The RealReal Booms Despite Luxury Stall

The RealReal's sales have grown for three straight quarters as shoppers look to the secondhand market to save on high-end wares.

The company sells 75% of everything on its resale platform within 90 days, while luxury brands have lost millions of customers over the past couple of years and are selling fewer items.

The RealReal is working to keep items selling, and fast, by investing heavily in technology developed in-house that cuts down the time and cost it takes to prepare products, including Chanel bags, Rolex watches and Gucci shoes, for sale.

"We're constantly pushing the envelope on what we could use technology for to drive efficiencies in our business," Chief Financial Officer Ajay Gopal said. "We have a real advantage in how we can benefit from the advancements in [artificial intelligence]."

One way The RealReal saves time and money is by using AI to authenticate the products it sells. For example, before listing one of Chanel's quilted bags on The RealReal, an employee takes photos of everything from the quilting to the metal hardware and chain strap. They press tiny cameras against the bag, taking high-resolution photos.

Previously, employees would manually compare the photos with those in The RealReal's image archive, which has data from each of the more than 40 million items sold, looking at attributes including the logo, coloring and metal used in the zippers, to determine whether an item is authentic.

"Now, you've got a machine-learning algorithm that looks at the image at a much finer grain and then compares it to the images we have," Gopal said, referring to the reduction in the authentication time.

Most handbags on The RealReal platform that fall in the ultraluxury category will be authenticated using machine learning and AI by the end of this year, he said. For most handbags outside that category, this is already the case.

Authentication is one of several areas where technology developments are reducing The RealReal's costs. AI comes up with item descriptions and speeds up the cataloging process for the thousands of wares listed on the platform.

Technology also helps with real-time pricing. A pricing algorithm reviews more than 100 attributes for each itemfrom the brand to its condition, what it sold for in the past and its popularity-to set a price that appeals to shoppers, according to the CFO.

The algorithm, with human oversight, sets the initial price and then adjusts based on various signals, such as how many shoppers are clicking on an item.

"Everything is going to sell, given the sales rates on our platform, but where is the sweet spot in terms of how quickly we want something to sell and what price we can get for it?" Gopal said. "That's what our algorithm is trying to solve for." The cost savings from the various technologies are significant, Gopal said, adding that the processing times for items are down 10% this year compared with 2023. The RealReal doesn't disclose figures on savings from the technologies.

Growth of The RealReal platform requires more designer wares, which for the most part come from individuals whose items are listed on the platform.

Sellers get a cut of any sale, with the percentage depending on the item. The model allows The RealReal to list thousands of items, typically without tying up cash because sellers aren't paid until their items sell.

Unlike others in the secondhand luxury space, The RealReal for the most part handles various aspects of the selling process, from picking up clothing, bags and more from sellers to authentication, pricing and shipping. That requires more employees and infrastructure, so the resale platform needs to find efficiencies, said Marvin Fong, an equity analyst at financial-services firm BTIG.

"They have a higher cost structure," he said. "Automation and AI can really help them in that regard." The technology developments come as The RealReal has made several changes in recent years in an effort to turn the business around.

Management has changed: Gopal joined in March and Chief Operating Officer Rati Sahi Levesque became CEO in October.

Underperforming categories, such as home goods and children' wear, were cut. And unprofitable items, typically those listed for under $100, have been de-emphasized.

The strategy and those investments are paying off, analysts said. Revenue for the quarter ended Sept. 30 was up 11% over the previous year, continuing a three-quarter streak of sales growth. The RealReal's share price has more than quadrupled this year.

The resale platform is benefiting from inflation-weary shoppers looking to spend less on their designer purchases, which has some luxury brands looking to directly capitalize on the demand for secondhand items.

Even if the outlook for shoppers improves, The RealReal is in a good position, analysts said.

"If you can buy the $7,000 Chanel bag for $4,000, and it's authentic...in great condition," said Bobby Brooks, a senior equity research analyst at Northland Capital Markets. "I don't think that if the consumer gets better, they're going to go back to buying the new thing."