REAL | New CEO Taking Action

RealReal (Best Idea Long) announcing a 7% workforce cut and other cost cutting measures. In fairness, it’s probably not doing this from a position of strength. But it’s the first move by the new CEO to rightsize this business, which we like. As a reminder, the company announced a new CEO with relevant experience at Ebay and digital operations of various retailers including Neiman Marcus.  We don’t have a great read on the new CEO yet, but certainly seems qualified to lead the turnaround based on his work/board experience.  The business has real secular tailwinds as the resale market grows and becomes more accepted within the marginal consumer and upcoming generations.  There are potential cyclical tailwinds as consignment models tend to do well in consumer recessions. In effect, this kind of a backwards way to ‘short the rich’ via a pickup in the wealthy selling more high-end luxury bags, accessories, jewelry and apparel in the current downturn.  The stock and debt are trading like there is a real bankruptcy concern – we don’t think it gets to that scenario (as we highlighted in out Bone, Bagger or Bust deck last year).  It is burning some cash (less so with these cost cuts), but it also sits on about $300mm in cash as of last Q.  The company is in the process of a transformation to shift the focus on profitability and profitable growth from the high growth unprofitable model it had been running post IPO.  We think this company can get to profitability well before cash runs out if it is focusing on core customers and higher margin product segments while increasing authentication efficiency.  The stock and valuation have been punished in this Quad4 market where small cap, unprofitability, and leverage have all been trading down.  Though we’d note the EV here is actually much lower than it looks given where bonds are trading.  Converts are trading around 47 cents on the dollar. So the real market EV pre-premium is ~$175mm.  That’s ~0.1 EV/GMV and 0.3x EV/sales. That’s a very low price for a company we think has built up the most valuable assets needed in this retail segment, quality authenticators and a recognizable resale brand name.  If we wanted to re-create this model, it would cost much more than the current implied EV. We think the assets here are definitely worth something, and it should be eventually a target for a luxury brand house (LVMH, KER), but perhaps for PE firms step in to unlock the value in the interim.  In a deal with think the equity is worth between $5 and $10 per share vs current $1.70. The downside risk is that the company is getting rid of product that sells for under $150, and is focusing on the high end. That could give GMV growth a hit in the coming quarter (though margins would likely be better), and in the event of a sell-off we’d get heavier in the name. We’ve had this name on our Long Bias list for over a year, and have been wrong, but with greater conviction on the management change, recessionary trade-down effect, likelihood of a take out, and significant discount to replacement value, we’re getting incrementally bullish.