The RealReal Earnings: We See Authentic Problems on the Horizon for U.S. Luxury Resale Marketplace

While attributable to external factors like slowing consumer discretionary spending, we believe that The RealReal's current strategy stands to limit its long-term growth prospects, and exposes it to elevated competitive pressure, a view consistent with our no-moat rating. The firm is quickly shrinking its first party sales business in a move to boost profitability, but we believe that the lack of certain habitual draw products (jewelry, handbags) at higher price points may pinch the marketplaces ability to attract traffic and capture an enduring niche in the U.S. luxury resale space. While the market seemed to like results, with management targeting, by necessity, a strategy that shows solid progress toward at least adjusted EBITDA profitability before it has to tap capital markets (to service a $170 million debt repayment in 2025), we foresee the underinvestment in platform development and marketing that logically follows as substantial concerns for investors. On balance, we expect to lower our long-term gross merchandise volume forecast for the firm (to $4.5 billion, about a 10% haircut) but increase our operating margin estimate (to 7.3% of sales, up 140 basis points) in response to results, with a neutral to slightly negative impact to our $1.07 fair value estimate. Shares continue to look meaningfully overpriced.