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spk05: Welcome to Rent the Runway's third quarter 2022 earnings results conference 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Rent the Runway's CEO and co-founder, Jennifer Hyman.
spk27: I wanted to take a moment before we begin today's earnings call to introduce our new head of investor relations, Jackie Blatt. Jackie has been at Rent the Runway for over seven years, first within our finance department and for the last four years as my chief of staff. As a result, she knows an enormous amount about Rent the Runway. And I'm personally very excited for her to build strong relationships with all of our current and future investors. Here's Jackie.
spk06: Thanks, Jen. Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's third quarter 2022 results. Joining me today to discuss our results for the quarter ended October 31st, 2022, our CEO and co-founder, Jennifer Hyman, and Chief Financial Officer, Scarlett O'Sullivan. Before we begin, we would 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 filings of the SEC, including our Form 10-Q that will be 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 will 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 presentation posted on our investor website and in our SEC filing. And with that, I'll turn it back to Jen Hyman, co-founder and CEO of ResRMI. Thanks, Jackie.
spk27: And thank you, everyone, for joining our earnings call today. We are very proud of our strong financial performance in the third quarter of 2022 as we beat both top and bottom lines of our guidance. We posted record quarterly revenue of $77.4 million, demonstrating strong 31% year-over-year revenue growth. We have seen an improving trend in subscriber acquisition, pause, and retention rates since the end of Q2. as our Q3 ending active subscriber count grew 8% quarter over quarter. Despite the uncertain consumer environment, this tells us that our offering is still resonating with our target consumer. This quarter, we delivered a gross margin above 40% for the second quarter in a row. We also posted a very strong adjusted EBITDA margin of 8.5%, our second consecutive quarter of positive adjusted EBITDA. beating our Q3 guidance, and demonstrating adjusted EBITDA profitability significantly ahead of the timeline we shared at IPO. In the third quarter of 2022, we largely completed our restructuring plan to reduce costs, streamline our organizational structure, and drive operational efficiency, which was previously announced in September. As a reminder, the restructuring had three main objectives. First, to transform the cash flow profile of our business. At approximately $400 million in revenue, we expect to be able to reduce annual cash burns before interest expense to approximately $30 million. Second, to accelerate our path to break even on adjusted EBITDA after taking into account product depreciation, which we continue to expect to achieve in the near term. Finally, and perhaps most importantly, to allow us to reinvest into delivering value to our customers. The brands we offer are unmatched by other fashion rental companies, and our cost actions allow us to deliver even more Rent the Runway to customers. Posting growth in our active subscriber count this quarter in a tough macro environment is a step in the right direction, but we're not satisfied. We're encouraged by recent performance trends, as this Cyber Monday marked our second highest subscriber acquisition day in company history. As I'll outline, we intend to further accelerate growth. Our plans for 2023 are bold and focused on providing our customers with even more reasons to love their Rent the Runway subscription. I'm confident we will look back on 2023 as a year where we gave our customers more value, more choice, and a better experience overall. Before I discuss where we're going in more detail, I want to take a step back and acknowledge how far we've come. I founded Rent the Runway over 13 years ago, and in this time, we created the market for fashion rental, where there was none before, and have driven broad acceptance of secondhand apparel. In fact, our unaided awareness as a clothing rental service is 21%. In other words, 21% of women in our target demographics When asked to name a clothing rental service, say Rent the Runway. I'm really proud of that. I've never felt more confident in our opportunity to thrive and deliver tangible value to our customers, both because of what we've accomplished over the past few years and because of the plans we have for 2023 and beyond. Rent the Runway is not only already a larger business in 2022 than we were in 2019, but we are also fundamentally a stronger business in three key ways. First, we've built a more powerful revenue platform. Second, we've transformed the cash needs of the business by innovating the way we acquire the fashion we rent. And third, we've dramatically improved our underlying cost structure. Now I'll discuss how each of these levers makes us stronger today than three years ago. First, we have strategically built a more powerful revenue platform with multiple engines of growth, subscription, a la cart rental, and resale that help us to capture the opportunity ahead of us and a large team of customers who come to us for diverse reasons in different life stages. We're the only platform to offer all three of these revenue engines in one place. In 2019, resale was only available to our subscribers. And now anyone can buy the fashion we have on our site. In addition, we've doubled the penetration of high margin add-on revenue since 2019 amongst our subscribers by giving them the ability to personalize their program. In the first nine months of fiscal 2022, nearly 30% of our subscribers have paid for at least one add-on slot. Our customer base is more diverse than ever before. Since 2019, we've seen a 14-point increase in the geographic diversification of our subscriber base away from our top five MSAs. And they use Rent the Runway across more use cases, broadening our utility in their lives. In 2019, customers used their subscription for work and special occasions 55% of the time. Today, they use us for casual everyday life 55% of the time. This means she's renting items like denim, sweaters, winter coats and handbags from us. Things that keep subscribers sticky in this program, even when they don't have special events. That said, we're thrilled by the success of special occasion wear and workwear on our platform this year. We have seen and are continuing to see near record highs in terms of special occasion utilization, as well as nearly double the workwear demand in 2022 compared to last year. and we still believe there is opportunity here. Second, it's hard to overstate how much we've transformed how we acquire the fashion our customers love and how this has changed the cash needs of our business. In fiscal 2022, share by RTR and exclusive design are expected to together comprise around 60% of our product acquisition versus 26% in 2019. In 2019, we spent $118 million on upfront purchases of rental products compared to our estimate of approximately $60 million this year, despite being a larger business. Further, we bear considerably less risk as 30% of our inventory is procured on consignment. Finally, we've made significant advances in using our customer data and brand relationships to manufacture another 30% of inventory at significantly lower than wholesale costs via our exclusive designs. These designs are desired by our customers and as Scarlett will discuss later on the call, show early signs of being sought after by other retailers. Over these three years, we believe we've also become an even more important partner to our brands who value us for customer acquisition and data insights. In short, we believe our inventory leads the market in terms of quality and provides us with an enduring cost advantage. The third key transformation to our business since 2019 is our vastly improved cost structure and margin profile. The changes we made to our subscription program since 2020 have resulted in a 16-point reduction in fulfillment as a percent of revenue, which has decreased from 46% in 19 to 30% in Q3 2022. As a result, we've doubled our gross margins since 2019 to 41% in Q3 2022. Moreover, we restructured our fixed cost base, allowing us to significantly improve the overall profitability of the business. In summary, these major changes to our business model over the past three years have a quantifiable and meaningful impact. The fact that our customers are more diverse and are using us for a wider variety of use cases means they have higher retention and stick with us longer, resulting in a long tail of loyal, long-term customers. Our improvements to fulfillment and product acquisition costs mean we have gross margins after fulfillment costs that are better than many traditional retailers and online peers. All in, as previously shared, at around $400 million in revenue, we expect to reduce annual cash burn before interest expense to approximately $30 million in the near term. Shifting to this year, we are proud to have laid three primary foundations in 2022 that we believe will set us up for an exciting path forward in the next year. The first is our Customer Experience Foundation. Our conversion and loyalty, and thus our growth, our reliance on women seamlessly browsing, finding, and receiving inventory they love. Over the last 13 years, we believe we've collected more unique product metadata than many other retailers. Data on everything from fit to quality, customer feedback and reviews, attributes, garment longevity, styles, sizing, occasions, and the list goes on. Despite amassing this incredibly rich inventory database as one of our biggest competitive advantages, Our technology is just now beginning to connect our data mode into the customer experience. This year, we completed key foundational work to connect our proprietary inventory data system into our on-site search and discovery experiences. As a result of this, we expect that we will be able to significantly expand the way our customers are able to browse our site next year. In Q3, we also launched Elasticsearch, a third-party industry leader in enterprise search technology, which coupled with our enhanced product catalog is expected to provide a much richer search experience to our customers. Second is our technology foundation. We made improvements across our tech stack in 2022 in order to enable greater scale, enhanced resiliency, and faster site speed. This year, we completed our migration to the cloud, an important milestone which we think will be key to unlocking even better resiliency, performance, and reliability, increased developer velocity, as well as the ability to scale more efficiently with subscriber growth. Next year, we plan to build upon this work to improve our site speed even more, which we believe will help us improve convergence. Lastly, in 2022, we solidified our fashion foundation by expanding our exclusive design capabilities and launching our first celebrity collection. Throughout 2022, we co-created exclusive designs with a total of 18 brand partners, half of which were new to the program. We have increased the number of factories we work with, which has enabled us to manufacture more categories of clothing. For example, as a result of this diversification in our production capabilities, for the first time, our exclusive design channel is set up to manufacture black tie and evening wear, two of the most expensive categories we procure, where the relative cost savings versus wholesale are significant. This is an important lever as we continue to reduce our upfront cost per unit. Most recently, this November, we launched our first celebrity collection with Ashley Park, the co-star of Netflix's Emily in Paris. Celebrity collections enable us to develop fashion that our customers love while simultaneously providing built-in marketing as a result of the brand heat and cultural relevance of the personality. Ashley Park has a social following of over 2.4 million across her platform and has been actively engaged in organically promoting her collection and Rent the Runway. To date, around the launch of our capsule selection with Ashley, we have been able to leverage her media buzz for over one billion earned media impressions and counting. Last call, We spoke about how even just small improvements in conversion and retention, like the ones I just discussed, can have a substantial impact on growth and are within our control. We think that providing more value and a better user experience to our customers are key drivers of influencing these metrics. The purpose of our key 2022 investments is to deliver more to the customer in 2023 and to iterate quickly to accelerate growth. We will share more detailed plans on our Q4 call, but we believe 2023 will be a transformative year for Rent the Runway. Our plans are informed by a deep analysis of customer data, as well as by constant experimentation and testing. Our customers can expect to see significant improvements in plan design, site experience, and in the clothing they love. In a tough macro environment, with inflation and price consciousness top of mind for many consumers, Rent the Runway plans to lead by offering more value and more fashion to our customers. As our customers benefit, so too should our brand partners. We expect these changes to provide lasting benefits for growth well past 2023. With that, I'll turn it over to Scarlett.
spk20: Thanks, Jen, and thanks again, everyone, for joining us.
