Business Overview and History

Rent the Runway, Inc. (NASDAQ:RENT) has been on a transformative journey in recent years, as the company navigates the challenges of the evolving fashion rental market and works to achieve sustainable profitability. With a rich history spanning over 15 years, Rent the Runway has established itself as a pioneer in the shared closet economy, empowering women to access designer fashions through its innovative rental model.

Rent the Runway was founded in 2009 by Jennifer Hyman and Jennifer Fleiss while they were MBA students at Harvard Business School. The company's mission was to transform the way women get dressed by pioneering the world's first "closet in the cloud" - allowing customers to rent designer dresses and accessories rather than purchase them. In its early years, Rent the Runway faced numerous challenges as it sought to disrupt the traditional retail model, including convincing both consumers and brands that renting clothing could be a desirable and sustainable option. The company also had to build out the logistics and technology infrastructure to efficiently clean, repair, and deliver clothing to customers.

Despite these obstacles, Rent the Runway was able to grow its customer base and forge partnerships with hundreds of designer brands. By 2015, the company had expanded beyond its original dress rental business, launching subscriptions that allowed customers to rent multiple items per month. This subscription model helped drive recurring revenue and customer loyalty. Rent the Runway also began investing in its proprietary technology and data capabilities to enhance the customer experience and improve operational efficiency.

In 2021, Rent the Runway went public, marking a major milestone in the company's evolution. However, the COVID-19 pandemic shortly after presented new challenges, as lockdowns and changing consumer behavior significantly impacted the business. Rent the Runway had to rapidly adapt its operations and strategy to navigate this turbulent period.

Today, Rent the Runway's business model revolves around three key acquisition channels: Wholesale, where products are purchased directly from brand partners; Share by RTR, a consignment-like arrangement where brands share in the rental revenue; and Exclusive Designs, where Rent the Runway collaborates with brands to create custom products.

Rent the Runway's strategic shift towards more capital-efficient inventory acquisition methods, such as Share by RTR and Exclusive Designs, has been a key focus in recent years. In fiscal year 2023, approximately 61% of new items were acquired through these channels, up from 58% in fiscal year 2022 and 55% in fiscal year 2021. This diversification has helped the company enhance its profitability profile and reduce the capital intensity of its operations.

Financial Performance and Liquidity

Rent the Runway's financial performance has experienced significant volatility in recent years, as the company navigated the challenges posed by the COVID-19 pandemic and worked to reposition its business for long-term success. In fiscal year 2024, the company reported annual revenue of $298.2 million, a 13.2% increase from the prior year's figure of $264.9 million. However, the company continued to generate net losses, with a reported net loss of $113.2 million in fiscal year 2024, compared to a net loss of $138.7 million in the previous year.

Despite the ongoing losses, Rent the Runway has made significant strides in improving its liquidity and cash flow position. In fiscal year 2024, the company reported negative free cash flow of $98.2 million, a substantial improvement from the negative $118.7 million recorded in the prior year. This progress can be attributed to the company's cost-cutting initiatives, improved inventory management, and increased efficiency across its operations.

For the nine months ended October 31, 2024, Rent the Runway reported total revenue of $229.8 million, an increase of 3.3% year-over-year. Gross profit was $87.1 million, with a gross margin of 37.9%. The company reported a net loss of $56.5 million for this period, an improvement from the $88.4 million net loss in the prior year period. Adjusted EBITDA, a non-GAAP metric, was $29.5 million, representing a margin of 12.8%.

In the most recent quarter (Q3 2024), Rent the Runway reported quarterly revenue of $75.9 million, up 4.7% year-over-year. The quarterly net loss was $18.9 million, and free cash flow improved by $14 million year-over-year to negative $3.4 million. The company cited improved business momentum, with acceleration in revenue growth led by stronger Reserve performance and continued growth in Other revenue. Rent the Runway also returned to subscriber growth in Q3 2024.

As of the end of fiscal year 2024, Rent the Runway had $94.0 million in cash and cash equivalents, along with $356.6 million in total debt. The company's liquidity position has been bolstered by a series of debt refinancing and restructuring efforts, including the amendment of its credit facility with Temasek Holdings in December 2023. This amendment provided for the elimination of all interest payments for six fiscal quarters, reduced the minimum liquidity covenant, and imposed new spending limits on the company's rental product, fixed operating, and marketing expenditures.

As of the most recent quarter, Rent the Runway reported $74.1 million in cash. The company's debt-to-equity ratio stood at -0.27, while both the current ratio and quick ratio were 1.65, indicating a relatively stable short-term liquidity position.

Product Segments and Revenue Streams

Rent the Runway operates two main product segments: Subscription and Reserve.

The Subscription segment is the company's core offering, providing customers with ongoing access to its unlimited closet of thousands of styles from hundreds of designer brands. Subscription fees are recognized ratably over the subscription period, which automatically renews on a monthly basis until cancelled or paused by the customer. As of October 31, 2024, Rent the Runway had 132,520 active subscribers, up 1% year-over-year. The majority of the company's revenue is generated by these subscription customers, contributing 88% of total revenue for the nine months ended October 31, 2024.

The Reserve offering allows customers to rent items a-la-carte for a specified rental period. Reserve rental fees are recognized ratably over the rental period, which starts on the date of delivery to the customer. Reserve orders can be placed up to four months prior to the rental start date, with the customer's payment charged upon order confirmation.

