Rent the Runway, Inc.

Welcome to Rent the Runway's fourth quarter and fiscal year 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 Chief Legal and Administrative Officer, Cara Schembri. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us today. During this call, we will make references to our Q4 fiscal year 2023 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 this afternoon's press release, as well as our filings with the SEC, including our Form 10-K that will be filed within the next few days. We have 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 over to Jen.

Hi, everyone. Thanks for joining us. We're pleased to share that we exceeded top and bottom line guidance for fiscal year 2023 and believe we are ending the year in a great position for both growth and profitability in fiscal year 2024. We believe 2024 will be a milestone year for Rent the Runway, as we're committed to delivering free cash flow break-even and showing the strength of our business model. Our results in Q4 23 show the stability of our business and that we've turned a corner towards growth. We achieved historical high Q4 and full-year adjusted EBITDA of 11.2 million and 26.9 million, respectively. Q4 adjusted EBITDA was strong, most notably because of record sales success from our Try Before You Buy business, where our subscribers purchase items they already have at home, have already worn, and already love. We believe that Try to Buy's Q4 success was primarily due to investments we made into our pricing strategy and technology earlier in 2023, which drove significant increases in customer conversion. For full year 2023, we grew our on-site inventory resale business by 36% by both significantly increasing the number of customers transacting and increasing the units purchased per subscriber. We view this as a strong continued revenue driver in 2024 and beyond. This business line drives strong margins to the business and enables us to fund quicker inventory newness. while also increasing customer loyalty as subscribers view trying before they buy to be a key value proposition of our subscription program. Throughout 2023, we made tangible improvements to our customer experience that are showing up in our metrics. Subscription net promoter score is at the highest consistent levels it's been in several years and improved 20 points from a low in Q2 23 to highs in Q4 that are continuing. Customer loyalty rate is also up 10% year over year. These are solid indicators to us that the positive virality of Rent the Runway is coming back and growth is ahead. The place where we've made the biggest strides in 2023 was around our inventory position. In late 22, We identified that we had to correct for low inventory depth and saw throughout Q1 and Q2 that lower in-stock rates were leading to higher rates of customer churn. We quickly actioned against this and made tremendous improvements to the inventory experience by the back half of 2023. Depths on new styles have doubled and our Q4 in-stock rate was nearly 50% higher than Q4 2022. Inventory churn rate, which represents churners who cite inventory as the primary reason for leaving subscription, decreased by 35% in Q4 2023 relative to Q1 through Q3 2023. What we hope this conveys to current and potential investors is that we're nimble in running our business, can pivot due to our data-driven culture, and we have the focus and execution prowess to find solutions quickly. Not only did we make major strides in 2023 on inventory depth, we ensured that our selection continued to get more high-end and desirable, with access to the most coveted designer brands in line with our core psychographics. In Q4 of 2023, we launched luxury special occasion wear into our assortments, which was received with great excitement from our customers. You can expect to see us continue to partner with the best designer brands in the industry to grow our businesses together with many exciting new designer launches on the platform planned for 2024. We believe Rent the Runway continues to hold the premium brand positioning in the market, appealing to a sophisticated customer who wants to use us for her busy life of work, events, travel, and weekends. A powerful example of Rent the Runway continuing to elevate our premium positioning and premium service is the one-on-one texting concierge service. We launched in beta in May 23 and now serves nearly 40% of our first 90-day customers. In 2023, we saw that one-on-one communication with customers improved early-term retention by answering questions, styling customers, and helping them get the most out of their memberships. We plan to continue to scale our concierge program as part of a new 360-degree lifecycle strategies we're implementing and view it as a compelling loyalty lever in 2024 for various customer segments. Lastly, we spent fiscal year 2023 taking action to achieve free cash flow break-even in fiscal year 2024. First, we have focused on continued improvements to our margins. Fulfillment costs as a percentage of revenue were 29% of revenue in fiscal 2023, compared to 31% in fiscal 2022, driven by continued efficiencies in our warehouses and consolidation of our shipping needs at competitive rates. We have moved towards a more capital-light inventory model, with a third of our inventory procured on consignment, with little to no upfront payments, and 28% of our inventory acquired in 23 from our exclusive designs program, where Rent the Runway collaborates with some of the top designers in the world on exclusive collections at much lower cost than wholesale procurement. Our December debt restructuring eliminated cash interest through Q1 of 2025. Lastly, throughout fiscal year 2023, we executed various cost reductions, including the January 2024 restructuring, to realign the business behind growth while cutting costs. All of these margin and cost improvements that we have already completed make us confident that we will achieve free cash flow breakeven in fiscal year 2024. Now I would like to turn to 2024. Our primary focus in 2024 is growth, and our strategy to focus our resources and energy into two avenues, reinvigorating full-stack marketing of our brand to widen our funnel of potential customers, and digital product innovation to increase customer conversion and loyalty. We think now is the perfect time to put our foot back on the gas paddle as it relates to marketing, as our