spk21: I will provide an overview of our third quarter results for fiscal 22, and we'll end with guidance for the fourth quarter and full year. In Q3, we generated record revenue of $77.4 million, up 31% year-over-year. Ending active subscribers increased 15% year-over-year to 134,000, up 8% quarter-over-quarter. Total subscribers increased 17% year-over-year to 176,000 subs, and up 2% quarter-over-quarter. As we pointed out last quarter, the macroeconomic environment remains tough and has had an impact on our business. Our active subscriber growth this quarter versus Q2 reflects two key factors. First, our acquisitions improved in Q3 versus a seasonally weaker Q2. Second, and with the benefit of more data from Q3, we believe that the reaction by customers to our April price increase was a significant contributor to our elevated levels of churn and pause activity in Q2. As customers have adjusted, we have seen reduced rates of churn and pause in Q3. We also believe that this affected our Q2 acquisitions to some extent. In Q3, we've also seen a slightly higher proportion of new subscribers going into our lower price program, which we factored into our expectations for Q4. As Jen mentioned, we have plans for next year that are designed to accelerate subscriber growth. Rent the Runway has solid site traffic that we believe we can do more to monetize, and that's why we're focused on strategies that drive conversion and loyalty. Our strong revenue beat versus our guidance was primarily due to strength in ARPU, driven by add-on spots, and solid other revenue performance. 28% of active subs paid for one or more add-ons in the quarter. We are pleased that our subscribers are willing to spend more with us despite the inflationary environment. We are increasing our ARPU estimate for the year to be up approximately 7% for fiscal year 22 versus last year. We also saw healthy performance in our reserve business. which continues to be a strong funnel of new customer growth. Reserve orders from new customers in Q3 were up 27% year-over-year and 46% quarter-over-quarter, with the proportion of high-formality rentals higher than last year and near record highs in terms of utilization. We successfully increased assortment in Q3 real-time to address the increased need for special events preparing us for Q4 and fiscal 23. Other revenue represented 11% of revenue in Q3 versus 8% in Q3 21, and up 83% year over year. We saw a 14% increase in average items bought by subscribers in the quarter versus Q2 22, and a 53% increase versus Q3 21, resulting in 84% of total revenue being generated by subscribers in Q3. Other revenue also included $1.6 million from a pilot to wholesale brand-new exclusive design to a third party, showcasing demand for our products from other retailers and the consumer appeal of our design. We generate strong margins from exclusive design sales, given the low cost of these items. It's too early to say how this pilot will evolve, but we believe it highlights the power of the Rent the Runway data and platform and the monetization opportunities of our product. Our Q2 gross margin of 41% was 7 percentage points higher than prior year. Fulfillment cost as a percentage of revenue came in at 30% versus 33% in Q3-21, primarily due to higher revenue per order. We improved transportation cost per shipment versus Q2-22 by negotiating lower carrier rates and optimizing carrier and ship method mix, including a higher penetration of at-home pickups. We expect higher fulfillment cost per shipment in Q4, as we typically would see seasonally, and now expect fulfillment cost as a percentage of revenue for the full year 22 to be approximately 32%. Total product cost came in at 29% versus 34% last year, with rental product depreciation at 18% of revenue versus 23% in Q3 21, as it was absorbed over a higher revenue base. We now expect gross margin to be up approximately 400 basis points versus full year 21. Q3 adjusted EBITDA continued to be positive and came in significantly ahead of our guidance at $6.6 million versus negative $5.6 million in Q3 last year, representing a positive 8.5% margin and an 18-point improvement versus negative 5.5%, negative 9.5% in Q3 last year. Our total operating expenses, marketing, technology, and G&A, represented 63% of revenue, compared with 101% in Q3-21. Employee expenses in Q3 saw the partial positive impact of the restructuring. We'd largely expect the full impact in Q4 as we still carry approximately $2.4 million of employee expenses in Q3 that will go away by the end of Q4. As expected when we provided guidance last quarter, we saw sales from a new liquidation partnership. Proceeds came in higher than anticipated this quarter, positively impacting the GNA line where we usually recognize the net impact of liquidation sales by approximately $2.5 million this quarter. We partner with a new third-party retailer to broaden our liquidation network and drive additional monetization of our products while giving our rental garments a second life. Overall, the exclusive designs pilot and new liquidation partnership together contributed approximately $4.6 million to adjusted EBITDA. Even without these deals, we have made significant progress driving adjusted EBITDA to be positive, especially for our third quarter, which historically sees lower profitability. Going forward, as you'll hear when we discuss guidance, we expect to continue to generate a strong positive adjusted EBITDA margin, reflecting the increased profitability of the business and full benefit of the restructuring. We are choosing to be opportunistic and take advantage of the current retail slowdown to buy attractive inventory from our brand partners at discounted prices. This pulls forward some of next year's buy into this year. Our anticipated cash usage now reflects incremental product spend this quarter, As a result, we currently expect our fiscal 22 free cash flow margin to be slightly lower versus last year. A couple of housekeeping items I want to call out for the quarter. The restructuring-related severance charge came in at $2 million in Q3. In addition, we decided not to move forward with a long-term CapEx project in our warehouses as part of our restructuring work, and we recognize a largely non-cash loss of $3.8 million due to the asset impairment. Our Q3 results reflect our improved quarter-over-quarter subscriber trends, and we believe showcase the strength of our offering and how it resonates with customers, even with this macro backdrop. So we're pleased to be raising guidance. We continue to be in an uncertain macro environment, and as we've mentioned, we typically see a higher rate of turn and pause in January due to the seasonality of our business at that time of year. For Q4, we expect revenue of 72 to 74 million dollars. we expect a positive adjusted EBITDA margin of 4 to 5%. In terms of full year, we now expect revenue in the range of $293 to $295 million, representing 45% growth at the midpoint of the range versus full year 2021. Our adjusted EBITDA margin guidance for full year is revised to positive 1%, reflecting our strong Q3 performance our cross-discipline throughout the year, and the post-restructuring employee base by the end of Q4. We've made a few tweaks to our full year expectations for a few other items, so please refer to the guidance page of our earnings deck on our website. For fiscal 23, we're not providing revenue guidance at this time, but I want to reinforce a few important points. First, as Jen mentioned, we're excited about our plans in fiscal 23 and believe they will be impactful for growth. Second, we are reaffirming the estimated restructuring annual OpEx reduction of $25 to $27 million for next year versus a Q2 22 run rate, which is expected to boost adjusted EBITDA for next year. This means that we anticipate reducing annual cash burn substantially versus this year. This is expected to hold even if revenue growth is lower next year due to macro or other factors. We will provide additional details on our Q4 call. In the medium term, we intend to maintain strict cost discipline and anticipate higher flows through on incremental revenue, generating approximately 30% adjusted EBITDA margin. That represents a 15% margin on adjusted EBITDA, less product depreciation. At that level, we believe we would be free cash flow profitable, fully internally self-funding the business, even at strong growth rates, and we aim to get there with the cash we have on hand. We continue to be intently focused on balancing robust growth with profitability and will seek to strike the right balance to attain both objectives and maximize the long-term value of rent-to-runway. With that, we are happy to open it up for questions.
spk05: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Edward Yerma with Piper Sandler. Please proceed.
spk18: Hi. This is Abby Zvaniak on for Ed. Thanks for taking our question. Just first of all, in terms of the, you know, favorable terms on getting inventory in this excess inventory environment, can you talk a little bit about that? you know, the kind of flow through impact on product appreciation going forward. And then on brand seeking, you know, this data and this new, you know, new marketing funnels in the current environment, can you talk about any potential to be, you know, more of a partner with these brands, maybe from an advertising perspective on Rent Runway? Thank you.
spk27: So first I want to address what makes us different than most other retailers and why this environment where there's kind of softness in overall retail is positive for Run the Runway. Most other retailers have to clear through 2022 inventory in 2022 because there won't be any relevance of that inventory on a go-forward basis. We have proven over the past 13 years that there is demand for and we monetize our inventory over multiple years. What the customer cares about is when she comes to Rent the Runway, she wants to wear something new every single time she comes. She doesn't care if that new thing that she's wearing is from last year or from a week ago or from a few years ago. And we keep that inventory in high-quality condition for multiple years. So we can be opportunistic right now in the market, whereas everyone else needs to be promotional. So what we're doing is we are going to our 800 plus brand partners. We are looking at what they have available and we're acquiring inventory at very healthy discounts, pulling forward some of the inventory spend that we would have spent in 2023. Now the other thing that is great about the environment that we're in is the very inventory that is available right now is inventory that is the highest performing inventory on Rent the Runway. So what we're seeing from our brand partners is the most fashionable inventory that isn't selling in stores, the most colorful inventory, the trendiest inventory. And that is exactly what performs the best on Rent the Runway. So not only are we getting inventory at a discount, we're getting the best inventory from some of our best brand partners at that competitive pricing. Of course, this will help to further accelerate upfront cost per unit going down, and that decreases the depreciation expense.
spk21: Abby, what I would say here is, you know, this is part of the overall philosophy, and every year we want to be showing improvement in our upfront cost per unit. You know, the items that we're acquiring is a combination of, you know, our three different methods. So obviously the ones where we own will have a nice impact on product depreciation. Some of them could be for consignment deals, which is also great for us that we can do that even in this environment, and that would show up in the revenue share line.
spk27: And one other point. The 800-plus brands that we work with are luxury or designer brands. So clearly a highly promotional environment like the one that we're in right now is extremely brand dilutive to them. They have a choice. They could either mark their inventory down on sale or on clearance, Or they can work with Rent the Runway often through our consignment channel, which is brand accretive to them. We don't mark down the inventory on our platform. We are displaying the original retail price. And by nature of putting it up on Rent the Runway, they're getting access to new younger customers. So it's really a win-win for the brands of being brand accretive and adding to customer acquisition in an environment where that matters more than ever.
spk18: Thanks, and then maybe just one more. Can you just elaborate maybe a little bit on the wholesale partnership for liquidation, and then will that continue in 4Q, and how should we think about kind of the go-forward benefit to adjusted EBITDA from that? Thanks.
spk27: Yeah, so this pilot is really exciting, and it showcases the consumer appeal and demand for our exclusive design products from other retailers. So as Scarlett mentioned, we already generate strong margins
spk21: from exclusive design sales. That's the exclusive design partnership. Abby, I think you were asking also about the liquidation partnership. We'll talk about both.
spk27: So, you know, we generate strong margins from exclusive designs because of the lower cost of these items. And so for us, it's too early to say how the pilot is going to evolve, but we really believe it highlights the power of the Rent the Runway data and our platform and monetization opportunities of our product. Scarlett, do you want to talk to the partner, the liquidation partner?