In addition to these two main segments, Rent the Runway also generates Other revenue, which primarily consists of revenue from the sale of rental products. The company offers customers the ability to purchase items from its rental inventory at a discounted price. Other revenue represented 12.6% of total revenue for the nine months ended October 31, 2024, up from 10.3% in the prior year period.

Operational Improvements and Strategic Initiatives

Rent the Runway's management team has been laser-focused on improving the company's operational efficiency and positioning it for sustainable growth. Key initiatives include:

1. Inventory Management: The company has made significant strides in managing its rental product inventory, with a focus on improving depth and breadth across its top-performing brands. In fiscal year 2023, the company increased its investment in rental product to address in-stock rate challenges, which has paid dividends in the form of higher utilization, hearts per style, and customer satisfaction.

2. Reserve and Resale Growth: Rent the Runway has seen strong performance in its Reserve and Resale offerings, with Q3 2024 Reserve orders growing 23% year-over-year and Resale units sold per subscriber increasing 38% over the same period. The company has attributed this success to strategic initiatives, such as expanding the Reserve booking window and enhancing the customer experience.

3. Marketing Efficiency: The company has made progress in improving the efficiency of its paid marketing efforts, with Q3 2024 marketing costs down 23% year-over-year. This has been driven by channel diversification, improved creative content, and a more targeted approach to customer acquisition.

4. Onboarding and Loyalty: Rent the Runway has implemented several initiatives to enhance the customer onboarding experience and drive higher loyalty, including a new 60-day replacement guarantee and the launch of a dedicated styling team to assist new subscribers.

5. Product Innovation: The company has introduced new subscription plans, such as the $119 per month "One Swap" offering, to cater to a wider range of customer preferences and life stages. Additionally, Rent the Runway recently appointed Bradford Shellhammer as its Chief Product Officer, tasked with driving innovation and growth across the product portfolio.

6. Cost Optimization: In January 2024, Rent the Runway implemented a restructuring plan expected to generate $12 million in annual savings. This, combined with the amendment of its credit facility in December 2023, is expected to help the company achieve cash flow break-even in fiscal year 2024.

Guidance and Future Outlook

Rent the Runway has provided guidance for the upcoming periods, reflecting its expectations for continued growth and improved financial performance:

• For Q4 2024, the company expects revenue to be between $74.4 million and $80.3 million.

• For FY 2024, Rent the Runway expects revenue to grow between 2% and 4% compared to FY 2023.
• The company has reiterated its guidance to be free cash flow breakeven for FY 2024.
• For FY 2024, Rent the Runway has reiterated its adjusted EBITDA guidance to be between 15% and 16% of revenue.
• For Q4 2024, the company expects adjusted EBITDA to be between $16.1 million and $20.1 million.
• For Q4 2024, Rent the Runway expects free cash flow to be approximately $9.3 million, resulting in free cash flow breakeven for the full fiscal year 2024.

It's worth noting that in Q3 2024, the company's performance was generally in line with its guidance. Revenue of $75.9 million fell within the guided range of $75 million to $77 million, while adjusted EBITDA of $9.3 million (12.3% of revenue) was slightly below the guided range of 13% to 15% of revenue.

Risks and Challenges

Despite the progress made, Rent the Runway continues to face several risks and challenges that could impact its long-term success:

1. Competitive Landscape: The fashion rental industry remains highly competitive, with traditional retailers, e-commerce players, and emerging startups vying for market share. Rent the Runway must continue to differentiate its offerings and provide a compelling value proposition to retain and attract customers.

2. Macroeconomic Conditions: The company's performance is closely tied to consumer discretionary spending, which can be influenced by factors such as inflation, interest rates, and broader economic uncertainties. A prolonged downturn could adversely impact Rent the Runway's growth and profitability.

3. Supply Chain and Inventory Management: Disruptions in the company's supply chain or challenges in managing its rental product inventory could lead to customer dissatisfaction and increased costs.

4. Regulatory and Legal Risks: Rent the Runway operates in a complex regulatory environment, with evolving laws and regulations governing areas such as data privacy, consumer protection, and labor practices. Failure to comply with these requirements could result in legal and financial consequences.

5. Technology and IT Resilience: The company's business is heavily reliant on its proprietary technology systems and software, as well as those of its third-party vendors. Any disruptions or security breaches could have a significant impact on Rent the Runway's operations and customer experience.

Outlook and Conclusion

Rent the Runway's journey towards profitability has been marked by both challenges and progress. The company's focus on improving operational efficiency, enhancing its product offerings, and driving customer loyalty has laid the foundation for a more sustainable future. However, the continued volatility in the fashion rental market and the broader macroeconomic environment present ongoing risks that Rent the Runway must navigate.

As the company looks ahead, its ability to execute on its strategic initiatives, adapt to changing market dynamics, and maintain a strong financial position will be crucial in determining its long-term success. Investors should closely monitor Rent the Runway's progress in achieving its goal of free cash flow breakeven in fiscal year 2024, as well as its ability to drive consistent revenue growth and profitability in the years to come.

The company's two-pronged product strategy of Subscription and Reserve offerings, combined with its focus on cost optimization, positions Rent the Runway to navigate the challenging macroeconomic environment and work towards profitability over time. However, the path forward remains challenging, and the company will need to continue to innovate, optimize its operations, and deliver value to its customers to achieve long-term success in the competitive fashion rental market.