AMDP Investment Proposal

The RealReal: Investment Memorandum 

____________________________________________________________________________

To: Clark Hanson, CEO of Anima Mundi Development Partners 

From: Wen-Hsin Kuo

Date: 04/08/24

Subject: Investment Recommendation 

After deep consideration of AMDP’s investment thesis and core beliefs, I strongly advise that the firm consider an investment in The RealReal. As the world’s largest online luxury resale marketplace, The RealReal is propelled by the ‘generational headwind’ of environmentally conscious young buyers who are eager to promote sustainability in response to the detriments of fast fashion. The RealReal’s business model and mission strongly aligns with our values and has strong potential to generate substantial year over year returns. 

In this memo you will find the following items:

• Review of AMDP’s sustainability guidelines 

• Description of The RealReal’s background, financial track record, and claims 

• Two expert opinions on The RealReal

• Final Recommendation 

AMDP’s Standards

At AMDP, we ensure that our investment dollars positively impact the world. We only want to partner with organizations that are committed to the following criteria: 

Triple Bottom Line The triple bottom line looks at a company's scorecard on three major criteria: how it treats people, the planet, and how much money it makes. It is designed to “provoke deeper thinking about capitalism and its future” (Elkington, 2018). Here's the breakdown:

• People: An organization's commitment to positively impacting society and all stakeholders.

• Planet: An organization’s effect on the natural environment.

• Profit: The financial return an organization generates for shareholders (Miller, 2020). 

Corporate Social Responsibility:  CSR is the “idea that a business has a responsibility to the society that exists around it” (Stobierski, 2021). Firms that value CSR are committed to positively impacting the world through their initiatives and strategies. CSR is typically broken down into 4 categories:

• Environmental Responsibility: reducing harmful practices (pollution, GGE, single-use plastics etc), regulating energy consumption, offsetting negative environmental impact.

• Ethical Responsibility: operating in a fair and ethical manner through fair treatment of all stakeholders: leadership, investors, employees, customers, and suppliers. 

• Philanthropic Responsibility: actively making the world and society a better place (e.g. donating earnings and working with nonprofits/charities).

• Economic Responsibility: backing all of its financial decisions in its commitment to do good.

Social Enterprise:

A social enterprise is a business that prioritizes its “social mission over financial mission” (Shossain, 2019). Though earning profits is not their primary goal, social enterprises seek to maximize benefits to society and the environment while also maximizing revenue.  

Carbon Footprint: 

A carbon footprint is the total amount of greenhouse gasses (GHG) that are generated by a company. As GHG emissions blanket the Earth, they trap the sun's heat. This is detrimental to the planet because it  leads to global warming and climate change. Carbon footprints are calculated by “summing the emissions resulting from every stage of a product or service’s lifetime,” (UMich, 2023). Companies that actively strive to reduce their carbon footprint are contributing towards long-term sustainability.

The RealReal Overview 

The RealReal, founded in 2011 by e-commerce entrepreneur Julie Wainwright, is a pioneering online luxury consignment store that promotes a circular economy by offering authenticated, pre-owned luxury goods. This innovative platform has revolutionized the way people shop by providing a sustainable alternative to fast fashion. By extending the life cycle of luxury items, The RealReal contributes to significant environmental benefits, including water savings and reductions in carbon emissions. The RealReal to appeal to modern consumers who increasingly prefer online shopping to traditional in-person retail experiences. By July 2018, the company had raised $288 million in venture capital funding and went public on Nasdaq, raising an additional $300 million during its IPO (Forbes, 2019). 

Company Claims

In an open letter addressed to all stakeholders, CEO John E. Koryl claims that the company harbors an "unwavering commitment to sustainability," declaring that this principle is "not just one of our company’s values, it’s fundamentally who we are, in all aspects of its meaning" (Koryl, 2023). 

