Investors Have Soured on Fashion Start-Ups. Can The RealReal Change Their Minds?

THE CHEAT SHEET

The RealReal Looks to Break E-Commerce's Losing Streak

Shopping bags from the Real Real | Source: Courtesy Shopping bags from the Real Real | Source: Courtesy

Shopping bags from The RealReal | Source: @therealreal

Luxury resale platform The RealReal reports its first quarterly earnings as a public company on August 13
Shares dropped 23 percent on Friday after two other fashion companies fresh from IPOs, Farfetch and Revolve, reported unexpectedly weak results
The RealReal's revenue shot up 55 percent last year to $207.4 million, but losses totalled $75.8 million

Fashion’s largely smooth ride on Wall Street came to a screeching halt on Friday. Over the last year, a series of the industry’s biggest e-commerce ventures have cashed out via IPOs, which were swarmed by investors eager for a piece of fast-growing companies promising to change how people buy clothes. That confidence was shaken when Farfetch said steep competition and heavy discounting were weighing on growth, followed hours later by influencer fashion hub Revolve reporting a surprise loss. Friday’s plunge may represent naive tech investors waking up to the realities of the volatile and cutthroat fashion industry, rather than any fundamental change in their respective models' potential. Still, the lack of consistency from quarter to quarter is unnerving, raising fears consumers are already moving on to the next big thing. Next up is The RealReal, which like Farfetch makes the case it is both inventing and dominating a new category, and like the luxury marketplace promises that steep losses today are necessary to deliver the scale that will drive even bigger profits down the line.

The Bottom Line: This past week has likely been most unsettling for the countless direct-to-consumer brands and e-commerce platforms still hoping for an acquisition or IPO. Both futures look less secure after last week, between Friday's plunging share prices and reports Walmart, once a top buyer of digital brands, is shopping around Modcloth.

Tapestry Looks Abroad for Growth

Coach Inc. offices | Source: Courtesy

Coach, Kate Spade and Stuart Weitzman owner Tapestry reports quarterly results on August 15
Rival accessible luxury brands Michael Kors and Ralph Lauren have reported strong international sales but weak US results
Tariffs on Chinese-made shoes and handbags likely won't pose much of a threat, as Tapestry moved most of its supply chain to neighbuoring countries in Asia years ago

The US economy is still humming along, but big American fashion brands are looking abroad for growth. In the US, brands like Ralph Lauren, Michael Kors and Coach historically relied on malls and department stores to drive sales. Those channels are ailing, and said brands and others are on the hunt for alternative ways to attract customers, preferably without slashing prices. Tapestry has made more progress than most of its peers, building a strong business in Asia and taking Kate Spade in a new creative direction. Still, none of these brands have managed to completely escape the department store: Capri lowered sales guidance for Michael Kors last week due to weak wholesale performance, and Ralph Lauren similarly said North American wholesale revenue was underwhelming.

The Bottom Line: One element to watch in Tapestry's results is sales to tourists visiting the US, another still-lucrative but steadily declining business since the 2016 election. The dollar's dramatic strengthening against the pound and yuan reduces the spending power of Chinese and British citizens in American shops.

Fashion Brands Caught Up in the Currency Wars

Chinese Yuan Renminbi banknotes | Source: Shutterstock

China's central bank unexpectedly allowed the country's currency to weaken to an 11-year low of roughly seven yuan to the dollar
President Donald Trump may decide as soon as this week how — or whether — to counter with measures to weaken the dollar
A weaker yuan makes American and European luxury goods more expensive to Chinese buyers

The intricacies of the foreign exchange market are rarely top of mind in the fashion industry. That's about to change. China's decision to allow the yuan's value to drop marks an escalation of trade tensions between the two countries and will almost immediately be felt by luxury brands that depend on Chinese consumers for growth. For starters, every Gucci dress, Moncler coat and Coach handbag just got more expensive for anyone who earns a salary in renminbi, and Chinese tourists may decide to stay home rather than go on that suddenly pricier trip to New York. Shares of companies as diverse as Kering, Adidas and L'Oréal sank after the yuan fell last week. More volatility is likely in the days and weeks ahead, as Trump could attempt to talk down the dollar's value via Twitter, or even order the Treasury and Federal Reserve to intervene in the market.

The Bottom Line: The currency moves appear slight, but over time, volatility can make it difficult for companies to plan for the future — whether it's determining where to open stores to which countries' factories should produce their clothes.

COMMENT OF THE WEEK

Instagram advertisements | Source: Instagram

"Brands and influencers need to make their accounts more of a community or extension of their lifestyle than a buy/sell/promote landing page. For brands, this may mean creating a profile that's more about the vibe of their brand than actually posting about and selling the products." @emilye.nina, commenting about "The Golden Age of Instagram Marketing Is Over."

SUNDAY READING

Professional Exclusives You May Have Missed:

More than an influential face: how social media stars are diversifying.
Why Farfetch bought New Guards Group.
The inner workings of Victoria's Secret: a chairman and his circle.
Live streaming apps are changing the way people shop.
Barneys New York: What happens now?
The golden age of Instagram marketing is over.

The Week Ahead wants to hear from you! Send tips, suggestions, complaints and compliments to brian.baskin@businessoffashion.com.

Was this BoF Professional email forwarded to you? Join BoF Professional to get access to the exclusive insight and analysis that keeps you ahead of the competition. Subscribe to BoF Professional here.