-28, aligning with this view.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrancy. We view the company's strategy as relatively sound, and appreciate its efforts to restructure its looming 2025 debt to assuage bankruptcy concerns.

No-moat The RealReal posted solid quarterly earnings, with revenue of $144 million and a diluted net loss of $20 million (excluding irregular items) beating our $133 million and $21 million loss estimates, respectively. Strong results were driven by improvements in the firm's consignment business, which grew 13% annually, and by changes in its fee structure and inventory sourcing, which drove take rate expansion of 200 basis points and a striking 1,100-basis-point improvement in consolidated gross margin to 74.6%. Much of that is tied to the firm's election to shift investment away from its first party inventory business, which runs at just 10% gross margins and has historically been used to fill inventory gaps on The RealReal's online platform and in its physical stores. While we view the moves as prudent in light of looming debt maturities in 2028 and 2029, driving its need to get profitable quickly, we do think that pulling back on first-party inventory, physical stores, and marketing investments will likely make it more challenging for the firm to defend its competitive positioning in the long run. As a result, we now expect the firm to capture a high-teens share of the US online luxury resale market, down from our roughly 33% estimate at the peak of the firm's growth. Given that our prior estimates fell in the firm's guided range for revenue, GMV, and adjusted EBITDA, we expect to increase our $2.08 fair value estimate by a low-single-digit percentage, consistent with time value.

The headline from no-moat The RealReal's fourth-quarter earnings report is that the firm is not likely to go bankrupt until at least until 2028 after it restructured $145.8 million of its outstanding 2025 convertible notes (roughly 86% of that series). While the restructured notes carry an eye-popping 13% interest rate (8.75% cash plus 4.25% paid in kind), the restructuring reduces The RealReal's total debt load by $17 million and pushes repayment on that series out until 2029. At that point, we forecast the firm will be free cash flow positive, and we believe that capital markets may prove more accommodative. The deal, while punitive, is much less dilutive than our previous expectation for roughly 3 times dilution at unfavorable equity prices. The net effect is an 80% increase in our intrinsic valuation to $2.08 from $1.21. While opening prices for March 1 trading are extremely uncertain, shares traded close to our revised valuation after a roughly 20% jump in after-hours trading on Feb. 29.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrancy. We view the company's strategy as relatively sound, and appreciate its efforts to restructure its looming 2025 debt to assuage bankruptcy concerns.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrancy. We view the firm's strategy as relatively sound, but recognize that the it will need to get lean quickly to assuage market concerns and service its 2025 and 2028 convertible debt issuances.

No-moat The RealReal posted better-than-expected third-quarter earnings, with $133 million in sales and a $0.22 operating loss edging our $128 million and $0.28 loss forecasts. The firm has made progress in slowing its cash burn rate and approaching adjusted EBITDA profitability, with a revamped fee structure helping emphasize its more profitable consignment business and curtailing lower-value inventory. We view the moves as an appropriate strategy but something of a pyrrhic victory, with spending cuts in marketing and research and development shoring up near-term results but likely positioning the firm poorly to carve out a durable competitive advantage in a quickly growing luxury resale space. As we digest results, we expect to raise our $1.11 fair value estimate by a high-single-digit percentage, driven predominantly by better-than-expected margin performance, but we continue to view shares as overpriced, particularly after a 21%-22% surge in aftermarket trading.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrancy. We view the firm's strategy as relatively sound , but recognize that the it will need to get lean quickly to assuage market concerns and service its 2025 and 2028 convertible debt issuances.

While attributable to external factors like slowing consumer discretionary spending, we believe that The RealReal's current strategy stands to limit its long-term growth prospects, and exposes it to elevated competitive pressure, a view consistent with our no-moat rating. The firm is quickly shrinking its first party sales business in a move to boost profitability, but we believe that the lack of certain habitual draw products (jewelry, handbags) at higher price points may pinch the marketplaces ability to attract traffic and capture an enduring niche in the U.S. luxury resale space. While the market seemed to like results, with management targeting, by necessity, a strategy that shows solid progress toward at least adjusted EBITDA profitability before it has to tap capital markets (to service a $170 million debt repayment in 2025), we foresee the underinvestment in platform development and marketing that logically follows as substantial concerns for investors. On balance, we expect to lower our long-term gross merchandise volume forecast for the firm (to $4.5 billion, about a 10% haircut) but increase our operating margin estimate (to 7.3% of sales, up 140 basis points) in response to results, with a neutral to slightly negative impact to our $1.07 fair value estimate. Shares continue to look meaningfully overpriced.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrance. We view the firm's strategy as relatively sound , but recognize that the it will need to get lean quickly to assuage market concerns and service its 2025 and 2028 convertible debt issuances.

Ouch. No-moat The RealReal posted forgettable first-quarter earnings, with 4% annualized gross merchandise volume growth and a 17% annual decline in orders per buyer leaving beleaguered investors in the luxury consignment marketplace feeling ill. While the firm's $142 million in sales and $0.46 EPS loss aligned with our $145 million and $0.45 loss estimates, respectively, a $36 million restructuring charge (representing more than 25% of the firm's current market cap) and guidance for GMV declines during 2023 severely shook our confidence in the firm's long-term prospects. We expect to lower our fair value estimate by about 60% on slower-than-expected near-term GMV growth and the proportionately lower long-term operating margins that sales deleverage espouses, concurrently lowering our Capital Allocation Rating to Poor from Standard.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrance. We view the firm's strategy as relatively sound and believe that investments in automation, neighborhood stores, and diversified supply sourcing represent a solid roadmap toward eventual profitability, but recognize that the firm will need to get lean quickly to assuage market concerns and service its 2025 and 2028 convertible debt issuances.