Social Impact (Source: TRR ESG By the Numbers) 

• ~50%  of consignors say environmental impact is motivation to consign 

• ~40% of customers say they shop at The RealReal as a replacement for fast fashion

• 68% of employees are female 

• 49% of employees are  racially and/or ethnically diverse 

• 60% female board members as of Feb. 22, 2021

• 9% of technical workers hold H-1B visas

Environmental Impact (Source: TRR ESG By the Numbers) 

• Since inception, The RealReal has kept 37.5+ million luxury items in circulation, while saving 4 billion liters of water and 75,867 metric tons of carbon (The RealReal).

• ~50% of recycled material is used to make polybag product packaging 

• TRR achieved carbon neutrality in 202, one year prior to commitment

• Waste and recycling: 

• 1.6% GHG emissions are from waste

• ~1,592 MT CO2e was avoided by recycling and food composting

• A total 557 tons of material has been recycled by TRR

Beyond having a positive social and environmental impact, TRR leverages technology to disrupt traditional retail industries. According to their 2023 Q4 earning’s report, TRR’s proprietary AI technology in authentication is what makes it stand out against competitors such as ThredUp and Poshmark. TRR uses a machine learning model to authenticate products with accuracy and operational efficiency.

Financial Track Record 

The RealReal is finally turning into a profitable business since going public in 2019. In the fourth quarter 2023, it reported positive adjusted EBITDA and positive free cash flow for the first time. A decrease in total revenue in 2023 indicates a downturn in sales and overall business activity compared to 2022. However, improvements in reducing net loss and adjusted EBITDA suggests better cost management and operational efficiency.

Full Year 2023 Financial Highlights (Source: TRR 2023Q4 Earnings Report)

• Total Revenue was $549 million, a decrease of 9% compared to full year 2022.

• Adjusted EBITDA was -$55.2 million, but in Q4 the company experienced its full quarter of positive EBITDA since their IPO in 2019. A negative adjusted EBITDA indicates that the company is experiencing operational losses. As a newer company, this is acceptable as The RealReal is prioritizing growth and market expansion over immediate profitability. 

• Net Loss was $168 million or (30.7)% of total revenue, compared to $196 million or (32.5%) of total revenue for full year 2022.

•  Net loss per share was $(1.65) compared to $(2.05) in the prior year.

• Earnings per share of -1.65.

• Asset Turnover Ratio is 1.23 which means that for every dollar of assets, TRR generated $1.23 in sales during the year. 

• Quick Ratio of 1.13 which shows that TRR has $1.13 in liquid assets for every $1.00 of short-term liabilities. It can cover its short-term obligations without having to sell inventory.

TRR also recently announced a new debt restructuring agreement that reduced company indebtedness by more than $17 million, giving the company greater financial flexibility to move forward (Danziger, 2024).

Industry Opinion #1: Forbes

According to Forbes, a well-known source for business and financial news, the second-hand luxury goods market is on fire, growing twice as fast as the primary market, advancing at an 11.6% compound annual growth rate compared to a 5.2% CAGR for the primary personal luxury goods market. 

Despite high growth potential, companies that sell pre-loved luxury goods have been struggling to develop a business model that can convert this growing demand into a profitable business. As a leader in this burgeoning industry, The RealReal may have “cracked the code” after announcing positive free cash flow for the first time in Q4 of 2023. The company has finally gotten “the unit economics right so that every item that came in made a profit going out” (Danziger, 2024). Other strategic shifts include:

• Revamped the commission structure to share higher commissions for higher-value products

• Eliminated low-value items under $50 and categories that weren’t core, such as kids, art and home categories

This expert article shows strong support for The RealReal and is optimistic about its future performance after considering the company’s recent shifts in business strategy. 

Industry Opinion #2: Morningstar

Morningstar, a prominent business news outlet, also published an article that provides a far more bearish outlook on The RealReal. Since going public in June 2019, TRR stock has declined by 92% and the company conducted two rounds of layoffs in 2022. 

