The RealReal is an online marketplace for consigned luxury goods -- think eBay (EBAY +1.50%) but only for high-end fashion items such as handbags, watches, jewelry, and art. Founded just eight years ago, the company has already achieved unicorn status in the private markets but is now getting ready to go public. The company filed its S-1 IPO prospectus with the SEC, although it hasn't yet determined exactly how much money it will raise.
The RealReal is expected to hit the public markets this year under the ticker REAL. Could it be worth adding to a growth-oriented investment portfolio?
The RealReal marketplace
According to The RealReal, the existing market for luxury resale is outdated, fragmented, and full of counterfeit goods, which has made both buyers and sellers hesitant to participate. The RealReal is solving this problem with its trusted online marketplace aimed at helping to "recirculate" luxury goods to people who want them the most. This benefits consigners who sell the luxury items they no longer use as well as buyers who get to own secondhand luxury products at a discount to what they would cost brand new.
Importantly, The RealReal is a marketplace, not a retailer. It doesn't own the inventory it sells -- the company serves to connect buyers and consigners. Consigners -- the people who want to sell their items -- mail their items to The RealReal, where the luxury goods are inspected and appraised. If the consigner agrees with the appraisal, The RealReal will list the item on its website or in one of its three physical locations. On average, The RealReal keeps a 35% commission on each sale.
Image Source: Getty Images.
The value of trust
One of the biggest problems in secondhand luxury shopping is trust. Customers need to be confident that the items on the platform are genuine. The RealReal employs nearly 200 experts trained to examine luxury goods, authenticate, and appraise them. There is no guarantee the company's experts will always filter out fake goods and get the appraisals right, but the dedicated focus on the problem provides comfort to buyers and sellers and allows The RealReal to differentiate itself from competitors.
Could another e-commerce player like Amazon compete with The RealReal? Yes, but first they would need to develop the same expert infrastructure to authenticate items. eBay has actually entered the market for luxury goods reselling -- it launched eBay Authenticate in 2017, which allows eBay sellers to have luxury items certified by experts. However, eBay has a poor reputation as a result of issues with selling counterfeit goods and other scams. A person willing to spend thousands of dollars on a designer handbag or rare watch may be more inclined to use a service such as The RealReal that specializes in high-end products and has focused on running an authentic marketplace from day one.
The RealReal's focus on the luxury niche has made it an attractive marketplace for both buyers and consigners. The company has made it easy to sell goods on its platform: Just mail in products and let The RealReal take care of the rest. Buyers feel good about shopping on the platform because of its focus on authentic luxury. As a result of making both buyers and consigners happy, the platform has flourished and now holds the title of the largest marketplace for consigned luxury goods.
Losing money but growing quickly
Like so many unicorns, The RealReal is a fast-growing business, but it's unprofitable.
As the table below shows, The RealReal grew its sales by 54.9% last year and reported a net loss of $75.8 million. This level of growth is extremely enticing, but it's worth pointing out that the growth slowed down a bit in the first quarter of 2019 compared to full-year 2018.
It is also notable that the company appears to be losing more money each year, despite significant revenue growth. This begs the question of whether the company's growth at the expense of margins is sustainable. The company has plenty of cash, and the IPO will provide it with even more, but at some point, investors will want to see the company show progress toward becoming profitable.
| Metric | 2017 | 2018 | Q1 2018 | Q1 2019 |
|---|---|---|---|---|
| Revenue | $133.9 million | $207.4 million | $46.5 million | $69.3 million |
| YOY Change | 54.9% | 49.1% | ||
| Gross profit | $87.6 million | $136.9 million | $30.6 million | $42.4 million |
| Gross margin | 65.5% | 66.0% | 65.9% | 61.2% |
| Net loss | ($52.3) million | ($75.7) million | ($14.1) million | ($23.2) million |
| Gross merchandise value | $492.2 million | $710.8 million | $158.4 million | $224.1 million |
| Active buyers | 291,000 | 416,000 | 326,000 | 456,000 |
Data Source: The RealReal IPO Prospectus.
The RealReal also reports figures for the number of active buyers on its platform and the gross merchandise value (GMV) of goods sold through its platform. Both active buyers and GMV are growing at a rapid clip, which shows that both sides of the marketplace platform are healthy.
To those paying attention to the IPO market, it shouldn't be a surprise that The RealReal is significantly unprofitable, nor should it be a reason to immediately avoid investing in the company. Many of the big IPOs in 2019 so far have been for unprofitable companies, with Zoom Video being a notable exception. A lack of profitability hasn't stopped an IPO from being successful as long as the company is building long-term value in its business. The RealReal has certainly been investing in its business -- the question is whether the growth is sustainable and how long it will take the company to become profitable.
Previewing the upcoming IPO
There is a lot to like about The RealReal as a business. An old saying states, "There is riches in the niches," and The RealReal has a commanding presence in the niche of luxury consignment. By hiring an army of experts to authenticate and appraise goods, the company is providing a valuable service in an underserved market where competitors haven't lived up to the task. The RealReal's business moat is its brand, built on a reputation as a fair and trusted marketplace for high-end luxury goods.
The fact that The RealReal's business is unique and defensible is important, but it isn't the only success factor for the IPO. The stock's valuation and whether investors buy the long-term growth story are also crucial. The IPO valuation remains unknown, but based on recent private funding rounds, investors should expect it to be at or above $1 billion. At just over $200 million in annual revenue, a $1 billion valuation roughly implies a price-to-sales ratio of five times. This is just speculation, but a 5x price-to-sales ratio wouldn't come across as particularly expensive for a company growing revenue over 50% per year relative to other recent IPOs.
There are some concerning details about The RealReal's financial performance. Revenue growth appears to be decelerating, and net losses have grown. For the IPO to be successful, the company will need to assure investors that growth will continue to be robust and that it will eventually turn a profit.
Investors should pay attention to the coming quarters: If growth continues to decelerate and losses fail to reverse, the business may be in trouble. However, if growth holds steady (or accelerates) and losses are kept at bay, that indicates management has a visible path to profitability.
