A peek into Rent the Runway's financials

What I learned from reading the FY2022 10-K Report

There has been a lot of chatter about dupes recently:

• Totally Recommend
  wrote a great two part series about the High Sport Pant Dupe and revealed some fascinating info about the marketing strategies used to sell a $900 cotton and lycra pant.

• Hey Mrs. Solomon on Style
  wrote about how “Dupes are the Devil” and how our heightened consumer mentality has led us to want to purchase new things constantly, leading us to purchase dupes that 1) undermine the creative IP of the original creator, 2) are often lower quality, and 3) could instead be replaced with better quality items that are “inspired by” the original.

• Kara V
  wrote a really interesting piece about how the “dominant class” often looks to the “subordinate class” for inspiration and how “without [the subordinate class] and [their] daily oppositions to the status quo, nothing new would happen." Who’s really duping who?

I loved the different perspectives of each of these articles and I highly recommend reading them, if you haven’t already.

Now, one solution for the problem of “dupes” is a fashion rental service like Rent the Runway. On paper, it sounds great. As a consumer, you pay a monthly fee and get to rent a few designer items that would have cost a lot more than your monthly fee to purchase. These items are delivered directly to your door and you get to wear them as much as you want before you decide to return them, where they are cleaned and rented by the next person.

This model is easier on your wallet, theoretically better for the environment (as it extends the life of the product and reduces consumers turning to fast fashion for a cheaper dopamine hit from purchasing items), and is better for creative IP as consumers get to wear real designer items at a “fraction” of the price.

However, in reality, this model doesn’t quite always work.

Bri Boone

wrote a great piece about her experience with Nuuly, another fashion rental service. Two of the six dresses that Bri ordered for a garden wedding didn’t quite fit right and Bri also concluded that she’s likely going to cancel her subscription at the end of the month because the constant “revolving door” of newness wasn’t helping her make more mindful choices for her wardrobe.

I had a similar experience with Rent the Runway a few years ago during business school, when I signed up for a subscription thinking I'd have a need for more "business casual" and "party on the weekend" options temporarily. Usually the pieces didn't fit right or they'd arrive a little "too" dry cleaned and looked worn out. I chose to cancel after a few months and instead chose to invest in a few quality pieces that I just re-wore to all of my events.

I have heard others share this feedback as well, which led me to wonder, how is Rent the Runway doing financially? Thankfully for us, Rent the Runway is a public company, which means they are required to publish their financial statements and accompanying commentary annually. Anyone can read and download these statements, including the most recent 10-K, via their Investor Relations page. I spent some time today reading through the fiscal year 2022 10-K report and a few things stood out to me. My notes are below and I would love to know what you all think - whether you have read a 10-K before or not!

Before we get into it, I need to provide a little disclaimer:

The Information in this article is my personal opinion and is provided for education, informational and discussion purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. This blog is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. You should not make any financial decisions, investments, trades, or otherwise, based on any of the information presented in this article without undertaking independent due diligence and consultation with a professional broker or competent financial advisor. You understand that you are using any and all Information available in this article at your own risk.

Key Takeaways from the 10-K:

Alright, let’s get into it! In no particular order:

Mission Statement (Page 10):

“Our mission is to power women to feel their best every day”.

I first read “empower” and I’m sure that someone has spent a lot of time thinking about the use of the word power vs empower here. Any literary experts here? Do you have any insight into the use of the word “empower” vs “power”?

Retail Markups (Page 13):

“We have observed that the original retail prices set by the brands are often at a 2.5x mark-up to the wholesale price.”

This really surprised me. I always knew that fashion industry markups were high, but didn’t realize they were this high. This means that, on average, a $100 top that you buy actually costs around $28.57 to make. There are companies, like Everlane, that have found a lot of success in sharing the “Transparent Pricing” of what it costs to make a product. I feel like this could be its own separate topic…

Product Acquisition Strategy (Page 13):

Rent the Runway acquires the products it offers on its platform in the following three ways:

• Wholesale (42% of products acquired) = These products are purchased at a discount to wholesale price, meaning that hypothetical $100 top from earlier could be acquired for less than $28.57.

• Exclusive Designs (31% of products acquired) = RTR asks brands to make designs based on internal data at 50% cost of wholesale, so our hypothetical $100 top from earlier would cost about $14.00. Rent the Runway says that this approach “[enables] our brand partners to innovate their businesses and enter into new product lines at reduced cost to them. All of the styles are exclusive to rent on RTR for a period of time, after which brands may monetize these exclusive designs through other channels, typically subject to a royalty fee payment to Rent the Runway, which we have not begun to earn to date.” I’m curious to see if any brands will elect to monetize RTR designs through other channels next year…

• Share by RTR (27% of products acquired) = These products are acquired via consignment, with zero or low upfront cost and a revenue share each time an item gets rented (minus a logistics fee expense). This acquisition method mirrors a pay-per-use model, and if an item is rented more, it’s possible for the brand to get a higher revenue share on that product than if it had been sold wholesale. However, the 10-K also mentioned that RTR has agreements with brands that cap the maximum total revenue share across all items to 75-100% of wholesale prices in year 1 and an unspecified cap in years after that. This means that for Year 1, the most a brand could get from Rent the Runway is wholesale prices. What’s in it for them? More on that in the next section…

Brand Partner Value Proposition (Page 10):

“We have created a two-sided discovery engine: customers find new brands they love and brand partners find new customers they need.”

