Over the past decade, a number of retail players have entered the resale market. The pandemic has also triggered an influx of new shoppers wanting to buy secondhand. Health and wellness have become a top priority for consumers during these times. As a result, many have made the conscious commitment to change the way they shop by buying vintage as opposed to new items, which is better for the environment. They also continue to clean out their closets as the pandemic has forced shoppers to spend more time at home.
The resale market can help extend the lifecycle of merchandise, including fashion garments, which helps move away from a linear economy and promote a circular economy. In a linear economy, goods are produced, purchased, and once consumed they are disposed of. The goods eventually end up as waste in a landfill (Exhibit 1). The is also known as the take-make-waste’ linear economy.
Exhibit 1: An illustration of the Linear Economy
Source: Het Groene Brein
In the circular economy, goods are produced, purchased, consumed, but then either donated, repaired, re-sold, or recycled – over again. This extends the lifecycle of the product and helps to reduce waste, which is better for the environment. The Ellen MacArthur Foundation (EMF) defines the circular economy as an industrial economy that is restorative or regenerative by value and design.
Exhibit 2: An illustration of the circular economy concept
Source: The Ellen MacArthur Foundation (EMF)
The trend has expanded. For instance, Ikea has introduced a secondhand furniture venture. Innovation has also transformed the secondhand market, which has morphed from dusty resale shops to shopping on a phone app for luxury resale and consignment. Rent the Runway offers shoppers a subscription box to either rent and/or purchase items mailed to them.
Among the biggest players, Facebook has become the “new Craigslist” allowing shoppers to easily resell their merchandise on its marketplace. Although the company doesn’t disclose the number of marketplace transactions, it said on its latest earnings call that “daily active users reached 1.93 billion, up 6% or 110 million compared to last year” (Source Facebook Q3 2021 earnings call, 10/26/2021).
For the resale players that do report revenue, eBay continues to have the biggest piece of the pie (74%), followed by Etsy (16%), based on fiscal year 2021 estimated generated revenue.
Exhibit 3: Secondhand Market Share Based on estimated FY 2021 Revenue
Source: Refinitiv I/B/E/S
Are these companies ethical?
While many of the secondhand retailers claim they promote a circular economy, it also happens to be a marketplace where criminals sell stolen merchandise. Several retailers state on their websites that they frequently monitor for stolen items, which are prohibited. They also work with law enforcement to stop fraud. Some even offer an authentication service for popular categories like collectors’ trading cards.
Still, almost anyone can easily set up a seller account with no comprehensive background check procedure that would verify sellers are legitimate and stop organized shoplifting rings that sell merchandise on secondhand marketplaces.
Currently, eBay has the lowest Refinitiv ESG Controversies score among its peers. This score measures a company’s exposure to environmental, social, and governance controversies and negative events reflected in global media. The Refinitiv ESG data shows that eBay has the weakest score among this group at 9.78 out of a possible 100. The score is impacted by four business ethic controversies, six anti-competition controversies and one responsible marketing controversy.
Another issue in the secondhand sector is how fashion rental retailers impact the carbon footprint associated with home packaging delivery. On the Rent the Runway investor website, the company discloses the CO2 benefits for consumers to rent fashion vs. purchasing new items. However, the retailer itself still doesn’t report its own CO2 emissions. In order to achieve long-term success, it is critical for retailers to take actionable steps in tracking and reporting ESG standards.
Meanwhile, other secondhand retailers such as eBay and Etsy do disclose their CO2 emissions. In 2020, the carbon footprint of Etsy amounted to 1,208 tonnes of CO2 (Exhibit 4). This translates into an impressive 67% decrease in its CO2 emissions since 2017. Similarly, eBay posted a 47% reduction in CO2 emissions since 2017.
Etsy doesn’t only want consumers to be happy with their purchase but also wants them to feel good about their purchase and its impact on the planet. Every time a consumer purchases an item, Etsy automatically purchases verified emissions reductions, commonly known as “offsets,” at no additional cost to the buyer.
Exhibit 4: Total CO2 & Equivalent Emission in Tonnes: 2017 – 2020
*Please note: Total CO2 emission = direct (scope1) + indirect (scope 2). Refinitiv follows greenhouse gas (GHG) protocol for all its emission classifications by type.
Source: Refinitiv I/B/E/S
Favorite retailers
MarketPsych Indices from Refinitiv scour the news and other media, analyzing and extracting meaning. The data they provide can be used to drive profitable decisions and a more organic view of companies that are connecting emotionally with their customer base.