inventory is in a great position and the customer experience is as premium as it's ever been. As we've shared before, for almost the entirety of Rent the Runway's existence, the business grew organically, fueled by customers' deep love for our brand, service, and mission of female empowerment, which made them willing advocates of Rent the Runway with their friends. I still believe that the most powerful channel to build brands is authentic word of mouth, though today, more of that word of mouth can happen on social media, in addition to in real life experiences. The good news is, despite being pretty quiet on the marketing front for the past few years, we are working from a base of high brand awareness, and a significant amount of latent brand love that we believe we have the ability to reactivate. Our first step was hiring an experienced new chief marketing officer. On March 4th, we welcomed Natalie McGrath onto the team from Afterpay, where she was responsible for accelerating that brand's impressive growth. Natalie has 20-plus years of marketing experience at the intersection of fashion, retail, and tech, working for brands like Metaporte, Alexander Wang, and Boohoo. Over the next few months, you can expect to see us focus on the following five buckets of marketing opportunity. One, building mid-funnel consideration marketing plans focused on driving customer reasons to believe and supporting incremental conversion. Two, scaling new marketing channels with a social-first approach. This means diversifying away from a solely bottom-of-the-funnel meta and Google landscape into many channels that drive new traffic to the site and widen our prospect funnel. Three, rebuilding our lifecycle engine and customer marketing approach. Four, refocusing on a creative strategy that supports customer key segment needs to discovery of new trends, saving time, and use case-based shopping. Our creative strategy is centered around and supercharged our approach to content. And five, reinvesting in our reserve rental business. While we expect it may take a few quarters for marketing to rev up, Our goal is to reactivate the dynamic, beloved nature of the Rent the Runway brand, and we'll measure our performance through our organic growth and traffic. Throughout 2024, our customers will see and hear from us a lot more as we plan to activate in real life via partnerships, PR, influencers, celebrity, and most importantly, content that brings our own customers and mission of female empowerment back to the center of our brand stories. As a small example of what I mean, in March, we launched a campaign aligned with International Women's Month that encouraged women to show off their own professional accomplishments or those of their peers on LinkedIn. The campaign went viral, receiving over 630 million impressions, I believe due to its authenticity. Over 310,000 people engaged with it on LinkedIn. and thousands of women use the LinkedIn platform to tell inspirational stories of female career success. We also relaunched The Real Runway, which uses our own aspirational customers, self-defined women who are leaders in their fields and avid and authentic users of Rent the Runway to inspire our community. These women create social-first content that showcases how the Rent the Runway subscription has been an unlock for them in their own lives. This month, we've partnered with celebrity stylist Maeve Riley to create styling content that will inspire our customers on how to dress for work and all of their spring events. Maeve is joining us for a series of in-real-life events and pop-ups in New York City, where we're inviting many of our highest LTV and VIP win-back customers. We're excited to bring the magic and growth back to our brand, and we'll be sure to update you on progress as we go. Our second area of focus this year will be in continuing the digital product innovation we started in 2023 to drive increases in conversion and loyalty. In 2023, we made major strides on site performance and speed across all of our surfaces, and we made it easier for users to find inventory they love via enhanced discovery features like rent-a-look, AI search, new filtering, and upgraded photography and styling. This year, our product work is focused in three main buckets. One, innovations in app and site merchandising. Two, streamlined product UX and design to simplify conversion flows. And three, focus on styling and customer review content that teaches our customers how to wear our items, giving her even more confidence to rent. If you go to our site or app today, you can already see some of this work in action. Earlier this quarter, we transformed our site merchandising to center around use case-based shopping hubs that show her how to get dressed for work, parties, weddings, travel, and weekends. Within each hub, we focus on key trends, must-have items, and styling advice, visually inspiring potential customers that our limitless closet has everything they could possibly need. The insight is this. People don't come to our site to buy a subscription to fashion. They come to Rent the Runway because they need solutions. They're trying to solve functional problems, like how do I get dressed for work, special occasions, vacation, every day. And they're also trying to solve emotional problems, like how do I express myself through fashion and feel amazing. With these hubs and boutiques, we're delivering on the promise of actually helping her get dressed with a limitless closet and an expert fashion point of view. As the clothing industry Resale and rental market continues to expand. I feel confident in Rent the Runway's positioning as the premium offering in the marketplace and the most widely known solution. Our elevated customer experience is unparalleled with offerings like at-home pickup, speedy shipping, one-on-one styling, personalized curations, and the most flexible subscription programs. We're continuously iterating to improve the experience. We have strong momentum coming out of fiscal year 2023 Our margins and cost structure are in a great place. The team is fully aligned behind growth, and I'm excited for us to take advantage of this tremendous market. Though there continues to be enormous market skepticism in our business, I'm fired up to prove this wrong once and for all. The way to do this will be to drive profitability and growth. With that, I'll turn it over to Sid.