Rent the Runway, Inc.

Welcome to Rent the Runway's fourth quarter and full year 2022 earnings results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. I would now like to turn the call over to Rent the Runway's Vice President of Investor Relations, Jackie Blatt. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's fourth quarter and full year 2022 results. Joining me today to discuss our results for the quarter and fiscal year ended January 31st, 2023, are CEO and co-founder Jennifer Hyman, Chief Financial Officer Scarlett O'Sullivan, and SVP of FP&A, Sid Thacker. During this call, we will make references to our Q4 2022 earnings presentations. which can be found in the events and presentation section of our investor relations website. 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 with the SEC, including our Form 10-K that will be filed in the next few days. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During this call, we 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 gap to non-gap measures can be found in our press release slide presentation posted on our investor website and in our SAC filing. And with that, I'll turn it over to Jen Hyman, co-founder and CEO of Rent the Runway.

Thanks, Jackie, and thank you, everyone, for joining our earnings call today. I'm really excited for 2023, as I believe it will be a transformative year for Rent the Runway. We have entered a new era for the company where the majority of our internal resources are focused on investments for our customers. As we've shared before, the market for fashion subscription and rental, which we pioneered, is taking off and is expected to see massive growth over the next decade. It's our belief that we have built the brand and infrastructure to capture this opportunity. We have conviction that the way we grow and become a profitable business is by ensuring that we are adding tangible value to our customer experience quarter over quarter. We already kicked off this strategy in early March of this year by changing all our subscription programs to offer more items for the same price with minimal impact to our gross margins anticipated versus fiscal year 22. And the customer response has been incredible. I'm excited to share more throughout this call, but first, let's close out 2022. I'm pleased to report that we had a strong finish to fiscal 2022, and we exceeded guidance on both the top and bottom lines. On our earnings call at the beginning of fiscal 2022, we laid out two key priorities for the year. One, to grow revenues 45% to 50% in fiscal 2022, and two, show progress on our path to profitability. I'm proud to share that we achieved both goals. In fiscal 2022, we grew annual revenue 46% year over year to $296.4 million, which accelerated up from 29% revenue growth in fiscal 2021. We posted three consecutive quarters in our first full year of positive adjusted EBITDA since IPO, generating adjusted EBITDA of $6.7 million for the year. Fiscal 22 was notable for the decisive actions we took to position Rent the Runway as a financially stronger business. We right-sized our fixed cost base, cutting approximately $25 million in fixed operating expenses versus our Q2 2022 run rate. Financial discipline is firmly embedded in our operating culture. We extended our debt maturity and substantially reduced cash interest expense by over $20 million during the next two years. The cumulative impact of the decisions we have made since 2019 is highlighted by our 40% gross margins after fulfillment and product cost that are better than many traditional retailers and online peers on a comparable basis. Equally important is the progress we have demonstrated on product acquisition. We acquired almost 60% of our rental product in full year 22, either on consignment through our share by RTR program or through lower cost exclusive designs. Our product acquisition success provides a powerful competitive advantage for our business. We believe our gross margins are healthy, our cost structure is right sized, and our rental product acquisition is increasingly efficient. Our primary task is to grow. a larger subscriber base at our current margin structure leads to improved free cash flow. The thing we were not satisfied with in fiscal 2022 was our subscriber growth. We ended the year with 127,000 active subscribers. We've mentioned before that we believe the price increase we took in April 2022, though beneficial for revenue and profitability, hurt our subscriber growth, especially given that the price increase did not correspond to meaningful improvements in customer value or experience. We have long-term relationships with our customers via our subscription product, and it's critical that they feel that their experience is always getting better, which is our strategy for 2023 and beyond. As of April 8, 2023, we've already rebounded to an all-time record high of over 141,000 active subscribers. which gives us early signs that our growth strategies, which I will discuss later on this call, in greater detail are working. Before I discuss our plans for fiscal 2023, I want to discuss our path to free cash flow profitability. As the founder of this business, who sees Rent the Runway as my life's work, it's my number one goal to create a self-funding company that generates cash and captures the massive global opportunity for a closet in the cloud. The customer thinks about building her wardrobe in a way that is completely different than just 10 years ago. She's open to secondhand, she's willing to subscribe and rent, and it's our job to capture the growing market we built. The good news is that these goals are consistent. A larger subscriber base at current gross margins and fixed costs should lead to free cash flow