The RealReal (NASDAQ:REAL) Surprises With Q4 Sales But Guidance Underwhelms

Full Report / February 28, 2023
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Secondhand luxury marketplace The RealReal (NASDAQ: REAL) reported Q4 FY2022 results topping analyst expectations, with revenue up 10% year on year to $159.7 million. However, guidance for the next quarter was less impressive, coming in at $140 million at the midpoint, being 13.2% below analyst estimates. The RealReal made a GAAP loss of $38.6 million, improving on its loss of $52.2 million, in the same quarter last year.

The RealReal (REAL) Q4 FY2022 Highlights:

  • Revenue: $159.7 million vs analyst estimates of $157.2 million (1.53% beat)
  • EPS (non-GAAP): -$0.29 vs analyst estimates of -$0.36
  • Revenue guidance for Q1 2023 is $140 million at the midpoint, below analyst estimates of $161.4 million
  • Free cash flow was negative $6.97 million, compared to negative free cash flow of $17.4 million in previous quarter
  • Gross Margin (GAAP): 60.5%, up from 55.6% same quarter last year
  • Trailing 12 months Active Buyers : 1 million, up 201 thousand year on year

Founded by consignment store aficionado Julie Wainwright, The RealReal (NASDAQ: REAL) is an online marketplace for buying and selling secondhand luxury goods.

The RealReal provides an online marketplace for consignment luxury goods with its key differentiation being that it authenticates each item sold on its platform, reducing risk for buyers of expensive secondhand goods, while also enabling it to provide fulfillment services. The top selling categories are men’s and women’s apparel, watches and jewelry, and home and art. Its authentication differentiation has enabled The RealReal to grow an audience of buyers, which in turn has attracted high net worth individuals willing to sell their used goods. The key differentiation on the seller side is that The RealReal has reduced the friction of selling by taking care of packaging, shipping, listing and photos.

This intermediary model is more expensive to operate than a traditional marketplace, which tends to be asset lite, merely connecting buyers and sellers, but necessary to unlock a previously latent supply of merchandise that was relegated to brick and mortar consignment shops. As a result, The RealReal charges one of the highest take rates (commissions) in online commerce.

Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition.

The RealReal (NASDAQ:REAL) competes with Poshmark (NASDAQ: POSH), ThredUp (NASDAQ: TDUP) and Revolve Group (NYSE: RVLV).

Sales Growth

The RealReal's revenue growth over the last three years has been strong, averaging 27.9% annually.

The RealReal Total Revenue

This quarter, The RealReal reported a mediocre 10% year on year revenue growth, roughly in line with what analysts expected.

The RealReal is guiding for revenue to decline next quarter 4.57% year on year to $140 million, a further deceleration on the 48.5% year-over-year decrease in revenue the company had recorded in the same quarter last year.

Usage Growth

As a online marketplace, The RealReal generates revenue growth both by growing the number of buyers using the platform and how much each of those buyers spends.

Over the last two years the number of The RealReal's paying users, a key usage metric for the company, grew 21.6% annually to 1 million users. This is a strong growth for a consumer internet company.

The RealReal Trailing 12 months Active Buyers

In Q4 the company added 201 thousand paying users, translating to a 25.2% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for The RealReal it a function of how much its users spend on the platform and what is The RealReal's take rate (cut) from each transaction.The RealReal ARPU

The RealReal’s ARPU growth has been decent over the last two years, averaging 18.9%. The ability to increase price while still growing its user base shows the value of The RealReal’s platform. This quarter, ARPU shrank 12.1% year on year, settling in at $159.97 for each of the paying users.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like The RealReal grow by a combination of product virality, paid advertisement or incentives.

The RealReal is very efficient at acquiring new users, spending only 18.3% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a combination of scale and a highly differentiated product offering, which gives The RealReal the freedom to invest its resources into new growth initiatives while still maintaining optionality.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

The RealReal's EBITDA was negative $20.2 million this quarter, which translates to a -12.6% margin. The company is one of the least profitable consumer internet business and over the last twelve months The RealReal has EBITDA margins of -18.8%.

The RealReal Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. The RealReal burned through $6.97 million in Q4.

The RealReal Free Cash Flow

The RealReal has burned through $128.5 million in cash over the last twelve months, a -21.3% free cash flow margin. This low FCF margin is a result of The RealReal's need to continue investing in the business in order to fuel growth.

Key Takeaways from The RealReal's Q4 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on The RealReal’s balance sheet, but we note that with a market capitalization of $131.4 million and more than $293.8 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We enjoyed seeing The RealReal’s strong user growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak in absolute terms. Overall, this quarter's results could have been better. The company is up 1.47% on the results and currently trades at $1.38 per share.

Is Now The Time?

The RealReal may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although The RealReal is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been good, though we don't expect it to maintain historical growth rates. But while its user acquisition efficiency is best in class, the downside is that its EBITDA margins indicate low profitability of its core business when compared to other consumer internet businesses and its cash burn raises the question of whether it can sustainably maintain its growth.

The RealReal's price/gross profit ratio based on the next twelve months is 0.3x. In the end, beauty is in the eye of the beholder. While The RealReal wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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