Have you ever bought a designer item on eBay? There’s a high probability you wouldn’t take the chance. And if you have, you probably wondered whether you were buying the real thing or a fake.
But, just imagine all the pairs of designer shoes, handbags and other branded clothing items gathering dust in the back of people’s closets. With the right business model, all of that could be turned into cash for sellers, and potentially for investors too.
The resale market for apparel is expected to double over the next five years to $51 billion
One of the arguably most successful companies of the last decade is Airbnb. They turned unused real estate into cash for their owners and upended the hotel industry in the process. The RealReal is doing the same with unused and unwanted luxury goods.
Clothing stores that sell other people’s clothing or ‘Consignment shops’ along with online marketplaces like eBay have been around for a long time. But, when it comes to luxury items, both are limited. Physical stores only see a limited amount of traffic. Online marketplaces have global reach, but the chance of buying a fake is high. Buyers are wary, and if sellers can’t get a decent price, they’re unlikely to bother listing their goods.
Like any good entrepreneur, Julie Wainwright, the founder of The RealReal, saw this problem as an opportunity. She decided to set up a marketplace for luxury goods that operates on and offline and authenticates the goods before they are sold.
There’s money in luxury
The luxury goods category has grown rapidly over the past two decades. The Financial Times did a great job charting the way luxury goods group LVMH grew sales elevenfold between 1995 and 2018. There are two good reasons for this. First, discretionary spending in emerging markets like China and India has grown exponentially along with those economies. Second, the millennial generation, which is more brand-conscious than previous generations, has entered the workforce over the last two decades.
It’s not just about rapidly growing sales, though. When consumers buy into a premium brand, profit margins are typically very high. This means luxury goods companies are very profitable and remain profitable during recessions. In 2011, when the US economy weakened, companies like Tiffany’s and LVMH continued to show strong sales growth.
But what about the resale market? Well, Thredup, a secondhand apparel marketplace is projecting the resale market for apparel to double over the next five years to $51 billion. And, already, CB Insights believes that the luxury resale market could reach 9% of all luxury sales as soon as this year. Luxury brands are recognizing the potential of a strong resale market. An active resale market makes products more valuable to consumers, which is good for their sales.
How does The RealReal make money?
The RealReal is a marketplace that connects buyers and sellers in much the same way that Airbnb or eBay do. The business model works on a consignment basis, with ownership remaining with the seller until the goods are sold. The company charges a commission of between 30 and 45% on each sale. This is high, but includes authentication.
The RealReal held its IPO July last year with a share price of $20. The stock price jumped 40% on the first day, touching $28 and giving the company a market value of $2.4 billion. Since then, the stock has been on somewhat of a rollercoaster ride, trading as high as $30 and as low $13. There has been a lot of uncertainty since November after a CNBC report alleged that not all goods are properly authenticated as claimed by the company. At the time of writing, the share price was hovering around $15.50.
The RealReal is prioritizing growth over profitability. This is very much the way growth companies like Amazon, Netflix and Uber have grown.
This means the company is not yet profitable but is keeping expense growth in line with revenue growth. In the 12 months up to September 2019, the company generated $282 million in revenue and a net loss of $104 million.
The company’s sales have grown at between 53 and 71% over the last year, and the market is now waiting for the next earnings report to see if that trend is continuing. Wall Street analysts are expecting year on year growth to slow to 40% for the quarter ended December 2019, and then accelerate again later this year.
Innovative and new companies like Tesla, Uber and Beyond Meat are popular among millennial investors. The same is true for The RealReal, although the stock is not yet as well known.
According to Robintrack, 2,500 Robinhood investors bought the stock immediately after the IPO and that number steadily grew to 4,500 by October. Since then, the number of Robinhood holders has plateaued around 5,000.
This may be a lot lower than the 240,000 Robinhood investors who own Apple or the 150,000 who own Tesla, but for its size and age, The RealReal is punching above its weight. For example, Google, a company worth 800 times more, has just 10 times more holders on the Robinhood platform. It also implies there is a lot of room for new investors to load up on the stock.
As per Whalewisdom, which tracks institutional (Hedge Fund) ownership, there was some buying in the months after the IPO. Since then, hedge funds have taken profits, while only a few large funds have added the stock to their portfolios. This suggests the stock is far more popular with retail investors at this point.
What about competitors?
Most of The RealReal’s competitors with comparable revenue are focused on general clothing, rather than luxury goods. eBay runs an authentication program for luxury goods, but the service is quite new, and revenue is not disclosed.
There are also several niche exchanges that specialize in specific brands and guarantee their authenticity. Bob’s Watches, for example, is an online marketplace for used Rolex watches.
In the long term, eBay is likely to be the company’s biggest competitor. For now, though, The RealReal enjoys a market leadership position.
The good and the bad
We have covered most of The RealReal’s stock’s positives already: The market for secondhand luxury goods is growing. Platforms that authenticate goods are attracting new users who were previously nervous about buying or selling luxury goods online. Luxury goods brands are generally supportive of the concept, because an active resale market is good for their businesses. And, the RealReal has established itself as a market leader and specialist in the field.
Unfortunately, it’s not all good news. There are several risks and weaknesses you should be aware of before you consider investing in The RealReal.
A quick glance on the Finviz website shows that the majority of news alerts concern class action lawsuits against The RealReal. Most of these concern allegations made about the company’s authentication process. Even if the lawsuits don’t amount to anything, they may be a distraction for the company.
Company insiders have sold over 1 million shares in the past three months. This is small fraction of the total number of shares held by insiders – but the timing just ahead of the next set of results may suggest weak growth.
Finally, it is not certain whether The RealReal can actually make a profit. The model still needs to be proven, and as competition increases, profit margins may fall while costs don’t.
The RealReal has produced very impressive growth over the last two quarters. However, it remains to be seen whether or not the company can be profitable in the face of growing competition.
Wall Street’s analysts have price targets for the share of between $19 and $23 over the next 12 months. The company’s next financial results are due on February 25. If these results show that the growth trend is continuing, those targets may still be in reach. If, however growth is slowing, those targets may be revised lower.