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September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
The RealReal (REAL) – The Carvana of Luxury
$30 Price Target
We have watched Carvana’s (CVNA) stock price go up >20x since the company’s 2017 IPO as bears incorrectly called the company’s business model “uneconomic”. Reflecting back, what investors missed was that CVNA was disrupting an outdated industry by providing a convenient end-to-end solution that differentiated the business from every other website that sold used cars. Just like the used car market and CVNA, we see the same dynamic playing out in the luxury resale industry today with The RealReal (REAL). We have watched this business for years just waiting for the inflection point and have finally found it if we read the words from yesterday’s Raymond James Conference when CEO Julie Wainwright stated: “Exiting this year, you are going to start seeing some leverage and it will only go from strength to strength… the near-term things are only going to get better because the demand is there and the supply is coming in and the structure we have around our business is really going to be something to build on and we’ve also said NOT something to continue to invest in so really smart investments we made early that are going to pay the dividends and to be honest we made them in 2019” Showing the operating leverage is all that was missing from a company which is disrupting the luxury resale market by providing a do it for me solution that is unmatched in the industry. Today, REAL is:
• The ONLY multi-category fully managed luxury resale marketplace in the world with 23+ million members and the largest data set in a $200 billion US luxury goods industry based on 19.7+ million items sold
• Growing 50% this year with management guiding to 30%+ growth annually “for the foreseeable future”
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
• Selling 99% of its inventory with no inventory risk for unsold merchandise Yet, REAL is a trading at a fraction of the valuation of every one of its peers though we believe the company’s data alone could be worth the entire market cap today making REAL a great strategic acquisition for a luxury conglomerate. Below is why we think REAL is headed over $30. Circular Economy = Secondary Luxury Market Will be Huge The trends are obvious and clear. Gen Z and Millennials care about sustainability and supporting the circular economy:
• “For Gen Z, upcycled, reclaimed fashion is opening up a new sense of individuality and self-expression, while helping to save the planet” – BBC
• “Millennials are choosing vintage furniture over fast furniture in the name of sustainability” – Forbes
• “Gen Z is increasingly buying and selling luxury, and consumers are making conscious, smarter purchasing decisions with sustainability playing more of a motivating role” – The RealReal head of women’s Sasha Skoda
• “Consumers will increasingly shun cheap clothes and favor preowned designer goods instead, predicts Max Bittner, the CEO of resale platform Vestiaire Collective” – McKinsey & Company
• “Overall, we see a significant trend of people becoming very focused on the sustainability aspect of the way they consume. Consumers are realizing that the fashion industry is a major contributor to many ecological issues the planet is facing right now” – Vestiaire CEO Max Bittner
• “Younger consumers are paying attention to what brands are doing to be more sustainable. A recent survey we released with BCG found that 62 percent of consumers would be more willing to buy from fashion brands that partner with resale platforms” – Vestiaire company spokesperson
• “Secondhand is the future, as resale clothing is projected to be 27 percent of consumers’ wardrobes by 2023” – Vestiaire company spokesperson
https://www.bbc.com/culture/article/20201113-why-gen-z-and-millennials-go-wild-for-vintage-clothes https://www.forbes.com/sites/emmareynolds/2021/09/02/millennials-are-choosing-vintage-furniture-over-fast-furniture-in-the-name-of-sustainability/?sh=47b34e6e4df3 https://www.forbes.com/sites/sharonedelson/2021/08/27/the-realreals-2021-report-reveals-gen-z-continues-to-be-powerful-driver-of-luxury-resale/?sh=5213a1f22d2d https://www.mckinsey.com/industries/retail/our-insights/is-luxury-resale-the-future-of-fashion https://wwd.com/fashion-news/designer-luxury/luxury-brands-reluctant-to-join-resale-market-1234898376/ https://www.firstinsight.com/white-papers-posts/gen-z-shoppers-demand-sustainability
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
https://digiday.com/marketing/fashion-resale-brands-have-lasting-power-beyond-2020-pandemic-induced-boom/ Will resale play a big part in the luxury industry? No one knows luxury better than Kering and this what CEO Francois-Henri Pinault thinks about the secondary luxury market: “Pre-owned luxury is now a real and deeply rooted trend, especially among younger customers. Rather than ignoring it, our wish is to seize this opportunity” https://wwd.com/fashion-news/designer-luxury/luxury-brands-reluctant-to-join-resale-market-1234898376/ How big is the opportunity? We think it will be huge and so does REAL CEO Julie Wainwright. In an interview with Bloomberg this June, Julie enthusiastically targets $5 billion of GMV in 5 years, which would imply approximately $1.5 billion of revenue: "We just had a big company meeting before this and I said my short-term goal is $5 billion in 5 years which maybe not aggressive enough" https://www.youtube.com/watch?v=wXpMl3TM7dk To sanity check Julie’s numbers, let’s start with the US luxury goods TAM of approximately $200 billion. Assuming the resale market reaches a 25% penetration implies a US luxury resale market of $50 billion. Now let’s conservatively assume that the split between full-service and peer to peer is 50/50 though we think full-service will dominate as consumers will likely want a seamless end-to-end solution to buy authenticated luxury items. The net result is a $25 billion opportunity for REAL and the company has no competition in sight. In our opinion, the runway for growth is huge. https://www.sec.gov/Archives/edgar/data/0001573221/000119312519174180/d720814ds1a.htm
The Carvana of Luxury How many people own something of value that they don’t use but don’t sell purely due to convenience? A LOT. As noted by Rebag founder Charles Gorra:
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
“Only 10 percent of luxury goods owners actively sell on the secondary market. That means 90 percent of owners do not sell anything and we think it’s largely because of convenience” https://wwd.com/accessories-news/handbags/how-luxury-handbag-resale-platform-rebag-is-using-ai-to-grow-its-base-1234882173/ Providing “transaction tools” (i.e., an app/website to list products) is not solving the industry’s core problem of convenience. This is what Poshmark (POSH) is doing: “All products are listed, managed, sold, and shipped by our sellers, utilizing our transaction tools” https://www.sec.gov/Archives/edgar/data/0001825480/000119312521007531/d66583ds1a.htm#toc66583_11 Enter The RealReal Just like CVNA, REAL is providing an end-to-end solution unmatched in the industry to disrupt an outdated market. Just look at the similarities between the IPO prospectuses of REAL and CVNA. REAL is not just another marketplace website but rather REAL has created a full-service platform that is years ahead of competition.
