The path to profitability: Why some struggling resale names could triumph in the long-run

Published Sat, Apr 30 20229:32 AM EDT

Secondhand apparel is becoming an increasingly popular option for consumers searching for sustainable fashion and cheaper luxury goods, but until growing sales turn into profits, investors should be cautious when hopping on this trend in the near-term. Demand for resale apparel and footwear is growing, with the market expected to hit $47 billion in 2025, according to Global Data. That's up from just $9 billion in sales in 2020 and $15 billion in 2021. More broadly, consumer appetite for resale could outpace some long-established retail sectors, as its market share swells to 18% of total retail sales by 2030, from 9% in 2020, GlobalData forecasts. The category should come out ahead of direct-to-consumer and department store sales, but just behind off-price retail. Gen Z seems keen on the trend. A recent biannual survey from Piper Sandler of 7,100 teens found that about half said they buy and sell secondhand. Those numbers are down slightly from a previous survey the firm conducted that found that 51% of teens have purchased, and 62% have sold secondhand. "From the top line, it's probably going to be a really good space," said Needham analyst Anna Andreeva. "But the profitability part to these companies is becoming a little more tricky and elusive, and that's exactly what investors want right now." Investors looking for growth opportunities welcomed companies like ThredUp , Rent the Runway and Poshmark to the market with lofty valuations. But the struggles the group has had in turning a profit has left risk-averse investors unwilling to take a chance on this emerging category. Each now trades below its IPO price. Competition is ramping up given the industry's low barrier to entry and new names are popping up as the current contenders battle local and big consignment companies like Goodwill and Salvation Army. Many resale brands will benefit from rising inflation as they typically source products directly from consumers instead of creating new items. But rising advertising costs have led to increased marketing costs — not to mention the headwinds from Apple 's privacy changes. "At one point in time the market was willing to pay for growth at all costs," said Tom Nikic, an analyst at Wedbush Securities. "A switch flipped at some point in late 2021 where the market said 'We're not just going to assume that all of these money-losing businesses are going to generate these robust margins over the long-term and we need to see actual evidence.'" Who's getting into resale? To keep up with shifting customer preferences toward resale, retailers including Madewell and Levi's have launched their own recycling campaigns to swap old denim — in some cases for credit — while names like Target and Abercrombie & Fitch are partnering with ThredUp to offer used products at a discount. Luxury brands including Kering -owned Gucci and Burberry joined forces with The RealReal , while LVMH dipped its toes in the market when it launched a platform for selling leftover fabrics in April 2021. As the market grows, competition is ramping up, leading to more mergers and acquisitions. For example, Etsy purchased resale app Depop for $1.62 billion in July and Europe-based Vestiaire Collective's March acquisition of Tradesy in March. Some of the biggest names in the space remain Poshmark, ThredUp, and Rent the Runway, though the companies are far from the only contenders vying for consumer cash. Poshmark Poshmark has proven profitability in the past , but shares of the company have fallen more than 35% this year, giving it a market cap of roughly $858 million. That's a fraction of the more than $3 billion valuation it fetched after pricing its IPO at $42 a share. In March, the company said it swung to a net loss of $98.3 million on $326 million in revenue in 2021. A year earlier, it earned $18.8 million even though revenue was lower. Poshmark said it was planning to increase the percentage of its revenue it spends on marketing to a range in the high 40s in the first quarter, partially due to higher digital advertising costs. Not to mention, Apple's privacy changes have put a crimp in the reseller's ability to target its ads. The new privacy updates, released in April, force app developers to ask for permission before they collect a phone's advertising identifiers, which are used to target potential customers. The change may make advertising less effective in drawing in new buyers. "It has really increased the cost of digital advertising and decreased the efficacy when running targeted marketing programs," Manish Chandra, Poshmark's founder and CEO said during a November earnings call. "So for us, being a data-driven organization, we spent June and July really measuring the ROI and figuring out the right level of spend." Despite the setbacks, several analysts including Morningstar's Sean Dunlop maintain a buy rating on Poshmark. While Poshmark may offer a lower average sale price than some luxury platforms, it boasts impressive retention metrics, with users spending more money each year, Dunlop said. One key metric used to track returning customers is stacked buyer cohort retention. It rose to 104% in 2021, up 2% from the previous year. Stacked seller cohort retention — which