Fast Fashion Is Out. Pre-owned Fashion Is In.

Fast Fashion Is Out. Pre-owned Fashion Is In.
Milou Beunk

over 2 years ago4 mins

  • Increasing focus on sustainability issues has pushed up demand for pre-owned fashion, which is expected to be one of the fastest growing segments in the retail industry.

  • But it's a young and competitive market, and one where it’s hard to make a profit.

  • Poshmark stands out in terms of profitability, and Realreal in terms of growth. But you’ll also want to keep your eye on any upcoming stock market debuts.

Increasing focus on sustainability issues has pushed up demand for pre-owned fashion, which is expected to be one of the fastest growing segments in the retail industry.

But it's a young and competitive market, and one where it’s hard to make a profit.

Poshmark stands out in terms of profitability, and Realreal in terms of growth. But you’ll also want to keep your eye on any upcoming stock market debuts.

With sustainable fashion high on shoppers’ lists these days, second-hand clothing companies are stepping up to meet the moment – and it could make for one very chic investment opportunity indeed.

Why is pre-owned fashion suddenly so… well, fashionable?

Truth is, our throwaway culture is only getting more throwaway.

The average number of times people wear a piece of clothing before ditching it for good has dropped 36% in the last 15 years. Nowadays, in fact, 60% of clothing is buried or burned within one year of being made. Clothing production, meanwhile, doubled between 2000 and 2014. Put together, these factors make the fashion industry the second-most polluting in the world.

Source: Ellen MacArthur Foundation
Source: Ellen MacArthur Foundation

But the landscape is changing, and demand for a complete revamp of the fashion industry’s behaviors has now driven shoppers – particularly young shoppers – into the arms of second-hand marketplaces.

Where’s the investment here?

Two second-hand fashion marketplaces have already made hugely successful stock market debuts in the US this year: ThredUp and Poshmark. And there might be another to come, with rumors brewing that StockX is getting ready to list.

There’s a good reason so many of these marketplaces are jostling for room: according to a study by consultant BCG, the global second-hand clothing market is expected to grow by 20% a year for the next five years. And developed markets could see even more demand: a survey commissioned by ThredUp estimated that US growth could be as high as 39% a year for the next three years. That would make preowned fashion one of the fastest-growing segments in the entire retail industry.

Source: Boston Consulting Group
Source: Boston Consulting Group

And the downsides?

The industry may have its heart in the right place, but that doesn’t mean it can do no wrong.

Second-hand platforms have complicated business models. Most companies are loss-making, and profitability might be some way off given the costs involved in collecting, organising, and cataloguing all the clothing. The supply is unpredictable too: there’s no constant production like there would be for a standard fashion house, after all. And seeing as all these unique single items need to be handled individually, big investments in tech are required to automate this otherwise expensive and unprofitable process.

These marketplaces, then, have had to decide which of two possible business models to pursue: they can buy the item from the seller and have it sit on their books as inventory, or they can facilitate the sale for the third party. The former is riskier as they might not find a buyer, and costlier too if they can’t get a good price. Of the three listed marketplaces, Poshmark is the only one that doesn’t hold any inventory out of the three listed names – and, shock, the only one that makes a profit.

To make matters more complicated, second-hand fashion platforms are sprouting like mushrooms. That means it’s hard to figure out which one will emerge as the winner, especially when so many fashion powerhouses are catching on to the trend too: H&M, Asos, and Zalando have all begun to experiment with second-hand fashion.

So is pre-owned fashion a good investment?

There is a lot of growth potential here. But between those issues of profitability and fierce competition, it’s not clear-cut.

So if you’re going to try to tap into the preowned fashion market, you’ll need to choose wisely. And since there aren’t a wealth of reference points for this young industry, it’s worth comparing the key financials of a few newly listed second-hand online fashion retailers to some more proven general secondhand online marketplaces, like Ebay.

Source: Bloomberg
Source: Bloomberg

A few things stand out here. First, the median valuation multiple of the stocks – i.e. the ratio of its enterprise value (the company's shares plus debt) to this year’s forecasted sales – is almost 6x. That’s a lot higher than the multiple US retail stocks are trading on, which means the market’s looking pretty expensive. But that’s probably because investors are more excited about the growth prospects of second-hand marketplaces.

The most potential upside – certainly as far as analysts are concerned – is luxury clothing-focused Realreal, which also boasts the fastest sales growth. To top it off, it has the lowest multiple, making it the cheapest stock of the three.

Of course, it might well lose that title soon enough: Vinted, Vestiaire Collective, and StockX might not be listed on the stock market yet, but with the rate of companies going public in this space, it might only be a matter of time. Because let’s face it, turning up to the stock market fashionably late is so last year.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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