How Rent the Runway Came Back From the Brink

Last week, Rent the Runway got a taste of what it’s like to be the hottest start-up in fashion again.

After reporting along with quarterly results that it expected by the end of the year to be free cash flow breakeven, a key profitability milestone, the company’s stock shot up, at one point trading at more than triple its value before releasing earnings.

Shares have since given back most of those gains, though they were still up about 68 percent from a week ago. Rent the Runway’s problems haven’t disappeared. The post-pandemic era of hybrid work and casual dressing may have permanently capped demand for the company’s assortment of clothes to wear to the office. Competition is fierce, especially from Urban Outfitters’ Nuuly, which offers a wider and cheaper assortment. Even after this past week’s recovery, the company’s market capitalisation is just $41 million, down from $1.3 billion after its IPO.

Even so, the rapturous response to its latest earnings is a sign that Wall Street might be ready to give Rent the Runway a chance again. And after years of painful retrenchment, including store closures and layoffs, chief executive Jenn Hyman is talking like it’s 2019.

“It’s all about how we grow Rent the Runway from being a business that generates $300 million in revenue a year to a business that generates billions,” Hyman told BoF Tuesday. “We have the opportunity to do that because the industry is growing. Rental is growing like crazy.”

The company has its work cut out for it. In its most recent quarter, active subscribers fell 1 percent year-over-year to 128,840, below pre-pandemic levels. That’s partially a factor of Rent the Runway’s lower profile; marketing was scaled back last year amid complaints from existing customers about frequent out of stock notices. The company boosted inventory levels in the second half of 2023.

With profitability on the horizon, Rent the Runway can finally get back to chasing new customers, Hyman told BoF.

Last month, Rent the Runway hired former Afterpay executive and retail veteran Natalie McGrath as chief marketing officer. It’s planning new ad campaigns, influencer partnerships and in-person events. It also has more clothes available to rent and a leaner operating model.

While the subscriber count has basically held steady after bouncing back from the pandemic, there are other signs business may be about to pick up: Customer retention increased by 10 percent in the fourth quarter, the company said, and its net promoter score, a measure of the likelihood of existing customers recommending the service to a friend, jumped 20 points from the lowest point in 2023.

“We’ve made all the right moves over the last few years to drive both growth and profitability,” Hyman said. “We’re about to prove the world wrong.”

Not everyone is so sure. Rent the Runway pioneered the clothing rental concept from its founding in 2009, and had the high end of the category largely to itself for much of the 2010s. Today, there are more rental options, both from individual brands, Rent the Runway-like services and a new crop of peer-to-peer start-ups, where users borrow clothes from each other.

And there’s a chance that just about anyone who was going to try rental already has.

“I suspect that their inability to grow subscribers relates to the fact that they are fairly deep into the total addressable market of people who want subscription rental clothing,” said Berna Barshay, an equity analyst and partner at online investment platform Wall Street Beats. “It is tough to reactivate lapsed users who had a less-than-ideal experience.”

Rent the Runway said it has tackled the biggest pain point among users: inventory availability.

For years, subscribers complained that the most appealing clothes were rarely available to rent. New drops are marketed to customers each week, but the most compelling products are immediately rented, resulting in frequent out-of-stock encounters among members.

“For many users, as their membership continues, they find fewer and fewer new options to rent from,” said Eda Anlamlier, a professor of marketing at the University of Nevada, Las Vegas who published a study about consumer behaviour on Rent the Runway in October.

Starting last year, Rent the Runway began boosting its inventories, doubling the number of units of new styles. In the fourth quarter, the in-stock rate was nearly 50 percent higher than the year prior, Hyman told analysts last week, and the number of subscribers who cancelled their membership because of inventory issues fell by 35 percent compared to earlier in the year.

Rent the Runway made improvements elsewhere in the user experience too, said Hyman, including increasing the speed of the e-commerce site, adding more premium brand partners and launching a styling concierge service for all subscribers.

Other changes behind the scenes have helped stabilise Rent the Runway’s finances. The company shifted half its inventory from traditional wholesale arrangements to revenue-sharing agreements, where brands are paid per rental, rather than up front.

Cost-cutting measures, including a round of layoffs in January, has yielded almost $50 million in savings. Higher customer retention rates, restructured debt, and improved margins overall also contribute to Rent the Runway’s breakeven trajectory.

The company’s fiscal 2023 net loss was $113 million, or 38 percent of revenue compared to $139 million in 2022, which represented 47 percent of revenue. In its most recent quarter, losses totalled $24.8 million, down from $26.2 million in the same period last year.

Even so, Rent the Runway remains a capital-intensive business, with general and administrative costs that amount to almost 40 percent of sales, said Barshay. This means it has to grow to hit its profitability timeline.

Rent the Runway forecasts modest revenue growth of 1 percent to 6 percent this year. Still, Hyman is confident that the improvements on inventory availability, combined with investment in marketing, will result in a new base of subscribers.

Stylist Maeve Reilly and Jenn Hyman inside the Rent the Runway pop-up event.
Stylist Maeve Reilly and Jenn Hyman. (Rent the Runway)

“Lower inventory depths [resulted] in an unideal customer experience [so] we pulled back on marketing in 2023,” she said. “As we fix that problem, we now have aligned the entire company behind growth.”

Another hallmark of rental’s glory days is also coming back: for four days this week, Rent the Runway’s flagship store in New York’s Flatiron neighbourhood, will reopen. Once a spot for users of the legendary, now defunct unlimited monthly subscription to drop off their rentals and pick up new ones, this time the store will act as an event space promoting Rent the Runway’s new seasonal assortment and a partnership with celebrity stylist Maeve Reilly.

Hyman is mum on whether the company will open permanent stores in the near-term. But Rent the Runway will definitely be more visible from now on, she said.

“I believe that one of the key ways to build a brand is via in-real-life experiences and you’ll see us participate in that a lot more,” she said.

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