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Rent the Runway CEO: ‘Black Tie Is to 2022 as Sweatpants Were to 2020’

Rent the Runway is hoping its second wind can take the fashion rental service to pre-Covid growth levels as people return to dressing up again for wedding, galas and more.

The company doubled its first-quarter revenue to $67.1 million, but is still trying to figure out how to make a profit, with net losses coming in at $42.5 million. RTR notified members on April 6 that membership prices would go up on May 6 to keep up with rising inflation.

In a Nutshell: Rent the Runway was hit particularly hard by the Covid-19 pandemic, shuttering its five physical stores and doing away with its unlimited membership that allowed consumers to rent and return clothing and accessories as often as they wanted each month.

But the company is hoping to more forward after going public and engaging more subscribers.

At the end of the first quarter ended April 30, the company had 134,998 active membership subscribers, an increase of 82 percent year-over-year from 74,018. Total subscribers, both active and paused, add up to 177,213, and increase of 70 percent year-over-year from 104,138 a year ago.

RTR’s active subscriber count surpassed its previous record from the fourth quarter of 2019, just months before the pandemic triggered a widespread shutdown.

On a sequential basis, the 17 percent quarter-over-quarter increase represents the highest end-of-quarter active subscriber count since RTR launched subscriptions.

The company said that 86 percent of first-quarter revenue came from subscribers, while 28 percent of subscribers added one or more additional paid items into their orders in the period.

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Currently, RTR has $81.7 million in rental inventory on hand, 7.1 percent more than the $76.3 million it tallied at the end of the first quarter.

Gross margin was 33.5 percent in the first quarter, up 930 basis points (9.3 percentage points) from the 24.2 percent in the year-ago period. The significant improvement is largely due to higher revenue per shipment versus last year and rental product depreciation and revenue share costs at 32 percent of revenue versus 50 percent in the year-ago quarter. Chief financial officer Scarlett O’Sullivan attributed the decline in revenue sharing costs to the higher subscriber count, which generated more revenue and absorbed product costs.

During the quarter, Rent the Runway launched six new “Exclusive Designs” collections, with plans for almost 20 such partnerships this year to make non-wholesale merchandise 60 percent of RTR’s product acquisition mix. The company is aiming for exclusive brands to become two-thirds of its assortment up from 26 percent in 2019, as part of its plan toward free cash flow profitability.

The rental company expanded its at-home pickup option to over 20 markets covering more than one-third of its subscriber base, according to Rent the Runway CEO, co-founder and chairman Jennifer Hyman.

She said in an earnings call that “customer adoption of home pickup during its initial pilot phase exceeded our plan with minimal marketing efforts,” indicating home pickup should reach 50 percent of RTR’s subscriber base by year-end.

And in an effort to cut fulfillment costs, RTR completed the full rollout of RFID on all of its rental products at the end of last year, meaning it can now automatically sort inventory into one of 26 distinct cleaning processes to improve garment quality and longevity.

In the 2022 first quarter, Rent the Runway took another step in automating its back-end processes and further using RFID by rolling out its digital issue tagging software.

“Now whenever we discover a garment quality defect, we can record it digitally, which allows us to automate our decisions around processes like cleaning or restoration, which is expected to reduce labor costs and improve product ROI,” Hyman said.

The rental service also continued the rollout of new packaging, which is now being used for over 20 percent of the company’s shipments.

“Our packaging has always been reusable but we’ve improved upon it, making it waterproof and easier to pack for us and for our customers,” Hyman said. “The new packaging also doesn’t need to be laundered which is more cost-efficient for Rent the Runway and supports our sustainability goals by reducing water usage.” Most of RTR’s shipments arrive in reusable fabric garment bags.

For the second quarter, Rent the Runway expects revenue in the range of $72 million to $74 million, up from $47 million in the comparable 2021 period for a 53 to 57 percent increase. Adjusted EBITDA is expected in the $4 million to $3 million range.

Full-year guidance expects revenue in the range of $295 million to $305 million, a 45 to 55 percent jump over $203.3 million in 2021. For 2022, negative adjusted EBITDA margin is projected to be between 6 percent and 5 percent.

Cash, cash equivalents and restricted cash at the end of the period was $229.8 million.

Net Revenue: Revenue was $67.1 million, a 100 percent increase year-over-year from the $33.5 million generated during the year-ago period. 

Net Earnings: Rent the Runway’s first-quarter net loss was $42.5 million, or a diluted earnings per share loss of 67 cents. The loss is similar to last year’s $42.3 million, or a diluted earnings per share loss of $3.75.

Adjusted EBITDA loss was $8.8 million in the quarter, as compared to $6.2 million in the first quarter of fiscal year 2021. Adjusted EBITDA margin loss was 13.1 percent, as compared to the 18.5 percent margin loss in the prior-year.

 CEO’s Take: “We’re building out the addressable market for wedding through partnerships like our recent successful partnership with Zola and a strong pipeline of future tie-ins during the coming months as we head into peak wedding season,” said Hyman in the call. “Black tie is to 2022 as sweatpants were to 2020. We are seeing our customers gravitate towards more formal looks with cocktail dresses and gowns having the highest utilization of any category in Q1 and reaching all-time highs.”