Rent the Runway, Inc.

Welcome to Rent the Runway's first quarter 2024 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 call is being recorded. I would now like to turn the call over to Rent the Runway's Chief Legal and Administrative Officer, Kara Shembray. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us today. During this call, we will make references to our Q1 2024 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-Q that will be filed 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. 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.

Thanks, Kara, and thank you, everyone, for joining. On our Q4 earnings call, I shared that 2024 would be focused on two major goals for Rent the Runway. One, getting to free cash flow breakeven for full year 2024, and two, reigniting the growth flywheel of the business. I'm proud to report that we believe we are well on our way on both fronts, and as a result, we are reiterating our guidance for the year. Q1 2024 was a strong quarter for Rent the Runway. We hit the top end of our guidance on revenue, coming in at $75 million for the quarter, and we beat unadjusted EBITDA, coming in at 6.5 million or 8.7%. This was our eighth consecutive quarter of positive EBITDA. Most exciting, we reduced free cash flow burn, to $1.4 million, a record low. Our Q1 free cash flow of negative $1.4 million is an $11 million reduction in cash burn versus Q1 2023, and a $27 million reduction in cash burn versus Q1 2022. We've come a long way over a short timeframe. One way that I look at our evolution from a heavily cash-consumptive model to a business that is on the cusp of free cash flow break-even is through the lens of operational rigor. We set a goal to be free cash flow break-even for full year 2024, and we've been relentless in inspecting every aspect of our P&L and working to find operational efficiencies and opportunities for margin expansion. But the other way I'd love for you to think about our profitability journey is by digging into the strength of our core business model, brand, and position in the fashion industry. We believe our business model's competitive advantages have been a big part of getting us closer to break-even and will enable us to reach our ultimate goal of being a highly cash-generative business in the future. There are two strong examples of the competitive advantages we've built over the last several years that we believe have set us up for continued profitability. First, we've transformed our inventory model to a more capital-light one where we acquire nearly half of our inventory at zero or minimal upfront cost and revenue share with our brand partners only when the inventory performs. This eliminates fashion risk from nearly half of our assortment. How have we been able to accomplish this? Rent the Runway provides our brands with a platform to get in front of our young, educated, and upwardly mobile customer base. As customers use Rent the Runway for important everyday and special moments in their life, they try new brands and develop authentic brand love. We encourage brands to think about Rent the Runway as a cheaper CAC alternative to their paid marketing dollars. One unit of inventory on the Rent the Runway platform can be worn by dozens of women and seen across thousands when our customers post on social media. Our brand partners have shared that many of their full-price customers came to them via having a Rent the Runway experience first. We believe that another important example of the strength of our business model translating into our financial performance is the frequency and loyalty of our customer base. We generate significant revenue and profit per customer because many of our customers use our service frequently. They view Rent the Runway as a solution to their everyday fashion needs, be it work or a special event. This isn't by accident. It's because we've invested over many years in excellent operations and customer service that strives to put the customer first and a product experience where we've innovated around fit and discovery to earn our customers' trust. E-commerce of any kind isn't without significant customer risk, as evidenced by the high rates of returns that most apparel retailers suffer from. For most customers, buying clothing online only works some of the time, but we believe that our loyalty rates and high LTV to CAC demonstrate customer trust and show that our business model of providing the dress in two sizes for special events or five items at a time via our subscription works for them. We're proud of the trust we've built and believe it will continue to support our growth for years to come. Q1 ending active subscribers were 145,837, a record high quarterly ending active subscriber count for Rent the Runway, and a 16% increase in ending active subscribers versus Q4 2024. Subscriber growth was fueled by strong rejoiner and retention rates. Our Q124 loyalty rate was at the highest levels in over two and a half years, and we maintain strong subscription and total net promoter scores. It makes sense that due to the year-over-year improvements we've driven in inventory depth and in-stock rates, that our current and former customer base would be the first to notice, as these women are still engaged. They're receiving our marketing communications and are attuned with what's new with the brand. We're confident that the improved experiences that we're delivering to our customers is the first step in reinvigorating our new customer growth. Now let's get into what we've been up to since the start of the year. First, on marketing. I founded this business with a mission to empower women to feel self-confident every day because I believe that confident women can change the world. Fashion is armor, and enabling everyone to access it, express themselves freely through it, and have fun with it is game-changing. Why? Because designer fashion, i.e. expensive fashion, which is the space Red the Runway operates in, has always been about exclusion and has had the effect of making many women around the world feel like they were never rich enough, thin enough, or cool enough to wear it. The Rent the Runway brand has always stood for inclusion and had a rebellious spirit that the old rules do not apply. The crisis of COVID presented immense business challenges and reduced our ability to put our mission and brand at the center of everything we do. I am so proud that we're moving forward with a full funnel strategy of building emotional relationships with our customers and prospects so that they not only consider us and love our service, but that they advocate on our behalf. Customers only advocate on behalf of businesses they love and businesses that have values that align with their own. We see a significant untapped audience that is either aware of Rent the Runway and has not tried us or is not aware, and we believe that we have the ability to convince. We started with the team. I announced last quarter that we had hired a new CMO who started in early March, and she has very quickly reorganized our team into different pods focused on acquisition, retention, creative, and go-to-market, and recruited new talent with both deep marketing experience and customer obsession into the company. We've moved very quickly. On acquisition, we expanded channels, adjusted some of our keyword tactics, and overhauled our creative across all of our bottom and mid-funnel marketing channels. As a result, traffic in April was up more than 40% to March and has reached the highest level in years. On retention, we have dedicated a team to segmenting our over 3 million lifetime customers and developing unique multi-channel lifecycle strategies against each segment. This means that though we have one single threaded view