Why The RealReal Stock Popped on Thursday
Key Points
The RealReal is replacing high-interest debt due in 2029 with lower-cost debt not due till 2033.
The luxury goods resale specialist is entering its third straight year of positive free cash flow -- and could double FCF next year.
The RealReal (NASDAQ:REAL) stock jumped 11.5% through 12:15 p.m. ET Thursday after the second-hand luxury goods online marketplace announced it is rolling over its debt.
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Real talk
According to the latest data from S&P Global Market Intelligence, $1.1 billion-RealReal is carrying just over $463 million in debt against $119 million in cash reserves. The debt's not coming due anytime soon. Still, perhaps out of a desire to head off rising interest rates, RealReal is getting ahead of the problem now and signing a new $150 million senior secured term loan and a new $25 million senior secured revolving credit facility.
The new debt will charge only 5.75% interest, a significant improvement over RealReal's current "4.25%/8.75% PIK/Cash Pay Senior Secured Notes due 2029," which the company intends to pay off with the new cash. Moreover, the new loans will not come due until October 2033.
Management confirms that the goal of the transaction is "reducing overall interest costs and further extending our maturity profile." Ultimately, RealReal's objective is to reduce its total debt load to $150 million -- a reduction of more than two-thirds.
An interesting opportunity
Valued at $1.2 billion after today's run-up, RealReal stock isn't technically "profitable" -- it's actually reported earnings calculated under generally accepted accounting principles (GAAP) losses every year of its existence. Its free cash flow, however, turned positive in 2024 and has been growing steadily since.
Valued at a price-to-free cash flow ratio of 34x today, the stock's not obviously cheap. But with debt levels coming down and FCF forecast to more than double next year, I can see why investors are starting to warm to the stock.
The RealReal could be a real buying opportunity today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.