Hello everyone,

We apologize for not sending out reports sooner. As you can imagine, with the recent volatility, it’s becoming increasingly difficult to get to new ideas while trying to actively hedge your portfolio from getting smoked.

But now that some dust has settled with the 90-day pause, we’re happy to share with you a new idea that we are long, which we disclosed to subs in the chat a bit ago.

First and foremost, we’re not going to get the timing right on this investment. Flat out.

With so much uncertainty in the markets that can rip or dip with a single tweet, we can’t gauge a “perfect time” to hop in this or size up. However, that doesn’t mean that presenting the idea to you all won’t be valuable, as you determine for yourselves if it makes sense.

For us, we liked the idea before tariffs were put in place, and believe it’s gotten quite interesting now that tariffs are in place. Given that nearly everything is collateral damage these days, we think that the market hitting the name hard leaves a better starting opportunity for investors than even a mere month ago.

If you’re new here, don’t forget to check our table of contents to see all our ideas in one succinct place.

With that, let’s get into it.

The RealReal (REAL), or “TRR”, is a very simple business to understand. They are a marketplace (both online and in-store) for secondhand luxury goods to be sold. The keywords there are luxury and secondhand. This is so that the business model is not to be confused with any secondhand merchandise or brand new (fresh from the factory) items.

For conducting business, TRR sources its supply (consignors) by various options (online consignment, in-store, or manager pick-up) that agree to a 365 agreement for the inventory to be on the platform.

Once the product has arrived at their facility, it is then authenticated (not fake), deemed sellable (if not, it’s sent back), and then placed online or in-store to be sold to value-oriented luxury shoppers.

If the item sells, the company takes a fee (take-rate) for its services and immensely negates any shipping costs from both the consignor and buyer.

This has allowed TRR to establish itself as a premier second-hand luxury marketplace that connects consignors looking to sell their gently used or vintage luxury goods to buyers who are either looking for older, unique pieces or just don’t want to pay the full price of a brand new luxury item and will pay for past collections.

Reflected in TRR becoming a second-hand luxury marketplace is its overall GMV they’ve sold on the platform. Since 2017, the company has grown GMV at a 24.2% CAGR through the end of 2024, which would fall to a 22% CAGR over 8 years if they end up hitting their midpoint GMV target for FY’25.

Before we dive into the opportunity presented to us, we need to understand what went wrong in the first place and how its turnaround strategy is currently unfolding since its Q3’24 earnings that returned ~3x in two months.

Since going public back in June of 2019, the company has had a hard time justifying its business model and its valuation since coming out of COVID.

The stock has sold off significantly once the pandemic ended and has more or less been treading water within the $1 - $3/share range for quite some time. However, there were reasons for this, and the steps the company has taken to right the ship have started to become realized in the bottom line.

Let us first tell you what went wrong and then highlight the changes that they made, which will be further supported by natural tailwinds and even possibly under the new Trump tariffs.

So you might be wondering why the company’s stock price has been utterly destroyed despite continuously ramping up GMV sold on the platform since going public. The answer lies in what presumably helped jettison their GMV growth in the first place: COVID.

While everyone was sitting at home, flush with cash, consumers were spending money left and right, which is why you saw GMV growth explode >50% higher y/y from 2020 to 2021 and another >22% the following year.

However, this was not without consequences. As we mentioned earlier, TRR operates by sourcing inventory supply from consignors in order to sell to willing buyers. While that is the crux of their business, they also have “direct revenue,” which is them actually buying the physical inventory to have on the books and then flipping it.

As you can imagine, being the facilitator of a transaction is a lot more lucrative, margin-wise, than holding inventory on your books and then selling it (consignment vs direct). The problem for them was that when everyone was sitting at home on a massive surplus of cash, fewer people were actually consigning their goods, which forced TRR to increase its direct inventory purchases in order to continue to grow GMV.

So while on one hand, they were able to pour rocket fuel into sales, they allowed gross margin to suffer.

And being the facilitator of luxury goods, the business model is a hard one to make profitable, as there is a fine equilibrium between supply and demand, with the latter only being able to be recognized if the former has a continuous flow.

More on this later.

But, like all pain points that occurred as a result of COVID, the company has made efforts to right the ship since the end of 2022. So far, TRR has,

These improvements can be seen below in the various graphs.

