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Rent the Runway Pounces on Retail’s Inventory Problem

Rent the Runway is seeing a bit of positive momentum amid a restructuring that laid off 24 percent of corporate employees, offering a rosier full-year outlook than originally anticipated.

RTR’s third quarter saw revenue increase 31 percent to $77.4 million on net losses of $36.1 million, with sales surpassing Wall Street estimates by $4.5 million and losses more than halving from the year prior.

In the time since the company reported its earnings on Wednesday, the company has seen its stock price rise, nearly doubling to $2.54 per share as of 3 p.m. Friday.

In a Nutshell: Rent the Runway anticipates revenue of $72 million to $74 million in the fourth quarter, surpassing the $72 million anticipated by analysts, according to Refinitiv. This would mark a 12 percent to 15 percent revenue jump over the $64.1 million 2021 fourth quarter.

For the year, the rental service expects revenue in the range of $293 million to $295 million, up from its previous forecast of $285 million to $290 million. In total, this would be a revenue bump of 44 percent to 45 percent to $203.3 million in 2022.

RTR’s new adjusted EBITDA margin forecast of 1 percent is another indication that the company may be getting its act together, given that the previous outlook called for a decline of 2 percent to a flat performance.

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The company’s 134,240 active subscribers at the end of the quarter represented an increase of 15 percent from 116,833 a year prior. Total subscribers amount to 176,167, a 17 percent year-over-year increase from the 150,075 at the end of the 2021 quarter.

More subscribers keep coming as the company continues to give itself a face lift, particularly in how it is procuring products. While the company spent $118 million on upfront purchases of rental products in 2019, that has dwindled to approximately $60 million this year, CEO Jenn Hyman said in an earning call.

The capital-light Exclusive Designs and Share by RTR business models are expected to comprise around 60 percent of Rent the Runway’s product acquisition in 2022, versus 26 percent in 2019.

“We bear considerably less risk, as 30 percent of our inventory is procured on consignment,” Hyman said. “We have made significant advances in using our customer data and brand relationships to manufacture another 30 percent of inventory at significantly lower than wholesale costs via our Exclusive Designs. These designs are desired by our customers, and show early signs of being sought after by other retailers.”

Chief financial officer Scarlett O’Sullivan further elaborated on this, noting that the company is piloting wholesaling its Exclusive Designs products to an undisclosed third-party retailer. The looks sold will be new, and not from the rental inventory. Rent the Runway already entered a partnership with Saks Off 5th earlier this year to sell pre-worn inventory on the luxury off-price retailer’s e-commerce site.

Hyman attributed the new pilot’s launch to Rent the Runway’s customer data set.

“Our data isn’t just about what customers are doing on our site,” said Hyman. “Our data is about how they actually wear the item. It’s about fit. It’s about product quality. It’s about manufacturing. How items should be manufactured. And we have seen that when we use data to manufacture products, that best renders on our platform. I think other retailers have recognized that our data provides a significant advantage and that these could be blockbuster styles on their sites as well and have approached us.”

RTR also entered a new liquidation partnership with another unnamed retailer to broaden its clearance network and better monetize products.

Overall, the Exclusive Designs pilot and new liquidation partnership appear to be helping the business get closer to profitability. Together, the two initiatives contributed approximately $4.6 million to the $6.6 million in adjusted EBITDA in the quarter, O’Sullivan said.

The company has tested other new approaches to differentiate its merchandise and work with designer brands. In November, it launched its first celebrity collection with Ashley Park, the co-star of Netflix’s “Emily in Paris.” In the earnings call, Hyman indicated that all eight pieces from that collection were in the top 5 percent of styles rented by volume on the Rent the Runway platform.

RTR also launched four new Exclusive Design brands in the quarter, including Atlein, Ronny Kobo, Marina Moscone and Toccin, and is on track to offer 18 Exclusive Design partners this year.

For a brief period in September and October, Rent the Runway even operated a popup shop in Washington D.C. powered by Leap, a platform that helps e-commerce brands secure brick-and-mortar store space.

It appears more consumers are responding to the changes at RTR. Twenty-eight percent of subscribers paid extra to add one or more additional items into their subscription program each month. Subscriber adoption of at-home pickup within eligible zip codes grew from 29 percent to 39 percent during the quarter. The company expanded at-home pickup to over 30 markets covering 55 percent of its subscriber base, surpassing the goal to reach half of the RTR subscriber base by year-end.

Gross profit was $31.8 million, up 60 percent from $19.9 million generated in the 2021 third quarter. Gross margin was 41.1 percent, as compared to 33.7 percent in the third quarter of fiscal year 2021.

Total cash and cash equivalents as of Oct. 31 totaled $176 million, down from $278.7 million in the year-ago period.

Net Revenue: Revenue was $77.4 million, a 31 percent increase year-over-year from $59 million in the third quarter of fiscal year 2021.

Subscription and reserve rental revenue jumped 27 percent to $68.8 million from $54.3 million in the year-ago period.

Other revenue soared 83 percent to $8.6 million, up from $4.7 million in the prior-year quarter.

Net Earnings: Net losses were $36.1 million, a major improvement from the $87.8 million net loss in last year’s third quarter. For the quarter, Rent the Runway saw a basic and diluted per share loss of 56 cents, compared to a $6.72 per share loss in the year-ago period.

Net loss as a percentage of revenue was 46.6 percent, as compared to the prior-year period’s whopping 148.8 percent. The recent quarter included $5.8 million in restructuring charges.

Adjusted EBITDA was $6.6 million, as compared to a $5.6 million adjusted loss in the third quarter of 2021. Adjusted EBITDA margin was 8.5 percent, another improvement from the year-ago quarter’s -9.5 percent margin rate.

CEO’s Take: Hyman addressed the benefits RTR has been reaping from the current inventory environment forcing apparel retailers to rely on markdowns to offload excess merchandise.

“We can be opportunistic right now in the market, whereas everyone else needs to be promotional. We are going to our 800-plus brand partners, we are looking at what they have available and we are acquiring inventory at very healthy discounts pulling forward some of the inventory spend that we would have spent in 2023,” Hyman said. “It’s the very inventory that is available right now…that is the highest-performing inventory at Rent the Runway. What we are seeing from our brand partners is the most fashionable inventory that isn’t selling in store. The most colorful inventory, the trendiest inventory and that is exactly what performs the best on Rent the Runway.”