Rent the Runway, Inc.

Welcome to Rent the Runway's third quarter 2023 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 general counsel, Cara Schembri. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's third quarter 2023 results. Joining me today to discuss our results for the quarter ended October 31, 2023, are CEO and co-founder Jennifer Hyman and CFO Sid Thacker. During this call, we will make references to our Q3 23 earnings presentation, which can be found in the events and presentation section of our investor relations website. Before we begin, we'd like to remind you that this call will include forward-looking statements. These statements include our future expectations regarding financial results, guidance and targets, market opportunities, and our growth. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially. These risks, uncertainties, and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including our Form 10-Q that will be filed within 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 GAAP to non-GAAP measures can be found in our press release, slide presentation posted to our investor website, and in our SEC filing. And with that, I'll turn it over to Jen.

Hi, everyone, and thanks for joining. With a sub-dollar stock price and very little support from the public markets, my goal this evening is to address the elephants in the room when it comes to Rent the Runway. with transparency and convey that we believe that we have reached a positive, important turning point where our business can hopefully start to be evaluated on its strong business model and the vast opportunity ahead of us, as opposed to our challenged balance sheet. As of the end of Q3, 2023, Rent the Runway has $312 million of outstanding debt, which obviously is a large amount especially compared to our current equity value. Before COVID, Rent the Runway held significantly less debt with a sizable portion of it at low rates via an asset-backed loan, which used our inventory as collateral. After COVID hit in mid-March 2020, we needed to move very quickly to refinance to secure the business and address the fact that our inventory was now being appraised at a small fraction of its pre-COVID value. and we face serious consequences under the term of our ABL. This pressure alongside our precipitously declining revenue due to COVID lockdowns meant that we had to take on a higher quantum of debt at high pick to save the company and repay our ABL. While the debt amount was always in our view high, it was essential to stabilize the business for the duration of the pandemic and support our post COVID recovery. And it felt manageable at a $1.7 billion IPO valuation. I believe it's clear, based on many conversations with public investors, that a key reason why our stock price has declined into sub-dollar territory is because of this debt. Because of our balance sheet, we believe that the market lacks confidence in our viability. Today, we are announcing significant modifications to our debt terms that we believe provide meaningful flexibility and will allow the company the opportunity to generate significant free cash flow before the debt's maturity date. First, both PIC and cash interest have been eliminated for six quarters, beginning with Q4 2023, reducing total interest expense by $66 million over this period, $18 million of which is cash interest. This means that the debt will remain flat at $312 million during this period, which is intended to allow equity value to accrue as we grow and to reduce drain on company cash while we are driving the business to free cash flow break even. In addition, the minimum liquidity covenant has been reduced from $50 million to $30 million, which provides additional cushion even in significant downside scenarios. We have also mutually agreed on spend caps in fiscal year 2024 for inventory capex, marketing, and fixed operating expenses, which align with our profitability goals. I encourage you to read the full details of the amendment that has been filed in a form 8K prior to this call. While the quantum of debt still needs to be addressed, we believe that these modifications provide significant breathing room while we are laser focused on significant free cash flow generation and proving the strength of our business model to the market. Simply put, don't believe everything you read in the press. Rent the Runway is here to stay. And I'm confident that 2024 is going to be a big year for us. The other significant elephant in the room has been a question mark as to whether Rent the Runway can grow. The market has lacked confidence in our growth opportunity. because the business is expected to be more or less flat this year at around $300 million in revenue. I want to be clear that we believe our lack of growth in 2023 is a temporary problem primarily driven by the inventory depth issue that we explained in detail last quarter. Lack of depth in the styles customers wanted to rent led to elevated rates of churn, And as a result, we enacted strategies to pull back acquisitions while we solved this problem. In great news, the actions we have already taken to fix our assortment and greatly improve inventory depth in the second half of 2023 have already made market improvement on our customer experience. We are seeing positive green shoots and momentum in the most important input and output metrics of the company, including subscription net promoter scores, that are both the highest we've seen since pre-COVID and that continue to climb weekly. Global churn is down since last quarter, and the churn of our post-90-day subscribers is amongst the lowest levels we've seen since Q4 2021. With higher NPS and higher loyalty, we believe that our positive customer growth flywheel can be re-engaged. As a result, we're highly confident that we're on the right track. We believe we're focused on the right priorities in 2023 to fix the foundations of our customer experience. And we want to update our commitment to being a fully cash flow break even business in 2024. I want to be clear. We are laser focused on driving this business to free cash flow break even next year. That's why we are setting up a cost structure that is designed to enable us to do so even in a zero growth scenario. Zero growth is clearly not our goal, but we think best to plan conservatively when it comes to cost. I firmly believe that creating a sustainable business will enable us to control our own destiny and capture as much of the large rental market as possible over the upcoming years. The rental market continues to grow at a clip far faster than the overall fashion market in the U.S. and around the world, as demand for a subscription to fashion and normalization of rental has never been higher. While we believe there will be many winners, we have generated the highest revenue of any fashion rental platform, and we believe this is due to our positioning as the premium service for the more premium professional customer with the premium brand relationship. Regarding this quarter specifically, we met expectations on the top and bottom line. We ended the