The RealReal Earnings: We See Authentic Problems on the Horizon for U.S. Luxury Resale Marketplace

While attributable to external factors like slowing consumer discretionary spending, we believe that The RealReal’s REAL 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.

During the quarter, the firm posted a $0.41 diluted loss per share, clocking in below our $0.37 loss estimate despite a modest beat on revenue (where $131 million in reported sales edged our $128 million estimate). The quarter was forgettable in many respects, with gross merchandise volume falling 7% annually, revenue falling 15%, and orders per customer dropping a striking 24% from the year-ago period. We expect pressure to bleed well into 2024 as the firm’s core customer—young, with low to moderate earning power—continues to pull back on discretionary expenditures and shift spending toward travel and services, before rebounding in 2025.