Consignment Aids Resale, ThredUp and RealReal Inch Closer to Profits

ThredUp Inc. and The RealReal Inc. might have carved out their niche with consumers and helped bolster fashion’s eco-ambitions — but the resale crowd still has lots of work to do to win back Wall Street for real.

Resale was once seen as just maybe the next big thing by investors, who saw low inventory costs and a huge potential customer base as a ticket to big market share gains and, eventually, profits.

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But the path hasn’t been a straight one, and investors have taken a step back and are still largely waiting for the businesses to turn over and start making money.

Third-quarter updates from ThredUp and The RealReal this week did show signs of progress — with both companies crowing over the benefits of not owning inventory with a consignment model — but investors are still being cautious, even as they leaned in some at The RealReal.

Shares at The RealReal advanced 8.1 percent to $1.73 in after-hours trading on Thursday after quarterly results were released, but that still left the company with a market capitalization of just $178 million.

The scene at the Dinner to Celebrate The RealReal's Consign Commitment.
The scene at the dinner to celebrate The RealReal’s Consign Commitment.

“Today we reported our best quarter of adjusted EBITDA since the company’s IPO in 2019,” said John Koryl, who’s been chief executive officer of The RealReal since February. That “adjusted EBITDA” was actually an adjusted loss before interest, taxes, depreciation and amortization of $7 million (EBITDA is the shorthand even with losses). Still, that was a much narrower loss than the $28.2 million logged a year earlier.

“Our strategic shift to refocus on the higher-margin portion of the consignment business is delivering significant progress in our results,” Koryl said.

“During the third quarter, the consignor commission-structure changes we implemented in November 2022 drove higher take rates and, by design, reduced lower-value consignments,” he said. “Furthermore, we continued to transition away from transactions involving company-owned inventory, which helped to improve our gross margin rate. These actions resulted in a higher take rate, a higher gross margin rate, higher gross profit, reduced company-owned inventory, and a significantly improved adjusted EBITDA compared to the prior year period. Looking forward, we continue to project we are on track to deliver positive adjusted EBITDA on a full-year basis in 2024.”

On the other hand, ThredUp, which has seen its stock gain off a low base this year, took a big step back in the stock market.

Shares of ThredUp dropped 33.4 percent to $2.29, leaving it with a market cap of $241.5 million. It seems a cut to the firm’s fourth-quarter outlook outweighed a milestone — the U.S business was adjusted EBITDA break-even and generated free cash flow for the first time in the third quarter.

ThredUp’s net losses narrowed to $18.1 million, or 22 percent of revenues in the quarter, from $23.7 million, or 34.8 percent, a year earlier.

Revenues gained 21 percent to $82 million and the number of active buyers increased 4 percent to a record high of 1.8 million.

The company has been holding less inventory and switching to a consignment model in the U.S. and is working to make the same switch in Europe.

“With just one quarter left in our fiscal year, we have clear sight to achieving our goal of reaching quarterly EBITDA breakeven, but not on our original Q4 timeline,” James Reinhart, cofounder and chief executive officer, told analysts on a conference call.

“There are accelerating headwinds in Europe,” Reinhart said. “Since our European business is not a consignment-based business yet, there are fewer levers to manage gross margins. We expect this to change over time as we transition to consignment. But in the meantime, it is presenting a headwind to our consolidated margins.”

ThredUp is also facing a tough marco environment — like everyone else — and has chosen to be “incrementally more promotional” to keep its momentum.

“We remain committed to building a business for the long term and will not optimize for short-term optics when faced with difficult decisions,” Reinhart said. “It is these types of decisions that enable us to be extremely proud of the continued progress we’re making towards our growth and profitability goals in the face of ongoing consumer uncertainty and a competitive promotional environment; we expect the U.S. business to again be EBITDA positive in Q4, despite Q4 historically being our slowest quarter in the U.S.”

The company is now looking for its fourth-quarter revenue growth to decelerate to a rate of 11 percent to 14 percent.

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