The latest round of cutbacks at The RealReal Inc. — which will bite hard into the resale pioneer’s workforce, stores and real estate — highlight just how hard fashion’s next retail generation is now pushing for profits.
RealReal, ThredUp Inc., Rent the Runway Inc., Stitch Fix Inc. and even Farfetch are all buzzy names with big ideas and loyal consumer bases that have become laser-focused on the bottom line.
That’s a change that’s been forced by Wall Street, where investors are no longer content to fuel the growth of newer business models with steep losses. Jeff Bezos managed to spill a sea of red ink before turning Amazon into a money machine, but it’s a trick no one in fashion has been able to replicate.
Related Galleries
And so the changes are coming fast and furious.
RELATED: Neiman Marcus Group Sets Layoffs, Reorganizes Management
RealReal, which is now led by chief executive officer John Koryl, said in a regulatory filing that it would lay off about 230 employees, or 7 percent of its workforce. The company is also closing flagships in San Francisco and Chicago as well as two neighborhood stores and two consignment offices and reducing office space on both costs.
RealReal said it would “continue to evaluate its real estate presence as it deems appropriate to create efficiencies and to address trends in the marketplace and macroeconomic factors.”
The changes will lead to first-quarter charges of $1.7 million to $2.2 million.
“Heading into 2023, our e-commerce space has one key theme in common: improving the path to profitability,” said Wells Fargo analyst Ike Boruchow in an analysis this week released before the RealReal cuts were revealed.
Boruchow, who covers the resale company as well as ThredUp, Rent the Runway, Stitch Fix and Farfetch, said the companies were all on the move.
“With e-commerce names materially underperforming in 2022 on profitability/cash flow concerns in a rising rate environment, management teams…are more urgently examining business models and infrastructures in an effort to drive material EBITDA improvements — and potentially positive free cash flow in 2023,” the analyst said.
In a particularly timely projection given the RealReal cuts, Boruchow said, “We expect to the extent top lines remain volatile across our space, some names could see additional roles and cost cleaved in an effort to make progress towards at least EBITDA breakeven.”
While Boruchow said the process starts with headcount reductions — which have been widespread — he said that’s just part of the plan and pointed to new revenue streams the companies are developing, including:
- Farfetch’s efforts to bring on high-margin customers for its platform services business.
- ThredUp’s efforts to build its resale as a service platform.
- Rent the Runway’s launch of an Amazon storefront.
- Stitch Fix is also “reexamining its model with [founder] Katrina Lake returning as interim CEO.”
Each faces a version of the RealReal’s challenge. They have businesses that need to find their way to profits to reignite investor interest.
Clearly, Wall Street wants more from all of them.
Shares of RealReal dropped 9.6 percent to $1.61 on Thursday, leaving the company with a market capitalization of $157.9 million. It’s not alone in the market cap doldrums, where it is joined by ThredUp ($149.2 million), Rent the Runway ($258.8 million) and Stitch Fix Inc. ($537.4 million). Farfetch’s market cap stands higher, at $2 billion, but is still well below its peak.
Competition is expected to remain tough as the market is getting more crowded, with no one player able to own a new idea for long.
Neil Saunders, managing director of GlobalData, said the resale market RealReal plays in is getting “tougher with a raft of new resale players, including brands selling directly to consumers. Throw in the higher costs of doing business into the mix and there is a significant threat to The RealReal’s quest to move into the black.
“Today’s job cuts and the closure of some physical locations in the form of stores and consignment offices are a recognition of the growing external challenges and that tougher action is needed to balance the books,” Saunders said. “Riding the wave of high growth in resale is no longer enough to satisfy some investors who want to see that revenue growth will eventually lead to profits.”