In this episode of Industry Focus: Consumer Goods, join Motley Fool analysts Asit Sharma and Emily Flippen as they discuss some of the most popular fashion e-tailers on the market: Poshmark (POSH), Revolve (RVLV 1.79%), ThreadUp (TDUP 5.04%), FarFetch (FTCH), and The RealReal (REAL 2.95%).
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This video was recorded on Aug. 24, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, Aug. 23, and I'm your host, Emily Flippen. Today, I'm joined by Motley Fool senior analyst Asit Sharma, as we circle back around on some of these fashion e-tailers and see how they're performing midyear. Asit, thank you for joining.
Asit Sharma: Emily, thank you very much. I am so glad to be with the most fashionable choice in podcasters, which is Emily Flippen.
Flippen: Oh, goodness, I'm so happy that people out there in podcast land can't see the fact that I very rarely change outfits. I in fact have a single pair of yoga pants that I wear. I'd probably say four out of five of my working days are done in the same pair of pants.
Sharma: Well, I must say myself, I've got a few pairs of jeans that I rotate through. Just a side note of trivia -- you know this, Emily, because we work on another service together, but I own some yoga pants, too. I just haven't gotten used to wearing them during work hours, but I like my yoga pants.
Flippen: If and when we go back to working in person, I'm going to have such a challenging time even just putting jeans back on, which makes it especially ironic that we're going to be talking about the fashion e-tailers today. These are businesses that I probably should spend more time shopping with, especially with the impending return to our office this year, maybe within the next year or so. But I'm definitely not, I'm still wearing that same pair of yoga pants. But they're interesting businesses to think about regardless. When I went through today's outline thinking about some of these names of which of course will include in the episode description, I kind of split them up into two categories of opportunities, one being the secondhand markets. Again, we've talked about this in the podcasts in the past. And the other being the luxury-goods market. They have such, I guess, polarizing ideas behind them. One's getting things at a really steep discount; the other, paying hundreds of dollars for luxury goods. There is one business, though, that does both, consignment luxury goods. I'm not sure if we've ever specifically talked about it on the podcast, but it certainly is an interesting business and industry to be looking at right now, especially considering how they're moving out of the pandemic into 2021.
Sharma: Yeah, hence we're going to get real with the fashion models. But the company that we're going to talk about does include both worlds. But it's so interesting, Emily, in these various approaches to fashion retailing or fashion e-tailing, you've got lots of ways that you can approach the market. You can own your inventory. As you mentioned, you can have goods on consignment, you can be high culture with luxe, luxury goods, or you can be more down to earth in the fashion resell market. There is so much in this space, and there's such a huge market that I think hopefully will be proven right for spending some time on it this year. As you mentioned, many of these names we've had whole or half-episodes devoted to. I think in the future, some of these models will emerge as pretty nice investments.
Flippen: I'm curious from your perspective, just at face value, thinking about the secondhand e-tailing market and the luxury-goods e-tailing market, does one stand out to you as better than the other, or is this a basket-approach situation?
Sharma: I think it's a basket approach, just because so many of these models are going to keep evolving. For example, a company which has an innovative method of handling its inventory might decide as time goes on to add a social element to its platform because it sees other companies succeeding with that. So I think we'll see a lot of mixing and matching. There is no right answer now, because consumers are themselves experimenting with ways to purchase, with ways to bring fashion, which may be a huge fashion exercise for many consumers into their online journeys. I think it's wide open right now. There's no single company that stands out to me as a must-have, although I will say there are a couple, and I'll mention them as we go along, which are more persuasive than some of the others.
Flippen: I will say, going through prepping for today's episode, while I like the entire industry, I think I've maybe dismissed the luxury-goods industry more than it deserves to be dismissed. I came across a McKinsey report that had a really narrow focus. I think they are just looking at businesses and their performance during the three quarters of the year, last year, that were most impacted by COVID. So please take this with a grain of salt. But one of the interesting facts they called out was the performance of certain businesses within online retail that outperformed their counterparts. And they found that e-tailers with 30% or more of their sales coming from the APAC region outperformed their peers by nearly 10%. And a lot of these businesses were luxury businesses that are serving into a really growing luxury market, specifically in China.
Again, it's a really narrow focus. I don't want to broad out too much, but it did just get me thinking about the fact that while general economic trends, you may think, doesn't exactly lend itself to the luxury goods industry the same way that discounting does, especially if you think about the economic hardships that have come out of the pandemic, but it tends to be that the luxury market is a bit more resilient than people expect, especially when you consider the fact that only a small amount of people relative to the total market base that are driving most of the gross merchandise value for the luxury industry. I thought that was an interesting trend, and I think coming out of this, I'm more interested in the luxury-good e-tailers than I expected to be.
