Zacks Small Cap Research – RERE: 2Q24 Earnings Review: Adjusted Operating Income Beat on Higher Revenues; Growth Outlook Remains Bright – Technologist

By Michael Kim

NYSE:RERE

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Pre-market open on 8/20/24, ATRenew (NYSE:RERE) reported 2Q24 earnings results. On a GAAP basis, RERE reported a net loss of $1.5 million for 2Q24, or ($0.01) per ADS. That said, excluding non-cash share-based compensation and intangible assets amortization expenses, adjusted EPS came in at $0.04, or a penny shy of our $0.05 estimate. Relative to our model, while both product and services revenue came in above expectations, the EPS miss was mostly a function of higher weighted-average shares outstanding for the quarter primarily reflecting the vesting/issuance of prior stock option awards.

After updating our model for 2Q24 actuals, we are trimming our 2024 and 2025 adjusted EPS estimates from $0.18/$0.35 to $0.16/$0.32 primarily reflecting higher shares outstanding. No change to our $4.00 price target implying considerable upside potential from current levels. From a risk profile standpoint, management remains focused on further expanding and diversifying the business model translating into more sustainable top-line growth, realizing ongoing efficiencies to drive improving profitability, and maintaining a strong balance sheet, with incremental capital management levers to pull to enhance shareholder value.

We highlight the following key takeaways:

1. Revenues set to step function higher: As mentioned earlier, revenues for 2Q24 exceeded expectations led by accelerating volumes (consumer product transactions up 9% year-over-year to 8.4 million in 2Q24 and 33.5 million over the last 12 months) and higher gross margins. Looking ahead, senior officials anticipate total revenues for 3Q24 to be in the range of RMB 3,970 million and RMB 4,070 million ($556 million to $570 million), implying year-over-year growth of 22% to 25%, with a further step up in growth in 4Q24 around the launch of Apple’s iPhone 16, we believe.

Stepping back, our model calls for revenue growth in the mid-20% range in 2025 reflecting two powerful macro trends. First, GDP growth in China remains sluggish, thereby driving building recycling volumes and rising demand for pre-owned products. Second, the Chinese government remains active in promoting trade-in activity (via subsidies) to boost the supply of pre-owned products. Ongoing introductions of governmental policies designed to advance the circular economy also serve to raise awareness and acceptance of recycling, thereby driving more sustainable growth for RERE.

2. Evolving business model: As reinforced by commentary on the earnings conference call, management remains focused on increasingly leveraging RERE’s differentiated recycling, supply chain, and distribution capabilities to drive higher and more sustainable growth, particularly in light of shifting consumer behavior around spending and trade-in activity. From a product standpoint, recycling activity continues to expand beyond consumer electronics, with higher-growth multi-category GMV up from RMB 1 billion ($138 million) in 2023 to RMB 1.5 billion ($206 million) in 1H24 led by luxury goods, gold, jewelry, and premium liquor. Furthermore, senior officials remain committed to building out corporate services with Apple (recovering pre-owned iPhones and MacBooks from corporate clients), thereby leveraging an incremental source of growth, while repair/refurbishment sales continue to accelerate (RMB 850 million, or $117 million in 1H24).

Turning to distribution, the company operated 1,516 AHS offline stores located in 260 cities across China as of the end of 2Q24. Management remains focused on further expanding the footprint (opened 19 self-operated and 69 jointly-operated stores last quarter), as well as upgrading existing locations to better showcase multi-category products, as well as strengthen the brand. Importantly, the Chinese market lacks a nationwide network of retail stores focused on offering high-quality pre-owned products – a gap RERE management intends to fill. Indeed, product revenue from AHS Select offline stores and the company’s official website surged 31% quarter-over-quarter and 8x year-over-year to RMB 210 million ($29 million) in 2Q24. As of the end of 2Q24, the company operated 450 AHS stores equipped with new category recycling capabilities.

Importantly, RERE recently announced the renewal of the company’s business cooperation agreement with JD.com through the end of 2027. The goal of the strategic partnership is to optimize consumer electronics recycling, trade-ins, and sales of pre-owned products across platforms. Notably, the recycling value of products traded in through JD.com surged by over 50% year-over-year in 1H24, with June’s trade-in activity surpassing traditional recycling transactions on the platform. Looking ahead, management remains focused on driving higher traffic from JD.com to further boost transaction volumes.

A key initiative in driving growth remains enhancing awareness of the company’s recycling capabilities and strengthening the AHS Recycle brand. More recently, management stepped up marketing efforts via strategic brand marketing, collaborations with leading consumer brands, and reengineered stores. While still early days, incremental market penetration can drive considerable growth in revenue and profits.

3. Margin expansion story: RERE’s adjusted operating margin rose 70 bps year-over-year to 2.5% for 2Q24, and we look for further margin expansion looking out to 2H24 and 2025. At a high level, management remains focused on balancing investing for growth (rising headcount, infrastructure, and advertising costs) while managing expenses to optimize profitability (non-GAAP fulfillment and selling and marketing expenses as percentages of revenue both down year-over-year). From a mix perspective, multi-category transactions accounted for 8% of service revenues in 2Q24, up from 1% in the prior-year quarter. As the underlying mix continues to shift in favor of higher-growth multi-category recycling services, we would expect further dilution in the firmwide take rate given lower commission/fee rates (~3% compared to 5.3% overall in 2Q24). That said, related volumes carry higher operating margins given limited costs, thereby driving further growth in profits and operating margin expansion, as the business continues to scale. Similarly, iPhone trade-in activity as part of RERE’s recycling partnership with Apple carries lower gross margins (low-single digits vs. 12.1% overall in 2Q24). However, related operating profit contributions remain steady reflecting limited incremental expense, with management setting a long-term margin target of 3% to 4% (ahead of the company’s overall adjusted operating margin of 2.5% in 2Q24).

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