By Michael Kim

NYSE:RERE

READ THE FULL RERE RESEARCH REPORT

Pre-market open on 11/20/24, ATRenew (NYSE:RERE) reported 3Q24 earnings results. On a GAAP basis, RERE reported net income of $1.5 million for 3Q24, or $0.01 per ADS. That said, excluding non-cash share-based compensation and intangible assets amortization expenses, adjusted EPS came in at $0.05, or in line with our estimate. Relative to our model, more favorable revenue and operating income were offset by lower non-GAAP addbacks (share-based compensation and intangible amortization).

After updating our model for 3Q24 actuals, we are edging up our 2024 and 2025 adjusted EPS estimates from $0.16/$0.32 to $0.18/$0.33. Crosscurrents include: 1) steady revenue growth assumptions looking out to 2025 (and beyond) reflecting government initiatives, broadening services/capabilities, and rising brand awareness; 2) more conservative margin assumptions, with senior officials focused on leveraging stepped up marketing initiatives and opening new stores to accelerate customer growth; and 3) lower shares outstanding, as management remains focused on returning excess capital to shareholders via share repurchases. No change to our $4.00 price target implying considerable upside potential from current levels.

We highlight the following key takeaways:

1. Steady top line growth: Focusing on 4Q24, senior officials anticipate total revenues to be in the range of RMB 4,740 million and RMB 4,840 million ($654 million to $668 million at current FX rates), implying year-over-year growth of 22% to 25%. Looking ahead, our model calls for revenue growth to hold steady in the mid-20% range in 2025 reflecting several key catalysts:

• First, the government remains proactive in promoting consumer spending, more specifically trade-in activity (via subsidies) to boost the supply of pre-owned products. Furthermore, demand for pre-owned products and adoption rates for trade-in transactions continue to rise.

• Second, management remains focused on leveraging the company’s strategic partnership with JD.com to increasingly capitalize on government-sponsored trade-in programs. Indeed, recycling/trade-in GMV via JD.com was up 40% in 3Q24 on a year-over year basis, with trade-in business up 2x. Much of the step up can be linked to cross-category transactions (i.e., consumers trading-in pre-owned smartphones for discounts on new home appliances), with ~100,000 related orders during the most recent grand promotion period.

• Finally, a key initiative in driving growth remains enhancing awareness of the company’s recycling capabilities and strengthening the AHS Recycle brand. More specific initiatives include brand building efforts across social media platforms (Douyin and Kuaishou) that likely enhance customer acquisition, market share, and revenue growth over time.

2. Broader footprint: A key strategic initiative remains further building out RERE’s recycling capabilities beyond consumer electronics, with a focus on multi-category products (luxury goods, gold, jewelry, premium liquor, etc.). As evidence, multi-category recycling transaction GMV was up 270% compared to 3Q23, with related service revenues up 400% year-over-year – accounting for ~9% of service revenues (at higher operating margins) in 3Q24, up from <2% in the prior-year quarter. Moreover, the company operated 587 AHS stores equipped with new category recycling capabilities as of September 30, 2024, up from 450 as of the end of 2Q24, with plans to further expand the footprint. Looking ahead, we expect multi-category contribution to continue to build, as management leverages the company’s pricing and customer service competitive advantages to increasingly tap into massive/growing gold and luxury goods recycling markets.

Turning to distribution, the company operated 1,637 AHS offline stores located across China as of the end of 3Q24 (up 8% on a sequential-quarter basis from 1,516 as of June 30, 2024), with management focused on growing the number of new store openings over the next several years to meet rising demand trends and further expand the footprint. Importantly, RERE’s offline stores serve as a key source of supply, as well as the primary point of contact to build customer relationships and brand awareness.

3. Striking while the iron is hot: RERE’s adjusted operating income margin expanded by 30 basis points year-over-year to 2.6% for 3Q24. Going forward, we (conservatively) assume margins hold steady looking out to 2025. At a high level, senior officials seem intent on increasingly reinvesting in the business to accelerate customer acquisition growth, with a particular focus on individuals accessing trade-in services for the first-time. More specifically, our model calls for rising fulfillment and marketing expenses looking out to 2025 reflecting a step up in new store openings and incremental advertising initiatives to increase brand awareness. That said, management remains focused on managing expenses to support profitability, and economies of scale continue to build, which in turn likely drive further margin expansion over time.

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