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
https://www.sec.gov/Archives/edgar/data/0001573221/000119312519174180/d720814ds1a.htm#toc720814_11 https://www.sec.gov/Archives/edgar/data/0001690820/000119312517141291/d297157ds1a.htm https://promotion.therealreal.com/whiteglove2/ https://www.carvana.com/selling-or-trades-how-it-works https://investor.therealreal.com/static-files/430255e8-f0c3-4073-961d-420c3713188c
Disruptive Businesses Are Many Times Met with Early Skepticism
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
Similar to how skeptics of REAL today question the economic viability of the company’s business model, CVNA was met with the same criticism after its IPO. For fun, we compared how CVNA traded in the first year and a half after its IPO vs. REAL’s stock price chart over the past year and a half and found that REAL’s stock price chart looks just like CVNA’s before the stock took off at the end of 2018.
The above is merely a stock price chart and could be nothing more than coincidence, but even skeptics must admit that luxury is a great business.
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
Luxury is a GREAT Business REAL is in the enviable position of being able to ride on the coattails of every luxury brand that is sold on its marketplace (i.e., REAL’s customers already know what Louis Vuitton and Gucci is) without being vulnerable to changes in fashion or trends. With luxury prices and an AOV that is double that of both Revolve and Wayfair, REAL generates luxury take rates as the ONLY multi-category fully managed luxury resale marketplace in the world, selling more authenticated Louis Vuitton bags and Rolex watches than any competitor. REAL generates a premium take rate of 35.7% vs. its resale peer average of approximately 19%.
*We estimated the implied take rate for resale peers that disclosed both their 2020 revenue and GMV. Sufficient financial data not available for ThredUp, GOAT, Vestiaire, and Vinted. https://techcrunch.com/2021/06/02/etsy-asks-how-do-you-do-fellow-kids-with-1-6b-depop-purchase/ https://www.sec.gov/ix?doc=/Archives/edgar/data/0001825480/000156459021014879/posh-10k_20201231.htm https://www.cnbc.com/2021/04/08/sneaker-reseller-stockxs-valuation-jumps-to-3point8-billion-.html https://www.sec.gov/Archives/edgar/data/0001600641/000119312521185143/d244039ds1a.htm https://www.sec.gov/Archives/edgar/data/0001573221/000156459021009884/real-10k_20201231.htm Anyone whose gone shopping in the past year has seen images just like the ones below. US consumers bought tons of Gucci and Louis Vuitton.
