Chit Chat Stocks - Fundamental Analysis: Real Real (REAL)

Episode Date: April 9, 2020

On this show we discuss the Real Real. Find out why Brett gave it a rating of 7.4 and Ryan a rating of 6.  --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello, everyone. You are listening to the Fundamental Analysis Show, and today we got another retailer. Well, I guess a retail platform. Yeah, a little different. A little different. A little different. A new age retailer. It is the real, real, another online marketplace that has gotten hit. The stock's gotten clobbered with this coronavirus uncertainty and the recession that we're probably in right now. So, Ryan, do you want to get into it? What is the real real and then do you want to get into the history of how they got started yeah so first of all i cannot get enough of that name it's a bad it's a bad name right yeah that should be my

future growth opportunity is name change um it makes me think of a reality tv show right yeah or like uh like a you know high school hype beast at the skate park like that's you know that's yeah real real anyway okay so the real real is the world's largest online marketplace for authenticated consigned luxury goods so customers come to the real real in search of luxury items so think jewelry clothes luggage watches and it's not like it's not like the cheaper brands it's valenciagas louis vuitton's gucci yeezys of the world and i don't wear a lot of that stuff but like that's basically my closet but yeah it's a flex with me i don't have any of that so typically that's like what it's seen as is like it's a flex i i don't know a lot of people that

wear this stuff but it's supposed to be like look at me i'm rich um it's important to understand that they are essentially a trusted middleman so uh if you don't understand how consignment works it's basically and so i've worked at um like a jewelry store that sells consigned goods so it consignment is when someone is tasked with selling the goods but they legally belong to someone else so let's say i come in i've got a fifty thousand dollar necklace and i don't i couldn't sell it myself i don't really know how i could come in i could give it to them i don't i don't they don't buy it or anything like that but if they sell it for fifty thousand dollars they'll take commission that's essentially what the real real is but they're an online

platform for doing that so essentially they're a market maker for luxury goods yeah they've they've sort of i i don't think consignment existed online before this i'm not sure i mean i'm sure it did but it it didn't really make sense to me and then i looked up what their take what they take So it's RealReal takes a 50% commission on the goods they sell according to some websites, but they also have the ability to reduce the selling price by 20% immediately once you consign it over to them. So let's say it's $200 good. They can immediately sell it for $160 and take 50% from that $160. So you lose 40% or $40 off the top. now usually these are products that are being sold for so much that they're making money anyway so

it's kind of you're going here because they're able to sell your goods and it's second hand right so it's like you're you're done wearing it um or it's out of style or whatever and you're trying to pass it on to someone else after you're you're not going to use it anymore yeah or or you're a collector like there's a lot of people that collect and sell i mean a lot of i think a lot of this stuff is bought because it's like collections like look how many yeezys i have i don't know if you ever had those kids or those people that you were around that like had way too many different pairs of shoes um but i'll get into the history heads in my uh in my group i'll get into the history julie mainwright is the ceo and she wrote a letter and in her letter to

the shareholder she said that she had her aha moment when her friend was shopping at an upscale boutique that sold full price designer shoes jewelry and clothing in the front of the store and then consigned designer goods in the back of the store and her friend bought the consigned goods which surprised her because she said she'd never done that she'd never seen her friend do that before and she's like why'd you do that and the friend said well i trust the owner i know that it's authentic it's real it's a real designer good um and it's not it's not fake it isn't counterfeit so and then that spurred the idea if you're a trusted consignment store online you're going to get a lot of those shoppers that usually go into those upscale boutiques

um because it's pretty hard for it's hard for people to trust luxury items online because there's it's such a huge counterfeit market um you know the fake easies the fake balenciagas and stuff like that it's it's a huge market um but they went public on may 31st 2019 so almost a year ago now um yeah and that's basically the history leading up to that i'm not sure when it was founded yeah pretty interesting i don't think it was too long ago but they're not like super new uh their market cap right now though is 633 million dollars and their ticker is r-e-a-l it just spells real and the price is eight dollars and 75 cents as of april 8th 2020 again we all have always been saying this the latest shows but make sure to update uh on the price because