spk21: Yeah, so here we're always looking to expand our network of partners. It's great for us to be able to have more partners that we're working with, to be able to give our items a second life and to really create more opportunities for monetization. So we were really excited to see this partnership. It was a pretty significant one. No plans on a go-forward basis just yet, but for both of these, I think they really showcase the power of our data, the appeal of our designs, as well as the appeal of our items that we believe are at the end of their rental life and yet still have another life somewhere else.
spk02: Great. Thank you.
spk05: Our next question is from Michael Benetti with Credit Suisse. Please proceed.
spk35: Hey, guys. Thanks for taking our questions here. You mentioned a little bit of hindsight here, diagnostics on the price increase in April causing a little bit of churn in second quarter that you think improved in third quarter. I know a lot of the vendors you deal with are still seeing some inflation today. Do you anticipate needing to take price next year? And if so, maybe any learnings you can point to as you look back at April to help you navigate that if the consumer is still in value-seeking mode with their household budgets?
spk27: Yeah, so first, you know, on our Q2 call, we were going through some of the various reasons we thought why there might have been softness. And with the benefit of more data in Q3, we think that the reaction that our customers had to our April price increase was a significant contributor to the elevated levels of turn and pause activity that we saw in Q2. And the good news is, as customers have adjusted, we've seen increased acquisition, reduced rates of churn, and reduced rates of pause activity in this past quarter, Q3, compared to Q2. So the price increase, we believe, was the right thing to do at the time. We've been very focused on driving profitability, as you know. And there was a lot going on in the macro environment. Our input costs were getting higher. And we've seen a significant positive impact of that price increase and that revenue per order has gone up. We've seen it reflected in our profitability and our gross margins. Having said that, we take our obligation to provide value to our customers very seriously. And our focus next year is all about How do we deliver even more value to the customer? We're very excited about the plans that we have in place.
spk35: I guess maybe I can follow up one on marketing. Could you speak a little bit to the marketing mix? Any changes you're seeing in the different channels or changes in the returns you're seeing in generating the different channels? And maybe just any update on trends and what you're seeing in organic versus inorganic trends on the marketing side as we think had to help us for next year.
spk27: Yeah, so in terms of marketing, like no real news. Our CAC is stable and attractive in 2022. It's stable to last year. We believe that the traffic that we have on Reds Runway, we are happy with the level of traffic that we have. And our focus is not on using marketing dollars to drive more traffic. All of our focus is on doing a better job with the traffic that we have in terms of our conversion and our loyalty. So you're going to see us focus inherently on the customer experience and customer value. You're not going to see marketing costs go up or us focusing on traffic because we believe that the level of traffic we have right now is in a good spot.
spk21: And Michael, just to add to that, there's really not been much change in terms of the channels that we use and the way that we do marketing. So that's stayed pretty consistent. Obviously, it's helpful when we do celebrity deals, but we also have the amplification of celebrities and them being out there talking about us, but nothing in terms of our own internal efforts and the channels.
spk27: I think that there's general tailwinds this year that we're seeing across culture and across the media related to rental overall. I mean, an example from this week alone, we saw that Princess Kate rented a dress last week. If you would have told anyone 13 years ago when we launched Rent the Runway and people thought renting was disgusting and not chic and not something that anyone would talk about, that Princess Kate, that royalty would be renting and talking about it publicly, that's really due to us you know, starting this movement globally, making rental something that's normalized, aspirational. And we're seeing that more and more in culture where the tailwinds, I think, of this becoming part of the consideration set are really improving. And we see that across the board every day in the diversification of our customer base and her considering us for more of the use cases in her life.
spk33: Okay, thanks a lot. Appreciate the help.
spk05: Our next question is from Eric Sheridan with Goldman Sachs. Please proceed.
spk37: Thanks so much. Maybe two questions if I can. First, in terms of what you're seeing on the gross addition side, is there any color you're able to give us on how much of that is people that are finding the brand for the first time and being driven by elements of either aided or unaided awareness on the platform driving gross additions versus your ability to go out and mine products the database of former users, former subscribers, continuing to remarket and remind that base of potential former users to drive incremental gross addition growth. That'd be number one. And then number two, you've started to see the beginning of sort of a return to work dynamic that's lagged sort of the reopening dynamic. How should we be thinking about what you're seeing from your subscribers in terms of return to work and how that might be a tailwind for the business in 2023? Thanks so much.
spk27: Yeah, so starting with the second question for, you know, we are really pleased with the performance of Workwear, which has doubled for us year over year in 2022. So we're seeing that women are more solidly in the office a few days a week, and this performance is in a world of hybrid work. We've also done a great job at shifting our inventory mix to reflect what our customers want. So it's our job to highlight all of the use cases to customers that she's able to use her subscription for, and we've done a great job at that given that work wear is double last year, but at the same time she's using 55% of her basket for everyday casual occasions. We're seeing that even in 2019, if you think about a world where she was in the office five days a week, She was using her subscription at the time, only around a quarter of the time, to go to work. Now, in that world where you're going into the office five days a week, making an investment into Workwear makes a lot more sense than a world where you don't know how much you're going to be in the office this month, next month. So we have a big opportunity to use the hybrid environment that we're in as a lever for acquisition. In terms of the first question of where are the customers coming from, are they new, are they from our database, we've actually seen streaks across the board. So we're seeing in Q3 we saw a nice rejoin rate of folks who had previously churned who came back. We saw a good amount of new customers coming to Rent the Runway. We saw a really nice increase to our pause, people unpausing their subscriptions. So it was really a combination of acquisition from all three of these sources.
spk36: Great. Thanks so much.
spk05: Our next question is from Rick Patel with Raymond James. Please proceed.
spk32: Thank you. Good afternoon. Can you talk about opportunities to lower product costs outside of the ongoing change in the product acquisition model? I'm curious if you see opportunity to realize better costing because of elevated inventories across the apparel industry. and perhaps some brands trying to right-size a product that they might be sitting on.
spk27: As we just talked about, we certainly think that this environment is right for us to be lowering our upfront product costs by working very closely with the 800 brands that we work with to acquire the very best inventory from them at deeply discounted rates. We're seeing higher desire amongst our brands to work with us both on our consignment business, Share by RTR, and exclusive designs. And as you've seen, Nick's shift towards exclusive designs and Share by RTR has been a major lever in helping us reduce the upfront cost of inventory. You know, I'll remind everyone again that our gross margin of 41% is inclusive of all of our fulfillment expenses and our inventory expenses. And that 41% gross margin is significantly or slightly better than many of our retail peers already. So the reduction in our inventory cost that we expect over the next few years will only help to improve a gross margin that we already think is quite positive.
spk21: Yeah, and Rick, I would just say that, you know, what Jen was talking about in the first part of the answer to the question is not hypothetical, right? We are, in fact, pulling forward some of the spend from next year. We are, you know, in market right now getting some attractive yields, so we're excited about what that does for our numbers.
spk32: And you talked about the progress of exclusive designs and the product being sought after by retailers. You know, can you provide some additional color on what you're doing to capture this demand and To what extent this can be a needle mover as we think about 23?
spk27: Right now it's just a pilot and we're excited by that pilot. We think that it's really interesting that another multi-brand retailer finds our exclusive designs to be so attractive that it's something that they would buy from us wholesale. One of the things that I think it showcases about our business is that of the data that we get, which is incredibly unique. Remember, our data isn't just about what customers are doing on our site. Our data is about how they actually wear the item. It's about fit. It's about product quality. It's about manufacturing, how items should be manufactured. And we've seen that when we use data to manufacture products, they become best sellers, best renters on our platforms. So I think other retailers have recognized that our data provides a significant advantage and that these could be blockbuster styles on their sites as well and have approached us. Last week, as an example, in our recent celebrity collection that we did with Ashley Park, all eight pieces from that collection were in the top 5% of styles rented by volume on our platform. And we have... tens of thousands of styles on our platform. So this is quite a big feat of the styles that we manufacture with our data. So I don't know what's gonna happen related to us selling this to more retailers over time, but we will certainly kind of inform you more as this pilot progresses and we feel very encouraged by the reception that we're getting.
spk21: And more directly, you know, we're not giving guidance at this point on 23, but I'm not building anything in my expectation at this moment.
spk31: Thank you very much.
spk05: Our next question is from Lauren Shank with Morgan Stanley. Please proceed.
spk42: Hey, I've got Nathan Suther on for Lauren Shank. Congrats on the quarter. You know, kind of going back to 2Q, there was some abnormal seasonality. You know, we've talked about that at least a little bit. to the pricing change. Can you talk about the inter-quarter trends in 3Q? And was that seasonality much different from last year or pre-COVID? And then a second question, in terms of this special occasion mix in 3Q, how close are you to closing that gap? Is it fully closed? And then kind of more broadly, what's your ability in terms of lead time to adjust that assortment across different chains? Thanks.
spk27: So Q3 is always seasonally better for us than Q2, and it was this year as well. But we did see in Q2, because of the price increase, we saw that turn rates were higher than we would have anticipated. Pause activity was higher than we would have anticipated. Acquisition was slightly lower than we would have anticipated. And all three of those metrics, which are the most important KPIs in our business, have improved significantly. quarter over quarter and have delivered a quarter where we were able to grow sequentially. So we're seeing that the customer has really adjusted and the initial, let's say, sticker shock she had to those increases in price, she's now feels comfortable and we've seen reductions in return, reductions in her pause activity and increases in acquisition.
spk21: In terms of the second question, I think you were referring to the fact that we had mentioned that there might have been some gaps in our assortment related to high formality.
spk19: We have a good ability to react.
spk21: We were able to quickly shift some of our buys and our chases during the quarter, so we were able to be able to really address the customer demand for these types of items. We acquired quite a bit more in terms of high formality items starting in Q3. We've seen a significant improvement in terms of that penetration of those items that are new receipts that came in during the quarter. In fact, they were double last year's level. So we do have a very good ability when we see the data, you know, we see data much more quickly, given that our customer is constantly giving us feedback, we're able to react very quickly.