profitability. While Scarlett will walk through more details, we are making rapid progress. Our expected free cash flow in fiscal 2023 is at least $42 million better than in fiscal 2022, a reduction in cash consumption of approximately 50%. As we will discuss shortly, with 158,000 average active subscribers, a level consistent with our minimum 25% subscriber growth guidance for this year, we might expect a further $20 million improvement in the cash consumption from our base business. The details of our business can be complicated to understand, so we are providing additional information to help illustrate the important strides we are making towards generating free cash flow. Finally, as Scarlett will outline, we think we are well within reach of an active subscriber base that is able to generate enough cash to sustain itself and begin to contribute towards our growth requirements. It's imperative that we capitalize on the significant growth opportunities that lie ahead of us. let me walk you through how we plan to grow in fiscal 2023 and beyond. Our growth plans revolve around our customers and seeking to improve every facet of their experience with Run the Runway. We believe doing so provides important benefits to retention as well as organic customer acquisition. While you can see in our earnings presentation that we enjoy strong revenue retention, we believe that focusing on customer experience can drive further improvements to retention. About half of the total subscribers who leave us do so within their first 90 days. Improvements to their experience can be powerful drivers of growth. While we aim to retain more of those customers, the benefits go well beyond that. Our longer tenured subscribers leave us at a fraction of the rate of these newer subscribers. Thus, retention improvements would not only add more customers, but also keep them significantly longer. Finally, more satisfied customers are key to driving organic growth for our business. The majority of our historical subscriber acquisitions have been organic, and almost 60% of customers hear about us from someone they know. Our customers have always been our best marketers. New customers will undoubtedly hear about the more positive experience we are trying to create via word of mouth. We started off our year with a bang. by changing all of our subscription programs to include an extra item in every shipment, offering 25% more value for the same price. With this launch, our base program shifted from four items to five items per shipment. So for the substantial majority of subscribers who pay $144 for two shipments per month, they are now receiving 10 items versus eight items previously. The math is simple for customers in our 10-item plan. Each designer item now costs $14. This pricing is meant to go head to head with fast fashion, but of course, we believe Rent the Runway beats fast fashion by offering the quality of real designer fashion, more variety with our hundreds of brands, and constantly rotating styles, and of course, a more sustainable way to get dressed. We had data from years of testing across various economic environments demonstrating The subscription loyalty is directly related to how many items customers wear from us every month. Giving her more items per shipment means there's a higher likelihood more items will fit, she'll wear more items, and her rental behavior will be cemented. Thus far, we've seen exciting results from our extra item launch. A few highlights are active subscriber count has grown to over 141,000 subscribers as of April 8, 2023. the highest number of active subscribers we have ever had. We are seeing significantly higher loyalty improvements amongst our full customer base than we had expected, meaning both completely new customers to Rent the Runway and tenured customers have all been churning less. Former subscribers are rejoining our program. Acquisitions of churners for the month of March were up 24% from levels just prior to launch. our PAWS subscribers have reacted extremely positively. We have seen a several percentage point decline in our PAWS population as a percentage of total subscribers from 26% at the end of fiscal 2022 to 22% as of April 8th, 2023. Here's one great example of how far we've come over the past few years. Following the launch, we've seen some of the highest volumes of units processed in our DSCs. since the fall and winter of 2019. However, our ops productivity rates so far this year are nearly double what they were three years ago, meaning to process the same volume, we need 43% fewer associates. Looking ahead for the rest of 2023, to drive improvements in loyalty, we are investing deeply into our customer experience. This makes sense because Rent the Runway has a fundamentally different model than other retailers where experience is our product. Typical e-commerce sites see clients purchasing a few times per year, whereas Rent the Runway subscribers are interacting with our website and app and selecting, receiving, wearing, and returning multiple pieces several times per month. The physical and digital experience of a subscription to fashion matters immensely. It's our job to continue making it easier and more delightful for our customers over time. There are three pillars of our strategy in 2023. These pillars are informed by rich data we have collected from current and former customers around what drives their loyalty and our biggest opportunities for improvement. Our three strategic pillars are in service of those opportunities, First is getting her more of the inventory she wants when she wants it. Second, best-in-class product discovery. And third is increasing the efficiency and ease of use of our experience. Regarding the first pillar of getting her more inventory