Note: where referenced, returns are as of 5/7/21.
As we approach the launch of the first offerings from Rares, a platform focused exclusively on fractionalizing rare sneakers, we felt this was an opportune moment to take a deeper dive into the fractional sneaker investment landscape. In part one of this series, we examine the performance of the asset class to date across platforms and subsectors. While sneakers are by no means the standard-bearer for fractional results to date, it's difficult to ignore the potential of the asset class, given its headline-grabbing tendencies, the fervent. large, and diverse population of sneakerheads, and the explosive growth of sneaker resale.
To date, there have been 24 sneaker-related offerings in the space: 19 from Otis and 5 from Rally. Included in these figures are those sneakers that would perhaps be better categorized as memorabilia - game-worn and/or signed items from prolific athletes, most often Michael Jordan. As Rares will be offering the Grammys-worn Yeezy Prototype, it seems appropriate to include those memorabilia-centric offerings in our analysis, though we will draw distinction between them and their deadstock counterparts.
Of the 24 total sneaker offerings, 22 had begun trading as of the end of last week. The results? Mixed.
The average ROI sits at -1.84%.
These offerings, as alluded to earlier, come in varying forms. Memorabilia vs. deadstock sneakers. Single assets vs. collections. We can cut through the noise and draw insights by deconstructing and categorizing the group for a closer look.
Thus far, sneakers best categorized as memorabilia, which represent about 2.5x more IPO proceeds than deadstock, have buoyed the space, delivering an average ROI since inception of 8.00%. This figure has been in freefall however, following the precipitous decline of the Michael Jordan Game-Worn Jordan IIIs last week on Rally, and that trend appears set to continue after a brutal first session for the Game-Worn Jordan 11 "Concord" this week. The positive, average memorabilia subsector return is, in large part, influenced by the outsized 93% positive return for the Zion Williamson Game-Worn High School sneakers. Those have not traded since 3/30 though, and as we know, the market hasn't been particularly kind to memorabilia in recent weeks.
The story worsens for deadstock sneakers, in this case referring to unworn pairs of incredibly scarce and otherwise sought-after sneakers (offered only on Otis to date). The average ROI of the deadstock sneaker subsector is -6.15%.
At face value, not incredibly encouraging, but let’s drill down further.
Of the 16 deadstock offerings, 4 are single-assets, meaning one pair of sneakers was valuable and notable enough to carry an offering of shares on its own. The other 12 are collections, curated by Otis to provide exposure to a certain theme, model, or collaborator.
The results, though, raise eyebrows.
Single asset offerings currently have an average ROI of 17.33%, but collections lag dramatically with an average return of -13.97%. And while secondary marketplaces have proven to be relatively inefficient across the board – meaning they’re not quick to digest relevant pricing information – this is especially the case in sneakers.
We took a more intensive look at several Otis collections. We examined the most recent comparable sales of the underlying sneakers on StockX, adhering primarily to sizes 9-13, unless scarcity or the size of the Otis holding dictated otherwise. Taking the average of the three most recent sales, we then compared the aggregate comp data for each collection to its current market value in trading on Otis.
The findings are staggering.
For the collections displayed below, on average, the collection traded on the secondary market at a 26% discount to comparable sales.
Let’s discuss a few examples in greater detail.
The Modern Classics collection on Otis is an assortment of highly-coveted Air Jordan 1 releases of the last 10 years. The Jordan 1 is perhaps the most widely-celebrated sneaker on offer, and when a modern release achieves the right mix of aesthetic, scarcity, and hype, the resulting market prices are astronomical. Based on comparable sales on StockX, the eight pairs in the collection have an aggregate comparable sales value of just under $36.7k.The collection traded as of 5/7 at a total market capitalization of $18,500, a 50% discount to comparable sales.
But it gets more interesting. There’s one pair in the collection worthy of further mention.
The Air Jordan 1 ‘Colette’, created to commemorate the closing of the so-named French boutique in 2017, was never released at retail, and pairs were given only to friends & family of the shop. This sneaker, in deadstock condition with original box, sold in the March 2021 “Scarce Air” Auction from Sotheby’s for $23,940. Certainly, the sales channel provides great credibility, and the sneaker’s inclusion alongside other five figure grails provides a tailwind, but still….just one pair of sneakers from the Modern Classics collection sold for a price in excess of the collection’s entire secondary market value.
