Shop second hand for luxury fashion bargains at The Real Real

San Francisco based The RealReal REAL 1.89%

There are 19 stores across America where people sell their used bags, watches, clothes and jewelry online, and a 450-strong sales team that goes to people’s homes to collect their unwanted designer items. The items are then inspected, photographed, priced and listed for sale online. In return for removing the real estate from the sale, they will reduce the transaction price by an average of 36%.

In the year Since its initial public offering in 2019, Real Real’s stock has fallen by around 90%. The business is expensive to run and never makes a profit. At an investor day earlier this year, the company pledged to generate at least $100 million in adjusted earnings before interest, taxes, depreciation and amortization by 2025.

If sales return to their previous patterns, Reel’s bottom line should improve. During the outbreak, the company had to buy goods rather than take them, as home visits became difficult during the lockdown. These low-margin self-count sales have risen from 15% of the business in 2019 to 20% to 28% today. This number should drop in the third and fourth quarters of this year. The midpoint of Real Real’s full-year guidance shows an adjusted EBITDA margin of minus 7.5% in the fourth quarter, down from 18.7% in the second quarter.

Technology can reduce labor costs. RealReal employs hundreds of professional verifiers, which is expensive but essential to maintaining buyers’ trust. By the end of this year, 40% of handbags will be verified using machine learning.

The problem with the stock is that no one knows how an online luxury retailer will do in a recession. Only in 2011. To hit its 2025 profit goal, the company needs to sell about $5 billion worth of goods. That’s about $1.9 billion more than expected in 2022.

So far, the growth still seems healthy. The company’s total cost of goods sold rose 30 percent in the three months to June from a year earlier. Strong U.S. demand reported by high-end brands such as Hermès and Louis Vuitton in recent weeks shows that luxury spending remains strong for now, even as the broader economy weakens.

Second-hand luxury websites can benefit when designer labels command huge price increases on the mainstream market. Brands including Chanel, Christian Dior and Gucci have increased prices of their most popular handbags by 10% so far this year, with an 11% increase in 2021, according to Jefferies analysis. This may encourage some consumers to trade in used items that are 30% to 40% cheaper than buying new, according to Morningstar.

In the long term, the second-hand clothing market is expected to grow as consumers become more aware of the environmental impact of the fashion industry. Mass-market brands like Patagonia, H&M and Lululemon accept used items in exchange for store credit, but the terms are tenuous. Shoppers who return merchandise to Lewis shave about 75% off what they originally paid for it, according to Morningstar analyst Sean Dunlop. That makes real estate commissions a relatively attractive one-third. The high value of luxury goods makes them particularly suitable for resale.

Real Real’s stock currently trades at 0.4 times projected sales, less than six times in most years. For investors willing to put up with some downsides, fashion trends should eventually move in the company’s favor.