I was trying to think through the “brand partners find new customers they need” bit - If brands are selling their product to RTR at a maximum of wholesale prices (no margin), then they must assume that RTR customers are purchasing their products outside of RTR, otherwise what would be the point of these “new customers”? Yet, I don’t know if this is something that RTR would want, since the entire focus of RTR should be on retaining customers. I thought there might be more to it, and sure enough…

“Brand partners are able to tap into our large, engaged community to discover new customers and get unparalleled data insights.”

They’re sharing data with brands. This is not a huge surprise to me, but I was surprised to learn that this data would be worth giving product to RTR at or below wholesale prices!

“The transformative nature of our customer value proposition means our customers are typically younger and different from other audiences our brands are exposed to. According to our June 2021 Rent the Runway Brand Survey, approximately 91% of our brand partners work with us because we introduce them to new, desirable customers and deepen awareness of their brands.”

If brands work with RTR because it gives them access to younger customers and data and then they hope that these customers (now older and aware of brands) will one day purchase items from them at retail price…does that mean that brand partners expect customers to churn? How does RTR feel about that?

Customer Value Prop (Page 10):

“our average subscriber [wears] clothes worth more than 20 times what she pays for a monthly RTR Subscription on an annualized basis (more than $40,000 in designer retail value in fiscal year 2022)”

Does this statement assume that I wear all of the clothing in my delivery? Also, we’ve just learned that RTR acquires clothes at or below wholesale costs and I know that I, as an individual consumer, would never have the buying power to be able to purchase an item at wholesale costs. But just think, if data is what these brand partners value most, what if I could just purchase products from brand partners directly at wholesale prices and give them data points about my usage afterwards? How funny that a RTR customer is instead is paying RTR to give data to brand partners? (I know this wouldn’t work in theory as RTR gathers a ton of data points mentioned below which wouldn’t be realistic for a consumer to report back on…but it’s still a fun thought exercise.)

Is Rent the Runway a …data insights company? (Page 14):

“We capture thousands of unique data points per subscriber per year and over 20 unique data points per item each time it is rented across four channels including website data, post-wear data, operations data and customer data. We also identify and tag approximately 70 detailed attributes per style. By mapping our interactions with our products’ inherent attributes, we create a strong feedback loop which allows us to optimize the supply of products in ways we believe that would be difficult for traditional retailers to achieve or replicate. This is one of our biggest competitive advantages.”

Okay I think I’ve made my point already, but if it wasn’t already clear, I wonder if we should stop thinking of Rent the Runway as a fashion rental service and instead think of them as a clever data gathering vehicle. What do you think?

Sustainability and Diversity (Various Pages, see below):

“In addition, as of June 2021, 67% of our brand partners believe that RTR is an important part of their business’s sustainability strategy” (Page 10)

I didn’t really get this at first, but apparently, according to Page 15, this is because RTR shares “product longevity data” back to brand partners, allowing them to improve future product development with regards to longevity

“Reduce carbon emissions from our business so that we operate with net zero emissions by 2040…Displace the need for new production of 500,000 garments by fiscal year end 2026…We estimate that our business model has displaced the need for new production of 151,523 garments in fiscal year 2022.” (Page 19, Ambition 1)

While I agree that RTR extends the life of a garment and reduces the need for new products, I doubt that 151,523 garments would not have been produced as RTR has also stated that customers use this to discover new brands they may not have known about and sometimes don’t wear all of the items in the order. I can’t think of a better substitute for this measurement, unless brands could report back a “decrease” in production? I don’t think brands would love that though…

I wanted to call out that Rent the Runway does list several goals regarding sustainability and they’re actually making pretty good progress on them, such as by purchasing carbon offsets, moving towards sustainable energy in factories, and sourcing sustainable materials. There was an article published in 2021 in the Environmental Research Letters journal, which was reported on by several sources such as Time Magazine and New York Times, which called to attention that rental services may not be that great for the environment due to transportation concerns. I know there is still a lot to figure out here, but I’m glad to hear that Rent the Runway has made it a priority.

“Create a culture and cultivate a community where all people are inspired, empowered and thrive…Maintain on average 40% representation of racial and ethnic minorities for the U.S. corporate workforce through fiscal year end 2026.” (Page 21, Ambition 2)

Again, I’m glad that RTR is focused on this and they’ve met this goal for workforce and corporate leadership, but unfortunately there is a little more work to be done as of the time this 10-K was written, only 10% of the board was a racial or ethnic minority. Board dynamics are different than corporate practices though and I’m not really sure of the best path to making progress here.

