A recession is starting to look like a possibility. Decades-high inflation is putting a strain on household budgets, housing costs are still setting records, and consumer confidence is plunging. The steep sell-off in stocks and bonds isn't helping, either.
When you think about industries that have a good chance of holding their own during a recession, apparel probably doesn't come to mind. Consumers can easily trade down for less expensive items, stretch out the lifespan of their existing wardrobe, and stick to buying only the essentials when necessary. It's easy to slash spending on apparel when times are tough.
One way a company can do well during a recession is to pitch itself as a money-saving alternative. Another way is to provide a method for consumers to generate some extra cash. Apparel resale marketplace Poshmark (POSH) does both. While there are no guarantees, Poshmark may do far better during a recession than the market seems to think.
Image source: Poshmark.
A massive opportunity
Consignment shops are a convenient way to sell old clothes, but they take big cuts of each sale since they handle storing and selling the items. Poshmark operates differently by providing a massive pool of buyers and leaving the selling up to the seller. Poshmark's platform mixes social media elements with e-commerce, providing sellers tools to connect with buyers and market their items.
Poshmark takes 20% of each sale, or $2.95 from sales below $15. That's a much better deal for sellers than consignment shops, assuming they're willing to put in the work. Those fees give sellers access to 7.8 million active buyers who collectively spent nearly $500 million through the platform in the first quarter.
Those millions of buyers are on the platform for a reason. Instead of paying full price for high-quality apparel and accessories, Poshmark offers a way to snag those items at a discount. And buyers can later resell those items to another buyer, generating additional fee revenue for Poshmark.
It's not hard to see how this model could help Poshmark prevent any major sales declines during a recession. Consumers who would normally buy new apparel may be more willing to turn to Poshmark to save some money. And those strapped for cash may see their closets as sources of some quick cash.
Poshmark rival ThredUp, which follows a consignment model, publishes an annual report on the resale market that provides plenty of optimism for the industry. ThredUp expects the global secondhand apparel market to grow by 24% this year, with sales more than doubling by 2026. The resale portion of the market is predicted to quadruple in size by that year.
This is all good news for Poshmark. These estimates could prove inaccurate, but with 93% of U.S. consumers over the age of 18 saying they're open to secondhand products, a recession could produce a surge of new buyers and sellers for Poshmark.
Enough cash to weather any storm
Poshmark isn't profitable yet, but its balance sheet can absorb losses for a long time. Even if the resale market performs much worse than expected in a weak economy, Poshmark will be able to weather just about any storm. Poshmark had $597 million in cash and no debt at the end of March. Despite being unprofitable, the company is producing positive free cash flow, so those losses haven't been eating away at the balance sheet.
That cash comes out to about $7.70 per share. Right now, Poshmark stock trades below $12 per share. While people may disagree on how to value that cash, it's clear that investors aren't assigning much value to the actual business. Poshmark's market cap is about $910 million as of this writing.
That rock-bottom market cap is the result of a painful decline for the stock. Shares of Poshmark have been slumping since soon after its initial public offering in early 2021, and they're down about 88% from their all-time high.
This massive drop on its own doesn't guarantee that Poshmark is a bargain. But with the expected growth of resale market, Poshmark's strong value proposition for buyers and sellers, and a cash-rich balance sheet, the stock could soar if the company can stand its ground in a recession.