No-moat The RealReal's challenge is stout: getting lean quickly while generating enough growth to service nearly $450 million in convertible debt coming due in 2025 ($169 million) and 2028 ($281 million). After digesting quarterly results, we see little impetus to meaningfully change our $2.52 fair value estimate, leaving shares of the Very High Morningstar Uncertainty company trading at a steep discount to our intrinsic valuation.

No-moat The RealReal announced that John Koryl will replace founder and former CEO Julie Wainwright after a CEO search that lasted nearly seven months. Wainwright stepped down in June 2022 after the firm's priorities pivoted from a "growth at all costs" ethos to improving transaction economics and steering toward operating profitability, coinciding with waning investor appetite for high-growth, but unprofitable companies. While installing long-term leadership is generally a net positive, Koryl is not a household name, and we're concerned by unusual clauses in the firm's initial contract, including a remote work arrangement and a separation clause that requires repayment of Koryl's $300,000 signing bonus if the parties separate within a year. We expect to maintain our Standard Morningstar Capital Allocation Rating with little indication of a strategic pivot.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales volumes over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other durable asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal's business model exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrance. We view the firm's strategy as relatively sound and believe that investments in automation, brick-and-mortar stores, and diversified supply sourcing represent a solid roadmap toward eventual profitability.

No-moat The RealReal reported mixed third-quarter results, with $143 million in sales missing our $157 million forecast, though improvements on profitability were encouraging (a $0.49 EPS loss edged our estimate by $0.06). Nevertheless, with gross merchandise volume growth slowing to 20% from a year ago and a bloodbath in share price performance that would give Michael Myers a scare (down 90% in 12 months), we believe that the dilutive impact of a what we view as likely equity issuance will destroy shareholder value. More concretely, with liquidity of $350 million (split between a $50 million credit facility and $300 million in cash and equivalents) and a $172.5 million principal payment looming in 2025, we expect the firm to be forced to raise capital at an inopportune time, accounting for the bulk of about a 60% anticipated cut to our $6.90 fair value estimate. While the logic feels circular, lower market prices suggest worse issuance pricing to redeem a fixed cost obligation, and the firm's relatively asset-light, cash-burning model most likely precludes a traditional subordinated debt issuance in the current macroenvironment. Much of the residual drag can be tied to an increase in our cost of equity for the firm (to 11% from 9%), with evidence of consumer trade-down and platform markdowns suggesting more pronounced sensitivity to business cyclicality than we'd initially expected—driving about a 20% headwind to our prior valuation, all else equal.

As we consider the evolving profile of the business, we've raised no-moat The RealReal's Uncertainty Rating to Very High from High previously. The move suggests increasing uncertainty associated with forecasting the future cash flow profile of a company without a meaningful publicly traded proxy, which will likely need to issue equity to refinance the $172.5 million principal balance tied to its 2025 convertible notes.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales volumes over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other durable asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal's business model exists to serve this end market more efficiently, with white-glove inventory sourcing (40% of inventory comes from in-home visits), faithful authentication protocols, and an online marketplace leading to step-change improvements in platform depth, turnover, and vibrance. We view the firm's strategy as sound and believe that ongoing investments in fulfillment efficiency, brick-and-mortar stores, and diversified supply sourcing represent a solid roadmap toward profitability and (potentially) excess returns.

No-moat The RealReal posted (relatively) solid second-quarter results given a difficult backdrop, with gross merchandise volume, or GMV, of $454 million, sales of $154 million and a $0.56 net loss per share clocking in approximately in line with our $451 million, $153 million and $0.58 loss forecasts. Management's adherence to profitability targets was encouraging despite a modest pullback in fiscal 2022 GMV growth targets (down 8%-9% to $1.875 billion at the midpoint), with better sales team staffing, elevated seasonal volumes, and a pullback in performance marketing spending set to drive a strong improvement in adjusted EBITDA performance in the back half of the year. Nevertheless, while we remain constructive about the business' long-term prospects, we're cautious about the firm's performance during a protracted downturn, and expect to materially lower our $13.30 fair value estimate (by 35%-40%) as we digest results.

The RealReal's exclusive partnership with Beckett Collectibles, a comic book and trading card grading service, leaves us scratching our heads. Given the minimal demographic overlap and well-capitalized competition, success here is unlikely, in our view. Suggesting that consignment models and verification render the niches comparable seems optimistic at best, as the men's category represents just north of 8% of The RealReal's 2021 gross merchandise volume, or $120 million. While collectibles sales would likely sit in the other merchandise category, the firm's senior director of men's merchandising was the executive quoted in the release on the partnership, telegraphing the true motive for the tie-up: reaching an underpenetrated demographic (men) and targeting any potential vector for growth. We plan to leave our $13.30 fair value estimate for the no-moat firm unchanged, absent compelling quantitative evidence of recent deterioration. But we note that the move could suggest slowing GMV growth, which would threaten an already protracted route to operating profitability.