Apparel Reseller Poshmark Being Bought Out; Is The RealReal Next? (NASDAQ:POSH, REAL)

Male fashion leather handbag isolated on white background

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The announcement on October 3 that Naver (KRX:035420), Korea’s largest internet company, was buying Poshmark Inc. (NASDAQ:POSH) for $17.90 cash per share caused some investors to aggressively buy The RealReal (NASDAQ:REAL) stock because both companies are in the apparel resale business. POSH shareholders should sell at the current stock price of $17.60 and not risking that the deal falls apart. REAL shareholders need to re-examine the credibility of their business model given the extremely unfavorable news reports and lawsuit in 2021. It is interesting to note that Naver’s stock price dropped on the news of the deal. It seems some Naver investors were not happy about the purchase or may not have been happy about the high price being paid for POSH.

Naver Buying Poshmark

The deal of Naver buying POSH for $17.90 may not have been a complete surprise to some traders because the stock price has been very strong relative to the rest of the market for the last few weeks. At the current price of $17.60 per share there is only about a 1.7% potential return and that is not, in my opinion, a high enough considering that these deals are not risk-free.

The merger is subject to POSH shareholder approval but considering that holders of 77% of the stock have already agreed to vote to approve, this is not an issue, and it is not subject to financing. One problem is that the deal is not expected to close until 1Q 2023. (There is a closing condition by April 3, 2023, but that is subject to an extension to July 3.) Things could happen before then. There is a “Company Material Adverse Effect” provision in the agreement that could cause the deal to fall apart. While there is a long list of items, such as general economic conditions and inflation, that would not be considered a company material adverse effect, there is a critical exception clause:

except in each case of clauses (a long list of clauses, including the economy and inflation) to the extent that such conditions, changes, events, effects or developments have had a disproportionate adverse effect on the Company relative to other companies operating in the industries in which the Company and its Subsidiaries conduct business, in which case only the incremental disproportionate adverse impact may be taken into account in determining whether a Company Material Adverse Effect has occurred.”

I have concerns that if Naver has second thoughts about the deal over the next 4-6 months, they may try to get out of this deal, especially if the U.S. goes into a major recession. Of course, there most likely be a lot of litigation regarding if POSH is impacted disproportionately more than their competitors, but why assume any risk. Sell POSH at $17.60 and take the cash now. I doubt there will any higher offer. I actually think the purchase price is too high given the company’s prior results and operating problems that I covered in my prior POSH articles.

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Data by YCharts
Chart
Data by YCharts

Is The RealReal A Potential Buyout Target?

According to a Seeking Alpha news report, an analyst at Needham, REAL is the “likeliest resale retailer to attract an offer” because of the POSH deal. While REAL currently does have a CEO problem and stock price is severely depressed that does not, in my opinion, make REAL a likely buyout target. Other retailers might be looking at ways to enter the resale market, but REAL has a serious PR problem with their authentication process because of prior litigation. Confidence in the authentication process is absolutely critical, especially the very high-end luxury product end. POSH resells across all price levels and authentication is not as critical as with REAL that almost exclusively sells at the top end of the resale apparel market.

REAL shareholders filed litigation against REAL, management, and their IPO underwriters. (Sanders v. The RealReal, Inc. et al, No. 5:2019cv07737 Federal Court Decision) Shareholders agreed to a $11 million settlement. The primary assertion by the shareholders was that they were misled by various statements in the June 2019 $20 per share IPO prospectus which stated:

We build trust by expertly authenticating every item. Each item is put through a rigorous, multi-point authentication process by our highly trained gemologists, horologists, brand experts or art curators. As a result, we believe we have become the most trusted online marketplace for pre-owned luxury goods.

Various media reports clearly indicated that there was not proper authentication for each item. These media reports were a PR disaster for REAL. Even now there are questions about being certain that a specific item is authentic and not a fake. Buying a used Nike jacket on POSH does not require much authentication at all but buying a used Gucci handbag requires a very highly skilled employee to authenticate that it is actually made by Gucci and not some fake bag from Chinatown in New York. In my opinion, REAL is so damaged by this case that any potential buyer would be reluctant to become associated with The RealReal brand name.

Yes, this case was that bad. I suggest investors read all the filed documents before you buy REAL securities.

REAL Has Serious Operating and Financial Problems

REAL’s latest 2Q adjusted EBITDA results of $28.809 million loss was actually much worse than the same period in 2021 after deducting the $11 million lawsuit settlement in 2Q, which would reduce the reported last year’s 2Q $32.894 million EBITDA loss to $21.894 million loss. Management guidance for 3Q is an adjusted EBITDA loss of $28 million and EBITDA loss of $13 million in 4Q. Management claims that they should have a profitable adjusted EBITDA in fiscal 2024. I have my doubts given that I expect the recession will continue until late 2023.

Adjusted EBITDA 2Q and Six Months

adjusted EBITDA in 2Q 2022 and 2Q 2021 Six months 2022 and 2021

Adjusted EBITDA 2Q and Six Months (investor.therealreal.com)

Their business model involves taking goods on consignment (68% of revenue) and reselling the items on their website and in their retail stores. REAL also sells directly from their own inventory (28% of revenue) and has additional revenue from shipping the merchandise. They make their money from the “take rate”, which averaged an extremely steep 36.1% in the latest quarter for the consignment commission, and from their direct selling. Most of their products are at the high end with average price in the latest quarter of $486, but that was down from $520 in the same period last year.

I was in their Wooster Street store in SOHO in New York City once with friends, but we prefer to buy new merchandise at the actual brand’s store. The merchandise was top quality, but it was still “used” or as some state “pre-owned”. I tried going into their website, but you have to sign in and I refuse to give any information just to look at their website. I personally think it is a huge marketing mistake to require a person to sign in using various social media accounts or a Google account just to look at their website.

REAL used $87.9 million cash for operation during the first six months of this fiscal year and the near-term results most likely will burn even more cash. There is a huge wall in 2025. There are $172.5 million convertible unsecured notes that mature June 15, 2025. Since they are convertible at $17.77 per share, these notes most likely will need to be paid either in cash or via some refinancing deal that would require paying a much higher coupon than 3%. Another $287.5 million convertible unsecured notes mature in March 2028. It is also highly unlikely they will be converted into stock before maturity because they are convertible at $31.80 per share. Both of these issues are trading at a very steep discount from par.

At this point, I would not be surprised to see some in court restructuring before June 2025. Why should a potential buyer of REAL pay for the company’s stock and also assume a $460 million debt liability? It might be much cheaper just to wait and buy the operating assets under a section 363 sale in Ch.11 bankruptcy.

Conclusion

Since there is only about 1.7% potential return, POSH shareholders should sell at the current stock price of $17.60. Given the financial results for POSH and problems with their business model, it is unlikely another buyer will bid higher.

It is, in my opinion, unlikely that any company will try to buy The RealReal because they have a serious PR problem regarding authentication of their luxury brand products, and they have such a large amount of debt a potential buyer would have to assume. Given the current difficult financial conditions, I find it more likely that a buyer would wait and buy the assets during a Ch.11 process. I rate REAL a sell for investors, if there are actually any investors holding REAL, and a hold for traders because there might be future rumors about buyers and/or future meme trading.

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