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Edited Transcript of RENT.OQ earnings conference call or presentation 12-Sep-22 9:00pm GMT

·49 min read

Q2 2022 Rent the Runway Inc Earnings Call Sep 13, 2022 (Thomson StreetEvents) -- Edited Transcript of Rent the Runway Inc earnings conference call or presentation Monday, September 12, 2022 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Janine Stichter * Jennifer Y. Hyman Rent the Runway, Inc. - Co-Founder, Chairman & CEO * Scarlett O'Sullivan Rent the Runway, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Andrew M. Boone JMP Securities LLC, Research Division - MD & Equity Research Analyst * Ashley Elizabeth Helgans Jefferies LLC, Research Division - Equity Analyst * Dana Lauren Telsey Telsey Advisory Group LLC - CEO & Chief Research Officer * Edward James Yruma Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Irwin Bernard Boruchow Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst * Lauren Elizabeth Cassel Schenk Morgan Stanley, Research Division - Equity Analyst * Michael Charles Binetti Crédit Suisse AG, Research Division - Research Analyst * Noah Seth Zatzkin KeyBanc Capital Markets Inc., Research Division - Research Analyst * Rakesh Babarbhai Patel Raymond James & Associates, Inc., Research Division - MD & Research Analyst * Ross Adam Sandler Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Rent the Runway Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Janine Stichter, Vice President, Investor Relations. Thank you, Janine. You may begin. -------------------------------------------------------------------------------- Janine Stichter, [2] -------------------------------------------------------------------------------- Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway Second Quarter 2020 results. 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 SEC filings, including our Form 10-Q that will be filed in 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 also referenced 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 hand over to Jen. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks for joining us today. I'm going to focus my remarks on 2 important topics: First is my confidence in the long-term demand outlook and strength of our customer proposition. Second is my commitment to building Rent the Runway into a business that is profitable, has strong margins and it's self-funding. The restructuring actions we announced today are an important step towards meeting those goals, and Scarlett and I will review the details with you today. Let's begin with the customer. Our revenue grew 64% year-over-year to $76.5 million, our highest quarterly revenue to date. We also were adjusted EBITDA positive for the first time since our IPO, significantly ahead of plan, generating $1.8 million and a 2.4% margin. Subscription and reserve revenue grew 63% and quarter ending active subscribers grew 27% versus the prior year. We began the quarter with some of our best subscriber acquisition numbers in history, culminating in our strongest ever May acquisition. All subscribers also reactivated nicely in May. Our subscriber engagement metrics, such as customers who add items to their subscriptions, were at strong levels, and we saw some of the highest monthly subscription ARPUs in our history. We saw strength in our event-based rental business as our customers demanded wedding and party [hire], black tie and going out close. Our resale business also demonstrated excellent performance. Starting in mid-June, we noticed an increase in subscriber pause rates and a decrease in retention along with the delay in former subscribers rejoining versus history. This, combined with seasonally lower acquisitions, resulted in ending active subscriber count that was lower than expected for the quarter. Our goal is to be transparent with investors about what we do and do not yet understand about our performance and the evolving consumer environment. We are highly confident in the long-term opportunity for our business, and this is unchanged. However, in the short term, I want to acknowledge that it remains difficult to predict how customers will behave, and we want to be measured in our approach and guidance for the rest of the year. It is becoming clear to us that our customers live, work, socialize and travel differently in 2022 than they did prior to the pandemic. And this influences what they wear. We are still learning how these types of changes in customer behavior impact the business, particularly in a challenging macro environment. At just over 124,000 active subscribers at the end of the quarter, we believe that we are in the early inning of our closet in the cloud model for fashion. We have seen positive signs of stability and a strong bounce back in our customer metrics in August and September to date. Let me outline just a few reasons I'm confident that Rent the Runway can grow significantly and become an even more important part of our customers' lives. First, we think we're only just scratching the surface of initiatives to improve every customer metric from organic acquisition and conversion to retention and propensity to rejoin. We believe just executing on these initiatives and continuing to invest in our customer experience provides us an opportunity to more than double our business in the years to come. Let me highlight just a few examples. We recently began testing a loyalty program to reward our early term customers with one additional item of clothing for their next shipments. This simple test was one of the most successful drivers of loyalty in our history. Another successful initiative to improve our customers' conversion and loyalty with giving them an understanding of items that are likely to fit them via fit tags on product pages. We plan to soon rollout fit tags on our product grid to expand on our impact here. We've seen success this quarter in optimizing the way we display pricing to our customers, driving higher conversion and we plan to build on this in Q3. Given our long history with event-based rental, we think there is significant opportunity in reactivating some of the more than 2 million customers who have been onetime rental customers in the past. In July, we launched home pickup in our app and now over 50% of our subscribers have access to this, ahead of plan. We continue to see improving customer adoption and satisfaction with home pickup, which both improved customer experience and lowers cost. We believe we can become a much larger business simply by focusing on matters within our control. Notably, the opportunities above don't require any changes in customer acceptance of rental. We believe the apparel market continues to evolve in a way that's favorable to our business. Our recent partnership with Saks Off 5th to sell pre-left clothing with our branding, with a success and highlights an increased willingness by mainstream customers to wear secondhand clothing. As more of the biggest apparel retailers in the world sell pre-owned cloth, these trends should only strengthen. At first, we would expect greater usage in our events-based business. Retailers around the world sell billions of dollars of outfits that customers wear to social events. We want to capture this demand and grow event-based rentals into multiples of where it is today. As acceptance grows and as event-based