What happened
Shares of TheRealReal (REAL -1.18%) were up 13.5% as of 2:48 p.m. ET on Wednesday after delivering better-than-expected earnings results in the second quarter.
Revenue was slightly below estimates, but the secondhand merchandise seller reported improving profitability that buoyed the stock.
So what
Selling secondhand items online is a competitive market. In addition to a weak consumer spending environment, TheRealReal is competing with ThredUp, among several other marketplaces. The company said gross merchandise value fell 7% year over year in the second quarter, which dragged revenue down 15%, although this decline was mostly self-inflicted by steps to improve the company's profitability.
Despite strong growth in revenue over the last five years, TheRealReal has failed to deliver profitable growth, which sent the stock tumbling last year. But management is making progress to turn this around. It moved to limit lower-value transactions that don't generate a profit for the company. This pressured top-line growth but boosted average order value by 10%.
Most importantly, gross margin improved to 65.9%, up 9 percentage points over the year-ago quarter. Management called this a "structural change" to the business model and sets up TheRealReal for more profitable growth.
Now what
The demand for secondhand merchandise is a large and growing market. As a leading brand, TheRealReal has a lot of potential with currently over 33 million members and a leading assortment of luxury goods.
If it can turn revenue growth around, the stock could have legs over the long term. It is certainly cheap, trading at a very low price-to-sales ratio of 0.40.
