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June 28, 2019 

NEW YORK, United States — On The RealReal, a Rolex GMT-Master II with encrusted diamonds and sapphires currently sells for $59,995. Also on the site is an $18 Alice + Olivia chain-link knit vest. For the same price, you might be able to buy a share of the company as well.

The RealReal is slated to go public on the Nasdaq Friday, offering 15 million shares with a projected pricing range between $17 and $19. How those shares fare after the bell will depend on whether investors see a path to profitability for the resale platform.

The RealReal differentiates itself within the crowded resale space with its focus on luxury goods and elaborate authentication process. Every item is physically inspected by one or more members of a team of more than 100 gemologists, horologists, art curators and other experts — even the $18 vests  then photographed and posted for sale. For shoppers and sellers alike, this is what makes The RealReal so appealing: items are attractively presented with a guarantee of authenticity amid the online resale market’s sea of poorly shot counterfeits.

But all those authenticators and photographers don’t come cheap. While the luxury consignment platform saw its revenue double last year, to $207 million, losses amounted to $75 million, a 45 percent increase from 2017.

The RealReal argues that it has a winning formula to grab a huge share of the $24 billion secondhand market. Like Amazon, Google and Facebook before it, today’s losses will prove to be an afterthought as the company scales. With its IPO, The RealReal is no doubt hoping for a similar reception to Revolve, the online fashion retailer that saw its shares spike nearly 90 percent in its first day of trading.

“The mutual funds will invest because they’re investing long-term, and hedge funds will invest because they’ll have a pop in the beginning,” said Jane Hali, Chief Executive of research firm Jane Hali & Associates, which counts a number of investment firms among its clients. “When I spoke to my clients about The RealReal, the caution of the expense structure didn’t put them off because they’re used to it now … It’s the Amazon effect.”

For a company like The RealReal to fuel topline growth is a capital-intensive feat that requires big bucks for not only marketing but also authentication. More buyers and sellers means more products, which necessitates more authenticators in more warehouses.

For a business model like The RealReal’s, “there’s not exactly a long history to look to for what profitability looks like at scale,” said Bernstein analyst Jamie Merriman. “The outlook for profitability is more of a to-be-determined [issue] … The primary goal for the business is more likely to be continuing to grow the topline, grow customers, grow consignors and grow the amount of products they’re moving.”

Merriman, citing Bain, points out in a recent note that resale represents 8.5 percent of the $25 billion luxury market. That share will likely grow. Already, secondhand apparel is growing 21 times faster than the retail industry overall, according to a report by GlobalData and ThredUp, which predicts it will reach $51 billion by 2023.

In the resale playing field, The RealReal has only captured market share in the low single digits, according to Merriman.

The company plans on expanding inventory in categories like jewellery, home goods and menswear. Its core of women’s apparel and accessories currently make up about 67 percent of the value of total inventory.

Beyond acquiring new customers and increasing their lifetime value, The RealReal also plans to continually invest in its tech-driven infrastructure, expand its brick-and-mortar presence and grow internationally, it said in the IPO filing.

For most online companies, customer acquisition through marketing racks up the highest bills. The RealReal spends about 20 percent of its total sales on marketing — down from 27 percent in 2017 but still significantly higher than other retailers and e-commerce players, according to Merriman. But as brand awareness rises, word-of-mouth marketing will further mitigate these costs, she added.

The RealReal’s biggest operating cost, however, is what the company calls “Ops & Tech,” which comprises of IT costs, product fulfilment and authentication. This category cost $105 million in 2018, which implies a cost of about $40 per item of the 2.6 million products sold last year. So when a customer buys a $15 Rag & Bone T-shirt, the company loses $25 — and that’s not counting the marketing cost per acquisition and SG&A. Of course, most items for sale on the site cost far more than $25: the average order value was $446 in 2018.

Those investments could pay off if the company can find ways to authenticate items using technology, limiting the number of authenticators it needs to retain. Some resellers, including Tradesy, already use algorithms to verify sellers rather than vet individual items. However, The RealReal has said it is committed to having all products physically authenticated by human specialists rather than artificial intelligence.

For its part, The RealReal projects that these costs will decrease as a percentage of revenue in the long term as they continue to invest in technology that could make authentication more efficient.

"We have built a proprietary technology platform that powers our complex single-SKU inventory model and merchandising operations, which include authenticating, copywriting, pricing and photographing up to 14,000 unique items a day in 2018," the company in its IPO filing. "By leveraging our technology platform, automation and machine learning, we are able to drive operational efficiencies at scale."

The RealReal declined to comment for this story.

Regardless of its high operating costs, Hali believes The RealReal will perform well.

“It’s a disruptor and a part of today’s market, part of today’s shared economy,” she said, pointing to Footlocker’s investment in sneaker resale site GOAT and Neiman Marcus’ minority stake in Fashionphile, an e-commerce platform similar to The RealReal.

The RealReal’s IPO follows that of Revolve last week and Farfetch in late last year. Given the decline of traditional brick-and-mortar retail, investors have an appetite for new concepts, Hali added. “Retail has to be disrupted and the focus moving forward will be subscription sites, resale sites, specialty concepts, and off-price models, and this is all taking share from the department store sector.”

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