Rent the Runway, Inc.

Hello, and welcome to Rent the Runway's second quarter 2023 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 the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'll now turn the call over to Rent the Runway's General Counsel, Carol Shembrey. Carol, please go ahead.

Good morning, everyone, and thanks for joining us to discuss Rent the Runway's second quarter 2023 results. Joining me today to discuss our results for the quarter ended July 31, 2023, our CEO and co-founder Jennifer Hyman and CFO Sid Thacker. During this call, we will make references to our Q2 23 earnings presentation, 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 today's press release, as well as our filings with the SEC, including our Form 10-Q that will be filed later today. 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. Reconciliation 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 over to Jen.

Thanks, Kara, and thank you, everyone, for joining. I want to start by talking about our progress in Q2. starting with our strong bottom line performance and momentum towards profitability. We're pleased that we exceeded our Q2 profitability guidance by remaining disciplined. Adjusted even of margins hit a historic high at 10.2% in Q2, driven by fulfillment efficiencies, strong growth margins, and fixed cost control. And notably, today we announced that we have accelerated our plan to be free cash flow break even before cash interest expense to full year 24. For some time now, we've been focused on taking decisive actions with the goal to bring Rent the Runway to profitability, and we believe now is the right time to accelerate our efforts. Our growth and improvement story starts with our cash, where we've made immense progress. We've transformed a business that consumed almost $100 million in cash in full year 22 to a business that will consume around $50 million in cash in full year 23, and will break even next year, less cash interest expense. We believe that a key part of getting to profitability is also making decisive choices that are prioritizing the medium and long-term health of the business over short-term revenue gains and lower margin customers. Next, Q2 was the fifth consecutive quarter of positive adjusted EBITDA. We've made significant improvements over the past several years, reducing both our fixed and variable cost structure and growing our margins. Cost discipline continues to be firmly embedded into Rent the Runway's culture. Our 22 restructuring was clearly an important step, and we have continued to make progress on optimizing costs during the first half of full year 23. Our teams are continuing to examine our cost structure to assess additional steps we can take to remain agile, flexible, and able to achieve our profitability goals in a range of revenue scenarios. Going up to gross margins, we've continued to improve performance in our fulfillment operation, and in how we acquire inventory, even as we changed our subscription program to offer customers 25% more value in every shipment in Q1. Our fulfillment costs have improved primarily by focusing on labor productivity and transportation efficiencies. The strength of our inventory expense is a reflection of the continued impact of product acquisition mix changes towards more efficient channels. Lastly, I want to acknowledge our Q2 miss on revenue. We had a slight revenue miss due to lower than expected active subscriber count, primarily driven by lower early-term subscriber retention, which we believe to be attributed to inventory depth levels that were too low. Reserve, our one-time event rental business, also declined year over year, which we believe was the result of greater focus on subscription in our marketing efforts and on our site, as we discussed last quarter as well. Our goal is driving this business to free cashflow profitability, less cash interest expense next year. To do so, we are making deliberate choices that we anticipate will negatively impact short-term revenue and subscriber counts. We're planning to be less promotional and focus more on rebuilding our high margin reserve business. We also plan to pull back on marketing spend to prioritize inventory in stock rates. Above all, we're empowering our leaders to make the right choices to drive profitability. We do not waver from our long-term belief in the enormous market opportunity for rental. As a result, we are focused on creating a sustainable business so that we can control our own destiny and capture as much of the large and growing market as possible over the upcoming years. Before I discuss the positive improvements we've made to the customer experience in the first half, I want to discuss what we believe are the two biggest challenges we had. Lower inventory depth than needed and a softer reserve business. We learned a lot in Q2 about the criticality of inventory depth to the customer experience. We started Q2 with a record number of subscribers and on the heels of our extra item plans launch in April. While we had enough inventory overall to serve our customer base during the quarter, We did not have enough depth in new styles, and as a result, our in-season in-stock rates were down 17% versus Q2 last year. We have data that indicates that an inventory depth issue was the primary driver of lower early-term subscriber retention, and therefore lower active sub-counts. To take a step back, we fully transitioned from our unlimited swap program to fixed swap plans in 2021, and 2022 was our first year of operating these programs in a more normalized environment where customers were going to offices and out to events again. In 2022, we revamped success metrics for inventory and fixed swap programs, shifted our go-forward strategy away from a breadth strategy to focus on a depth strategy, and established inventory availability as one of our key strategic pillars for 2023. The most important component of this strategy is greater investment in depth of styles and brands we know she wants, so we are in stock more of the time. Given the nature of a six-month fashion buying cycle, we were able to implement our learnings from 2022 and impact our Q3 and Q4 2023 buys with higher depth, which is now coming to life in our fall 2023 assortment. As we shared previously, we expected that the customer impact would begin to be felt on this timeline, which was key in informing our original back half weighted growth expectations for full year 23. However, we believe that the lag between the time of the buy and live to site impacted the customer experience more