A similar story rings true for the Travis Scott collection. Cactus Jack Jordans and Nikes have consistently attracted rabid demand in recent years - the man's clout is undeniable, having caused frenzies at McDonald's over burgers with BBQ sauce, and his sneaker aesthetic isn't too shabby either. Relevant StockX data is available for just 4 of the 5 pairs in the collection, as the Air Jordan 4 “Friends & Family - Mocha” pair’s scarcity is such that sales data is impossible to come by. Now, those 4 pairs have an aggregate StockX comparable sales value of $43.6k, led by the Air Jordan 4 “F&F Purple” with an average sales value of $19k. The collection of all 5 pairs trades on the secondary market at $30k, a 20% discount to the aggregate comparable sales value of just 4 of the 5 pairs….and that value is missing what might be the single most expensive pair of the bunch! To further illustrate the point, a Friends & Family Purple Jordan 4 sold in the “Scarce Air” Sotheby’s auction for $32,760. More than $2k greater than the collection’s secondary market value on its own.
The Chris Gibbs collection has an aggregate comparable sales value of just under $35k – excluding the most expensive pair in the collection, the UNDFTD Jordan 4, which lacks sales data due to scarcity. The secondary market value of the collection? Just under $32k. $3k less than the comparable sales without even including the anchor asset of the collection in those comps. That anchor - the UNDFTD Jordan 4 - was one of the very first, if not the first, third party collaborations for Jordan Brand; only 79 pairs were made, and that was back in 2005, which is to say, these aren't exactly an easy cop today.
Clearly, there is a degree of opacity to these collections for the current fractional investor; sum of the parts is perhaps more demanding and intensive than simply comparing asset sales of a single sports card (though the secondary markets don’t always trade snug to comps in those assets either). Allocators may struggle to connect to the thesis for each collection in a way that is more intuitive and natural for single assets. In the same vein, an individual may be particularly bullish on the Nike Dunk SB Low “Pigeon”, for example, but indifference or bearishness towards the other assets in the collection renders them reticent to engage with the collection to express their view.
Still, some of the single asset secondary market values are similarly disconnected from available sales data. The “Freddy Krueger” Dunk SB sits at $21,400 on the secondary market, though three StockX sales within the last 6 months average just over $26k. The discount might not be as frightening as Freddy himself, but it's significant nonetheless.
Meanwhile, the Dior Jordan 1 Low trades at a 96% premium to an average of the three most recent sales in the same size. Honestly? It kind of beats me, though I suspect the low barrier to entry ($1 IPO share price) plays a role, and it bears noting that the Dior Jordan releases were among the very most renowned of 2020, arriving in a moment of perfect convergence between Jordan hype and the infiltration of luxury brands in sneakers. The 80% return on this asset to date does a hearty favor for the average ROI of single asset offerings.
So, what do these findings mean? And what does the future hold? Because there’s certainly no guarantee that secondary market prices tighten to their sales comps in short order, a reality that is generally important to bear in mind in not only fractional markets but in traditional investing as well. You can have a fantastic thesis, but unless the market at large comes to agree with it, a great thesis alone doesn't assure great performance.
What we believe this data suggests is a lack of broad traction to date for the fractional space among fervent sneakerheads – the kind that, by nature, keep up to date on the prices of these assets and thirst over the opportunity to one day own a pair outright. I, for one, desperately need to keep up with the price of Nike Air MAGs, just in case I’m ever afforded the chance to travel back in time armed with a sports almanac to make a gambling fortune – then, and probably only then, will I grab a pair.
By and large, though, it seems that this impassioned sneakerhead is missing from the fractional marketplaces; I suspect that if they were present in large numbers, their activity would drive prices to mirror comparable sales of the full asset more accurately.
Incremental, well-informed activity makes markets more efficient. But will that activity arrive, or is the sneakerhead broadly revolted by the sneaker-as-an-asset movement?
That's a topic we'll confront in greater detail in the coming weeks, as we prepare for the investable sneaker universe to get a whole lot bigger.
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