Rent the Runway, Inc. (NASDAQ:RENT) is revolutionizing the fashion industry by providing customers access to thousands of designer styles through its innovative rental and resale offerings. The company has experienced significant growth in recent years, driven by its unique business model and strong brand loyalty.
Business Overview
Rent the Runway's mission is to empower women to feel their best every day. Launched in 2009, the company has built the world's first and largest shared designer closet, offering access to thousands of styles from hundreds of brand partners. Customers can access Rent the Runway's "unlimited closet" through its subscription offering ("Subscription") or rent items à la carte through its reserve offering ("Reserve"). The company also offers customers the ability to purchase pre-loved styles from its closet at a discount through its Resale offering.Rent the Runway's business model is centered around three key ways of acquiring products: Wholesale, Share by RTR, and Exclusive Designs. Wholesale items are acquired directly from brand partners at a discount, while Share by RTR and Exclusive Designs are more capital-efficient, with the former acquired on consignment and the latter designed in collaboration with brand partners. This diversified approach has allowed Rent the Runway to reduce its capital expenditures on rental product over time, with approximately 61% of new items acquired through Share by RTR and Exclusive Designs in fiscal year 2023, up from 58% in fiscal year 2022.
Financial Performance
Rent the Runway reported annual revenue of $298.2 million for the fiscal year ended January 31, 2024, a decrease of 0.5% compared to the prior year. The company's net loss for the year was $113.2 million, and its annual operating cash flow and free cash flow were negative $15.7 million and negative $98.2 million, respectively.In the first quarter of fiscal year 2024, the company generated revenue of $75.0 million, an increase of 1.1% year-over-year. Subscription and Reserve rental revenue was $66.1 million, a decrease of 1.0% compared to the same period in the prior year, while Other revenue, primarily from the sale of rental product, increased 20.3% to $8.9 million.
Gross profit for the first quarter of fiscal year 2024 was $28.4 million, representing a gross margin of 37.9%, compared to $31.4 million and a gross margin of 42.3% in the same period of the prior year. The decrease in gross margin was primarily due to higher rental product depreciation and revenue share costs as a percentage of sales, partially offset by lower fulfillment costs.
Rent the Runway reported a net loss of $22.0 million in the first quarter of fiscal year 2024, compared to a net loss of $30.1 million in the same period of the prior year. Adjusted EBITDA, a non-GAAP metric, was $6.5 million, or 8.7% of revenue, in the first quarter of fiscal year 2024, compared to $4.5 million, or 6.1% of revenue, in the same period of the prior year.
Free cash flow, defined as net cash used in operating activities plus net cash used in investing activities, improved significantly in the first quarter of fiscal year 2024, reaching negative $1.4 million, compared to negative $12.1 million in the same period of the prior year. This improvement was driven by higher profitability, improved working capital, and lower rental product expenditures.
Guidance and Outlook
For the second quarter of fiscal year 2024, Rent the Runway expects revenue to be between $76 million and $78 million and adjusted EBITDA margin to be between 14% and 15% of revenue. For the full fiscal year 2024, the company reiterates its guidance for revenue growth of between 1% and 6% compared to fiscal year 2023, and adjusted EBITDA margins of between 15% and 16% of revenue. The company also expects to be free cash flow breakeven for the full fiscal year 2024.Rent the Runway's management has highlighted several key initiatives that are expected to drive the company's performance in fiscal year 2024 and beyond. These include:
1. Enhancing the customer experience through improved inventory depth, better merchandising, and increased focus on fit and discovery. 2. Expanding marketing efforts to increase brand awareness and customer acquisition, with a focus on both digital and in-real-life channels. 3. Continuing to optimize the company's product acquisition strategy, with a goal of further increasing the proportion of inventory acquired through the more capital-efficient Share by RTR and Exclusive Designs channels. 4. Driving operational efficiencies and cost savings through initiatives such as the January 2024 restructuring plan, which is expected to generate approximately $12 million in annual cost savings.
Liquidity and Capital Structure
As of April 30, 2024, Rent the Runway had $82.0 million in cash and cash equivalents and $313.1 million in long-term debt, primarily consisting of the company's 2023 Amended Temasek Facility, which matures in October 2026. The 2023 Amended Temasek Facility includes a minimum liquidity maintenance covenant of $30 million and provides for certain restrictions on the company's rental product capital expenditures, fixed operating expenses, and marketing expenditures during fiscal year 2024.Rent the Runway's management believes the company's current cash position, combined with the expected improvements in profitability and cash flow generation, will be sufficient to sustain its business operations and satisfy the minimum liquidity covenant for at least the next twelve months. However, the company may need to seek additional capital or refinance its debt in the future to fund growth initiatives or satisfy its debt obligations.
Risks and Challenges
Rent the Runway operates in a highly competitive and rapidly changing fashion industry, which presents several risks and challenges to the company's business. These include the ability to attract and retain customers, manage its product acquisition and inventory effectively, achieve operational efficiencies, and navigate macroeconomic and consumer trends.The company also faces risks related to its reliance on third-party vendors and service providers, including for payment processing, shipping, and logistics. Disruptions or changes in these relationships could adversely impact Rent the Runway's operations and financial performance.
Additionally, Rent the Runway is subject to a complex regulatory environment, including laws and regulations related to consumer protection, data privacy, and environmental, social, and governance (ESG) matters. Failure to comply with these requirements could result in legal and financial consequences for the company.