Resale company The RealReal has been in a rough spot. Last July, it announced an accelerate plan to reach profitability — which it has yet to achieve in its 12 years of existence, including in the four years since going public. Last week, in a cost-cutting effort, the company announced plans to cut 230 jobs, close four stores including two flagships and reduce its office space. A rep from The RealReal said the recent layoffs and store closures are meant to help bring the company closer to profitability but declined to comment further for this story.
Over the last year, The RealReal’s stock has lost 80% of its value. CEO Julie Wainwright stepped down in June. Nearly eight months later, the company announced a permanent replacement for Wainwright, Neiman Marcus vet John Koryl, earlier this month. Former employees have alleged a chaotic environment behind the scenes since the IPO. And the company has remained unprofitable, with a most recent net loss of around $47 million for the three months ending in September. Yet, the company still maintains that it can reach profitability by 2024.
Most recently, BMO Capital Markets, one of the financial services companies that regularly covered and analyzed The RealReal’s earnings, announced that it will discontinue coverage of the company’s results. Simeon Siegel, a BMO analyst and close follower of The RealReal’s performance, declined to comment on the decision. Analysts will sometimes discontinue coverage of a company if they see a problem with the stock’s future viability, but a note from BMO said that its move was due to “a reallocation of research resources.”
So how did a company that helped usher in the massive and still growing fashion resale boom end up in this predicament? It’s not due to revenue, which has continued to grow. In the company’s most recent earnings report, in November, revenue was up 20% compared to a year prior. Instead, public statements from the company since Wainwright left and internal details that have come out suggest that The RealReal’s inability to get its spending under control is a major culprit of its current crisis.
The RealReal’s brick-and-mortar locations, often designed and operated like luxury boutiques and positioned in expensive neighborhoods like SoHo, are one major drain on the company’s budget. A report from The Information alleged that the company’s high costs came from the expensive stores, as well as the vast resources dedicated to authenticating every item sold and its reluctance to embrace ideas pitched by the finance team to improve revenue, like charging for returned items. Competitors including ThredUp have introduced such policies.
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The RealReal also aggressively expanded into new categories, including home goods, art and children’s clothing, starting in 2016. All three of those categories had very slim margins for The RealReal and, in some cases, they cost the company more than they made to sell them, according to interim co-CEO Rati Sahi Levesque.
“It was a little bit growth at all costs,” Levesque said in the November earnings report. “One of our core initiatives early on was on the home. We’re already in the house, why not pick up everything we can? But to be honest, it’s quite expensive to ship these large items like home and art. And items like kids are so low value that [it’s not profitable to sell them.]”
According to Yuriy Dovzhansky, principal at Visible Ventures, which invests in resale companies like Recurate, luxury resale is best focused on actual luxury products like jewelry and handbags, which have higher margins and are more likely to be profitable. The RealReal is now pulling back on those unprofitable categories as part of its overall cost-cutting efforts, Levesque said.
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The RealReal’s aggressive cuts have also extended to its marketing spend and commission rates. The company now pays sellers a higher rate for expensive items — which are more profitable for The RealReal — and a lower rate for more affordable items, which can cost the company money. The RealReal’s next quarterly earnings are set to come out on Friday where it will show if any of these cost-cutting efforts have borne fruit.