of the customer and strategy for her internally, we are using a multiplicity of channels, including customer service, stylists, text, chat, push, email, phone, and in real life events to communicate with her. The goal of Lifecycle is to drive more revenue from every customer cohort. Our lifecycle team works closely with our tech team to develop strategies that we automate throughout the customer journey and build into the digital product itself. Our early strategies are already seeing success. In April, our pause reactivation rate was 35% higher than our pause reactivation rate over the past 12 months. We're expanding our pause reactivation efforts to include Turner Winback, and recent automations we've implemented have seen high rates of customer engagement. Expect some significant innovations, especially in the back half of the year, as it relates to lifecycle marketing. The easiest way to see what's going on in creative is to go to our app or site. Our Make It a Moment summer campaign launched yesterday, and you'll see the site loaded up with new photography, copy, and merchandise curations that we believe look significantly more aspirational, bold, and alluring than our historical creatives. Given the premium nature of the brands we work with, and our brand ethos of living an unlimited life, our creative needs to live up to this and do the work of generating demand for the fashion we carry. We believe that the more aspirational our content and creative, the more we'll convert new customers to rental. More than the content living on our own surfaces, our summer campaign is social first, and taps into creator-led content across social platforms with almost 100 fashion influencers across Instagram, TikTok, and Meta. Our influencer takeover is targeted to specific geos and sociographics over a concentrated period of time so that we can have more of a swarm effect for a more focused group of prospects, showing these women that our unlimited closet can help her get dressed for every day and every occasion. For brand, Thus far, our focus has been on reigniting our in real life presence. We believe that in real life experiences, stores, and pop-ups must be a big part of our brand moving forward to grow. I do not believe that a brand in the fashion space can grow on digital alone. In April, we invited the New York City Rent the Runway community back to our flagship store to see our spring fashion, get styling advice, and interact with the brand again. I was absolutely floored by the line down the block to get in and by the dozens of customers who approached me personally, sharing how meaningful the Rent the Runway retail experience had been in their lives pre-COVID. and how much community they felt coming into the store to get dressed before work or to pick out outfits for a night out at the end of the day. The event also provided an uplift in organic traffic to our site and drove over 22 million impressions across social media, PR, and in real life. Interestingly, nearly 80% of those that visited the store were new to subscription at Rent the Runway. This past weekend, We held a second In Real Life event in Atlanta, which is one of our fastest growing and highest potential markets, with TikTok, Phenoms, Pookie, and Jet. We had over 1,000 women attend, and the energy was palpable. We're planning more In Real Life events throughout 2024 geared towards fueling the natural customer virality of the business that we thrived on pre-pandemic. Due to the success of the New York and Atlanta events, we plan to officially reopen our flagship New York City store this month. In our soft opening this summer, we'll enable women to try on looks in advance to get comfort on fit and styling. We plan to do a major relaunch of the store in the fall with new technology that will enable same-day rental like we used to do. Pre-COVID, we had five retail stores and these stores were a significant growth engine and brand building for the markets they were in. We have significant ground to make up and we plan to execute quickly. For an existing subscriber, the changes she's experienced over the past few months are significant. We're bringing our fashion-first brand back to the center of what we do. Imagery and styling has been brought to life with fresh editorial content, custom curations, use case hubs, and boutiques. We've upgraded our grids and PDPs to be much faster and to provide more filtering and discovery options. In the months to come, our customer can expect to continue to see this creative overhaul come to life across all of our channels. For new customers, we're in the midst of reimagining our prospect flow to provide a clear path from traffic to conversion. The new flow is meant to create interest first in the fashion we carry on our platform, then get the customer excited about rental overall, and then we follow with guiding her to a new checkout experience that reduces friction and streamlines her checkout. Since its phased rollout that began in April, we've seen subscription checkout completion rate already increase by over 20%. I also want to provide an inventory update, which is important to fully understand our growth strategies. We continue to believe that the fashion we have on our platform is the linchpin to our ability to be successful. Our plan for full year 24 was to increase our average in-stock rates versus 2023 and increase the number of units available to rent per subscriber. Thus far, we have seen success. Inventory in-stock rates in Q124 are 24% higher than Q123, and inventory churn is down 20% versus the same quarter last year. With such a solid inventory foundation in 2024, our team is now focusing on additional improvements to the inventory experience. For example, we're investing in more reserve-exclusive inventory with the aim of multiplying the size of our special event rental business by doing a more comprehensive job targeting customer segments where we can gain more share, such as Gen Z, the young professional, and the mother of the bride segment. We continue to focus on psychological comfort around fit as being a growth accelerant. In Q1, we significantly increased the number of customer reviews per style through product improvements and user flow, increasing reviews per unit rented by over 8x compared to prior years. We believe that reviews are crucial towards increasing wear rate and rental satisfaction. Beyond changing our inventory position, the other major thing that we have control over related to how our customers experience our selection is merchandising. We have a vast array of styles on site, and we know that even long-term subscribers only see a fraction of them because of traditional e-commerce browsing behavior. Our merchandising strategy involves better content inspiration, which I spoke to before, and ensuring that our customer is constantly experiencing greater diversity in our assortment so that it feels fresher to her. We plan to come back with progress against merchandising and future earnings calls. Finally, in Q1, we continue to grow our inventory resale business. Inventory resale drove a 20% increase in other revenue year over year. This strategy is customer-first, as subscribers view Try Before You Buy as a key value proposition to the subscription program. We plan to continue to utilize inventory resale as a way to generate strong margins, cash flow, and get back cash quicker to reinvest in fresh new inventory for our customers. I'm excited by the strong momentum we have coming out of Q1. We spent the last year enhancing our inventory experience and rebuilding our cost structure to drive profitability. Our Q1 results display the remarkable strides we've made. I'm energized and excited about the year to come. And with that, I'll turn it over to Sid.