The RealReal Earnings: Slowing Cash Burn, Narrowing Losses Mark Progress; Shares Expensive

No-moat The RealReal REAL 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.

During the quarter, the firm posted its best adjusted EBITDA result since going public—with a $7 million loss—and narrowed its cash burn rate to $19 million from $42 million in the prior quarter. We continue to view the risk of material value destruction as high, with The RealReal engaging two well-known law firms to lead the refinancing of its $175 million in 2025 convertible notes. Our estimates still suggest that equity dilution is likely in 2024, given the firm’s already high degree of leverage (debt comprises nearly 80% of enterprise value).

With our forecasts calling for another year of declining sales in 2024, we struggle to see the firm achieving its goal of positive adjusted EBITDA in that year, though we do expect losses to continue to narrow. Ultimately, with gross platform sales falling 7.5%, orders per active buyer dropping 17%, and active buyer growth falling to just 1%, we continue to see more reasons for worry than optimism, even with the third quarter’s relative outperformance.