Sharma: I'm sort of the same way. I intuitively push against the resilience of the high-end luxury-goods models because I always feel that they are susceptible to economic shocks. Over time, they proved that they're actually pretty stable. And you do have that aspirational middle class in China and India that sees luxury goods as both status and a realization of their efforts in working.
But again, consumers are still figuring out what they want to do over time with their lives. I point to young people in China who are starting to rebel against what is expected of them, that they will stay in jobs where they're putting in 50 hours a week, 60 hours a week, that they will find happiness in the purchasing of these luxe consumer goods. So this is something that simultaneously I see as surprising, how strong some of the luxury e-tailers are. It's simultaneously strong but also still brittle.
I should say, though, that, I don't know if you saw this, Emily, the richest man in the world for a short period, I think a few weeks ago, wasn't Jeff Bezos or Mark Zuckerberg, but it was the 72-year-old Frenchman who founded LVMH, which is the world's largest luxury-goods conglomerate. So I think that there is something in this model we've got to pay attention to. Somehow intuitively, I've never been able to feel comfortable buying companies which specialize in luxury goods. But just the outcomes are proving me wrong.
Flippen: I didn't know that. That's so interesting. I'm not surprised. Maybe a little bit, but not surprised, given the margins of some of these luxury goods. So let's think about some of these businesses. I feel like I've talked down a little bit about the secondhand market here, and I don't mean to. Let's start with them, because Poshmark is an interesting business. We did an entire, if I remember, show over their S-1 when they went public. They had some interesting conclusions that I may have dismissed the first time that we looked at this business. One of the things that really stood out to me that I'm not sure how I missed it in my first analysis, I feel really silly, is actually about their take rate. I hit the back of their hand a little bit here, because their average order value on Poshmark as a secondhand market tends to be very small.
What's interesting is that in their most recent quarter, their take rate actually fell marginally as the average order value has grown. I think it was around $15; it's typically around $7. So they actually have a lower margin on the higher order values than they do on their lower because of the flat rate on the low-value orders. They're still making more money when they sell higher-quality products, but I didn't draw that connect between the relatively higher take rate on the lower value-orders and then the relatively smaller take rate on the higher-value orders. So we see the average order value rising, but their take rate falling on average.
Sharma: Yeah, this is like PayPal with a mustache and a trenchcoat. It's PayPal in disguise, or other great platform businesses that actually really start kicking into gear when they have higher average orders, which affects the take rate. But then you get those gross dollars coming into the company. And by gross, I don't mean gross platform dollars or gross merchandise sales, but what I mean by that is higher gross profit dollars, higher absolute dollars from each sale. The margins are smaller, but you're making it on these higher orders.
So I think this is something that you didn't miss, Emily. If memory serves correctly at that point in evaluating Poshmark, they were still trying to prove bits of their business model. So you probably saw that, and maybe I saw it, too. But it's one of these things that got proven out I think during COVID and COVID's aftermath, and you know, we should mention that Poshmark is one of these companies that is trying to have a social aspect to their platform. But you mentioned, Emily, in our prep for this, that they also are working on geographical expansion and looking to one country in particular that I've already mentioned in the show.
Flippen: Yes, this is interesting. They specifically hired out a new VP to lead international expansion, and India is first up for this international expansion. I don't dislike the idea of them expanding internationally. I do feel like they haven't quite gotten the foothold that I would have expected them to get in the United States before moving internationally. But I think it says something about the fact that this is a business that does want to move fast, maybe break things along the way. India is in first place up, it seems. I'll be really interested to see what success they have heading into that market. If they can manage to expand successfully there, I think it says something wonderful about the demand for resale across the world.
Sharma: Yeah, I totally agree. And again, you've got another young population there who is very interested in expressing their earnings potential in things for the present moment. So fashion is one big signifier. I will say, for any of my friends in India who happen to be listening, you already know how important brands are to the younger generation, and what you wear says so much about you in major cities. I'm thinking of places like, of course, Bombay and New Delhi. But even big secondary cities like Chandigarh, which has a really fashion-forward youth population. So I could see Poshmark may be doing well in a place like India. We'll follow that over the next few quarters.
Flippen: I will say this is a business that's down nearly 70% since they went public earlier this year. I know that we weren't the biggest fans of Poshmark when they went public. I will say at just over a $2 billion valuation, I think that maybe I wrote off Poshmark too quickly initially. There are some interesting dynamics that they're looking to move into and expanding their platform into things like handmade artisan goods as well sounds a little Etsy-like, but it makes sense, given the fact that so many people manually tweak the clothes that they then sell on to Poshmark, right? They upgrade it. They may be making clothing themselves to sell on Poshmark. So it seems like a natural expansion. Then again, all of this could be floundering. They could be failing in the U.S., going, "Oh my gosh, what can we do to make this better? Let's go to India. Let's try to become Etsy." We'll see where they go. I will be keeping a closer eye on this one, though.
