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Rent the Runway Paying the Price for Delayed Return to Work

Rent the Runway’s 66 percent revenue jump to $59 million was overshadowed by growing net losses of $87.8 million, nearly doubling from the $44.3 million in the third quarter of 2020. Stock fell nearly 10 percent in after-hours trading on Wednesday.

In a Nutshell: Returning to profitability is going to take time, but CEO Jennifer Hyman believes the shift in how Rent the Runway buys product could take the fashion subscription rental service in the right direction.

The New York-based rental business, which went public in October, aims to cut costs by procuring product via capital-light acquisition models, such as its “Share by RTR” and “Exclusive Designs” avenues. In Share by RTR, the company’s buyers purchase apparel or accessories directly from brand partners on a consignment basis, at zero or low upfront costs. Through this model, RTR shares revenues with those partners each time items are rented.

And with Exclusive Designs, the company works with select fashion designers to create exclusive collections of clothing that are manufactured through third parties at a lower costs, the company said.

In the earnings call, Hyman said 56 percent of expected full-year 2021 rental product will be acquired via these models, ahead of 54 percent last year and well in front of the 26 percent of items procured this way in 2019. In total, purchases of rental product as a percentage of revenue has shrunk from -35 percent in fiscal 2020 to only -12 percent in the 2021 third quarter. Overall, this helped improve free cash flow from -64 percent of revenue to -24 percent of revenue.

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Gross margin was 33.7 percent of net sales in the third quarter, a significant jump from the 6.8 percent margin in the third quarter of 2020. Hyman said the company’s subscriber engagement levels have benefitted margins, with 24 percent adding one or more additional paid items into their subscription program.

Amid the global supply chain uncertainty, one factor that could be a tailwind for Rent the Runway is its control over supply, and partnerships with more than 780 designer brands.

“We have really faced no supply chain issues and given our unique business model where we monetize our inventory over multiple years, that puts us at an advantage versus other retailers who lack selection right now and the selection they do have, they’re raising prices on it,” Hyman told Wall Street analysts.

Now, the company has to figure out how to consistently attract subscribers. Rent the Runway saw a 78 percent year over year increase in active subscribers to 116,833. But these numbers still represent just 87 percent of the pre-Covid active subscribers counted at the end of 2019.

Total subscribers, including subscribers who have their paused account, jumped 45 percent in the quarter to 150,075. A full 82 percent of RTR revenue comes from subscribers, Hyman said.

The opportunity for growth is there, she added, highlighting a July 2021 Lab42 survey that 56 percent of women said that they will subscribe to fashion at some point over the next five years, representing a $21 million opportunity among its main demographic of 25-and-older college-educated, working women. She estimated that converting just 3.5 percent of this $31 million opportunity would quintuple total subscribers.

Rent the Runway said that all major U.S. metros have returned to roughly 90 percent of their pre-pandemic subscriber counts except for New York, Washington D.C. and San Francisco, three of the company’s biggest markets. Markets in the South Atlantic, South and Mountain regions are seeing subscriber activity significantly higher than in 2019.

In the call, Hyman said that the New York market is seeing week-over-week growth, and attributes the slower growth in the main markets to slow return-to-office rates. On any given weekday, Hyman said only 25 percent of people in New York and 28 percent in San Francisco have returned to an office.

Fifty percent of shipped items in the third quarter fell in the casual/weekend bracket, including trousers, sweaters, athleisure, coats and vacation attire. Evening comprised 27 percent of items, including attire for social outings, black-tie events and weddings, while work trailed at 23 percent.

Fulfillment costs nearly doubled year over year from $19.2 million to $11 million, as the company opened two warehouses in Nashville and San Francisco to consolidate, process and pack orders.

Rent the Runway said it is testing an at-home pickup option to help aggregate shipments, with the company working with more local couriers versus national providers to help offset some costs.

As of Oct. 31, 2021, cash and cash equivalents were $278.7 million, after paying down $140.7 million of debt and accrued interest (approximately one-third of the company’s pre-IPO debt balance) with a portion of the IPO proceeds.

For the fourth quarter, Rent the Runway expects an active subscriber base between 121,000 and 122,000, with revenue in the range of $62.8 million to $63.3 million and adjusted EBITDA margin of -8 percent. Anticipated revenues would be up more than 88 percent from the $33.5 million in the prior quarter.

And for 2021, Rent the Runway projects revenue to fall in the range of $202 million to $202.5 million, up approximately 28 percent from the $157.5 million generated last year, as well as an adjusted EBITDA margin of -9 percent.

Net Sales: Total third quarter revenue was $59.0 million, a 66 percent jump year-over-year from $35.5 million in the third quarter of 2020, but still down from the $64.3 million generated in the 2019 period.

Net Earnings: Net loss for Rent the Runway was $87.8 million, or $6.72 per share as compared to a $44.3 million, or $3.98 per share, in the third quarter of 2020. Excluding the one-time costs associated with its IPO, Rent the Runway said its net loss came in lower year over year.

Operating losses totaled $44.2 million in the period, up from $32 million in last year’s quarter.

Adjusted EBITDA losses in the third quarter were $5.6 million, slightly above $5.4 million in the year-ago period.

CEO’s Take: “We have a large assortment of items both in terms of quantity and selection to support customer growth. We are not constrained from an inventory standpoint like many others in the apparel space,” Hyman said. “And we are significantly less exposed to risks from late deliveries, because we already have tremendous selection acquired in prior years that we monetize over many years. Given that consumers are challenged finding enough apparel selection in traditional retail and e-commerce channels, we believe they return to Rent the Runway where our selection is as high as ever.”