there's been with smaller cap stocks especially it's been crazy uh out there the past month they're unprofitable with a very negative free cash flow margin so they've been burning a ton of money although the recent quarter it had gotten better price to sales is two uh it's about flat two 63.9 gross margin which i guess is the beauty of being a platform so not it's not based on all the dollars flowing through their market it's just based off of that take rate and then all the costs associated with that. So it's not like they're having like whatever. It's just the way they do it. They're spending about 15% of their sales on marketing, which I thought was a very good number for a young company growing this quickly. Their margin adjusted price to

sales, which is price to sales divided by sales growth and gross margin is 5.9, which is extremely low. And that is assuming sales growth stays the same, which it definitely won't. But if you normalized for what they were at. Maybe you can try to estimate if you think they're going to come out of this healthier than ever or that they're not going to get hurt too much. On the back end of this crisis, that's a number that I would look at. They have no dividend and they just IPO'd, but their SBC stock-based compensation, I guess, is at 2.68% of revenue, which I thought was a solid number as well. Almost $300 million in working capital versus a market cap of $633 million dollars which is a fantastic number tons of cash lots and lots of cash net debt of negative

370 million as of the end of last quarter which gives us a nice cash cushion as well a good very strong balance sheet especially right after the ipo yeah and so i think a lot of retailers you look at it and working capital can kind of get juiced up because of inventory there wasn't a lot of inventory on the balance sheet especially for them and i think that is because they are consignment so they don't brag about having low inventory yes right so they don't keep a lot of stuff stocked up um now that might change we're going to talk about it with our future growth opportunities if they pivot to uh storefront models um they might have to keep a little more inventory but uh for the time being that's kind of uh their their balance sheet does look really

clean i'll get into the earnings though the gross merchandise volume was one billion dollars roughly and that grew 42% year over year and that's for the full year 2019. Their total revenue for 2019 was $313 million up 53% year over year. 83% of the top line is from consignment and service revenues. So like we talked about,

they get that commission for their consignment for selling the goods. And then the other 17% is direct revenue. So I believe, and maybe you looked into this, I'm not sure, but they own clothing or luxury goods as well, and they're selling those directly. Is that what that is? I haven't seen that.

All I know is they own four physical stores, but that is also consignment, I think. So I'm not sure. Maybe they have some first-party goods, and they're just selling them themselves. But, yeah, I guess that is something to look into if that is actually 17% of their revenue. Yeah, a majority of the top line, though, is still that consignment and service revenue. know. They had 63.9% gross margins for 2019. I think you already said that. Their fourth quarter operating cash flow was 3.6 million versus negative 7.6 million in 2018. So that's the fourth quarter. And so it was a little misleading because their operating loss was pretty high.

So they had adjusted EBITDA of negative 73 million and their net loss for 2019 was negative 96 million. I think that's IPO costs. That's definitely IPO costs. Yeah. I was going to say it had to be because the fourth quarter looked a lot better. So there was a lot of misleading numbers in there. Um, they're trailing 12 month active buyers were 581,738. That's up 40% year over year. That blew my mind. That is like that quickly or it's that high that it's that number. Like if you look at these, I mean, there are hoodies selling for a thousand bucks. yeah i can't imagine there's that many people out there buying these things but 581 000 sort of an impressive number they're they uh for 2019 their consignment take rate totaled

36.2 percent and they issued guidance but that's all i have here i think their guidance is probably their guidance and it doesn't matter for 2020 yeah i was gonna say it's probably gonna get withdrawn anyway so i'm not really going to talk about guidance for a lot of these fa shows that we do coming up welcome back uh we're going to hit the second half of the show here first up is digging trenches which is just the moat rating that we do uh what do you think i mean i'm saying right now no but they could have the network effect down the line yeah i think that that actual physical storefront may help um right now i think their only competitors are poshmark or poshmark and thread up and i think poshmark delayed their ipo i don't think they've gone public yet