spk27: Right. I think that that's really the difference, you know, and one of our competitive advantages that because every time that someone is wearing clothing from Rent the Runway, they are required to give us data. We're getting data real time. So we knew in Q2 that we were under assorted on the things that she wanted in higher formality. We were able to go to market, react really quickly, use the leverage that we have in terms of our relationships with our brands, our consignment business, to procure way more of that special occasion inventory for Q3. And as Carla said, we doubled receipts of that high formality inventory. So we feel very well assorted right now. And we're encouraged by this really nice mix in the business we're seeing. You know, workwear is double what it was. Our special occasion utilization rates are at some of the highest levels that we've seen, you know, in Rent the Runway and history. We're seeing over 50% of our use case for everyday casual occasions. So it feels really good right now that all three of these components of the business are growing.
spk01: Great. Thank you.
spk05: Our next question is from Ike Burchow with Wells Fargo. Please proceed.
spk17: Yes, hi. This is Kate on for Ike. Thanks for taking our questions. Scarlett, one for you really quickly. I'm not sure I heard it. Can you speak to your net ad expectations into Q4, you know, tied to the current revenue expectations that's given the improvement in 3Q? By my modeling here, it looks like you are expecting them to be down year on year, so wanted to make sure I was thinking about it correctly. And then secondly, pleased to see the improvement on the fulfillment cost expectation for the year. Can you just speak to the contribution from your at-home pickup initiative and drivers of the improvement there, and maybe how we should think about opportunities on that line item looking out to 2023? Thank you.
spk13: Thanks for the question.
spk21: So in terms of Q4 and NetAds, we don't specifically give guidance on NetAds. I encourage you to take a look at Q4 in relation to a more normalized Q3 excluding the exclusive designs. So we said that I've given you the expectation there with revenue coming down a little bit, but you should probably exclude the pilot that I had mentioned to give you a little bit more of a sense of that. And then in terms of Q4 generally, look, you have to recognize that, you know, some of the issues that we suffered in Q2, you know, have impacted Q4 as well, right? So we're entering Q4, you know, with kind of that negative impact from the price increase that we just talked about. It takes some time to build back these subs. So, you know, we're pleased with the progress that we've seen and, you know, we do think that there's more work to do and we're especially focused on that for next year. And then in terms of anything you wanted to add there, Jen, before I talk about at-home pickup for a moment, or if you want to go there.
spk27: I just think that we have really exciting plans to accelerate our subscriber growth in 2023. In this market, the customer overall is looking for value. And, of course, she comes to Rent the Runway because of the tremendous financial value that we provide, but she also thinks about value on our platform In a few other ways, she thinks about how much fashion am I wearing from rent to runway. She thinks about how easy is it for me to find the fashion that I love. She thinks about how frictionless is the experience of receiving that fashion. And we plan to make significant improvements in all three of these areas next year that we think will provide tremendous value to the customer. We're reinvesting what we said in last call as part of why we did the restructuring is so that we can reinvest into customer value. And you're going to see us do that in a big way in 2023 to the kind of hopeful improvement of our conversion and our loyalty rate.
spk21: And then, Scarlett, maybe we could talk about that. One last thing on Q4. I mentioned this on the call, but obviously, you know, we typically do see seasonality in Q4 that you should be aware of. I think you were saying at the beginning of the call that you thought our our sub count would be down year over year. So I would encourage you to take a look at that again. That should not be the case. And then in terms of at-home data, maybe we'll spend a little bit talking about that. Okay, so a few things that I wanted to highlight there. So yes, we saw really nice fulfillment costs in this quarter. You see that it was at 30% versus 33% a year ago. A few contributors there, one of them being the revenue per order being quite strong, and then another, as I alluded on the call, we've done a really nice job continuing to work on transportation, diversifying our carriers, actually renegotiating some of our rates as well, which has been beneficial in this environment for us to be able to deliver on that. But of course, at-home pickup, as we've talked about all year, is also a contributor. So we are now live in 32 markets. We feel that... We've delivered something that is resonating with the customers. 55% of our subscribers have access now. That's ahead of our target. We thought we would be there at the end of the year, and we continue to plan to increase that coverage. For me, the most important determinant of how she's feeling about it is the fact that the adoption has grown significantly. So in the codes that we offer this, we are seeing the adoption go from 29% to 39% during Q3. This really is what we think highlights the customer values, the service, and finds it convenient to use. And, of course, you know, we've said along the way, you know, it's also great for us from a cost standpoint. So the economics of at-home pickup for us are as good, if not better, than our other return methods, you know, in those markets where we offer this convenience to our customers. And it's just because, as we've talked about, it's really a consolidation place. So we're excited about the fact that we're doing a lot more at-home pickup. We've seen the percentage of total inbound shipments via at-home pickups has more than doubled from Q1 to Q3 of this year. So you can see it is a really meaningful contributor. We're going to continue to do more. Maybe, Jen, you want to talk a little bit about LiveSwap and some of the things we're doing there, which I don't think we've talked about before.
spk27: Yeah, so part of how this company operates is we launch something and then we continue to iterate it and make it better. So a perfect example of this is at-home pickup. We were seeing really nice adoption of at-home pickup in the markets that we're in. Again, a launch having 39% adoption a short time after it's launched is remarkable. So what we did is we innovated on this and we now offer something that we call internally live swap. And what that means is that customers can return their order at the exact same time that they're receiving their next order. So it reduces what used to be two transportation legs into one. So we used to have someone come to the home to pick up the order from the customer that's at-home pickup, and then a separate courier or delivery service would come to deliver that order. We've consolidated this down to one pickup, which of course saves Rent the Runway money, but it's also great for the customer because it reduces the friction from the experience. And we're seeing that for the, we're seeing that 30% of our at-home pickups are live flop now.
spk21: And of course, it's great for the environment as well.
spk27: Thanks very much. So we continue into next year. We're going to continue to build upon the success that we've seen this year in the transportation innovation.
spk05: Our next question is from Ashley Huggins with Jefferies. Please proceed.
spk16: Hi, thanks for taking our question. Just a quick one for us. You mentioned customers are trading down to lower subscription tiers. We were wondering if you're seeing any trade down to lower-priced items or lower-priced rentals within the reserve business. Thanks.
spk21: Ashley, we're not seeing that kind of trade down in the other businesses. Maybe just in terms of the mix shift, I just want to maybe spend a moment on that. We're excited by the fact that we have many offerings for our customers, many different ways for her to come in. What's most important for us is that she comes in and we've seen the behavior when she comes in. We've seen, as you've already seen, what we've talked about in terms of add-ons, pods, the fact that she may move up. So the most important thing for us is for her to come in to Rent the Runway. And then it's our job to then serve her and remind her of all the things that she can do. So we're excited about, you know, in this environment, the fact that we have an offering that is resonating with customers, you know, and that we've seen different types of customers coming in.
spk27: Yeah, it's exactly what we would expect in this environment. So because we have a lower price program that enlarges the TAM for us, we have an acquisition funnel now where, She can come into reserve and then join a subscription program. She can come into lower price and then upgrade over time. And we've really factored this kind of mix shift that we would expect in this kind of macro environment into our guidance. And as a reminder, all of our subscription programs have similar margin profiles. So we're kind of agnostic into where they come into our business and it's our job to kind of just keep them within the business. And we've seen and shared that we've done a better job at we've seen higher loyalty from our customers now. We've done a better job, you know, in 2022 than we saw before the pandemic. And that was, of course, in 2019, we're talking about an environment where the macro was extremely positive. So the fact that loyalty is better than what we were seeing then, I think is really a testament to the value that we've been able to deliver to the customer.
spk15: Great. Thanks so much.
spk05: Our final question is from Andrew Boone with JMP Securities. Please proceed.
spk39: Thanks so much for fitting me in. Two, please. It sounds like next year will be more focused in terms of conversion. Jen, can you just talk about what you're most excited for? I think fit was a key component earlier this year. You guys are adding Elasticsearch. What are you most excited for in terms of driving conversion on the platform as we think about 23? And then Scarlett, I think historically we've talked about 4Q having COVID baked into the guide. Is there any way to think about how you guys are thinking about COVID for 4Q and maybe quantify any impact as that may be lesser than what we previously thought? Thanks so much.
spk27: Yeah, so what I'm personally most excited by is what we are going to be doing related to search and discovery. So it's really hard. to shop on any e-commerce site because you have the endless aisle. And that is true of Rent the Runway as well. We have millions of products on Rent the Runway and right now we offer a traditional search and filtering experience. What is gonna be different next year and what we've built the foundation for this year is we've talked a lot about the fact that we have a really unique data set. Well in the past we were using this really unique data set across things like manufacturing our explicit designs and we use our unique data to determine what we should buy in the first place. But we had never really connected that data into the search and filter experience. And so you're going to see us really transform the site experience next year to provide way more delightful ways for customers to engage with our product, more intuitive ways to search and filter, more emotional and surprising ways. We feel like because you don't have to buy anything on our platform, we can own fashion emotion. You don't have to have a rational reason for why you're going to wear something from Run to Runway. That searching our sites could actually be more fun and more engaging. So we've built all of the foundation to be able to very quickly iterate on that. And that's the second point I would say, that part of the foundation that we built this year isn't just kind of the connection of the pipe, but it's also building out the resiliency of our platform so that we can continuously experiment and iterate. Because though we have grand plans for search and discovery, we're probably going to run dozens and dozens of tests. And so that's an area where I'm extremely excited. I also am really excited to just increase the speed of our site. Site speed is an area where I think we lag some of our competitors. We know that there is a direct correlation between site speed and conversion, and because of all the infrastructure work we've done this year on technology, we're gonna be able to make really nice advances in site speed next year, which we think will have a, we believe will have a nice correlation to increased conversion.
spk21: And Andrew, thank you for the question on Q4 and COVID impact. Obviously, last time I did say that we were assuming some impact from the COVID variant. I don't specifically have something modeled this time in Q4 for COVID variant. Obviously, we're still in an uncertain environment. And frankly, at this point last year, we had no idea the impact that Omicron would have on events, on people going into offices. So that variant was very different than ones we've seen before. I feel good about the guidance that we're putting out there, and I kind of remind you of the seasonality and the macro environment, but I have not specifically modeled anything related to COVID into Q4.
spk34: Thank you so much.
spk05: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.
spk07: Thanks for joining us today.
spk27: We're really excited about not only our results this quarter, but our plans to accelerate our path to profitability, to deliver way more to our customers, and the long runway that we have for growth ahead of us. So we look forward to continuing to update you on our progress on our Q4 2022 call. And thanks again for joining us.
spk05: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. Thank you. Thank you.
spk12: you Thank you. Thank you. Thank you. Thank you. Bye. Thank you.