Key Morningstar Metrics:

• Fair Value Estimate: $2.08 (currently $3.66)

• Morningstar Rating: 1 star (highest rating is 5 stars)

• Morningstar Uncertainty Rating: Very High

Main Takeaways:

• The RealReal is in poor financial health and carries negative equity. However, Morningstar is “encouraged by the firm’s ability to restructure $146 million of its looming 2025 convertible notes” (Dunlop, 2024). This solves immediate bankruptcy concerns.

• Younger luxury consumers may favor cheaper self-service marketplaces like eBay and Poshmark, intensifying competition. 

• The route to durable profitability remains unproven and Morningstar “continues to fear that The RealReal’s model isn’t tremendously scalable” due to constraints in supply-side sourcing (Dunlop, 2024).

• As the first pure-play luxury reseller, “The RealReal is forced to path-find in its efforts to achieve enduring profitability, the success of which is not guaranteed” (Dunlop, 2024). 

Final Recommendation After thorough evaluation of The RealReal, I firmly recommend that AMDP does invest in The RealReal. As a young company, The RealReal has struggled to turn a profit and gain financial stability. However, the company’s first-time success in the last quarter of 2023 demonstrates how recent strategic changes can create a successful business model. 

I believe that resale is not just a trend. It is shaping the next era of fashion and changing the way consumers shop. The RealReal is a pioneer in this growing industry and is strongly rooted in environmental stewardship and social responsibility, both of which are core values at AMDP. Although this does present as a high-risk investment, I believe that theThe RealReal demonstrates strong macro fundamentals that will persevere in a fast-changing retail environment. 

Wen-Hsin Kuo, AMDP Research and Development Analyst

Works Cited: 

“25 Years Ago I Coined the Phrase ‘Triple Bottom Line.’ Here’s Why It’s Time to Rethink It.” Harvard Business Review, 13 Sept. 2018, hbr.org/2018/06/25-years-ago-i-coined-the-phrase-triple-bottom-line-heres-why-im-giving-up-on-it.

“Carbon Footprint Factsheet.” Center for Sustainable Systems, University of Michigan, 2023, css.umich.edu/publications/factsheets/sustainability-indicators/carbon-footprint-factsheet 

Danziger, Pamela N. “The Realreal May Have Turned the Corner to Profits in Luxury Resale.” Forbes, Forbes Magazine, 5 Mar. 2024, www.forbes.com/sites/pamdanziger/2024/03/04/the-realreal-may-have-turned-the-corner-to-profits-in-luxury-resale/.

“Earnings Results & Presentations.” The RealReal, investor.therealreal.com/financial-information/quarterly-results. Accessed 8 Mar. 2024.

“Earnings Results & Presentations.” The RealReal, investor.therealreal.com/financial-information/quarterly-results. Accessed 8 Mar. 2024.

Holman, Jordyn. “‘The Moat That We Have to Protect’: The RealReal’s C.E.O. on Reviving the Brand.” The New York Times, The New York Times, 26 Aug. 2023, www.nytimes.com/2023/08/26/business/the-moat-that-we-have-to-protect-the-realreals-ceo-on-reviving-the-brand.html.

“Realreal Roe 2018-2023: Real.” Macrotrends, www.macrotrends.net/stocks/charts/REAL/realreal/roe. Accessed 8 Mar. 2024.

“Social Impact.” The RealReal, investor.therealreal.com/social-impact. Accessed 8 Mar. 2024.

Therealreal, investor.therealreal.com/static-files/1a66612f-0a99-48f3-b5d6-59ec4785e754. Accessed 9 Mar. 2024.

Toma, Glenda. “The Realreal IPO: First Startup from Resale’s New Wave to Go Public Sees Shares Soar.” Forbes, Forbes Magazine, 24 July 2019, www.forbes.com/sites/glendatoma/2019/06/28/the-realreal-ipo-luxury-reseller-latest-retailer-to-go-public/?sh=750d43676289.

“What Is Corporate Social Responsibility? 4 Types.” Business Insights Blog, 8 Apr. 2021, online.hbs.edu/blog/post/types-of-corporate-social-responsibility.