The RealReal (NASDAQ:REAL) Reports Strong Q1, Stock Soars

Full Report / June 28, 2022
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Secondhand luxury marketplace The RealReal (NASDAQ: REAL) reported Q1 FY2022 results beating Wall St's expectations, with revenue up 48.4% year on year to $146.7 million. Guidance for next quarter's revenue was $155 million at the midpoint, 2.16% above the average of analyst estimates. The RealReal made a GAAP loss of $57.4 million, down on its loss of $55.9 million, in the same quarter last year.

The RealReal (REAL) Q1 FY2022 Highlights:

  • Revenue: $146.7 million vs analyst estimates of $136.3 million (7.59% beat)
  • EPS (non-GAAP): -$0.47 vs analyst estimates of -$0.52
  • Revenue guidance for Q2 2022 is $155 million at the midpoint, above analyst estimates of $151.7 million
  • The company reconfirmed revenue guidance for the full year, at $650 million at the midpoint
  • Free cash flow was negative $57.8 million, compared to negative free cash flow of $28.4 million in previous quarter
  • Gross Margin (GAAP): 53.5%, down from 59% same quarter last year
  • Trailing 12 months Active Buyers : 828 thousand, up 141 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 very strong, averaging 33.6% annually. The RealReal's revenue took a hit when the pandemic first hit, but it has since rebounded strongly, as you can see below.

The RealReal Total Revenue

This quarter, The RealReal beat analyst estimates and reported an impressive 48.4% year on year revenue growth.

Guidance for the next quarter indicates The RealReal is expecting revenue to grow 47.7% year on year to $155 million, slowing down from the 83.1% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 34.8% over the next twelve months.

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 18.9% annually to 828 thousand users. This is a strong growth for a consumer internet company.

The RealReal Trailing 12 months Active Buyers

In Q1 the company added 141 thousand paying users, translating to a 20.5% 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 9.73%. The ability to increase price while still growing its user base shows the value of The RealReal’s platform. This quarter, ARPU grew 23.1% year on year, reaching $177.17 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 22% 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 strong brand reputation, which gives The RealReal the freedom to invest its resources into new growth initiatives while still maintaining optionality in the business.

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 $35.3 million this quarter, which translates to a -24.1% margin. The company is one of the least profitable consumer internet business and over the last twelve months The RealReal has EBITDA margins of -25.2%.

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 $57.8 million in Q1, reducing the cash burn by 2.96% year on year.

The RealReal Free Cash Flow

The RealReal has burned through $191.2 million in cash over the last twelve months, a -37.1% 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 Q1 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 $435 million and more than $361 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth The RealReal delivered this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company currently trades at $3.2 per share.

Is Now The Time?

The RealReal may have had a good 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.

There's no doubt that the market is optimistic about The RealReal's growth prospects, as its price/gross profit ratio based on the next twelve months of 1.0x would suggest. We can find things to like about The RealReal and there's no doubt it is a bit of a market darling, at least for some. But it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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