All of these improvements have greatly benefited the company during its turnaround stage, which is why, on an adjusted basis, EBITDA has flipped positive for the most recent fiscal year to the tune of $9.3 million and generated FCF of >$12 million.

Besides the company actively taking the steps to improve the overall business, there are four points of focus that still get me excited about this company’s ability to continue growing and expanding even during this Trump tariff uncertainty.

While a lot of heavy lifting has been done so far, that doesn’t mean it’s over. For instance, on the AI front, TRR launched Athena, an AI tool that will use image recognition to authenticate items and pre-populate their key attributes for listing on its website.

Faster processing times have allowed it to cut out one full day from the entire flow, as well as better listing details have led to better pricing and sell-through.

The company also uses AI to price items. At the end of 2024, 85% of The RealReal’s items were launched with the help of its AI-driven pricing engine.

Additionally, TRR has also leveraged smart sales tools that use customer data and external data to help its luxury managers assess which clients are most likely to consign and when they are likely to do so.

Because of this tool, TRR saw its value generated per sales rep increase by 15% in 2024. The highest reps bring in > $10 million annually, and over half the reps have been there for over two years.

Marketing leverage continues to impress as the company’s push into various social media channels has delivered a great ROI and significantly brought down the cost of acquiring new buyers.

Lastly, according to the company, headcount is finally in a good place, and TRR will be able to scale and leverage over time with future investment, though current capex is focused on other areas like automation, AI, and other technology.

One of the shifting positive trends that we’re seeing is that people still want luxury goods, just not at the prices that they’re currently charging.

Luxury brands have lost about 50 million customers in two years. Expensive brands aren’t only selling to fewer people, they are selling far fewer products. The number of units sold by the luxury industry in 2023 was expected to be 20% to 25% lower than in 2022.

Higher prices have juiced profits but made luxury shoppers more sensitive to how far their dollar stretches at the designer store.

The secondhand market is winning customers who still want to buy top luxury names, but not at the prices brands are charging in their stores, which has led to the market growing twice as fast compared to the primary personal luxury goods market since 2019 (11.6% CAGR vs 5.2%).

Though only 12% as large as the primary market, it’s advanced 73% over the past five years compared to 30% for the personal luxury goods market, according to Bain and Company.

The changing consumer buying patterns and habits are bringing about a shift in the conventional methods of shopping, especially in the luxury fashion market.

Diminishing stigma of using pre-owned products, rising demand for affordable pre-owned luxury goods among millennials & Gen Z is expected to help the market expand from $34.2 billion in 2023 to $72.3 billion by 2032, with a compound annual growth rate (CAGR) of 8.7%.

We’ve also attached TRR’s 2023 Resale Report below if you want to dive into their findings, which show

What most people are afraid of, and rightfully so, is that we will go into a recession in 2025 from the Trump-inflicted tariffs. In that instance, don’t most things that revolve around consumer spending get hit?

The answer is yes, but not as bad as you think. As we mentioned before, luxury is recession-resilient, but not recession-proof.

Using the Great Financial Crisis (GFC) as the worst possible benchmark that we have outside the few months of COVID, you can see that it’s not as bad as it looks.

Considering that during that time, both markets and countries were on the brink of a depression, it’s not illogical to use this as a worst-case scenario, but it also yields an interesting point.

The economic downturn of 2008-2009 shaved 9% off the value of the global luxury goods market, although it recovered quickly in 2010 and accelerated greatly through Chinese expansion.

As opposed to over a decade ago, brands are better prepared for a recession thanks to better inventory controls and less dependence on third-party retailers.

But unlike the traditional market for luxury goods, we believe TRR sits in a very special place that could help it come out stronger than the likes of an LMVH, for instance.

As we mentioned previously, TRR operates under an equilibrium of supply (consignors) and demand (buyers). One cannot work without the other. But their operational improvements have allowed it to sell ~50% of listed items within 30 days (declining trendline) and ‘nearly all of our items [sell] within 90 days.’

Where a (possible) recession comes in to benefit the company is on the supply side, which could help spur demand from value-oriented luxury shoppers.

A recession scenario where people are strapped for cash means more might turn to resale to make an extra buck and start looking around their houses, seeing what they may be able to sell. The flip side is that while supply might explode, demand could tank. But we don’t think that to be the case for TRR.

If you’re thinking about this intuitively, TRR never catered to luxury shoppers who wanted the newest and greatest collection, nor did it cater to those looking for a steal. Luxury is luxury, and just like art, there’s always a buyer for something because it revolves around one word: status.