spk05: Welcome to Rent the Runway's third quarter 2022 earnings results conference 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Rent the Runway's CEO and co-founder, Jennifer Hyman.
spk27: I wanted to take a moment before we begin today's earnings call to introduce our new head of investor relations, Jackie Blatt. Jackie has been at Rent the Runway for over seven years, first within our finance department and for the last four years as my chief of staff. As a result, she knows an enormous amount about Rent the Runway. And I'm personally very excited for her to build strong relationships with all of our current and future investors. Here's Jackie.
spk06: Thanks, Jen. Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's third quarter 2022 results. Joining me today to discuss our results for the quarter ended October 31st, 2022, our CEO and co-founder, Jennifer Hyman, and Chief Financial Officer, Scarlett O'Sullivan. Before we begin, we would 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 filings of the SEC, including our Form 10-Q that will be 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 will 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 presentation posted on our investor website and in our SEC filings. And with that, I'll turn it back to Jen Hyman, co-founder and CEO of ResRMI. Thanks, Jackie.
spk27: And thank you, everyone, for joining our earnings call today. We are very proud of our strong financial performance in the third quarter of 2022 as we beat both top and bottom lines of our guidance. We posted record quarterly revenue of $77.4 million, demonstrating strong 31% year-over-year revenue growth. We have seen an improving trend in subscriber acquisition, pause, and retention rates since the end of Q2. as our Q3 ending active subscriber count grew 8% quarter over quarter. Despite the uncertain consumer environment, this tells us that our offering is still resonating with our target consumer. This quarter, we delivered a gross margin above 40% for the second quarter in a row. We also posted a very strong adjusted EBITDA margin of 8.5%, our second consecutive quarter of positive adjusted EBITDA. feeding our Q3 guidance, and demonstrating adjusted EBITDA profitability significantly ahead of the timeline we shared at IPO. In the third quarter of 2022, we largely completed our restructuring plan to reduce costs, streamline our organizational structure, and drive operational efficiency, which was previously announced in September. As a reminder, the restructuring had three main objectives. First, to transform the cash flow profile of our business. At approximately $400 million in revenue, we expect to be able to reduce annual cash burns before interest expense to approximately $30 million. Second, to accelerate our path to break even on adjusted EBITDA after taking into account product depreciation, which we continue to expect to achieve in the near term. Finally, and perhaps most importantly, to allow us to reinvest into delivering value to our customers. The brands we offer are unmatched by other fashion rental companies, and our cost actions allow us to deliver even more Rent the Runway to customers. Posting growth in our active subscriber count this quarter in a tough macro environment is a step in the right direction, but we're not satisfied. We're encouraged by recent performance trends, as this Cyber Monday marked our second highest subscriber acquisition day in company history. As I'll outline, we intend to further accelerate growth. Our plans for 2023 are bold and focused on providing our customers with even more reasons to love their Rent the Runway subscription. I'm confident we will look back on 2023 as a year where we gave our customers more value, more choice, and a better experience overall. Before I discuss where we're going in more detail, I want to take a step back and acknowledge how far we've come. I founded Rent the Runway over 13 years ago, and in this time, we created the market for fashion rental, where there was none before, and have driven broad acceptance of secondhand apparel. In fact, our unaided awareness as a clothing rental service is 21%. In other words, 21% of women in our target demographics When asked to name a clothing rental service, say Rent the Runway. I'm really proud of that. I've never felt more confident in our opportunity to thrive and deliver tangible value to our customers, both because of what we've accomplished over the past few years and because of the plans we have for 2023 and beyond. Rent the Runway is not only already a larger business in 2022 than we were in 2019, but we are also fundamentally a stronger business in three key ways. First, we've built a more powerful revenue platform. Second, we've transformed the cash needs of the business by innovating the way we acquire the fashion we rent. And third, we've dramatically improved our underlying cost structure. Now I'll discuss how each of these levers makes us stronger today than three years ago. First, we have strategically built a more powerful revenue platform with multiple engines of growth, subscription, a la cart rental, and resale that help us to capture the opportunity ahead of us and a large team of customers who come to us for diverse reasons in different life stages. We're the only platform to offer all three of these revenue engines in one place. In 2019, resale was only available to our subscribers. And now anyone can buy the fashion we have on our site. In addition, we've doubled the penetration of high margin add-on revenue since 2019 amongst our subscribers by giving them the ability to personalize their program. In the first nine months of fiscal 2022, nearly 30% of our subscribers have paid for at least one add-on slot. Our customer base is more diverse than ever before. Since 2019, we've seen a 14-point increase in the geographic diversification of our subscriber base away from our top five MSAs. And they use Rent the Runway across more use cases, broadening our utility in their lives. In 2019, customers used their subscription for work and special occasions 55% of the time. Today, they use us for casual everyday life 55% of the time. This means she's renting items like denim, sweaters, winter coats and handbags from us. Things that keep subscribers sticky in this program, even when they don't have special events. That said, we're thrilled by the success of special occasion wear and workwear on our platform this year. We have seen and are continuing to see near record highs in terms of special occasion utilization, as well as nearly double the workwear demand in 2022 compared to last year. and we still believe there is opportunity here. Second, it's hard to overstate how much we've transformed how we acquire the fashion our customers love and how this has changed the cash needs of our business. In fiscal 2022, share by RTR and exclusive design are expected to together comprise around 60% of our product acquisition versus 26% in 2019. In 2019, we spent $118 million on upfront purchases of rental products compared to our estimate of approximately $60 million this year, despite being a larger business. Further, we bear considerably less risk as 30% of our inventory is procured on consignment. Finally, we've made significant advances in using our customer data and brand relationships to manufacture another 30% of inventory at significantly lower than wholesale costs via our exclusive designs. These designs are desired by our customers and as Scarlett will discuss later on the call, show early signs of being sought after by other retailers. Over these three years, we believe we've also become an even more important partner to our brands who value us for customer acquisition and data insights. In short, we believe our inventory leads the market in terms of quality and provides us with an enduring cost advantage. The third key transformation to our business since 2019 is our vastly improved cost structure and margin profile. The changes we made to our subscription program since 2020 have resulted in a 16 point reduction in fulfillment as a percent of revenue, which has decreased from 46% in 19 to 30% in Q3 2022. As a result, we've doubled our gross margins since 2019 to 41% in Q3 2022. Moreover, we restructured our fixed cost base, allowing us to significantly improve the overall profitability of the business. In summary, these major changes to our business model over the past three years have a quantifiable and meaningful impact. The fact that our customers are more diverse and are using us for a wider variety of use cases means they have higher retention and stick with us longer, resulting in a long tail of loyal, long-term customers. Our improvements to fulfillment and product acquisition costs mean we have gross margins after fulfillment costs that are better than many traditional retailers and online peers. All in, as previously shared, at around $400 million in revenue, we expect to reduce annual cash burn before interest expense to approximately $30 million in the near term. Shifting to this year, we are proud to have laid three primary foundations in 2022 that we believe will set us up for an exciting path forward in the next year. The first is our Customer Experience Foundation. Our conversion and loyalty, and thus our growth, our reliance on women seamlessly browsing, finding, and receiving inventory they love. Over the last 13 years, we believe we've collected more unique product metadata than many other retailers. Data on everything from fit to quality, customer feedback and reviews, attributes, garment longevity, styles, sizing, occasions, and the list goes on. Despite amassing this incredibly rich inventory database as one of our biggest competitive advantages, Our technology is just now beginning to connect our data mode into the customer experience. This year, we completed key foundational work to connect our proprietary inventory data system into our on-site search and discovery experiences. As a result of this, we expect that we will be able to significantly expand the way our customers are able to browse our site next year. In Q3, we also launched Elasticsearch, a third-party industry leader in enterprise search technology, which coupled with our enhanced product catalog is expected to provide a much richer search experience to our customers. Second is our technology foundation. We made improvements across our tech stack in 2022 in order to enable greater scale, enhanced resiliency, and faster site speed. This year, we completed our migration to the cloud, an important milestone which we think will be key to unlocking even better resiliency, performance, and reliability, increased developer velocity, as well as the ability to scale more efficiently with subscriber growth. Next year, we plan to build upon this work to improve our site speed even more, which we believe will help us improve convergence. Lastly, in 2022, we solidified our fashion foundation by expanding our exclusive design capabilities and launching our first celebrity collection. Throughout 2022, we co-created exclusive designs with a total of 18 brand partners, half of which were new to the program. We have increased the number of factories we work with, which has enabled us to manufacture more categories of clothing. For example, as a result of this diversification in our production capabilities, for the first time, our exclusive design channel is set up to manufacture black tie and evening wear, two of the most expensive categories we procure, where the relative cost savings versus wholesale are significant. This is an important lever as we continue to reduce our upfront cost per unit. Most recently, this November, we launched our first celebrity collection with Ashley Park, the co-star of Netflix's Emily in Paris. Celebrity collections enable us to develop fashion that our customers love while simultaneously providing built-in marketing as a result of the brand heat and cultural relevance of the personality. Ashley Park has a social following of over 2.4 million across her platform and has been actively engaged in organically promoting her collection and Rent the Runway. To date, around the launch of our capsule selection with Ashley, we have been able to leverage her media buzz for over one billion earned media impressions and counting. Last call, We spoke about how even just small improvements in conversion and retention, like the ones I just discussed, can have a substantial impact on growth and are within our control. We think that providing more value and a better user experience to our customers are key drivers of influencing these metrics. The purpose of our key 2022 investments is to deliver more to the customer in 2023 and to iterate quickly to accelerate growth. We will share more detailed plans on our Q4 call, but we believe 2023 will be a transformative year for Rent the Runway. Our plans are informed by a deep analysis of customer data, as well as by constant experimentation and testing. Our customers can expect to see significant improvements in plan design, site experience, and in the clothing they love. In a tough macro environment, with inflation and price consciousness top of mind for many consumers, Rent the Runway plans to lead by offering more value and more fashion to our customers. As our customers benefit, so too should our brand partners. We expect these changes to provide lasting benefits for growth well past 2023. With that, I'll turn it over to Scarlett.
spk20: Thanks, Jen, and thanks again, everyone, for joining us.
