Rent the Runway, Inc.

Greetings. Welcome to the Rent the Runway first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Janine Stitcher, Vice President of Investor Relations. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Red the Runway's first quarter 2022 results. Before we begin, we'd like to remind you that this call will include forward-looking statements. These statements include our future expectations regarding our financial results and guidance, market opportunities, and our growth. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially. These risks, uncertainties, and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including our Form 10-Q that will be filed in the next few days. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During this call, we'll also reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or to substitute for financial information presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in our press release, live presentation posted on our investor website, and our SEC filings. And with that, I'll turn it over to Jen.

Hi, everyone. Thanks for joining us today. We are very proud of our strong Q1 performance, which showcases our accelerated business momentum, robust subscriber engagement, and improved year-over-year profitability. We exceeded our Q1 guidance across all key metrics, both on the top and bottom lines. We grew revenue 100% year-over-year and grew gross margin by nine points year-over-year. Adjusted EBITDA margin came in five points above Q1 2021. We finished Q1 with 135,000 ending active subscribers, hitting a new record high for quarterly ending active subscribers. Additionally, our subscribers are increasingly more profitable for three key reasons. One, the margins of our new subscription plans, whose rollout was completed last year in May 2021, are nearly double what they were in 2019. Two, subscribers are more loyal than pre-COVID. And three, they are highly engaged, evidenced by the rate at which they opt to pay for additional items in their subscriptions, meaning they rent many items from us for more use cases. In sum, we see continued evidence that the strategies we have in place are paying off, and we are on track for a record 2022. We remain confident in achieving free cash flow profitability over the medium term with the cash we have on hand as we laid out in our Q4 earnings call, as well as with our more near-term goals to cover our operating expenses over the next two to four quarters. In April, I laid out three key business strategies intended to drive top line and three intended to impact the bottom line in 2022. While these initiatives are just gearing up, I wanted to provide updates on our progress in Q1 and how they're impacting our financials. The first top line initiative is events. We believe the boom in events this year gives us the opportunity to build out our funnel of potential subscribers, not just for 2022, but for years to come, taking advantage of one of the most unique aspects of the Rent the Runway business, our organic growth flywheel. For 12 years, over 80% of our customers have come to us via word of mouth, And as a result, we have not had to be as reliant as others in the consumer space on paid marketing. The reason why renting from us is so viral is because women rent very bold clothing from us. And when a customer walks into a restaurant or work or an event wearing some sexy red knockout dress, the other women in the room notice them and the same conversation ensues. Wow, you look awesome. Where did you get that? And the response is typically, thanks, it's Rent the Runway. Multiply this by the roughly 80 days per year when subscribers are in our clothing, and that's a lot of opportunities to share Rent the Runway organically. So why am I bringing this up right now? It's because Rent the Runway is benefiting from the fact that women are using fashion for self-expression as they emerge from COVID. In other words, Fashion is bolder than ever. The shorter hemlines, cutouts, new trends, and colorful clothing women are wearing right now translates into highly cost-efficient customer acquisition for us. To this end, we've been taking a 360 approach to capturing this demand with dedicated teams focused on full funnel marketing strategy and product experience. We've nearly tripled our events-focused content and creative across our own channels, and continue to both market our reserve business and position subscription as a solution for multiple events. We're building out the addressable market for weddings 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. 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. Customers are evidencing greater confidence in their upcoming plans. As an example, international travel as a use case for our new subscribers has almost doubled since fall 2021. Our second and third top line initiatives, search and discovery and fit, are more long-term and iterative in nature. In Q1, we focused on backend infrastructure and cloud investments that provide scaling and efficiency benefits and support our work to provide an enhanced search experience for the consumer, which is expected to be rolled out over the coming quarters. Now, shifting to our strategies impacting the bottom line. First, we remain extremely excited about the prospects for at-home pickup, which is currently live in over 20 markets, covering well over one-third of the subscriber base. As a reminder, at-home pickup is not only more convenient for the consumer, but also less expensive for us versus national carriers, thanks to pickup density and consolidation of inbound shipments back to our warehouses. We are well on our way to bringing this offering to more than half of our subscriber base by year-end. Customer adoption of home pickup during its initial pilot phase exceeded our plans with minimal marketing efforts. The way customers find out about at-home pickup today is via a sticker on her garment bag. We expect adoption to increase meaningfully as we integrate at-home pickup into the product experience of our app, which is set to launch within the next few months. Second, we are continuing to build on the technology and automation investments into our warehouses in 2021, which drove a more than 30% year-over-year reduction in non-transportation fulfillment costs in 2021, and we see ongoing opportunities. We completed the full rollout of RFID on all of our rental products at the end of 2021, which affords us many opportunities to simplify processes within our warehouses, reduce labor expense, and gather more data. Prior to RFID, each returned item had to be individually scanned with a barcode 10 to 15 times throughout the reverse logistics process. versus now we can quickly scan units via RFID readers without human intervention. This has improved labor productivity and we continue to see cost savings benefits. RFID also enables us to use the hundreds of millions of data points we've gathered over the past decade to automatically sort our inventory into one of 26 distinct cleaning processes to improve garment quality and longevity. In Q1, We took another step in automating our processes and further utilized RFID by rolling out our 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. We also continued the rollout of new packaging in Q1, which is now being used for over 20% of 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. 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 compared to our current garment bags. Third, we continued to grow exclusive designs and launched six new collections in Q1. We remain excited about the pipeline with nearly 20 exclusive design partners in 2022, around half of which are new. Share by RTR and exclusive designs are on track to represent a combined 60% of our product acquisition mix this year. We are within striking distance of the two-thirds that's embedded in our midterm plan to get to free cash flow profitability. Lastly, I'd like to touch on the macro environments. which is on everyone's minds and very uncertain. To date, our business continues to grow and our outlook is positive, which is reflected in our guidance this quarter. But I want to take this opportunity to speak a bit to the character of our team. Two years ago when COVID hit and the U.S. was sheltering at home, our customer demand significantly declined. Our team reacted swiftly and made a series of tough and bold decisions to cut a significant amount of costs from every area of our business. We changed the way we financed our rental products with our vendors' support because Rent the Runway matters to them. We nearly doubled the margins of our subscription programs. We transformed processes in our warehouses and added significant automation. We were focused on every dollar that we spent as a culture of frugality is embedded in our DNA. We have well-tested plans based on our COVID experience that give us confidence that we are prepared for macro challenges and can continue to drive our business to profitability and capture our long-term opportunity for a large and profitable business that changes how women get dressed. It's not business as usual, but I feel reassured that our team is battle-tested, scrappy, innovative, and most important, resilient. That said, what we believe, interestingly, is that Rent the Runway is entering an environment that may be conducive to growth for our business. Rent the Runway stands to benefit as the share of consumers' wallets shift towards experiences over ownership. We see in our data that the customer is yearning to get back out into the world, back to weddings, back to concerts and events, back to vacations, and even back to the office a few days a week. And we believe that all of this stands to benefit us. Given the significant cost savings she derives from renting, which is around 15% of retail price if she rents a la carte, and around $20 an item in our subscription program, we believe that women will consider renting in a cost-conscious environment. During the 2008 recession, Americans continued to purchase about 65 articles of apparel per year. They just purchased them more often at off-price and value-focused retailers. At that time, rental and resale were not mainstream options for the consumer the way they are today. We can't predict how the consumer will be impacted by the macro environment, but we will aim to be part of the customer's larger cost savings consideration set during these uncertain times. We plan to stay vigilant and are confident in our ability to react swiftly take advantage of opportunities, and always keep our customer as our North Star. And with that, I'll turn it over to Scarlett.