Overview   

The RealReal Inc (REAL), headquartered in San Francisco, CA, is an online marketplace of authenticated consigned resale of luxury goods including fashion products, jewelry and watches. The company also operates retail stores, including flagship stores in New York, Los Angeles and California, and smaller neighborhood stores at other locations.

REAL earns revenue from the consignment of pre-owned luxury goods through online marketplace and retail stores (77% of 3Q23 revenue). It also generates direct revenue from the sale of company-owned inventory (13%), while earning fees from shipping services (10%).

Advisory hire

As per the 3Q23 earnings release, REAL hired Moelis & Company and Wachtell, Lipton, Rosen & Katz to support the refinancing of convertible notes.

Liquidity and cash burn 

As of 3Q23, the company’s cash-only liquidity stood at USD 171m. A consistent decline in the topline since the last three quarters coupled with higher operating costs has led to cash burn ever since the inception of the company. We believe the cash burn will continue but at a declining rate due to improvement in gross margin and lower SG&A expenses as a result of cost savings initiatives undertaken since FY22 (see 1Q23 report for details on cost savings).

REAL is likely to record a cash burn of USD 101m in FY23 and USD 53m in FY24E, leading to further reduction in cash balance (see chart below).

Financial performance

In 3Q23, revenue was down 7% YoY to USD 133m, driven by a shift from lower-margin direct business, wherein revenue decreased 49% YoY to USD 17m.

Consignment revenue grew 10% YoY to USD 103m in 3Q23, backed by 210bps improvement in take rate and 11% YoY rise in average order value to USD 513 (3Q22: USD 463) due to a shift towards higher-value items. However, shipping revenue decreased 13% YoY to USD 13m due to fewer orders amid the decrease in direct business.

Despite the reduction in revenue, gross margin expanded by 1,053bps to 70.6% in 3Q23, aided by cost-saving initiatives, a reduction in consignor inventory adjustments relating to lost and damaged products, and a drop in credit card fees and a shift from lower-margin direct revenue.

Consequently, adjusted EBITDA loss narrowed to negative USD 7m versus negative USD 28m in 3Q22, aided by a decline in SG&A expenses due to lower employee compensation expenses amid a decrease in headcount. REAL expects positive adjusted EBITDA in FY24, for the first time since its inception in FY19, as a result of the shift from the direct business and cost savings.

A decline in adjusted EBITDA loss and a reduction in capex resulted in a lower cash burn of USD 14m in 3Q23 (3Q22: USD 29m). While on an LTM basis, cash burn was down to USD 117m as of 3Q23 (LTM 3Q22: USD 151m), impacted by lower adjusted EBITDA loss, partially offset by higher capex.

Net debt and valuation

As of 3Q23, net debt increased to USD 289m (3Q22: USD 160m), as the cash balance declined to USD 171m (3Q22: USD 300m).

REAL currently trades at an EV/NTME revenue multiple of 0.9x versus the peer average of 0.6x.

Considering consistent cash burn and depleting liquidity, we have taken NTME revenue multiple range of 0.3x-0.4x, which translates into 53%-63% recovery for the convertible notes in our low case (currently trading at an average price of 56.6). At the same multiple range, we estimate no recovery for the equity (see Valuation table).

In our liquidation analysis, we anticipate 51%, 54% and 57% recovery for the convertible notes in our low, base and high case, respectively, with no recovery for other liabilities and equity holders (see Liquidation table below).

Tracking the significant margin expansion and narrowing adjusted EBITDA loss, the stock price is up 68% YoY to USD 2.36/share on 8 December 2023. The company’s 3% convertible senior notes due 2025 last traded on 15 November 2023 at 72.8, up 11 points YoY, yielding 23.4%. Its 1% convertible senior notes due 2028 last traded on 9 November 2023 at 40.5, up five points YoY, yielding 23.9%.