spk21: I will provide an overview of our third quarter results for fiscal 22, and we'll end with guidance for the fourth quarter and full year. In Q3, we generated record revenue of $77.4 million, up 31% year-over-year. Ending active subscribers increased 15% year-over-year to 134,000, up 8% quarter-over-quarter. Total subscribers increased 17% year-over-year to 176,000 subs, and up 2% quarter-over-quarter. As we pointed out last quarter, the macroeconomic environment remains tough and has had an impact on our business. Our active subscriber growth this quarter versus Q2 reflects two key factors. First, our acquisitions improved in Q3 versus a seasonally weaker Q2. Second, and with the benefit of more data from Q3, we believe that the reaction by customers to our April price increase was a significant contributor to our elevated levels of churn and pause activity in Q2. As customers have adjusted, we have seen reduced rates of churn and pause in Q3. We also believe that this affected our Q2 acquisitions to some extent. In Q3, we've also seen a slightly higher proportion of new subscribers going into our lower price program, which we factored into our expectations for Q4. As Jen mentioned, we have plans for next year that are designed to accelerate subscriber growth. Rent the Runway has solid site traffic that we believe we can do more to monetize, and that's why we're focused on strategies that drive conversion and loyalty. Our strong revenue beat versus our guidance was primarily due to strength in ARPU, driven by add-on spots, and solid other revenue performance. 28% of active subs paid for one or more add-ons in the quarter. We are pleased that our subscribers are willing to spend more with us despite the inflationary environment. We are increasing our ARPU estimate for the year to be up approximately 7% for fiscal year 22 versus last year. We also saw healthy performance in our reserve business. which continues to be a strong funnel of new customer growth. Reserve orders from new customers in Q3 were up 27% year-over-year and 46% quarter-over-quarter, with the proportion of high-formality rentals higher than last year and near record highs in terms of utilization. We successfully increased assortment in Q3 real-time to address the increased need for special events preparing us for Q4 and fiscal 23. Other revenue represented 11% of revenue in Q3 versus 8% in Q3 21, and up 83% year over year. We saw a 14% increase in average items bought by subscribers in the quarter versus Q2 22, and a 53% increase versus Q3 21, resulting in 84% of total revenue being generated by subscribers in Q3. Other revenue also included $1.6 million from a pilot to wholesale brand-new exclusive design to a third party, showcasing demand for our products from other retailers and the consumer appeal of our design. We generate strong margins from exclusive design sales, given the low cost of these items. It's too early to say how this pilot will evolve, but we believe it highlights the power of the Rent the Runway data and platform and the monetization opportunities of our product. Our Q2 gross margin of 41% was 7 percentage points higher than prior year. Fulfillment cost as a percentage of revenue came in at 30% versus 33% in Q3-21, primarily due to higher revenue per order. We improved transportation cost per shipment versus Q2-22 by negotiating lower carrier rates and optimizing carrier and ship method mix, including a higher penetration of at-home pickups. We expect higher fulfillment cost for shipment in Q4, as we typically would see seasonally, and now expect fulfillment cost as a percentage of revenue for the full year 22 to be approximately 32%. Total product cost came in at 29% versus 34% last year, with rental product depreciation at 18% of revenue versus 23% in Q3 21, as it was absorbed over a higher revenue base. We now expect gross margin to be up approximately 400 basis points versus full year 21. Q3 adjusted EBITDA continued to be positive and came in significantly ahead of our guidance at $6.6 million versus negative $5.6 million in Q3 last year, representing a positive 8.5% margin and an 18-point improvement versus negative 5.5%, negative 9.5% in Q3 last year. Our total operating expenses, marketing, technology, and G&A, represented 63% of revenue, compared with 101% in Q3-21. Employee expenses in Q3 saw the partial positive impact of the restructuring. We'd largely expect the full impact in Q4 as we still carry approximately $2.4 million of employee expenses in Q3 that will go away by the end of Q4. As expected when we provided guidance last quarter, we saw sales from a new liquidation partnership. Proceeds came in higher than anticipated this quarter, positively impacting the GNA line where we usually recognize the net impact of liquidation sales by approximately $2.5 million this quarter. We partner with a new third-party retailer to broaden our liquidation network and drive additional monetization of our products while giving our rental garments a second life. Overall, the exclusive designs pilot and new liquidation partnership together contributed approximately $4.6 million to adjusted EBITDA. Even without these deals, we have made significant progress driving adjusted EBITDA to be positive, especially for our third quarter, which historically sees lower profitability. Going forward, as you'll hear when we discuss guidance, we expect to continue to generate a strong, positive adjusted EBITDA margin, reflecting the increased profitability of the business and full benefit of the restructuring. We are choosing to be opportunistic and take advantage of the current retail slowdown to buy attractive inventory from our brand partners at discounted prices. This pulls forward some of next year's buy into this year. Our anticipated cash usage now reflects incremental product spend this quarter, As a result, we currently expect our fiscal 22 free cash flow margin to be slightly lower versus last year. A couple of housekeeping items I want to call out for the quarter. The restructuring-related severance charge came in at $2 million in Q3. In addition, we decided not to move forward with a long-term CapEx project in our warehouses as part of our restructuring work, and we recognize a largely non-cash loss of $3.8 million due to the asset impairment. Our Q3 results reflect our improved quarter-over-quarter subscriber trends, and we believe showcase the strength of our offering and how it resonates with customers, even with this macro backdrop. So we're pleased to be raising guidance. We continue to be in an uncertain macro environment, and as we've mentioned, we typically see a higher rate of turn and pause in January due to the seasonality of our business at that time of year. For Q4, we expect revenue of 72 to 74 million dollars. we expect a positive adjusted EBITDA margin of 4 to 5%. In terms of full year, we now expect revenue in the range of $293 to $295 million, representing 45% growth at the midpoint of the range versus full year 2021. Our adjusted EBITDA margin guidance for full year is revised to positive 1%, reflecting our strong Q3 performance our cross-discipline throughout the year, and the post-restructuring employee base by the end of Q4. We've made a few tweaks to our full-year expectations for a few other items, so please refer to the guidance page of our earnings deck on our website. For fiscal 23, we're not providing revenue guidance at this time, but I want to reinforce a few important points. First, as Jen mentioned, we're excited about our plans in fiscal 23 and believe they will be impactful for growth. Second, we are reaffirming the estimated restructuring annual OpEx reduction of $25 to $27 million for next year versus a Q2 22 run rate, which is expected to boost adjusted EBITDA for next year. This means that we anticipate reducing annual cash earn substantially versus this year. This is expected to hold even if revenue growth is lower next year due to macro or other factors. We will provide additional details on our Q4 call. In the medium term, we intend to maintain strict cost discipline and anticipate higher flows through on incremental revenue, generating approximately 30% adjusted EBITDA margin. That represents a 15% margin on adjusted EBITDA, less product depreciation. At that level, we believe we would be free cash flow profitable, fully internally self-funding the business, even at strong growth rates, and we aim to get there with the cash we have on hand. We continue to be intently focused on balancing robust growth with profitability and will seek to strike the right balance to attain both objectives and maximize the long-term value of rent-to-runway. With that, we are happy to open it up for questions.
spk05: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Edward Yerma with Piper Sandler. Please proceed.
spk18: Hi, this is Abby's Maniacs. Thanks for taking our question. Just first of all, in terms of the, you know, favorable terms on getting inventory in this excess inventory environment, can you talk a little bit about that and then you know, the kind of flow through impact on product appreciation going forward. And then on brand seeking, you know, this data and this new, you know, new marketing funnels in the current environment, can you talk about any potential to be, you know, more of a partner with these brands, maybe from an advertising perspective on Rent Runway? Thank you.
spk27: So first I want to address what makes us different than most other retailers and why this environment where there's kind of softness in overall retail is positive for Run the Runway. Most other retailers have to clear through 2022 inventory in 2022 because there won't be any relevance of that inventory on a go-forward basis. We have proven over the past 13 years that there is demand for and we monetize our inventory over multiple years. What the customer cares about is when she comes to Rent the Runway, she wants to wear something new every single time she comes. She doesn't care if that new thing that she's wearing is from last year or from a week ago or from a few years ago. And we keep that inventory in high-quality condition for multiple years. So we can be opportunistic right now in the market, whereas everyone else needs to be promotional. So what we're doing is we are going to our 800 plus brand partners. We are looking at what they have available and we're acquiring inventory at very healthy discounts, pulling forward some of the inventory spend that we would have spent in 2023. Now the other thing that is great about the environment that we're in is the very inventory that is available right now is inventory that is the highest performing inventory on Rent the Runway. So what we're seeing from our brand partners is the most fashionable inventory that isn't selling in stores, the most colorful inventory, the trendiest inventory. And that is exactly what performs the best on Rent the Runway. So not only are we getting inventory at a discount, we're getting the best inventory from some of our best brand partners at that competitive pricing. Of course, this will help to further accelerate upfront cost per unit going down, and that decreases the depreciation expense.
spk21: Abby, what I would say here is, you know, this is part of the overall philosophy, and every year we want to be showing improvement in our upfront cost per unit. You know, the items that we're acquiring is a combination of, you know, our three different methods. So obviously the ones where we own will have a nice impact on product depreciation. Some of them could be for consignment deals, which is also great for us that we can do that even in this environment, and that would show up in the revenue share line.
spk27: And one other point. The 800-plus brands that we work with are luxury or designer brands. So clearly a highly promotional environment like the one that we're in right now is extremely brand dilutive to them. They have a choice. They could either mark their inventory down on sale or on clearance, Or they can work with Rent the Runway often through our consignment channel, which is brand accretive to them. We don't mark down the inventory on our platform. We are displaying the original retail price. And by nature of putting it up on Rent the Runway, they're getting access to new younger customers. So it's really a win-win for the brands of being brand accretive and adding to customer acquisition in an environment where that matters more than ever.
spk18: Thanks, and then maybe just one more. Can you just elaborate maybe a little bit on the wholesale partnership for liquidation, and then will that continue in 4Q, and how should we think about kind of the go-forward benefit to adjusted EBITDA from that? Thanks.
spk27: Yeah, so this pilot is really exciting, and it showcases the consumer appeal and demand for our exclusive design products from other retailers. So as Scarlett mentioned, we already generate strong margins
spk21: from exclusive design sales. That's the exclusive design partnership. Abby, I think you were asking also about the liquidation partnership. We'll talk about both.
spk27: So, you know, we generate strong margins from exclusive designs because of the lower cost of these items. And so for us, it's too early to say how the pilot is going to evolve, but we really believe it highlights the power of the Rent the Runway data and our platform and monetization opportunities of our product. Scarlett, do you want to talk to the partner, the liquidation partner?
