The RealReal Earnings: Shaving Our Fair Value by 60% as Forward Prospects Look Really Challenging

Ouch. No-moat The RealReal REAL 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.

More concretely, we now expect a 4% decline in GMV for 2023, down from our prior forecast for 1.3% growth. While we still foresee the firm achieving GAAP profitability on a similar timeline (2027-2028), we expect it on a smaller base of sales, with the de-emphasis of the firm’s direct sales channel and the closure of two of the firm’s procurement-sourcing consignment offices and four of its retail stores suggestive of slower top line momentum. We now project that The RealReal will capture just 20% of the U.S. online luxury resale market by 2032, from 25% previously, suggesting a much higher probability of competitive displacement in a winner-take-most marketplace niche. Importantly, slower top line growth also curtails operating leverage, resulting in a trimmed forecast of 5.9% for 2032 operating margin, from 8%.

The problems confronting the firm are massive, and present a formidable challenge for new CEO John Koryl. A further compounding issue is a 172.5 million convertible debt obligation looming in 2025, with dilutive equity issuance looking increasingly likely in a frosty capital market environment.