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Will IPO Put RTR Back in the Billion-Dollar Club?

Rent the Runway is reportedly targeting a valuation between $1.24 billion and $1.46 billion in its initial public offering (IPO) set for next week.

The fashion rental service, which touts an “unlimited closet” of more than 18,000 styles and 750 designer brands, revealed in its amended S-1 filing that intends to sell 15 million shares at a range between $18 and $21. In the initial filing, RTR said it would list its Class A common stock on Nasdaq, under the stock ticker “RENT.”

The targeted valuation range is above the $1 billion the company was valued at in early 2019, before the pandemic largely eliminated the need for work apparel and social events attire. Last year, its valuation shrank to roughly $750 million, as Covid-19-related office and other closures caused as much as two-thirds of the company’s subscribers to pause or cancel their memberships. Active subscribers shrunk to nearly 54,000 in the summer of 2020 from more than 133,000 as of Jan. 31 of that year.

And as the subscribers slipped, so did the sales. Rent the Runway’s revenues decreased by 39 percent to $157.5 million in fiscal 2020 from $256.9 million the year prior, while net losses piled up even more to $171.1 million after $153.9 million in 2019.

During the pandemic, the retailer opted to close all five of its brick-and-mortar stores, laid off 33 percent of its employees and furloughed another 37 percent. The company has not reopened the stores, but has physical drop-off points in New York City, Boston, Nashville, Houston, and San Francisco. Consumers can also return items through third-party shipping vendors.

Fiscal 2021 has been slightly kinder to Rent the Runway, which makes sense given the return to social gatherings and office returns once vaccines were widely distributed in the U.S. At the end of September, the company’s active subscribers had grown to roughly 112,000. But revenues still need to bounce back. In the six-month period ending July 31, 2021, revenue dipped to $80.2 million from $88.5 million in the 2020 period.

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One problem that RTR hasn’t quite been able to solve is product depreciation, which is a considerable expense for the company. In the first six months of fiscal 2021, rental product depreciation costs were $23.9 million, or 30 percent of revenue. Changing styles, stains, snags and other wear and tear will inevitably devalue a garment over time, posing a barrier to what is positioned as a premium business, as it forces more expenses related to alterations and new inventory in general.

For now, the business has sought to put more eggs in its “asset-light” basket. Items in the Share by RTR consignment model, as well as its Exclusive Designs, which are co-produced with select brand partners and manufactured for enhanced durability and longevity, accounted for roughly 54 percent of its products in fiscal 2020, up from 26 percent in 2019.

The Brooklyn-based retailer is hopping on the IPO bandwagon that other apparel resale players have jumped into over the past year. Both peer-to-peer fashion marketplace Poshmark and online consignment thrift shop ThredUp capitalized on the overall apparel push toward IPOs, although their stock prices have gone in opposite directions. Poshmark is down approximately 42 percent from its $42 per share IPO price, while ThredUp is up approximately 48 percent from its initial $14 per share.

Rent the Runway’s “re-commerce” ambitions also seize on consumers’ desire for more sustainable shopping, perhaps further spurring the luxury service into a public offering. In its S-1 filing, RTR highlights 2019 McKinsey statistics indicating that 56 percent of women place greater value on sustainability as it relates to fashion choices than they did five years prior. And between 2016 and 2019, Internet searches for “sustainable fashion” tripled.

“Our ultimate goal is displacement of new clothing, meaning that rental and purchase of ‘pre-loved’ clothing ultimately replaces production of new clothing,” the company said in the filing. “We have seen that renting through our shared Closet in the Cloud creates less overall clothing consumption amongst our customer base.”

As of June 2021, 89 percent of Rent the Runway subscribers said they buy fewer clothes than they used to prior to joining RTR, with nearly one-third of the subscribers saying they buy six to over 20 fewer items of clothing per month since signing up, the retailer said. Another 83 percent say they’ve bought less “fast fashion” since subscribing. Note that these subscribers account for more than 80 percent of the company’s total revenue.

Additionally, these subscribers also spend less on clothes: 60 percent of subscribers report spending between $100 and $500 less per month on clothes and at least $25 less on dry cleaning per month when they have a subscription to RTR.

The company buys inventory directly from designers wholesale, through consignment and designs some items in collaboration with brands, according to the prospectus. Shoppers can not only rent designer clothing, but also other high-end fashion items like handbags, scarves, earrings and sunglasses.

The fashion business uses technology and data to better personalize styles for its customers, inform demand for its brands, and build lifetime value and return on investment so subscribers can keep coming back.

Upon the IPO, co-founder and CEO Jennifer Hyman will own the biggest chunk of shares, with 39.3 percent of voting power, while co-founder Jennifer Fleiss will control 9.5 percent.

As of July 31, Rent the Runway had 893 full-time and 81 part-time employees in the U.S. and Ireland.

Goldman Sachs, Morgan Stanley and Barclays are the lead underwriters on the IPO.