Looking at U.S. retailers, MarketPsych Indices help rank these equities with the highest average sentiment scores and show the “most loved” retailers since the beginning of 2021 to January 2022. The results underline the importance of the value proposition to consumers. Rent the Runway and Etsy were in the top ten most loved stocks since last year, showing that shoppers’ preference towards secondhand continues to grow as shoppers love the deals there (Exhibit 5).
Exhibit 5: The Most Loved Retailers: January 2021 – January 26, 2021
Source: MarketPsych App in Eikon
Does this translate into an earnings beat?
The StarMine SmartEstimate data agrees with consumers’ preference towards Etsy and Rent the Runway as investors can expect positive surprises from these two and ThredUp. Looking forward to anticipated Q4 earnings performance, we used SmartEstimate to determine which companies mentioned in this report are better poised to beat and/or miss earnings estimates.
Etsy currently has an EPS mean forecast of $0.76 a share for Q4 2021 (Exhibit 6). However, there’s a five-star rated analyst with a very accurate rating that published a Bold Estimate, which is different (in this case higher) than the consensus estimate. The analyst expects Etsy to report earnings of $1.00 a share, above the mean. Meanwhile, the SmartEstimate data shows that negative surprises for the RealReal are in the offing.
Please note that a positive earnings surprise is not an indication that a company is doing a good job in ESG and reducing their CO2 emissions. Ideally, successful companies should become more transparent in reporting ESG data to fire on all cylinders, especially since consumers are showing a growing preference to do business with companies that are environmentally and socially conscious.
Exhibit 6: Etsy’s SmartEstimate
Source: Refinitiv Eikon
Which retail companies are more financially sustainable?
The StarMine Smart Ratios Credit Model analyzes companies’ profitability, leverage, liquidity and interest coverage to determine which companies are more sustainable. When combined with the StarMine Smart Holdings model, this can help analyze whether the companies’ fundamentals are aligned with what institutional investors currently value.
Poshmark and 1stDips.com both score in the top quartile of the SmartRatios Credit model (Exhibit 7). On the other hand, the StarMine models caution that The RealReal and Rent the Runway have credit issues and that the stock price momentum is not in its favor. Both their Credit Risk – SmartRatios Model scores are in the bottom decile. Rent the Runway is a weak 8 out of a possible 100. This model looks at accounting ratio analysis, utilizing both financial statement data and forward-looking analyst estimate data via the StarMine SmartEstimate. The score of 8 suggests that its profitability, coverage, growth and stability ratios look weak.
Exhibit 7: StarMine Smart Ratios Credit Risk Scores
Source: Refinitiv Eikon
Which stocks are currently appealing to institutional investors?
The Smart Holdings model helps us figure out which stocks appeal to institutional investors such as hedge funds and mutual funds, based on a sophisticated StarMine behavioral finance algorithm. This model is designed to predict changes in the percentage of institutional ownership, which is correlated to price changes through the law of supply and demand.
The model looks at the purchasing profile of institutional investors based on the underlying factors of the companies they are buying. Notice in the exhibit below how Etsy went from a Smart Holdings darling to plunging in November 2021 (Exhibit 8). Right before that, in the beginning of November, the Smart Ratios Credit Risk score also fell.
Shortly after both models dropped, Etsy’s stock price took a dip in December. Etsy is a good example of how the Smart Holdings model showed that the smart money preferences were ahead of the market.
Exhibit 8: Etsy’s StarMine Smart Holdings Model
Source: Refinitiv Eikon
Similarly, Stitch Fix is another example of Smart Holdings drops being ahead of price drops.
Exhibit 9: Stich Fix StarMine Smart Holdings Model
Source: Refinitiv Eikon
The MarketPsych data show that resale is increasingly becoming more popular among consumers as they were among the top 10 most-loved U.S. retail stocks over the past year. These resale companies are connecting emotionally with their customer base, which is translating into stronger than anticipated earnings performance. Accordingly, the StarMine SmartEstimate shows that both Etsy and Rent the Runway are on track to beat their Q4 2021 earnings estimates.
The secondhand market continues to grow with new resale players, making the StarMine Smart Credit Risk Ratios and Smart Holdings models useful to analyze these companies’ fundamentals against what institutional investors currently value. These metrics can be helpful to examine the sector as more players keep entering the resale market, but still don’t report ESG metrics.
Providing ESG metrics is critical to provide transparency on a company’s action on sustainability. Many retailers claim they are committed to reducing their greenhouse gas emissions usage by adding long-term net zero goals on their websites and claim they are promoting a circular economy that is less environmentally damaging. Reporting ESG metrics can verify these actions and sustainability claims from consumer-product companies. It can also check for other areas where there’s room for improvement, by using the ESG Controversies pillar for example.
