Best Idea Long REAL put up a smoker...which flies in the face of all the bears that tell us 'they're not gonna make it'. Aside from putting up POSITIVE EBITDA for the first time since going public, the company restructured its 2025 maturities – basically kicking the can down the road to 2029, but buying critical time at the same time its showing proof positive in generating real cash. This is one of those 'buy on the print even if it's up 30%' type of stock events. Initially the stock traded down on the headline GMV numbers, which was a great after-hours buying opportunity, as this was COMPLETELY expected as the company exits low-priced and negative margin businesses. In fact, average order value (AOV) was up 10% in the quarter, accelerating from 10% in the prior quarter, with ASP up 13%. The company's guidance for EBITDA in 2024 is easily beatable (and surprisingly vague), but we'll take that any day of the week.
We Build to $110mm in EBITDA Over a TAIL Duration = $10+ Stock
As we've said all along, this stock is not for the faint of heart. But we think the cash flow profile will dramatically change and this will generate over $100mm in EBITDA over a TAIL duration. We’d argue that’s worth a minimum of 10x EBITDA – we could argue 15x. We think gross margins will push 80% in this business vs 62% last year and 74% in 2023 – largely driven by an upshift in the merchandise to a more premium offering and higher consignment mix. Note that we should also see the company creatively source supply (supply, not demand, is the key constraint to this business) from Luxury hubs like London and Dubai, which is a top line accelerator. Tack on cost cuts on a bloated infrastructure and this company, and the potential to become the de-facto off-price clearance arm for European Luxury brands (yet to be announced) and REAL should be able to self-fund the 2028 and 2029 bonds, instead of doing anything that would be dilutive to the equity. Ultimately, we think institutions will start looking at this stock after it triples.
As with any 'Bone' (a sub $5 stock), positions should be sized appropriately – but this one is a winner – especially as we pivot to being positive (or at least far less negative) in retail after 2-years of being (correctly) short the group.