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
https://www.lvmh.com/news-documents/press-releases/lvmh-delivers-record-first-half-performance/ https://www.kering.com/en/news/very-strong-growth-in-sales-revenue-up-materially-on-first-half-2019-sharp-rebound-in-income-margins-and-cash-flow https://www.nytimes.com/2021/09/08/fashion/watches-rolex-audemars-piguet-patek-philippe-mille.html https://www.washingtonpost.com/business/2021/06/18/luxury-boom-recovery/ https://www.bignewsnetwork.com/news/271077242/luxury-clothing-market-is-booming-worldwide-with-kering-kiton-hermes-versace As Consumers have used the past 18 months to load up on luxury goods, who will be the 1st derivative beneficiary? THE LUXURY RESALE INDUSTRY!!! “There’s a lot more availability in resale than in regular retail right now because of supply chain issues. You can’t sell stuff that’s stuck on ships in the middle of who-knows-where. People have been cleaning out and rearranging their homes for over a year” – Adele Meyer, executive director of The Association of Resale Professionals https://money.yahoo.com/pandemic-supercharges-fashion-resale-193640423.html https://www.glossy.co/fashion/fashion-resale-has-lasting-power-beyond-2020-boom/
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
And remember, REAL sells 99% of its inventory. More inventory equals more sales. In 2020, REAL’s online marketplace sell-through ratio was 99%. https://www.sec.gov/Archives/edgar/data/0001573221/000156459021009884/real-10k_20201231.htm How is REAL so good at doing luxury resale? Using Machine Learning to Disrupt Luxury Resale One of Citron’s past investing mistakes was shorting Wayfair on the thesis that the company could never generate a profit selling cheap furniture online. What didn’t show up in the company’s financial statements was the data science. This is why Amazon couldn’t beat Wayfair. As Wayfair was losing money selling furniture, what we missed was that the company was gathering extremely valuable data on its customers and transactions to perfect its pricing model. When a company has more data on their specific industry than anyone else, they cannot be beat. We see a very strong parallel between Wayfair and REAL today. Funny enough, early Wayfair investor Michael Kumin of Great Hill Partners also sees this parallel as he was an early REAL investor and sits on the board today. Wayfair’s CTO Jim Miller also sits on the board of REAL. REAL has figured out the luxury resale market. The biggest complaint of buyers is the products are still expensive and not much cheaper than retail. The biggest complaint of sellers is REAL’s take rate is too high. Yet, the company’s sell through ratio last year was 99%. In other words, there is a lot of profit in the middle for REAL and they’ve used data science to perfect their pricing algorithms just like Wayfair did in online furniture. As noted by REAL in the company’s 2020 10-K: “Each consigned item also has up to 50 unique attributes. Informed by this data, we have developed proprietary algorithms and business processes to optimize our
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
operations, including supply sourcing, merchandising, authentication, pricing and marketing” https://www.sec.gov/Archives/edgar/data/1573221/000156459021009884/real-10k_20201231.htm Not surprisingly, we were able to find the profiles of many strong pedigreed machine learning engineers at REAL including a former senior machine learning engineer from Wayfair.
https://www.linkedin.com/in/dhaval-dholakia https://www.linkedin.com/in/frankzhu https://www.linkedin.com/in/josh-zastrow https://www.linkedin.com/in/christopher-brossman-a1225a88 https://www.linkedin.com/in/pratikramdasi https://www.linkedin.com/in/hasancheema https://www.linkedin.com/in/shivanibetu
How much data does REAL have on the luxury market? A LOT. REAL has data on its 23+ million members and 19.7+ million items sold.
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
https://the-realreal.cdn.prismic.io/the-realreal/3c75ecef-87b9-4887-b92c-c6e62ec7e5ac_2021+Resale+Report_Final.pdf
With hundreds of millions of unique data points, including data from approximately 733 million views of items on REAL’s marketplace in 2020 alone by potential buyers and over 19 million item sales since inception, REAL’s data would be incredibly valuable to any luxury conglomerate as they could use this data to optimize their branding, fashion trends, and pricing. Marketplace Winners Trade at a Premium When looking across different sectors, it is clear that the stock market awards premium multiples to marketplace winners. On NTM EV/Revenue, FTCH trades @ 5-6x, ETSY @ 10-11x, DASH @ 12-13x, and ABNB @ 14-15x. Despite REAL having no competition, REAL trades @ 2x.
September 15, 2021
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REAL trades at a significant discount to its resale peers as well. On 2020 EV/Revenue, REAL’s resale peer group trades at an average multiple of 10-11x vs. REAL at 3-4x. *Only 2020 financials disclosed for private companies Depop, StockX, GOAT, and Vinted.
https://techcrunch.com/2021/06/02/etsy-asks-how-do-you-do-fellow-kids-with-1-6b-depop-purchase/ https://www.cnbc.com/2021/04/08/sneaker-reseller-stockxs-valuation-jumps-to-3point8-billion-.html https://www.sec.gov/ix?doc=/Archives/edgar/data/0001484778/000162828021014439/tdup-20210726.htm
September 15, 2021
© Copyright 2021 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
https://www.sec.gov/Archives/edgar/data/0001600641/000119312521185143/d244039ds1a.htm https://www.sec.gov/ix?doc=/Archives/edgar/data/0001825480/000156459021014879/posh-10k_20201231.htm https://www.cnbc.com/2021/06/24/sneaker-marketplace-goat-group-valued-at-3point7-billion-in-latest-funding-round-.html https://techcrunch.com/2021/05/11/vinted-raises-303m-for-its-2nd-hand-clothes-marketplace-used-by-45m-and-now-valued-at-4-5b/
Ultimately, Citron believes eBay becomes the acquirer of REAL. What could eBay pay for REAL? Even if REAL were acquired at the low-end of the valuation range of its peer group at 6x revenue, the stock would trade for close to $30.
Conclusion Never discount a business model that is using an unmatched end-to-end solution to disrupt an outdated industry. Luxury is here to stay and the resale market is only getting bigger. As the undisputed leading marketplace of authenticated luxury goods, we believe REAL offers investors a fantastic risk/reward at current levels. Cautious Investing to All
September 15, 2021
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