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RTR CEO: Despite 24% Job Cuts, ‘We Can More Than Double the Business’

Rent the Runway is going into the holiday season as a much slimmer operation as it chases profitability. The designer fashion rental service is cutting its corporate workforce by approximately 24 percent as it restructures its business.

The company announced the restructuring when reported second-quarter earnings results, with revenue growing 64 percent versus 2021 to $76.5 million, on a net loss of $33.9 million.

In a Nutshell: The restructuring plan aims to reduce $25 million to $27 million in annual operating costs, streamline the organizational structure and drive operational efficiencies. Cutting jobs also includes canceling some open roles and reducing backfills, with the company saying it is reorganizing certain functions and reallocating resources to prioritize the customer experience and growth initiatives.

Rent the Runway’s layoffs preceded Tuesday’s announcement from Gap Inc. that it was slashing 500 corporate employees, and illustrate an ongoing movement across apparel and footwear retail. VF Corp. and PVH both announced jobs, while Stitch Fix, StockX, Allbirds and ThredUp all have cut payroll in recent months. Walmart and Bed Bath & Beyond also slashed jobs amid concerns about a possible recession.

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In an earnings call on Sept. 12, CEO, co-founder and chairman Jenn Hyman said the headcount reduction will be largely complete in the third quarter, with the company expecting to realize savings beginning in the period and into fiscal 2023.

The company estimates that it will incur total cash charges for employee severance and related costs of approximately $2.5 million and certain immaterial non-cash charges associated with stock-based compensation. The restructuring plan will be substantially completed by the end of the fourth quarter, with these actions expected to positively impact adjusted EBITDA by approximately $4 million to $5 million.

Nevertheless, despite the restructuring, Hyman said the company has seen strong signs of stability and a “strong bounce back” in customers since August.

“We believe this market is in its infancy and customer adoption of rental and resale will continue to grow,” Hyman said. “And there’s so much here that’s in our control just by focusing on the metrics that are in our control such as acquisition and conversion and rejoin rate and our loyalty. We can more than double the business in the upcoming years.”

For the third quarter of fiscal year 2022, Rent the Runway expects revenue in the range of $72 million to $74 million, an increase of 22 percent to 25 percent. Adjusted EBITDA margin is projected to be between 1 percent and 3 percent.

Rent the Runway revised its full-year sales guidance downward, but now expects a slimmer adjusted EBITDA margin loss. Revenue is now forecast to range between $285 million and $290 million, down from the prior range of $295 million and $305 million. The new forecast would represent a 40 percent to 43 percent jump.

Adjusted EBITDA margin is now expected to range from a 2 percent loss to 0 percent, up from the 6 percent loss to 5 percent loss.

In the second quarter, active subscribers at Rent the Runway jumped 27 percent to 124,131, up from the prior year’s 97,614 active members. However, the period represented by far the slowest growth since the first quarter of 2021, when active subscribers jumped 40 percent. And sequentially, the active subscriber base decreased 8 percent from the 134,998 members the rental service had a year ago.

Total subscribers increased 37 percent year-over-year to 173,321 subs and declined 2 percent quarter-over-quarter.

Chief financial officer Scarlett O’Sullivan attributed the sequential declines to weakened consumer demand.

“This was in addition to the seasonality we typically see with lower acquisition and a higher rate of pause in Q2 versus Q1,” O’Sullivan said. “Although active subs were down sequentially, we beat our revenue guidance due to strength in customer engagement and ARPU—or average monthly subscription rental revenue per subscriber. Q2 ARPU benefited from both a full-quarter impact of price increases and high add-on rates, with 30 percent of active subs paying for one more add-on. We reiterate our outlook for ARPU to be up approximately 5 percent for fiscal year 2022 versus last year.”

Gross profit was $32.4 million on gross margin of 42.4 percent, a 340-basis-point (3.4-percentage-point) increase as compared to 39 percent in the second quarter of fiscal year 2021.

Net Revenue: Revenue was $76.5 million, a 64 percent increase year-over-year from $46.7 million in the second quarter of fiscal year 2021.

Subscription and reserve rental revenue totaled $70 million, a 63 percent increase from the $42.9 million generated a year ago.

Other revenue was $6.5 million, up 71 percent from the $3.8 million in the year-ago period.

Net Earnings: Net loss was $33.9 million, as compared to $42.4 million in the second quarter of fiscal year 2021. Net loss per share attributable to common stockholders, basic and diluted, was 53 cents per share, compared to $3.75 per share in the year-ago period.

Adjusted EBITDA was $1.8 million, as compared to a $1.9 million loss in the second quarter of fiscal year 2021. This marks the first time since the company’s IPO that Rent the Runway has generated a positive adjusted EBITDA in a single quarter. Adjusted EBITDA margin was 2.4 percent, as compared to -4.1 percent in prior-year quarter.

CEO’s Take: Hyman reiterated the differences in consumer behavior and how it has impacted the product line since 2019.

“In 2019, over third of subscriber activity was related to closely rented for the office. In 2021 and first half of 2022, only 20 percent of what she wore was related to clothing she wore for work,” Hyman said. “So if return to office maintains the status quo or remote and hybrid work trends increase, our subscription business might become more socially and casually oriented, as it has been in 2021 and 2022 to date. And therefore, we might experience more seasonal peaks and troughs.”