Also, before we move on to the luxury market, I think it's worth touching up on ThredUP. ThredUP also reported an interesting quarter this quarter. A lot of demand, obviously, heading back into the school season. Kids were particularly strong for ThredUP. But for me, the real excitement is this initiative that they are launching, this resale-as-a-service, RAAS, offering. So far they have some pretty big customers: Farfetch, which we'll talk about, Madewell, Fabletics are all customers that are using ThredUP to create a platform that they can then have customers come on and then resell and reuse clothing that they sell. So it's essentially a custom resale shop. I like that. It's an interesting dynamic. I'll be interested to see what they do with that in future quarters as well.
Sharma: Yeah. And Emily, I'm going to call us out on this, because I think the first time around, when we talked about ThredUP earlier this year, we were making fun of the RAAS concept, and we thought it was some fancy terminology for something that seems second nature to this platform. But the more I see it and of course with brands like Madewell, which is specializing in its own core unique product jeans, this seems to be something that works really well in the retail world. To me it's more like Shopfying for bigger-enterprise companies. I think that ThredUP, with a little bit of early success, can maybe get some brand power here.
I don't know if anyone will ever really think of this as resale as a service, but forgetting the name for a minute, the fact that you can utilize their platform and get the data fed back to you and make decisions about future inventory if you are a manufacturer or future designs if you are a retailer, I think this is potentially a really nice symbiotic relationship that ThredUP can have with some potential competitors as well. Even though Farfetch, which you mentioned, is a different type of platform in a different segment of the market -- upscale -- as I said earlier to that point, many of these platforms will experiment. ThredUP may in the future have some higher-end price points, and Farfetch may slum it a bit. So it's good to see them partnering now with some of the potential competition.
Flippen: Maybe I'm totally forgetting, so I apologize if we mentioned this when we did the show earlier this year, but if we did it, I immediately forgot it. This is almost new information to me, but LG Electronics is also a partner for their RAAS concept. It's their first non-fashion customer. Maybe there's something there. Again, ThredUP has a similar market cap in comparison to Poshmark. They do significantly less in gross merchandise value in comparison to Poshmark. So that's something to keep in mind. They are doing less in terms of revenue. They're about, I think, two-thirds in terms of revenue in comparison to Poshmark. Similar valuations, though, but different business models. I like them both, but I'm still more excited about the luxury market.
Let's talk about Farfetch. I know this is a personal favorite among Motley Fool analysts. It's obviously a luxury goods, luxury resale market here for Farfetch, and it's capitalizing upon many of those same favorable trends that we talked about earlier. How do you feel like Farfetch is performing midyear?
Sharma: The performance is pretty phenomenal. This is one, Emily, I think I'm in the minority here. I've had trouble getting enthusiastic about Farfetch. Their sales in their most recent quarter, which I think they reported on Aug. 1, full-price sales grew 90% year over year. The two-year stock was even more impressive; they grew 140% over the quarter that occurred before the 2020 COVID quarter. So this is a company and a platform that obviously is garnering a lot of scale. They've partnered up with luxury brands, and so far, the strategy is to have as many of these high-end brands on the platform as possible and become the de facto choice for those which don't want to take the investment into their own footprints online.
And I think that this is something that is going to be important in the future, because the competition among brands in the luxury space is increasing as more capital is flowing into the concept. Luxury right now is on a multiyear high, whether you look at the fashion part of the segment or luxury goods. Across the scale of goods and items that we define as luxury, they're really in this extended tailwind, which again makes me feel like maybe I'm missing out on something. What do you see in Farfetch's earnings that stands out to you as something investors should pay attention to? I'm curious, too, Emily. I can't remember when we covered this the first time. I know you talked about this with Yasser, what your personal opinion on the company is.
Flippen: I like the business. I'm actually not a shareholder, but in part it's because so much of their growth has been exposure to China, and I already own a ton of Chinese businesses. So in some respects, it felt like doubling down on a geography that I was already exposed to. That is my probably poor excuse for not owning this significant winner for so many investors, but they've always had a strong exposure to the Asia market. They had a partnership with Alibaba as part of their luxury new retail strategy, where they're really just trying to serve the needs of a luxury retailer. So you can think about the luxury retailers as the core customers for Farfetch, as opposed to the people who are actually making sales on their platforms.
But what I think is even more interesting that stood out to me in this quarter was, they're really impressive with their payback periods, their customer acquisition costs over the lifetime value of their customers. Those are the people making the purchases on the platform. That's around six months, even for the cohorts that they've brought on during the pandemic. A really short payback period for what is essentially a retail business. It does say something about the stickiness of the customers they bring in and also more importantly, just how much money people are willing to spend on luxury goods.