People buy luxury for what it gives them → Premium goods and a higher level of status in the eyes of whoever is looking.

Rich people want to spend because they can and because they appreciate nice things, while everyone else buys these pieces because they want to appear rich. Similar to being car poor or house poor.

That has not and will not ever change in the slightest. Pulling a comment from WSJ about the market,

It will be a nice test to see how it pans out, but we think favorable outcomes are there to unlock further supply and even better prices and pieces for buyers.

Just like a fear of a recession, Trump’s tariffs have come into play, and most retail companies have been hit hard since “Liberation Day.”

Since that announcement, the above retail names as examples are all down at least 10%, with some pushing above 15%, and of course, the ugly duckling CPRI of ~-32%.

But the problem here is that ALL companies listed above, outside TRR, should have been hit by the announcement of tariffs. Having supply chain exposure to Asia is obviously a bad thing, and for the European brands, needing to import from the EU also has its negative tariff implications.

Pulling a helpful chart when it comes to a hypothetical tariff exercise, luxury brands are naturally better insulated on their margins than mid-end retailers, as you can see below.

But the best part about TRR is that they have ZERO tariff exposure. None.

They source all their inventory from U.S. consignors. Buyers are from the U.S. (with some sales outwards). So all of TRR’s operations are domestically sourced and sold within the continental U.S.

So why has the stock sold off ~11% since Liberation Day? We think partially because of recession fears, but predominantly from market beta tied to tariff sentiment.

But aside from sentiment, Business Insider also posted a recent article on the broader secondhand market with an interesting callout.

So, if you’re looking for a company that has been smacked around from the recent turmoil that most likely shouldn’t have, we think TRR is a name that has plenty going for it and is insulated from this trade war.

However, it is not without risks, which we think the greatest is tied to its capital structure.

We won’t sugarcoat it. TRR’s debt could be better, but we think they’ve taken necessary steps to give them a little more breathing room at the moment.

As we mentioned in the preview, the company recently underwent a 2025 Exchange Agreement with existing 2028 convertible note holders to exchange $183.3 million in principal for $146.7 million in new 2031 notes.

This move has effectively cut their debt by ~$30 million but increased the rate that they’re paying.

The table below will help you understand the changes to their debt recently.

While we would like to see a cleaner debt load, the company still does have a ~$157 million cash position (net of restricted) and most debt due in 2029 at the earliest. This gives the company some more breathing room to enact the turnaround strategy, which did yield positive FCF in the most recent FY.

TRR is not new to the game at this point. Other companies out there operate in the secondhand luxury market like ThredUp, Farfetch, Vestaire (though more EU), Depop, etc, but the more name brands aren’t much of a concern in our opinion.

For instance, ThredUp (TDUP) items can include luxury, but that’s not what they’re known for. TDUP tries to keep its pricing 60% to 70% lower than what consumers could buy at regular retail, is facing a very promotional environment in which brands are offering steep discounts on new products.

So while it exists, validation in TRR from Gucci’s partnership hints that they aren’t low on the totem pole to be pushed around.

We don’t stand too firm on this one just due to the fact that many other secondhand platforms do sell luxury and consigners on those platforms will testify that they make more on them, which is why they choose them, but TRR charges more because of the service and authentication it provides buyers.

While we’re all trying to navigate uncharted waters, we think that TRR is an interesting opportunity in the market that has been thrown in with every other retailer on the tariff trade, and, while warranted, suffers from a recession.

As we mentioned before, we cannot time this one, or do we know if/when Trump will backtrack on his tariff plans.

Looking at valuation, it’s not far off from its historic 1-year median of 1.3x NTM EV/Sales, and while we hate using that method, a recent positive inflection doesn’t warrant any other method.

If REAL ends up coming out of this with LDD sales growth and no multiple expansion, the stock could be worth >50% more than it is today and >100% if it can get the high growth re-rating it recently had.

All we know for now, and what we believe, is that the market is not appropriately pricing in their lack of tariff exposure and oversimplifying a recession on luxury goods without considering the resiliency of what is a fast-growing secondary market with strong tailwinds.

We’re willing to see how this one materializes and are thus long The RealReal (REAL).

As always, we appreciate your support of our work. If you have any questions, please make sure to message or comment below. If you think others would benefit from the research/commentary we release, we would greatly appreciate your sharing.

Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm