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The RealReal's (NASDAQ:REAL) Q4 Earnings Results: Revenue In Line With Expectations But Stock Drops


Full Report / February 29, 2024

Secondhand luxury marketplace The RealReal (NASDAQ: REAL) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 10.2% year on year to $143.4 million. On the other hand, next quarter's revenue guidance of $140 million was less impressive, coming in 1.6% below analysts' estimates. It made a non-GAAP loss of $0.07 per share, improving from its loss of $0.29 per share in the same quarter last year.

The RealReal (REAL) Q4 FY2023 Highlights:

  • Revenue: $143.4 million vs analyst estimates of $142.5 million (small beat)
  • EPS (non-GAAP): -$0.07 vs analyst estimates of -$0.11
  • Revenue Guidance for Q1 2024 is $140 million at the midpoint, below analyst estimates of $142.2 million
  • Management's revenue guidance for the upcoming financial year 2024 is $592.5 million at the midpoint, beating analyst estimates by 1.9% and implying 7.9% growth (vs -8.9% in FY2023)
  • Free Cash Flow of $3.79 million is up from -$19.05 million in the previous quarter
  • Gross Margin (GAAP): 74%, up from 60.5% in the same quarter last year
  • Trailing 12 months Active Buyers : 922,000, down 76,000 year on year
  • Market Capitalization: $176.7 million

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.

Online Marketplace

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).

Sales Growth

The RealReal's revenue growth over the last three years has been strong, averaging 26.7% annually. This quarter, The RealReal reported a year on year revenue decline of 10.2%, in line with analysts' estimates.

The RealReal Total Revenue

The RealReal is expecting next quarter's revenue to decline 1.3% year on year to $140 million, improvement on the 3.3% year-on-year decrease it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $592.5 million at the midpoint, representing 7.9% growth compared to the -8.9% decline in FY2023.

Usage Growth

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 14.6% annually to 922,000. This is solid growth for a consumer internet company.

The RealReal Trailing 12 months Active Buyers

Unfortunately, The RealReal's users decreased by 76,000 in Q4, a 7.6% drop since last year.

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 RealReal ARPU

The RealReal's ARPU has declined over the last two years, averaging 3.1%. Although the company's users have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPU declined 2.8% year on year to $155.50 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert 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 74% this quarter, up 13.5 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 $0.74 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. The RealReal Gross Margin (GAAP)

Over the past year, The RealReal has seen its already strong gross margins rise, averaging 68.5%. These robust unit economics, driven by the company's lucrative business model and strong pricing power, are higher than its peers and allow The RealReal to make more investments in product and marketing.

User Acquisition Efficiency

Consumer internet businesses like The RealReal grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

The RealReal is extremely efficient at acquiring new users, spending only 15.7% 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 $1.44 million, resulting in a 1% margin. Unfortunately, The RealReal's performance has been weaker than many other consumer internet businesses, averaging negative 10% EBITDA margins over the last four quarters.

The RealReal Adjusted EBITDA Margin

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's free cash flow came in at $3.79 million in Q4, turning positive year on year.

The RealReal Free Cash Flow

The RealReal has burned through $103.4 million of cash over the last 12 months, resulting in an uninspiring negative 18.8% 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 Q4 Results

It was good to see The RealReal beat analysts' revenue expectations, but looking under the hood, we weren't as impressed. Its average order value was 10% larger than in the same quarter last year thanks to higher prices for its products. That is encouraging, but we care most about sales volumes, which declined 17%. Furthermore, its number of active buyers fell.

On the bright side, the company delivered positive EBITDA for the first time as it focused on its consignment business, a strategic shift it enacted in 2023. Its revenue and EBITDA guidance for the full year 2024 also topped Wall Street's projections.  

Overall, this was a decent quarter. The company is down 5.6% on the results and currently trades at $1.67 per share.

Is Now The Time?

The RealReal may have had an average 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. Although its revenue growth has been good over the last three years, Wall Street expects growth to deteriorate from here. And while its user acquisition efficiency is best in class, the downside is its ARPU has declined over the last two years. On top of that, its growth is coming at a cost of significant cash burn.

The RealReal's price/gross profit ratio based on the next 12 months is 0.5x. 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.

Wall Street analysts covering the company had a one-year price target of $2.92 per share right before these results (compared to the current share price of $1.67).

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