Rent the Runway, Inc.

Greetings and welcome to the Rent the Runway Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Janine Stichter, Vice President, Investor Relations. Thank you, Janine. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Run the Runway's second 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 financial results, guidance and targets, 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 SEC filings, including our form time queue that we filed in the next two 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 as a substitute for financial information presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in our press release, slide presentations posted on our investor website, and in our SEC filings. And with that, I'll turn it over to Jen.

Thanks for joining us today. I'm going to focus my remarks on two important topics. First is my confidence in the long-term demand outlook and strength of our customer proposition. Second is my commitment to building Rent the Runway into a business that is profitable, has strong margins, and is self-funding. The restructuring actions we announced today are an important step towards meeting those goals, and Scarlett and I will review the details with you today. Let's begin with the customer. Our revenue grew 64% year-over-year to $76.5 million, our highest quarterly revenue to date. We also were adjusted EBITDA positive for the first time since our IPO, significantly ahead of plan, generating $1.8 million and a 2.4% margin. Subscription and reserve revenue grew 63% and quarter-ending active subscribers grew 27% versus the prior year. We began the quarter with some of our best subscriber acquisition numbers in history, culminating in our strongest ever May acquisition. Pod subscribers also reactivated nicely in May. Our subscriber engagement metrics, such as customers who add items to their subscription, were at strong levels, and we saw some of the highest monthly subscription ARPUs in our history. We saw strength in our event-based rental business as our customers demanded wedding and party attire, black tie, and going out clothes. Our resale business also demonstrated excellent performance. Starting in mid-June, we noticed an increase in subscriber pause rates and a decrease in retention, along with a delay in former subscribers rejoining versus history. This, combined with seasonally lower acquisitions, resulted in ending active subscriber count that was lower than expected for the quarter. Our goal is to be transparent with investors about what we do and do not yet understand about our performance and the evolving consumer environment. We are highly confident in the long-term opportunity for our business, and this is unchanged. However, in the short term, I want to acknowledge that it remains difficult to predict how customers will behave. and we want to be measured in our approach and guidance for the rest of the year. It is becoming clear to us that our customers live, work, socialize, and travel differently in 2022 than they did prior to the pandemic, and this influences what they wear. We are still learning how these types of changes in customer behavior impact the business, particularly in a challenging macro environment. At just over 124,000 active subscribers at the end of the quarter, we believe that we are in the early innings of our closet in the cloud model for fashion. We've seen positive signs of stability and a strong bounce back in our customer metrics in August and September to date. Let me outline just a few reasons I'm confident that Rent the Runway can grow significantly and become an even more important part of our customers' lives. First, We think we're only just scratching the surface of initiatives to improve every customer metric, from organic acquisition and conversion to retention and propensity to rejoin. We believe just executing on these initiatives and continuing to invest in our customer experience provides us an opportunity to more than double our business in the years to come. Let me highlight just a few examples. We recently began testing a loyalty program to reward our early-term customers with one additional item of clothing for their next shipment. This simple test was one of the most successful drivers of loyalty in our history. Another successful initiative to improve our customers' conversion and loyalty was giving them an understanding of items that are likely to fit them via fit tags on product pages. We plan to soon roll out fit tags on our product grids to expand on our impact here. We've seen success this quarter in optimizing the way we display pricing to our customers, driving higher conversion, and we plan to build on this in Q3. Given our long history with event-based rental, we think there is significant opportunity in reactivating some of the more than 2 million customers who have been one-time rental customers in the past. In July, we launched home pickup in our app, and now over 50% of our subscribers have access to this ahead of plan, We continue to see improving customer adoption and satisfaction with home pickup, which both improves customer experience and lowers costs. We believe we can become a much larger business simply by focusing on matters within our control. Notably, the opportunities above don't require any changes in customer acceptance of rental. We believe the apparel market continues to evolve in a way that's favorable to our business. Our recent partnership with Saks Office to sell pre-loved clothing with our branding was a success and highlights an increased willingness by mainstream customers to wear secondhand clothing. As more of the biggest apparel retailers in the world sell pre-owned clothes, these trends should only strengthen. At first, we would expect greater usage in our events-based business. Retailers around the world sell billions of dollars of outfits that customers wear to social events. We want to capture this demand and grow event-based rentals into multiples of where it is today. As acceptance grows and as event-based customers become subscribers, our subscription business should benefit. Given its everyday nature compared to the event-based rental business, we see an even larger opportunity. I truly believe that our best days lie ahead. Let me now turn to profitability. I want to be clear that in order for Rent the Runway to be successful, Rent the runway must be profitable and able to fund itself. Further, given our superior monetization of inventory versus traditional retailers, we have a significant gross margin advantage. Along with growth, we intend to maintain stricter cost discipline in order to generate above average profitability in the medium term. Today, we announced a restructuring plan to reduce 25 to 27 million of annual operating costs and streamline our org structure. We made the difficult decision to reduce our corporate headcount by about 24%. The headcount measures will be largely complete in Q3, and we expect to realize savings beginning in Q3 and into fiscal 2023. We took a deep and rigorous look at our business, benchmarking ourselves to other companies, and realized that we had the potential to improve efficiency and drive profitability sooner while continuing to grow revenue. Despite almost 45% incremental flow-through margins on additional revenue, growth in our relatively high fixed cost base prevented more rapid gains in profitability. We believe that our customers are best served by investments that focus on them and by simple and quicker decision-making. Let me discuss the financial implications of these actions. Once implemented, we expect these actions to positively impact adjusted EBITDA by approximately $4 to $5 million in Q4 and $25 to $27 million in fiscal year 23. As Scarlett will outline, we expect to generate a mid-teens adjusted EBITDA margin and cover our product appreciation at approximately $400 million in revenue. At this revenue base, which we think is well within our reach in the short term, we believe we will be able to fund product CapEx for our existing customers and reduce cash burn before interest expense to approximately $30 million. We also expect to maintain a healthy cash position, allowing us to navigate potentially tougher economic conditions. Our medium-term target is to generate a 15% margin on adjusted EBITDA, less product depreciation. I want to be open about the possibility that the path to this 15% margin may not be linear. While we intend to clearly demonstrate that Rent the Runway can be a profitable company with attractive margins, we may decide to reinvest in growing the business where it makes sense. That said, we remain steadfast in our commitment to efficiency and further prioritizing investments that benefit our customers. Ultimately, we believe the strength of our offerings, continued growth in the business, and a focus on removing costs in areas that don't affect the customer will result in value creation over time. I want to end by my remarks by acknowledging the contribution that all of our employees have made to the success of Rent the Runway and by saying a heartfelt thank you to the employees leaving us. These actions are difficult. However, they are necessary for Rent the Runway to become a healthier company. As a company, we are resilient and innovative and have always been willing to make difficult decisions that are right for the business. As an example, during COVID, we fundamentally changed the way we acquire rental products, changed our subscription programs to be higher margin, and drove efficiencies in our warehouses through technology and automation. Today, our challenge is to capitalize on the many opportunities in front of us while making rapid progress towards being a self-funded business. We intend to meet that challenge and provide our customers with the experience and product they deserve. With that, I'll turn it over to Scarlett.