For Real: Labor Hours Likely Stunting The Business Model at The RealReal

As an only child, much of my 2021 was spent handling the estate of a loved one who passed away unexpectedly last spring. As I went through my childhood home and organized possessions that had been accumulated by my family over 50+ years it became obvious that the best way to get the job done eventually and minimize wastefulness (by finding good new homes for most items) was to go the consignment route. With a category such as apparel and accessories, the natural fit was The RealReal (REAL) , a publicly-traded full service online consignment web site. Unlike some of their competitors, REAL does the hard work for you and takes a higher cut for their efforts. While I was not considering the shares as an investment, the experience of using the service as a consignor, which I am a few months into, was nonetheless interesting from a business analysis perspective, especially with the stock having lost about two-thirds of its value from the all-time high. My takeaway is that the main reason why a client would hire REAL (minimize the work required to sell items) is exactly what will make this a very hard business to run efficiently and profitably. With labor costs rising and worker shortages front and center due to the pandemic, the barriers to scale are likely even more pronounced now than a couple of years ago. Consider how many labor hours REAL employees put in to make this model work. First, a local consignment representative will come to my house, go through my items, bag them up, and take them home with them. They do this for free. I also have the option to box them up myself and ship them to a REAL distribution center via UPS, also on REAL’s dime. Given the volume I have, I opted for local pickup. Once the employee has the items they manually photograph and inventory them before packing them up and sending them in via UPS. Upon reaching their destination, another set of employees unpacks them and sorts them to be routed to the appropriate product specialist. The experts will then inspect every item for condition and use their knowledge of the current market to price and list each item on the site. And obviously once an item sells, more labor is required to pack and ship it to the retail customer. Oh, and don’t forget returns. While REAL requires buyers who want to return something pay the return shipping costs themselves, more labor is needed to receive the items, inspect them for damage, and restock them in the warehouse and on the site. Return rates in the apparel sector are sky high, often in the 30-50% range. Even without rising minimum wage rates across the country and a renewed enthusiasm for remote-only work, you can see how labor intensive this business model is. And it doesn’t exactly scale well with higher volumes of items. Yikes. Okay, but don’t they make good money off of sold goods? Sure, with gross profit running at about 60% even accounting for lower margin physical stores, of which they have some. But the expense lines are nuts. For the first nine months of 2021, SG&A, operations, and technology costs totaled 95% of revenue. Add in a another 14% of sales for marketing and the operating loss was negative 49% . Pandemic related expenses are hurting lately, but even in 2019 operating margins were still negative 32% . It’s going to be a tall order to get this business, in its present form, to profitability. Gross profits are falling despite rising revenue and they have seen no expense leverage except on the marketing line (undoubtedly due to huge labor needs). Before this experience, I wasn’t really paying much attention to REAL stock. Afterwards, with shares trading at about 2x 2021 revenue, I don’t see any reason to start. Maybe somebody bigger buys them at some point, but other than that, I recommend merely consigning through them if you don’t want the hassle of photographing, listing, pricing, and shipping stuff yourself. Full Disclosure: No position in REAL at the time of writing, although positions may change at any time