um but i think they have like the most foolproof authentication system and that's going to be the differentiator is how the customers trust um in whether or not the luxury goods are fake or not So if they can kind of differentiate themselves in that way and be the one trusted site where it's like, yeah, you're going to pay $2,000 for a handbag, but you're going to get the real item, then there could be a moat there. Yeah, I'd say it's kind of like the Airbnb moat. And similarly, it's not something that's a consumer staple. It's a consumer discretionary, which would be like travel. So yeah, they're kind of in a unique, they start a unique business model. It seems to work and you can build a mode off that. But I think a lot of demand could fall, you know, in a time like this when maybe people have to start penny pinching. But next up is further reading. What are you looking into if you're going to research the company more? uh so for me it is the competitor's authentication process um so and they made sure to highlight so

real real made sure to highlight how trusted they are and how much they've you know improved on the authentication process so do the other competitors have that can they build that out um what's the what's the sort of counterfeit rate um as a as a percentage of overall items sold um if they can start to improve on that process it's going to get crowded and it's going to be a little more difficult um coming up for real real yeah it'd start becoming a spending more sort of like an uber lift competition on those platforms and i just realized when i say for real real i'm not saying like for real i'm saying for the oh i know yeah well i'll just start calling it rr okay that's that's how that's what i'm gonna call them so my further reading which you already answered

my first one i guess was consignment i never heard of that and i guess you kind of it's not really like a it's kind of just a market maker where super pop like it's super popular with jewelry you'll see a lot of like we sell consigned goods kind of thing um now you know all right and then my other one though is they have a high net promoters net promoter score sorry uh which you know shows that i guess customers like them but i want to know how many people prefer shopping on rr compared to i mean any other standard place what's the big difference do people like it then going directly to the parties is it that big of a discount i don't know yeah that's just kind of how i like that if the value is there you're going to want to see that from the customer

attention and customers liking it and i think that's a good sign but i want to do more research on that uh what do you have for future growth opportunities so i have the physical stores they just opened one in san francisco uh bad timing but i mean i guess they only have four of them so it's not a big deal they're not going to need many of these just in like the big cities they have one and i think it's san francisco new york and i think there's two in new york and i'm guessing there's like one in la or maybe somewhere else but they're not really a way to buy clothes per se and yes you can buy clothes there but it's kind of the benefits of getting the consignors in getting new consignors in and then getting you know current buyers like the super buyers that

are big fans and then also new fans that come in just like walk-ins sort of as a customer acquisition tool uh you know getting more people to sign up and then that just builds that network effect of buyers and sellers uh just kind of like that flywheel where you need that two-sided marketplace i know that's a lot of buzzwords but i think it uh actually is legit there you know they're going to have full-time experts on site to help with luxury items to help with repairs pricing, and I think other things like that. I'm not really sure the exact details. On the conference call, they did mention that their stores have been doing really well. Huge growth in GMV at the stores. I know it's a small scale, but I think that's a good sign.

They could pop up at quite a few big cities around the United States and the world. Yeah. If I was guessing, those physical stores would definitely help build out that lasting brand or that lasting moat and allow them to be more than just a website or a middleman online. My future growth opportunity will be to increase and update their authentication process. I know in 2019, there were a lot of, there were some bad reviews as like a few people got counterfeit products. And so that's, I feel like no matter what, there's going to be one or two where you're going to get that. But in 2019, RealReal released their, in quotes here, no fakes on our site promise and a video of their authentication process. So I think if they invested in single

product videos where someone clicks on an item, so here's an item they want to buy. They want to buy a Louis Vuitton handbag. And they were able to see the authentication process for that individual item specifically, I think that would increase platform trust. But my first future growth opportunity, if I was choosing what the biggest one would be, I would say physical stores as well. Right. And I think this does, this plays into their comparison to Airbnb where you cannot have a bad experience or at least it needs to be like a 99.999% success rate for users on the platform or else uh you know people are going to start spreading that bad reputation and things kind of spiral out of control from there but it looks like they have it under control uh last