tracks the loyalty of Poshmark's sellers — rose to 112% in the same period. Its average order price hit $40 last year, thanks to sales of higher-priced products. Andreeva said she is concerned Poshmark may struggle to attract buyers post-pandemic as casual sellers return to full-time work, giving them less time to work a side gig. Poshmark takes a flat $2.95 commission for all sales under $15, and 20% from sales exceeding that amount. The shipping fee is typically paid for by the buyer, which is an advantage for Poshmark when shipping rates are rising. Even as the macro environment shifts, analysts continue to bet on the stock, which boasts an average price target of $17. That means a potential 54% from Friday's close . ThredUp Unlike some other resale names, ThredUp takes inventory, authenticates it and fulfills shipments. All consumers have to do to resell their items is fill up a package sent to their homes and drop it off with a prepaid shipping label at FedEx or the post office. In return, ThredUp often takes a larger chunk of an item's total sales price — anywhere from 3% to 80% . Dylan Carden, an analyst at William Blair, said the trade-off leaves consumers with fewer roadblocks to selling. ThredUp also partners with many traditional retailers to make it easy for consumers to send products, oftentimes in exchange for store credit. Meanwhile, retailers walk away with a more sustainable image. In a recent note, Goldman Sachs' Alexandra Steiger said ThredUp remains a "key player" in the growing resale market as the stigma surrounding secondhand dissipates. However, increased volatility is likely in the near-term. Steiger sees potential upside opportunities in the company's resale as a service and international and category expansions, which includes its recent acquisition of a popular secondhand European fashion company called Remix. "The balance between ThredUP's need to invest in its fulfillment infrastructure to support supply growth vs. ongoing automation efforts will be a key driver of its forward margin growth opportunity," she wrote. ThredUp's plan to build out one of its largest automated distribution centers could signal to investors the company is maturing its fulfillment operations, Carden noted. For ThredUp, the path to profitability isn't clear-cut. Goldman Sachs' said investors may need to wait until 2025. ThredUp's stock has come under pressure like many other resale companies, trading nearly 79% off of an all-time high of $31.40. When it first debuted on the public markets, ThredUp raised $168 billion bringing it to a nearly $1.3 billion valuation. But analysts see a promising near-term outlook based on the consensus $15.64 price target, meaning the stock could gain more than 137% from Friday's close price. Rent the Runway Rent the Runway offers one-time designer clothing rentals as well as memberships where customers can borrow four to 16 items each month for a fee of between $94 and $235 a month. Andrew Boone, an analyst at JMP Securities, said the company could benefit from growing demand due to a return to in-person events. Other analysts agree. In an April note to clients, Jefferies' Ashley Helgans picked Rent the Runway as a beneficiary of a wedding boom this year. 2022 is expected to log the highest number of weddings since 1984. The supply chain constraints that could prevent traditional retailers from adding inventory are less likely to hit Rent the Runway. Plus, the company may profit from rising inflation, which is contributing to surging prices for new apparel, she wrote. However, Rent the Runway has not provided a timeline for when it expects to turn a profit, though CEO Jennifer Hyman called it a "number one" priority during an interview with CNBC. In the fourth quarter, Rent the Runway reported a 91% year-over-year revenue increase and a smaller-than-expected loss. It plans to increase membership prices as it battles higher expenses. Rent the Runway had attempted to cut costs during the pandemic by shuttering its retail stores . "I think that this year, as we're operating in a more normalized environment — one of the best macro environments that's ever existed for Rent the Runway — and as we're expecting really strong revenue this year, you'll see a lot of operating leverage and really significant movement on our path to profitability," Hyman told CNBC's "TechCheck" earlier this month in a separate interview. Rent the Runway holds a $15.56 mean price target, which implies a potential 145% return for investors based on Friday's closing price. An obvious target To be sure, resale stocks aren't the only companies to go public in 2021 experiencing sharp stock declines, and it's by no means a sign of failure in the industry, Carden said. "I would think more that ThredUp and Poshmark came public in an overall pretty inflated market and what you're seeing in trading thereafter has more to do with investor appetite as it relates to risk and taking on unprofitable companies as a share class," he said. "Companies that are not profitable are obviously targets given that you're potentially going to have to hold the bag through what could be some pretty rocky broader economics."

A worker moves clothing in the storage area at Rent the Runway's "Dream Fulfillment Center" in Secaucus, New Jersey, U.S., September 11, 2019.

Andrew Kelly | Reuters