she wants when she wants it, in 2023, we are planning to invest $69 to $72 million in rental product half-actions. to support our existing customer base and anticipated growth in subscribers. We are focused on use cases that are relevant to her today, such as workwear. We are investing in greater depth amongst brands and styles customers love so that more of her desired styles are in stock when she's browsing and picking for her next shipment. We also have a renewed focus on inventory freshness and are strategically exiting inventory at the right moment in its life cycle leveraging our pricing algorithms to optimize monetization of our inventory base. Our second pillar is best-in-class product discovery. Right now, Rent-a-Runway is at par with most fashion retailers related to how customers find, filter, and search for inventory on our platform. We want to be way better, given how many items a subscriber has to select from us each month. Giving women access to variety and bounty is the basis of my vision for a closet in the cloud. The freedom to try something new and express yourself through fashion, however you want, is powerful. At this point, Rent the Runway already has an awesome matrix of designer brands and styles. And my opinion is that this closet in the cloud is one of our biggest competitive advantages. To fully capitalize on this advantage, we want to make it way easier and more fun for customers to access this fashion. So this pillar invests in tools, features, and algorithms that will bring our competitive advantage to the forefront of our customer experience. We need our customers to understand that we have just as many options for her day in the office as we have for upcoming beach vacations, and that we are the very best place to access trends and keep her wardrobe updated. Best-in-class product discovery will come to life across three areas on Renzo Runway. First, passive discovery, which means she doesn't know what she wants and needs to be inspired. We plan to create a large set of immersive curations of our products created by humans powered by AI tools. This will allow prospects and subscribers to better understand the myriad ways she could use her subscription. Second, active discovery is when she knows what she wants and she wants to find it efficiently. By leveraging foundational technology, product catalog, and database work done in 2022, we aim to improve search and filters so it's much quicker to get exactly what she's looking for. Third is stalled discovery. This is a somewhat unique challenge to rental. When she wants something, but it's not available right now, we plan to ensure she never hits a dead end and we are always recommending similar items to satisfy her needs. We have already made progress on Discovery in 2023. In March, we rolled out a much-asked-for feature called Rent the Look, which showcases how to rent the full outfit that's styled on the model and presents similar items if any item is unavailable to rent right now. This feature, coupled with an overall shift to styled model images on site, has up-leveled the usability of the site, and we've been seeing higher engagement on our product pages just in the few weeks since launch. We've also completed the integration of our new product catalog into new search service. As a result, we can tap into the richer and fresher set of product attributes to yield better search results. And over the coming months, customers will see improvements to other discovery features, like filters, powered by this more robust data set. Our third strategic pillar for 2023 is improving the efficiency and ease of use of our experience. One way we are tackling this is by making our site and app much faster, since site speed is an area where we lag behind our competitors today. We've already made improvements to two key entry points to our funnel that have improved speed and performance of these pages by over 30%. Another focus area for us is completely revamping our subscriber onboarding process so that new subscribers have deeper education at their fingertips on how to use our programs and direct contact, if needed, with CX associates to ensure they are receiving what they want right from the beginning of their experience with Red the Runway. As you know, we launched at-home pickup in 2021, and the service is now available in 34 markets. serving 60% of our subscriber base. At the end of Q4 2022, we saw 37% adoption among subscribers who had access to our at-home pickup offering. Transportation cost per shipment continues to benefit from at-home pickups. And for the 29% of at-home pickups in Q4 that were live swapped, where the delivery and return happened simultaneously, the transportation savings is higher. We've always believed in the strong correlation between home pickup and loyalty, and the data shows us that customers who use at-home pickup churn at significantly lower rates than those who do not. The three strategic pillars we're focused on this year are emblematic of a new era for Renza Runway, where we've transitioned the majority of our energy and attention to continuous improvement of the customer experience. Now that the market for circular fashion is robust and growing, and we've built the technology and infrastructure we need to scale, we believe extreme customer focus will help enable us to capture the multi-billion dollar opportunity of fashion subscription. While our customer economics are already strong and our subscribers are profitable, we expect that the loyalty improvements from our 2023 strategies should make our customer unit economics even better over time. We believe our plans will bring our business back to at least 25% active subscriber growth in 2023. And with that, I'll turn it over to Scarlett.