spk21: Yeah, so here we're always looking to expand our network of partners. It's great for us to be able to have more partners that we're working with, to be able to give our items a second life and to really create more opportunities for monetization. So we were really excited to see this partnership. It was a pretty significant one. No plans on a go-forward basis just yet, but for both of these, I think they really showcase the power of our data, the appeal of our designs, as well as the appeal of our items that we believe are at the end of their rental life and yet still have another life somewhere else.
spk02: Great. Thank you.
spk05: Our next question is from Michael Benetti with Credit Suisse. Please proceed. Hey, guys.
spk35: Thanks for taking our questions here. You mentioned a little bit of hindsight here, diagnostics on the price increase in April causing a little bit of churn in second quarter that you think improved in third quarter. I know a lot of the vendors you deal with are still seeing some inflation today. Do you anticipate needing to take price next year? And if so, maybe any learnings you can point to as you look back at April to help you navigate that if the consumer is still in value-seeking mode with their household budgets?
spk27: Yeah, so first, you know, on our Q2 call, we were going through some of the various reasons we thought why there might have been softness. And with the benefit of more data in Q3, we think that the reaction that our customers had to our April price increase was a significant contributor to the elevated levels of churn and pause activity that we saw in Q2. And the good news is, as customers have adjusted, we've seen increased acquisition, reduced rates of churn, and reduced rates of pause activity in this past quarter, Q3, compared to Q2. So the price increase, we believe, was the right thing to do at the time. We've been very focused on driving profitability, as you know. And there was a lot going on in the macro environment. Our input costs were getting higher. And we've seen a significant positive impact of that price increase and that revenue per order has gone up. We've seen it reflected in our profitability and our gross margins. Having said that, we take our obligation to provide value to our customers very seriously. And our focus next year is all about How do we deliver even more value to the customer? We're very excited about the plans that we have in place.
spk35: I guess maybe I can follow up one on marketing. Could you speak a little bit to the marketing mix? Any changes you're seeing in the different channels or changes in the returns you're seeing in generating the different channels? And maybe just any update on trends and what you're seeing in organic versus inorganic trends on the marketing side as we think had to help us for next year.
spk27: Yeah, so in terms of marketing, like no real news. Our CAC is stable and attractive in 2022. It's stable to last year. We believe that the traffic that we have on Red Runway, we are happy with the level of traffic that we have. And our focus is not on using marketing dollars to drive more traffic. All of our focus is on doing a better job with the traffic that we have in terms of our conversion and our loyalty. So you're going to see us focus inherently on the customer experience and customer value. You're not going to see marketing costs go up or us focusing on traffic because we believe that the level of traffic we have right now is in a good spot.
spk21: And Michael, just to add to that, there's really not been much change in terms of the channels that we use and the way that we do marketing. So that's stayed pretty consistent. Obviously, it's helpful when we do celebrity deals, but we also have the amplification of celebrities and them being out there talking about us, but nothing in terms of our own internal efforts and the channels.
spk27: I think that there's general tailwinds this year that we're seeing across culture and across the media related to rental overall. I mean, an example from this week alone, we saw that Princess Kate rented a dress last week. If you would have told anyone 13 years ago when we launched Rent the Runway and people thought renting was disgusting and not chic and not something that anyone would talk about, that Princess Kate, that royalty would be renting and talking about it publicly, that's really due to us you know, starting this movement globally, making rental something that's normalized, aspirational, and we're seeing that more and more in culture where the tailwinds, I think, of this becoming part of the consideration set are really improving. And we see that across the board every day in the diversification of our customer base and her considering us for more of the use cases in her life.
spk33: Okay, thanks a lot. Appreciate the help.
spk05: Our next question is from Eric Sheridan with Goldman Sachs. Please proceed.
spk37: Thanks so much. Maybe two questions if I can. First, in terms of what you're seeing on the gross addition side, is there any color you're able to give us on how much of that is people that are finding the brand for the first time and being driven by elements of either aided or unaided awareness on the platform driving gross additions versus your ability to go out and mine products the database of former users, former subscribers, continuing to remarket and remind that base of potential former users to drive incremental gross addition growth. That'd be number one. And then number two, you've started to see the beginning of sort of a return to work dynamic that's lagged sort of the reopening dynamic. How should we be thinking about what you're seeing from your subscribers in terms of return to work and how that might be a tailwind for the business in 2023? Thanks so much.
spk27: Yeah, so starting with the second question for, you know, we are really pleased with the performance of Workwear, which has doubled for us year over year in 2022. So we're seeing that women are more solidly in the office a few days a week, and this performance is in a world of hybrid work. We've also done a great job at shifting our inventory mix to reflect what our customers want. So it's our job to highlight all of the use cases to customers that she's able to use her subscription for, and we've done a great job at that, given that work wear is double last year, but at the same time, she's using 55% of her basket for everyday casual occasions. We're seeing that even in 2019, if you think about a world where she was in the office five days a week, She was using her subscription at the time, only around a quarter of the time, to go to work. Now, in that world where you're going into the office five days a week, making an investment into Workwear makes a lot more sense than a world where you don't know how much you're going to be in the office this month, next month. So we have a big opportunity to use the hybrid environment that we're in as a lever for acquisition. In terms of the first question of where are the customers coming from, are they new, are they from our database, we've actually seen straight across the board. So we're seeing in Q3 we saw a nice rejoin rate of folks who had previously churned who came back. We saw a good amount of new customers coming to Rent the Runway. We saw a really nice increase to our pause, people unpausing their subscriptions. So it was really a combination of acquisition from all three of these sources.
spk36: Great. Thanks so much.
spk05: Our next question is from Rick Patel with Raymond James. Please proceed.
spk32: Thank you. Good afternoon. Can you talk about opportunities to lower product costs outside of the ongoing change in the product acquisition model? I'm curious if you see opportunity to realize better costing because of elevated inventories across the apparel industry. and perhaps some brands trying to right-size a product that they might be sitting on.
spk27: As we just talked about, we certainly think that this environment is right for us to be lowering our upfront product costs by working very closely with the 800 brands that we work with to acquire the very best inventory from them at deeply discounted rates. We're seeing higher desire amongst our brands to work with us both on our consignment business, Share by RTR, and exclusive designs. And as you've seen, Nick's shift towards exclusive designs and Share by RTR has been a major lever in helping us reduce the upfront cost of inventory. You know, I'll remind everyone again that our gross margin of 41% is inclusive of all of our fulfillment expenses and our inventory expenses. And that 41% gross margin is significantly or slightly better than many of our retail peers already. So the reduction in our inventory cost that we expect over the next few years will only help to improve a gross margin that we already think is quite positive.
spk21: Yeah, and Rick, I would just say that, you know, what John was talking about in the first part of the answer to the question is not hypothetical, right? We are, in fact, pulling forward some of the spend from next year. We are, you know, in market right now getting some attractive yields, so we're excited about what that does for our numbers.
spk32: And you talked about the progress of exclusive designs and the product being sought after by retailers. You know, can you provide some additional color on what you're doing to capture this demand and to what extent this can be a needle mover as we think about 23?
spk27: Right now it's just a pilot and we're excited by that pilot. We think that it's really interesting that another multi-brand retailer finds our exclusive designs to be so attractive that it's something that they would buy from us wholesale. One of the things that I think it showcases about our business is that because of the data that we get, which is incredibly unique. Remember, our data isn't just about what customers are doing on our site. Our data is about how they actually wear the item. It's about fit. It's about product quality. It's about manufacturing, how items should be manufactured. And we've seen that when we use data to manufacture products, they become best sellers, best renters on our platform. So I think other retailers have recognized that our data provides a significant advantage and that these could be blockbuster styles on their sites as well and have approached us. Last week, as an example, in our recent celebrity collection that we did with Ashley Park, all eight pieces from that collection were in the top 5% of styles rented by volume on our platform. And we have... tens of thousands of styles on our platform. So this is quite a big feat that the styles that we manufactured with our data. So I don't know what's gonna happen related to us selling this to more retailers over time, but we will certainly kind of inform you more as this pilot progresses and we feel very encouraged by the reception that we're getting.
spk21: And more directly, you know, we're not giving guidance at this point on 23, but I'm not building anything in my expectation at this moment.
spk31: Thank you very much.
spk05: Our next question is from Lauren Shank with Morgan Stanley. Please proceed.
spk42: Hey, you've got Nathan Suther on for Lauren Shank. Congrats on the quarter. You know, kind of going back to 2Q, there was some abnormal seasonality. You know, we've talked about that at least a little bit. to the pricing change. Can you talk about the inter-quarter trends in 3Q and was that seasonality much different from last year or pre-COVID? And then a second question, in terms of this special occasion mix in 3Q, how close are you to closing that gap? Is it fully closed? And then kind of more broadly, what's your ability in terms of lead time to adjust that assortment across different chains? Thanks.
spk27: So Q3 is always seasonally better for us than Q2, and it was this year as well. But we did see in Q2, because of the price increase, we saw that turn rates were higher than we would have anticipated, pause activity was higher than we would have anticipated, acquisition was slightly lower than we would have anticipated. And all three of those metrics, which are the most important KPIs in our business, have improved. quarter over quarter and have delivered a quarter where we were able to grow sequentially. So we're seeing that the customer has really adjusted and the initial, let's say, sticker shock she had to those increases in price, she's now feels comfortable and we've seen reductions in return, reductions in her pause activity and increases in acquisition.
spk21: In terms of the second question, I think you're referring to the fact that we had mentioned that there might have been some gaps in our assortment related to high formality.
spk19: We have a good ability to react.
spk21: We were able to quickly shift some of our buys and our chases during the quarter, so we were able to be able to really address the customer demand for these types of items. We acquired quite a bit more in terms of high formality items starting in Q3. We've seen a significant improvement in terms of that penetration of those items that are new receipts that came in during the quarter. In fact, they were double last year's level. So we do have a very good ability when we see the data, you know, we see data much more quickly given that our customer is constantly giving us feedback. We're able to react very quickly.