than we expected in Q2. particularly for new customers, given the high growth we experienced in Q1. In a fashion rental business, availability changes moment to moment, and we have observed that new customers are more likely to be disappointed by lower in-stock rates because they expect to see the items they got excited about while browsing as a prospect. Retention of tenured customers continue to be strong because they understand that when they don't see something they parted one day, they're confident they'll be able to rent it soon. We believe that this issue is temporary in nature. Depths of our 2H2023 buy are expected to be approximately 1.7x the depths of our 1H23 buys, which would increase our in-stock rate by 700 to 1,000 basis points. We have acquired even higher depths in our most popular brands, and in key items, we have confidence our customers will want this fall and winter. Functionally, we expect this will be felt by customers throughout the second half of Q3 as they're refreshing their fall wardrobes and through to Q4. We anticipate that this will result in a meaningfully better customer experience and improved retention in the near to midterm. While 2H depths will be a huge improvement over 1H, customer behavior in Q2 illuminated that we should go even further on our depth strategy. To that end, we have further expanded our depth plans for 24. We expect that we will see continued improvement on in-stock in the first half of 2024 as a result of this. The nature of our business model dictates that any significant transition in inventory strategy must be done in multiple phases, given that we monetize inventory over multiple years and it stays in our rental ecosystem for multiple seasons. To be clear, while we have made significant improvements already, we expect the lion's share of the positive impact of our depth strategy and therefore the positive impact to revenue and subscriber growth to be in 2024, once significantly more of our inventory tranches have appropriate depth. Our data thus far indicates that we should see loyalty gains from all customers with the greatest gains coming from early-term customers. For reserve, we believe we have great opportunity here. Our one-time rental business is what we launched this business with 15 years ago. It's the easiest value proposition for customers to understand, as every woman finds herself having to buy outfits every year for events she rarely wears again. We've made three exciting changes to our reserve business over the past quarter. Last month, we debuted a distinct product experience for reserve, which separates the reserve funnel from the subscription funnel. This is intended to make it easier for customers to understand the reserve value proposition of locking in a look in advance and getting the second size for free. It also clarifies how the pricing compares to subscription. Second, we started acquiring distinct inventory for the reserve business, mostly on consignment, focused on premier designers that elevate our reserve assortments. Finally, we've shifted our org design to add new leadership focused on reserves, intended to ensure we can grow both this business and subscription side by side. We believe that the appetite for rental writ large is big enough that both of these offerings can grow, and we expect this change to the funnel to benefit both reserve and subscription from a conversion standpoint over time. Beyond our inventory depth strategies and focus on improving reserves, the teams have continued their work across our other strategic pillars, the efficient and easy-to-use experience and best-in-class product discovery, and have been successful in the first half of 2023 at markedly improving our overall customer experience. We believe we'll see more of the full retentive impact of these changes to customer experience and discovery when in-stock rates are higher. Let me share a few of those initiatives here. Related to our pillar on efficient and easy-to-use experience, we've seen early success with our SMS-based concierge program that is leading to improvements in loyalty amongst those who sign up. Concierge has already accelerated our learnings from early-term customers and priority areas to improve their experience. Given its success, we plan to continue to invest in concierge in full year 23 through expanding this program to more customers across more terms. Yesterday, we launched a new subscriber onboarding experience based on our learnings from concierge to help lead them to inventory they love quickly and pick their first shipment. This also includes the creation of an interactive customer styling profile and encourages sign-up into our concierge program to aid with live one-on-one assistance. Finally, we continue to drive major improvements in site performance and reliability. improving Lighthouse scores of key acquisition pages by 50% year over year. A Lighthouse score is the rating Google gives to websites based on a combination of criteria, including performance, accessibility, SEO, and other best practices. Related to best-in-class product discovery, we introduced multiple improvements during the quarter, which have driven reductions in time to select shipments for our customers. We achieved this by, one, launching a fully redesigned app product detail page experience that features more detailed, larger product images, clearly displayed fit advice, and makes the availability of that item more obvious to the customer. Two, we're elevating the look and feel of our brand and site across all touch points, from photography to design and creative, which is intended to ensure that our premium positioning is clear to our customers and brand partners. Three, we created more visibility for editorial curations throughout our site and accelerated our schedule for refreshing them. We've seen high engagement with our editorial suggestions. Four, we improved filters, making it easier for customers to search with specificity. And finally, we rolled out our AI search beta to 20% of our customer base. We are using this beta to get user feedback and iterate on the best and quickest way to search our catalogs. I firmly believe that we are making the right decisions for customers and that our customers will reward our product improvements, additional items, and improved experience with inventory. I'm excited about our plans for the remainder of full year 23 and into full year 24. Most importantly, we are excited to drive this business to free cash flow profitability, excluding cash interest. With that, I'll hand it over to Sid.