Going back, you mentioned that full-price sales growth rate up 90% year over year. That's critical for luxury retailers, almost the opposite of Poshmark and ThredUPs that are undercutting that full-price, knowing that you're getting really high-value customers that are willing to pay full price for items, even if they're ordering digitally from luxury retailers. That's what Farfetch needs to win, and they're doing a good job so far.
Sharma: Yeah. I'm impressed by the metric you point out, Emily. Across industries, if you had to pick a benchmark as a really great payback period, if it's a year or less, then that's outstanding. There are all kinds of implications for operating margins and cash flows when you can enjoy such a short payback period. So I have to pay a little more attention to that one as we move forward. Maybe I'll buy a few shares just to get some skin in the game. That makes me pay attention usually.
Flippen: Well, how do you compare a business like Farfetch to Revolve? I know their business models are slightly different, but when you look at their performance, is it similar?
Sharma: Revolve is interesting because they actually take in inventory, and they are a business which doesn't seek to partner with big brands so much as they do to grab their own customer through an experiential basis. So they market their goods and services within festivals and concerts and all types of outdoor activities. That's how the company grew, and they had a big jolt. We discussed this in a previous podcast, when COVID came around. The company pivoted pretty quickly toward offering more evergreen items.
What I was impressed by with Revolve recently, Emily, is just the scale of their growth. They also now have bounced back. They're growing at a much faster rate than they were before COVID. Their net sales growth in this quarter, that they recently reported on at the beginning of the month, was 60% year over year, but that was 41% over the similar quarter in 2019.
The thing that I really like about Revolve is management is obsessed with optimizing their inventory. They spend a lot on technology in their fulfillment and distribution, and that's resulting in really nice gross margins. Their gross margins expanded about 540 basis points in the most recent quarter to 56%, which is fairly decent for a clothing retailer.
So I like that Revolve was able to add some new revenue streams that aren't so event dependent. But now that the events business is starting to bounce back a little bit, delta variant of COVID notwithstanding, I think maybe they've got some gravy in their revenue going forward. I like this company. It's solidly profitable, and it has an extremely solid balance sheet to boot.
Flippen: Well, I'll tell you the one that stands out to me, that I don't think, and correct me if I'm wrong, we talk about so much. I don't think we've specifically talked about this business on Industry Focus before, but it's The RealReal. They do a combination of secondhand retail and luxury goods. So they are a luxury-good consignment. It plays into both spaces. I love a good deal, but I also love it when people are willing to spend a ton of money shopping at a store that I'm invested in. The RealReal does tend to check both of those. What stood out to me in their quarter was that their average order value was over $500. That's up 25% year over year, and granted, 2020 was a weird year, but it's still up nearly 20% or 15% versus 2019. So impressive growth there, but they also have a really high gross merchandise value per active customer of over $1,600. They're doing a good job, I think, of toeing that line between discounts while still retaining value.
But the reason why I wanted to talk about it today was because management for a while now has been in the process of building out what they call neighborhood retail stores, specifically in high-value areas; Dallas, Austin, Atlanta, those sorts of cities. And the idea is that the stores can act as an acquisition funnel for consignors, people who have luxury goods that they then want to resell. The RealReal can then purchase and resell either online through their shops. It's almost like traditional retail exposure operating as a funnel for customers to come into The RealReal. It will be an interesting one to watch. I think it's higher-risk. I will say that, than some of the ones that we've talked about, but still an interesting model.
Sharma: So interesting with this back-to-the future model of building out these stores for consigner acquisition. You probably will remember, we mentioned this briefly, The RealReal has taken out a few thrift stores in its business models in some cities like Washington, D.C., just because they've shifted some of that consignment traffic online. So just like Amazon opening up some retail stores, we learned earlier this week, the world comes full circle, and there's plenty of experimentation left in these hybrid models. There are so many ways to skin the cat in fashion e-tailing.
Flippen: Well, I don't know about you, but I'm excited for the potential to be shopping back in-store after a year and a half now of feeling uncomfortable doing so. I'm excited even for our luxury retailers to have a bit of a retail footprint here.
Sharma: Even for two people who have no fashion sense whatsoever, I think we're both excited to step out in the real world and see what's going on in the stores.
Flippen: Well, Asit, thank you so much for joining us, as always. We always love hearing your thoughts, especially on fashion e-tailers.
Sharma: Thanks so much, Emily. It's so much fun as always.
Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say "hey," you can always shoot us an email at [email protected], or tweet at us, @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the screen today. For Asit Sharma, I'm Emily Flippen. Thanks for listening and Fool on.