spk27: Right. I think that that's really the difference, you know, and one of our competitive advantages that because every time that someone is wearing clothing from Rent the Runway, they are required to give us data. We're getting data real time. So we knew in Q2 that we were under assorted on the things that she wanted in higher formality. We were able to go to market, react really quickly, use the leverage that we have in terms of our relationships with our brands, our consignment business, to procure way more of that special occasion inventory for Q3. And as Carla said, we doubled receipts of that high formality inventory. So we feel very well assorted right now. And we're encouraged by this really nice mix in the business we're seeing. You know, workwear is double what it was. Our special occasion utilization rates are at some of the highest levels that we've seen, you know, in Rent the Runway and history. We're seeing over 50% of our use case for everyday casual occasions. So it feels really good right now that all three of these components of the business are growing.
spk01: Great. Thank you.
spk05: Our next question is from Ike Burchow with Wells Fargo. Please proceed.
spk17: Yes, hi. This is Kate on for Ike. Thanks for taking our questions. Scarlett, one for you really quickly. I'm not sure I heard it. Can you speak to your net ad expectations into Q4, you know, tied to the current revenue expectations that's given the improvement in 3Q? By my modeling here, it looks like you are expecting them to be down year on year, so wanted to make sure I was thinking about it correctly. And then secondly, pleased to see the improvement on the fulfillment cost expectation for the year. Can you just speak to the contribution from your at-home pickup initiative and drivers of the improvement there, and maybe how we should think about opportunities on that line item looking out to 2023? Thank you.
spk13: Thanks for the question.
spk21: So in terms of Q4 and NetAds, we don't specifically give guidance on NetAds. I encourage you to take a look at Q4 in relation to a more normalized Q3 excluding the exclusive designs. So we said that I've given you the expectation there with revenue coming down a little bit, but you should probably exclude the pilot that I had mentioned to give you a little bit more of a sense of that. And then in terms of Q4 generally, look, you have to recognize that, you know, some of the issues that we suffered in Q2, you know, have impacted Q4 as well, right? So we're entering Q4, you know, with kind of that negative impact from the price increase that we just talked about. It takes some time to build back these subs. So, you know, we're pleased with the progress that we've seen and, you know, we do think that there's more work to do and we're especially focused on that for next year. And then in terms of anything you wanted to add there, Jen, before I talk about at-home pickup for a moment, or if you want to go there.
spk27: I just think that we have really exciting plans to accelerate our subscriber growth in 2023. In this market, the customer overall is looking for value. And of course, she comes to Rent the Runway because of the tremendous financial value that we provide. But she also thinks about value on our platform in in a few other ways. She thinks about how much fashion am I wearing from rent to runway. She thinks about how easy is it for me to find the fashion that I love. She thinks about how a frictionless is the experience of receiving that fashion. And we plan to make significant improvements in all three of these areas next year that we think will provide tremendous value to the customer. We're reinvesting, you know, what we said in last call is part of why we did the restructuring is so that we can reinvest into customer value. And you're going to see us do that in a big way in 2023 to the kind of hopeful improvement of our conversion and our loyalty rate.
spk21: And then Scarlett, maybe we could talk about that. One last thing on Q4. I mentioned this on the call, but obviously, you know, we typically do see seasonality in Q4 that you should be aware of. I think you were saying at the beginning of the call that you thought our our sub count would be down year over year. So I would encourage you to take a look at that again. That should not be the case. And then in terms of at-home data, maybe we'll spend a moment just talking about that. Okay, so a few things that I wanted to highlight there. So yes, we saw really nice fulfillment costs in this quarter. You see that it was at 30% versus 33% a year ago. A few contributors there, you know, one of them being the revenue forwarder being quite strong. And then another, you know, as I alluded on the call, we've done a really nice job continuing to work on transportation, diversifying our carriers, actually renegotiating some of our rates as well, which has been beneficial in this environment for us to be able to deliver on that. But of course, you know, at-home pickup, as we've talked about all year, is also a contributor. So we are now live in 32 markets. We feel that... You know, we've delivered, you know, something that is resonating with the customers. You know, 55% of our subscribers have access now. That's ahead of our target. We thought we would be there, you know, at the end of the year, and we continue to plan to increase that coverage. You know, for me, the most important determinant of, you know, how she's feeling about it is the fact that the adoption has grown significantly. So in the codes that we offer this, we are seeing the adoption go from 29% to 39% during Q3. You know, this really is what we think highlights the customer values, the service, and finds it convenient to use. And of course, you know, we've said along the way, you know, it's also great for us from a cost standpoint. So the economics of at-home pickup for us are as good, if not better, than our other return methods, you know, in those markets where we offer this convenience to our customers. And it's just because, as we've talked about, it's really a consolidation place. So we're excited about the fact that we're doing a lot more at-home pickup. We've seen the percentage of total inbound shipments via at-home pickup has more than doubled from Q1 to Q3 of this year. So you can see it is a really meaningful contributor. We're going to continue to do more. Maybe, Jen, you want to talk a little bit about LiveSwap and some of the things we're doing there, which I don't think we've talked about before.
spk27: Yeah, so part of how this company operates is we launch something and then we continue to iterate it and make it better. So a perfect example of this is at-home pickup. We were seeing really nice adoption of at-home pickup in the markets that we're in. Again, a launch having 39% adoption a short time after it's launched is remarkable. So what we did is we innovated on this and we now offer something that we call internally live swap. And what that means is that customers can return their order at the exact same time that they're receiving their next order. So it reduces what used to be two transportation legs into one. So we used to have someone come to the home to pick up the order from the customer that's at-home pickup, and then a separate courier or delivery service would come to deliver that order. We've consolidated this down to one pickup, which of course saves Rent the Runway money, but it's also great for the customer because it reduces the friction from the experience. And we're seeing that for the, we're seeing that 30% of our at-home pickups are live flop now.
spk21: And of course, it's great for the environment as well. Thanks very much.
spk27: So we continue into next year. We're going to continue to build upon the success that we've seen this year in the transportation innovation.
spk05: Our next question is from Ashley Huggins with Jefferies. Please proceed.
spk16: Hi, thanks for taking our question. Just a quick one for us. You mentioned customers are trading down to lower subscription tiers. We were wondering if you're seeing any trade down to lower priced items or lower priced rentals within the reserve business? Thanks.
spk21: Ashley, we're not seeing that kind of trade down in the other businesses. Maybe just in terms of the mix shift, I just want to maybe spend a moment on that. We're excited by the fact that we have many offerings for our customers, many different ways for her to come in. What's most important for us is that she comes in and we've seen the behavior when she comes in. We've seen, as you've already seen, what we've talked about in terms of add-ons, pods, the fact that she may move up. So the most important thing for us is for her to come in to Rent the Runway. And then it's our job to then serve her and remind her of all the things that she can do. So we're excited about, you know, in this environment, the fact that we have an offering that is resonating with customers, you know, and that we've seen different types of customers coming in.
spk27: Yeah, it's exactly what we would expect in this environment. So because we have a lower price program that enlarges the TAM for us, we have an acquisition funnel now where, She can come into reserve and then join a subscription program. She can come into lower price and then upgrade over time. And we've really factored this kind of mix shift that we would expect in this kind of macro environment into our guidance. And as a reminder, all of our subscription programs have similar margin profiles. So we're kind of agnostic into where they come into our business and it's our job to kind of just keep them within the business. And we've seen and shared that we've done a better job at we've seen higher loyalty from our customers now. We've done a better job in 2022 than we saw before the pandemic. And that was, of course, in 2019, we're talking about an environment where the macro was extremely positive. So the fact that loyalty is better than what we were seeing then, I think is really a testament to the value that we've been able to deliver to the customer.
spk15: Great. Thanks so much.
spk05: Our final question is from Andrew Boone with JMP Securities. Please proceed.
spk39: Thanks so much for fitting me in. Two, please. It sounds like next year will be more focused in terms of conversion. Jen, can you just talk about what you're most excited for? I think fit was a key component earlier this year. You guys are adding Elasticsearch. What are you most excited for in terms of driving conversion on the platform as we think about 23? And then Scarlett, I think historically we've talked about 4Q having COVID baked into the guide. Is there any way to think about how you guys are thinking about COVID for 4Q and maybe quantify any impact as that may be lesser than what we previously thought? Thanks so much.
spk27: Yeah, so what I'm personally most excited by is what we are going to be doing related to search and discovery. So it's really hard. to shop on any e-commerce site because you have the endless aisle. And that is true of Rent the Runway as well. We have millions of products on Rent the Runway and right now we offer a traditional search and filtering experience. What is gonna be different next year and what we've built the foundation for this year is we've talked a lot about the fact that we have a really unique data set. Well, in the past, we were using this really unique data set across things like manufacturing our explicit designs and we use our unique data to determine what we should buy in the first place. But we had never really connected that data into the search and filter experience. And so you're going to see us really transform the site experience next year to provide way more delightful ways for customers to engage with our product, more intuitive ways to search and filter, more emotional and surprising ways. We feel like because you don't have to buy anything on our platform, we can own fashion emotion. Like you don't have to have a rational reason for why you're going to wear something from Run to Runway. That searching our sites could actually be more fun and more engaging. So we've built all of the foundation to be able to very quickly iterate on that. And that's the second point I would say, that part of the foundation that we built this year isn't just kind of the connection of the pipe, but it's also building out the resiliency of our platform so that we can continuously experiment and iterate. Because though we have grand plans for search and discovery, we're probably going to run dozens and dozens of tests. And so that's an area where I'm extremely excited. I also am really excited to just increase the speed of our site. Site speed is an area where I think we lag some of our competitors. We know that there is a direct correlation between site speed and conversion. And because of all the infrastructure work we've done this year on technology, we're going to be able to make really nice advances in site speed next year, which we think will have a – we believe will have a nice correlation to increased conversion.
spk21: And Andrew, thank you for the question on Q4 and COVID impact. Obviously, last time I did say that we were assuming some impact from the COVID variant. I don't specifically have something modeled this time in Q4 for COVID variant. Obviously, we're still in an uncertain environment. And frankly, at this point last year, we had no idea the impact that Omicron would have on events, on people going into offices. So that variant was very different than ones we've seen before. I feel good about the guidance that we're putting out there, and I kind of remind you of the seasonality and the macro environment, but I have not specifically modeled anything related to COVID into Q4.
spk34: Thank you so much.
spk05: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.
spk07: Thanks for joining us today.
spk27: We're really excited about not only our results this quarter, but our plans to accelerate our path to profitability, to deliver way more to our customers, and the long runway that we have for growth ahead of us. So we look forward to continuing to update you on our progress on our Q4 2022 call, and thanks again for joining us.
spk05: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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