Secondhand luxury marketplace The RealReal (NASDAQ: REAL) reported results ahead of analysts' expectations in Q3 FY2023, with revenue down 6.7% year on year to $133.2 million. On the other hand, next quarter's revenue guidance of $140 million was less impressive, coming in 6.2% below analysts' estimates. Turning to EPS, The RealReal made a non-GAAP loss of $0.15 per share, improving from its loss of $0.38 per share in the same quarter last year.
The RealReal (REAL) Q3 FY2023 Highlights:
- Revenue: $133.2 million vs analyst estimates of $125.2 million (6.4% beat due to higher GMV Average Order Value despite a miss on Active Buyers and Orders)
- EPS (non-GAAP): -$0.15 vs analyst estimates of -$0.26
- Revenue Guidance for Q4 2023 is $140 million at the midpoint, below analyst estimates of $149.3 million
- Free Cash Flow was -$19.1 million compared to -$41.8 million in the previous quarter
- Gross Margin (GAAP): 70.6%, up from 60.1% in the same quarter last year
- Trailing 12 months Active Buyers : 954,000, up 4,000 year on year (miss vs. expectations of 973,000)
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 that feed back into further customer acquisition.
The RealReal (NASDAQ:REAL) competes with Poshmark (NASDAQ: POSH), ThredUp (NASDAQ: TDUP) and Revolve Group (NYSE: RVLV).
The RealReal's revenue growth over the last three years has been strong, averaging 27% annually. This quarter, The RealReal beat analysts' estimates but reported a year on year revenue decline of 6.7%.
The RealReal is expecting next quarter's revenue to decline 12.3% year on year to $140 million, a reversal of the 10% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 6.4% over the next 12 months.
As an online marketplace, The RealReal generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.
Over the last two years, The RealReal's users, a key performance metric for the company, grew 18.4% annually to 954,000. This is solid growth for a consumer internet company.
In Q3, The RealReal added 4,000 users, translating into 0.4% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like The RealReal because it measures how much the company earns in transaction fees from each user. Furthermore, ARPU gives us unique insights as it's a function of a user's average order size and The RealReal's take rate, or "cut", on each order.
The company's ability to increase prices while maintaining its users shows the value of its platform. This quarter, ARPU declined 7.1% year on year to $139.59 per user.
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. The RealReal's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 70.6% this quarter, up 10.5 percentage points year on year.
For online marketplaces like The RealReal, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, The RealReal had $0.71 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Over the last 12 months, The RealReal has seen its already reasonably high gross margins rise, averaging 65.1%. These strong unit economics are ahead of its peers and indicative of The RealReal's solid business model, competitive products and services, and lack of meaningful pricing pressure.
User Acquisition Efficiency
Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like The RealReal grow from a combination of product virality, paid advertisement, and incentives.
The RealReal is extremely efficient at acquiring new users, spending only 16.2% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and customer acquisition advantages from scale, giving The RealReal the freedom to invest its resources into new growth initiatives while maintaining optionality.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
This quarter, The RealReal's EBITDA came in at negative $7 million, resulting in a -5.2% margin. Unfortunately, The RealReal's profitability is weaker than many other consumer internet businesses, averaging -13.5% EBITDA margins over the last four quarters.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. The RealReal burned through $19.1 million in Q3, increasing the cash burn by 9.6% year on year.
The RealReal has burned through $114.2 million of cash over the last 12 months, resulting in an uninspiring negative 20.8% free cash flow margin. This low FCF margin stems from The RealReal's capital intensive business model and desire to stay competitive.
Key Takeaways from The RealReal's Q3 Results
Although The RealReal, which has a market capitalization of $162.4 million, has been burning cash over the last 12 months, its more than $170.8 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We enjoyed seeing The RealReal exceed analysts' GMV (Gross Merchandise Value) and revenue expectations this quarter, driven by higher-than-expected Average Order Values (Active Buyers and Number of Orders missed). Adjutsed EBITDA also beat. On the other hand, revenue guidance for next quarter missed Wall Street's estimates. For the full year, GMV and revenue guidance was lowered but Adjusted EBITDA was raised, signaling a more profitable business. Overall, the results were mixed. The stock is up 8.6% after reporting and currently trades at $1.74 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.
We cheer for everyone who's making the lives of others easier through technology, but in the case of The RealReal, we'll be cheering from the sidelines. Its revenue growth has been good over the last three years, though we don't expect it to maintain that historical pace. And while its user acquisition efficiency is best in class, the downside is that its cash burn raises the question of whether it can sustainably maintain growth. On top of that, its ARPU is growing slowly.
The RealReal's price/gross profit ratio based on the next 12 months is 0.4x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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