quarter with an active subscriber count of 131,725. We shared with you last quarter that we plan to make deliberate choices that we anticipated would negatively impact short-term revenue and subscriber count to drive profitability. We believe that the sub count is a result of our strategic decisions to hold the line on lower promotions and lower marketing spend to prioritize inventory in stock rates. In other words, we acquired fewer customers by design, but the customers we have acquired are more profitable. As we shared last quarter, for Rent the Runway, our customer experience is all about her ability to access the fashion she wants when she wants it, which is where our focus on inventory depth and in-stock rate comes into play. The fashion informs her satisfaction with and loyalty to our offering. Thus far, in the second half of 23, we've improved the fashion on our platform in terms of depth, selection that is significantly more aspirational and versatile, and importantly, in line with what our core professional female customer is looking for. The green shoots we are seeing in the data are as follows. First, as we've shared, the most important component of our inventory strategy is greater investment of depth of styles and brands we know she wants, so we are in stock more of the time. We told you that depths of our second half 23 buy were expected to be approximately 1.7x the depths of our first half buys. which would increase our in-stock rate by 700 to 1,000 fifths. We have over-delivered against our plans. As of Q3, in-stock rate was 1,400 basis points higher than Q2 and 1,200 basis points higher than Q3 last year, contributing to increased customer satisfaction and retention rates. Beyond buying at greater depths, there have been several additional important strategies we have deployed to improve the customer experience with fashion on our platform, including consolidating key styles by warehouse, better site and app merchandising, and creating a unique onboarding experience for early-term subscribers. Loyalty is highly correlated to in-stock rates, and we have early data to show that the focus on depth is working. As of October, inventory as a reason for churn has gone down by 40% over the past six months. Additionally, Her rental satisfaction rate has increased year over year. Not only is it easier for her to rent the items she wants, the assortment is resonating with her even more. Hearts on our new inventory are over 30% higher this year over last year. Workwear is a key driver of this satisfaction. Utilization of workwear is 1,000 basis points higher than last year, which is great for our business as there's less seasonality seasonality involved in people who use our service to dress for work. We're also seeing that paid add-on rates have gone up as in-stock rates have improved and are at the highest level since before we launched our extra item plans. It's great that when our inventory availability is higher, she will pay more to get more of it and ARPU increases. We're also pleased with our purchase rate this past quarter. We think that one of the most compelling elements of our business model for customers And for us, financially, is when customers use their subscription to try pieces and then purchase them from us when they already have them at home. In Q3, purchase rate is up 50% in units sold versus last year, indicating that the pricing and assortment is resonating and we are getting better at positioning try before you buy as a key value proposition of having a subscription with us. We think about the Try Before You Buy channel as a retail 2.0 experience where we are bringing the store directly into the customer's home. In a dressing room, she tries out the product and gets a brief sense of fit and aesthetic. But with Rent the Runway, she experiences how the product fits into her life, receives validation from people she knows, and determines whether she wants to make it a permanent part of her closet. The vast majority of these at-home sales have recovery rates far above what we paid for the item, and we see higher loyalty rates in subscribers who purchase from us. Expect us to continue to push on this developing channel in a much bigger way in 2024. Next, exclusive designs continue to be beloved by our customers as evidenced by utilization, wear rate, and love rate all up year over year. As a reminder, we create these designs in close collaboration with brand partners and leverage our own unique data. Today, just in time for holiday, Rent the Runway introduced The Vault, a new category of luxury evening wear styles from 20 of the top brands in fashion, including many new-to-site designers like Etro, Oscar de la Renta, Brandon Maxwell, Anna October, John Battista Valley, Rachel Gilbert, Paris, Georgia, and more, available exclusively for four- and eight-day rentals. We view this launch of luxury as a key step in reinvigorating our special events rental business, which was always based on renting aspirational brands that you couldn't afford or didn't make sense to buy, and solidifying our premium positioning in the market. Overall, our brand relationships continue to be one of the resounding strengths of our business model. Even in this complex macro environment, brands see us as a powerful marketing partner. The new to site designers I just mentioned are a testament to that. Over the past few years, we have managed to continue reducing the input cost per unit while increasing the MSRPs of the fashion on our site. Simply, our costs are decreasing. while the aspiration and premium nature of the assortment is increasing. Our pay for performance revenue share model continues to scale in terms of the number of partners and in the percentage of the overall buy. Based on our buys to date, we currently expect that in the first half of 24, that almost 50% of our inventory acquisition will be acquired via pay for performance. Beyond our success in our inventory pillar, the teams have continued their work across our other strategic pillars, efficient and easy-to-use experience and best-in-class product discovery. We are pleased with the strides we have made across the Rent the Runway ecosystem and are offering a high-touch luxury style experience that we believe our customers are noticing. Related to an easy-to-use experience, our SMS-based styling and support service, Rent the Runway Concierge, has reached an all-time high adoption rate, with over 30% of new subscribers opting in as of the end of Q3. We have seen sustained retention improvements, not only for customers who use Concierge in their first 30 days, but also in their second and third months with us. Early-term customers who opt into Concierge have 15% lower churn rates than those who do not, so our plans are to continue to scale this program. Our in-product onboarding is also seeing encouraging results. 95% of new subscribers complete it, leading to a 33% drop in the time it takes her to place her first order. That means she has more of the month to enjoy her Rent the Runway items. We've come a long way in 2023 and feel excited about the path ahead.