segment here highlights and lowlights what do you got so there i i think there is a strong customer value proposition here um they're in a unique industry and the ability to buy luxury goods with the trust and the the no the ability to know that you're getting the real item is hugely important and if they can hone in on that they've got a niche there that they're going to be able to milk money out of for a long time my low lights though is that they are going to get hurt by covid big time um and then also i can't see them with super high net margins at scale i just don't see how that's possible um if i might disagree with you on that i might i don't know how much like they're going to spend on marketing they're going to have to spend a little bit on

sgna but i think they can really decrease that it's high super high right now but i think that can come down quite a bit they spend barely any on marketing like 15 percent of revenue i their s no i think that's a positive because eventually the technology research and general and administrative will come down like how do those come how do those come down though without firing employees well years when you grow uh as a percentage of revenue yeah as a percentage of revenue it doesn't come down it comes down as a percentage of revenue uh so i think it can be strong but yes they are it's it's pretty heavy on the spending side right now yeah i just i'm i'm it's tough for me to see that because there is a niche there i think there's an absolute threshold

to people who buy $2,000 handbags. And the other part is, okay, if they got to the point where they were owning these outright, like that direct revenue started to increase as a percentage of revenue, I believe the net margins could get there. I like what they're doing with the storefronts, but on a consignment basis, I don't think the net margins are ever going to be close to what their gross margins are.

I disagree. I think consignment will be higher just because it's platform only, zero inventory uh but who knows we'd have to do more research okay and then also a low light for me is i can't believe people buy this crap which yeah i mean it's subtle and the name that's a low light but name is a low light uh personally yeah it's not something i'm ever going to go on but like for all of human history people have used uh what are the they've used fashion i guess it hasn't been fashion for maybe only the last century but they've used clothing to you know portray a sense of superiority and that's it's going to continue forever i would i would think

yeah but oh shit there's a b in here oh that's not good keep that all right don't cut that out we're gonna keep that in uh but i'll just be staring at it well but yeah i'll get into mine here uh it's similar to yours uh let's see if i just have a few things that yeah i like the unique business style they're different different than traditional retailers and clothing operators and department stores obviously and even someone that does unique things like stitch fix are they really going for that sustainability bump on used clothing uh which i think is a good thing and also it's like people like someone that does that and with normalized business operations i think they can get profitable pretty easily but we already discussed that low lights though it seems weird

to me and not for any everyone um and i don't think there's a huge growth right here but besides that and the profitability there's not much to complain about uh so yeah pretty simple on the highlights and lowlights okay um what's your rating for the stock my rating would be i i just looked at this so it's not going to be super high it's not something i know that well but it's definitely going on my watch list i give it like a 7-4 just because i think the business models of other online retailers like revolve group and stitch fix are better and possibly have a larger market opportunity and something that's more sustainable but at this valuation it seems pretty solid if you think that uh the real real rr uh can survive this so i give it like a 7-4 definitely

on the watch list okay i'm gonna go a little lower uh obviously we don't really i maybe i don't see the the master plan for the business here but i was hoping that i could put this in sort of like a clothing goods bath retail basket with stitch fix and revolve but it feels different to me um it's a different business model entirely and it's i mean you have to understand the nature of consignment if you're looking into it um i'm gonna go six two times sale two times revenue for me is still a little bit especially well it's one times if you take an enterprise value it's under one uh with a cash amount there yeah yeah maybe i'm being misled by the ipo expenses um so i i'll go six it could go higher if i dug a little deeper possibly well yeah i mean i think there's a lot to

like here but i also get concerned and this is a big concern you can have with the business if you don't really believe the business model can grow that much especially if it is a growth stock i'd say look at look at the s1 because that's going to give you uh like a look into the business before ipo expenses yeah i guess that's something to i mean we haven't looked into that but yeah if i definitely look into that if you're going to buy the stock or before you buy the stock uh because if you're going to hold this for the long term, you want to know or think you know that there's going to be a long runway for growth. But that's going to do it for this episode. Thank you guys for listening. Make sure to follow us as always on Twitter. We'll give you updates. You give us

suggestions for shows to do. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Thank you for listening to this episode. We'll see you guys next time. Smarter.