On Risks that felt a bit odd (several pages, see below):

“We have a history of losses, and we may be unable to achieve or sustain profitability” (Page 30)

I haven’t read enough 10-Ks to know whether new companies that post subsequent losses typically include this statement in their risk sections, but to me, it felt a bit odd because historical losses aren’t something that could happen…they have happened. I don’t see how historical losses have any impact on this year’s profitability aside from the fact that maybe it indicates you have some operational challenges that you may still be working through. These risks are called out elsewhere in the section though, so this feels a little redundant. Maybe it’s just standard practice and sort of a CYA though…does anyone know?

“The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.” (Page 45)

This statement just made me chuckle a little because while this is a risk, going public was a choice made by Rent the Runway. Wouldn’t it be funny if, after posting a year of losses, Rent the Runway said “Ah dang, it’s because we went public. This wouldn’t have happened if we stayed private…although you wouldn’t have heard about it if we had 😉” Again, maybe this is just standard practice.

Subscribers and attracting/retaining them (several pages, see below):

Rent the Runway had 126,712 ending active subscribers (excluding paused subscribers) in 2022 compared to 115,240 in 2021, representing 10% growth year-over-year. They also reported 128,586 average active subscribers in 2022 and 93,371 in 2021, representing 38% growth year-over-year; (Page 72)

I was surprised to learn that,

“…over one third of [RTR[ revenue in fiscal year 2022 was generated by customers who placed their first order with us in fiscal year 2017 or prior. (Page 75)

Rent the Runway has a retention problem and they know it - it probably didn’t help that they launched a big marketing campaign in March 2023 (Page 72) but then announced price increases in April 2023 (Page 76).

In her letter to stockholders (Pages 2-3), RTR Co-Founder and CEO addressed the big goals for the company in 2023, one of which was subscriber experience. Rent the Runway has already taken some steps towards this goal, including:

• Adding a 5th item to a shipment at no extra cost to the customer (besides the price increases already incurred in April 2023).

• Improvements to subscriber onboarding, the first 90 days are apparently the most important as that is when a majority of subscribers churn (page 74).

• Improving product availability by buying more and suggesting similar alternatives to subscribers if items are not available.

I had a few additional ideas, that Rent the Runway may have already considered (but haven’t mentioned in the 10-K):

• For Reserve items, why does RTR offer a backup size on every order? Customers may know their sizes in certain brands and what if RTR could offer a customer the option to “decline” a backup size for a small incentive (say, $5 off of the rental fee)? They’d save some efficiency in shipping and also have the size available for a different customer to rent.

• For Reserve items, could RTR offer an incentive to customers for returning items early? The sooner items return, the sooner they are available for someone else to rent.

• For the subscription offering, could RTR offer customers a small incentive to leave detailed reviews on every item? When I tried RTR in business school, I would occasionally leave reviews, but it was often more efficient to skip the review section and place my next order. I’d definitely do it for an incentive though, which would provide RTR with better data about fit and materials that it could resurface to future renters, increasing the likelihood that subscribers would receive items that fit well.

Financials, for reference (Page 82):

• Total Revenue, net: Increased from $203.3M in 2021 to $296.4M in 2022.

• Total Costs: Increased from $329.2M in 2021 to $400M in 2022

• Net Loss: Decreased from (212.1)M in 2021 to ($138.9M) in 2022

Other Random Things (several pages, see below):

“turns per unit” (page 15)

Love learning about new metrics via the 10-K! This is how they count the amount of times a product has been rented.

“Unlike traditional e-commerce companies, we are an experience-based company that our subscribers engage with multiple times a week” (Page 17)

I’m not sure what a “traditional e-commerce company” is, but I’m browsing websites like Net-a-porter, Shopbop, and The RealReal daily for some virtual fashion inspiration. I do write a fashion newsletter though so maybe I am not “average subscriber” that this statement is referring to 😉

“The plan primarily included total workforce reductions of approximately 24% of corporate employees…We expect the restructuring plan to generate total annual operating expense savings of approximately $25 million” (Page 71)

Just wanted to flag that Rent the Runway did have layoffs in September 2022. I know it’s a tough time in the economy right now and it probably doesn’t help employee morale or efficiency for a significant portion of their peers to be let go. I wonder if and how these layoffs will affect RTR’s ability to meet its goals.

What did you think?

Okay wow, that was quite a lot! Although fashion rental isn’t a great fit for me personally at the moment, since I’m trying to take a “mindful additions” approach to my wardrobe this year, it was still really interesting to learn more about their business model for this article. By the way, the 2023 fiscal year just ended, and I’m excited to read the next 10-K, when it becomes available and to learn if RTR was able to achieve the goals it had set out last year!

Would love to hear from you all - did you learn something that surprised you? Or was there something else you noticed in the 10-K that you’d like to share?

Catch you next Sunday,
Cost per Fit 💰