The RealReal Could Be Close To A Deal (NASDAQ:REAL)

The RealReal (NASDAQ:REAL) describes itself as:

the world’s largest online marketplace for authenticated, consigned luxury goods. We are revolutionizing luxury resale by providing an end-to-end service that unlocks supply and creates a trusted, curated online marketplace for buyers globally.

REAL is currently operating at a ~$2 billion in GMV run rate, and guided for a path to $5 billion in GMV in the next few years, which would drive about $1.5 billion revenue assuming its take-rate holds at 35%. Some would challenge the 35% take-rate as competition takes hold, but REAL provides a full end-to-end solution for luxury goods including its “white glove” service. Convenience is probably more of a competitive differentiator in the luxury goods market, so I could see the take-rates staying north of 30% given brick/mortar consignment shops have even higher take-rates.

No one would deny the size of the luxury resale market ($25 billion TAM, expected to grow to $60 billion in 2025), or the fact that it is growing 4x more rapidly than primary, first-hand sales. Historically the luxury brand owners such as LVMH (OTCPK:LVMUY), Kering (OTCPK:PPRUY), Tiffany (TIF) eschewed the secondhand market as it was viewed as a way to cheapen their brands, but given Millennials and Gen Z are flocking to the second-hand market for value and for ESG purposes, the second-hand market represents a great way to grow the customer base of young consumers.

Notably, the last few weeks have featured many noteworthy events in the luxury secondhand resale market which appears to potentially put REAL in play before its earnings release on November 8.

• After years of desiring to enter the luxury goods market, Amazon (AMZN) forged a partnership with What Goes Around Comes Around to resell authenticated secondhand goods on the luxury section of its site.
• eBay (EBAY) CEO Jamie Iannone provided an interview to the Financial Times discussing the company’s efforts to redouble its focus in the authenticated luxury goods and collectibles space, suggesting that those categories could grow to half its GMV by 2025. eBay already bought TCGPlayer, a trading card marketplace for ~$300 million in August.
• The GOAT Group acquired Grailed for an undisclosed amount. The GOAT Group reportedly raised money at a $3.8 billion valuation at a $2 billion GMV run-rate in 2021.
• Vestiare Collective acquired Tradesy in March 2022. Vestiare is probably the most comparable online platform to REAL. Vestiare received an investment from Kering and others in March 2021 at a $1.6 billion valuation. The combined Vestiare/Tradesy was reportedly at a $1 billion GMV run-rate as of March 2022.
• Another week has passed with no permanent CEO announcement at REAL.

The RealReal Valuation

If REAL is indeed an acquisition candidate by a larger player, what is it worth? It is true that REAL is burning cash and took on ~$500 million convertible debt in 2020 and 2021, but the company would suggest that much of its cash burn over the past couple years was fixed investment in new retail locations to drive more supply to its online platform and technology investments to drive AI authentication services. Taken together, those investments should lower long range operating costs as a percentage of revenue as it scales to a $5 billion GMV marketplace. To that end, co-interim CEO and CFO Robert Julian suggested that 60-65% of operating expenses are fixed while the rest is variable, suggesting solid operating leverage at higher levels of sales going forward.

However, these explanations for REAL “Vision 2025” operating model are likely more enticing to a larger, well-capitalized player looking for a foothold in the large luxury resale market versus public market investors who see cash burn for the next 12-18 months and an uncertain funding environment going forward.

I understand marketplace models historically garner 1-2x GMV multiples for rapidly growing two-sided marketplaces provided they are also profitable and playing in a market with a large TAM. That appears to be about the multiples that GOAT Group and Vestiare were valued out in capital raises in 2021.

Poshmark (POSH) recently sold for about 0.6x run-rate GMV, or about $1.2 billion enterprise value after backing out net cash while growing GMV at 9% YoY in the most recent quarter and operating at roughly break-even.

I believe REAL has long-run 30% GMV growth characteristics, but it remains unprofitable and has about ~$225-$250 million net debt currently coupled with a $2 billion GMV run-rate. Given the solid growth rates and large TAM but elusive profitability, I’m assuming REAL is worth about 0.4x GMV — $800 million — less $225-$250 million in net debt, or about $550-$575 million (or about $6 per share, potentially subject to some dilution from Make Whole Fundamental Change of Control provisions in the convertible bond indentures).

If REAL is indeed the subject of M&A speculation, there is a wide gap between the current $150 million market cap and $600 million takeover value for the company.

On a side note, REAL lead independent director Rob Krolik was appointed to the Board of embattled company Leaf Group in November 2020, and the company was acquired by Graham Holdings (GHC) in April 2021. His track record is good for selling public companies.

Now that founder/CEO Julie Wainwright relinquished her CEO and Chairperson of the Board duties in June 2022, I suspect the Board might be more open to M&A discussions with Ms. Wainwright out of the picture. Considering the board is yet to replace Ms. Wainwright with a permanent CEO after a 4.5-month search, perhaps the company is indeed fielding offers to maximize shareholder value.

Time will tell, but market participants certainly appear to be looking for bargains in the resale market as the industry rapidly consolidates.