customers become subscribers, our subscription business should benefit. Given its everyday nature compared to the event-based rental business, we see an even larger opportunity. I truly believe that our best days lie ahead. Let me now turn to profitability. I want to be clear that in order for Rent the Runway to be successful, Rent the Runway must be profitable and able to fund itself. Further, given our superior monetization of inventory versus traditional retailers, we have a significant gross margin advantage. Along with growth, we intend to maintain stricter cost discipline in order to generate above-average profitability in the medium term. Today, we announced a restructuring plan to reduce $25 million to $27 million of annual operating costs and streamlined our org structure. We made the difficult decision to reduce our corporate headcount by about 24%. The headcount measures will be largely complete in Q3, and we expect to realize savings beginning in Q3 and into fiscal 2023. We took a deep and rigorous look at our business, benchmarking ourselves to other companies and realize that we have the potential to improve efficiency and drive profitability sooner while continuing to grow revenue. Despite almost 45% incremental flow-through margins on additional revenue, growth in our relatively high fixed cost base prevented more rapid gains in profitability. We believe that our customers are best served by investments that focus on them and by simple and quicker decision-making. Let me discuss the financial implications of these actions. Once implemented, we expect these actions to positively impact adjusted EBITDA by approximately $4 million to $5 million in Q4 and $25 million to $27 million in fiscal year '23. As Scarlett will outline, we expect to generate mid-teens adjusted EBITDA margin and cover our product depreciation at approximately $400 million in revenue. At this revenue base, which we think is well within our reach in the short term, we believe we will be able to fund product CapEx for our existing customers and reduced cash burn before interest expense to approximately $30 million. We also expect to maintain a healthy cash position, allowing us to navigate potentially tougher economic conditions. Our medium-term target is to generate a 15% margin on adjusted EBITDA less product depreciation. I want to be open about the possibility that the path to this 15% margin may not be linear. While we intend to clearly demonstrate that Rent the Runway can be a profitable company with attractive margins, we may decide to reinvest in growing the business where it makes sense. That said, we remain steadfast in our commitment to efficiency and further prioritizing investments that benefit our customers. Ultimately, we believe the strength of our offering, continued growth in the business and a focus on removing costs in areas that don't affect the customer will result in value creation over time. I want to end my remarks by acknowledging the contribution that all of our employees have made to the success of Rent the Runway and by saying a heartfelt thank you to the employees leaving us. These actions are difficult. However, they are necessary for Rent the Runway to become a healthier company. As a company, we are resilient and innovative and have always been willing to make difficult decisions that are right for the business. As an example, during COVID, we fundamentally changed the way we acquire rental products, changed our subscription programs to be higher margin and drove efficiencies in our warehouses through technology and automation. Today, our challenge is to capitalize on the many opportunities in front of us while making rapid progress towards being a self-funded business. We intend to meet that challenge and provide our customers with the experience and products they deserve. With that, I'll turn it over to Scarlett. -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Jen, and thanks again, everyone, for joining us. I will start today with an overview of the restructuring plan we just announced and what it does for our profitability profile. Then we'll follow with a short review of our second quarter results for fiscal '22, and we'll end with guidance for the third quarter and full year. As we've discussed, our number 1 goal is to drive our business to profitability and demonstrate our compelling business model, which we believe can deliver 15% margin on adjusted EBITDA less product depreciation in the midterm. As Jen outlined, we are confident in Rent the Runway's ability to grow significantly in the coming years. We are taking restructuring actions now for 2 reasons. First, we want to ensure that the business can navigate potentially tougher macro conditions. In short, they are intended to provide a margin of safety. Second, these actions improve our medium-term profitability. They allow us to reinvest in our customer and create shareholder value. It's apparent that economic and financial conditions are uncertain. Our job is to position Rent the Runway to emerge from a tougher environment with strength. However, our actions aren't just a response to this environment. We believe we have high gross margins and the potential to be a very profitable business. We can make faster progress on profitability by focusing on our fixed cost base. These actions are intended to allow Rent the Runway to become more efficient and customer focused. We believe they will set the stage for significant margin improvement in the coming years. Let me now outline what these actions need for our business. First, the immediate impact. This plan is expected to result in a $25 million to $27 million improvement in adjusted EBITDA in fiscal 2023. The headcount reduction is expected to be largely complete by Q3 and positively impact adjusted EBITDA in Q4 by $4 million to $5 million. All these figures are versus the Q2 level; two, our near-term goal. At approximately $400 million in revenue, we expect to generate a mid-teens adjusted EBITDA margin and to be breakeven after product depreciation. This means we are able to fund product spend for our existing customer base with the only cash outlay being for growth. For example, if we funded 20% growth in our customer base, we would reduce cash burn before interest expense to approximately $30 million. Three, our medium-term goals. We intend to maintain strict cost discipline, approximately 45% incremental flow-through on revenue and generate approximately 30% adjusted EBITDA margin. That represents a 15% margin on adjusted EBITDA less product appreciation. This is, in our view, solid profitability that is considerably better than traditional retailers and online peers. At that level, we believe we will be free cash flow profitable, fully internally self-funding the business even at strong growth rates, and we aim to get there with the cash we have on hand. Now let me give a detail on the reductions and restructuring. I've already mentioned that we expect approximately $25 million to $27 million in annual cash savings in fiscal '23 compared with the Q2 '22 run rate, nearly all of which are fixed costs. We prioritize continuing to focus on growth and delivering the best customer experience and targeted our cuts in other areas. About $20 million relates to a reduction in head count of approximately 24%. We anticipate a related severance charge of approximately $2.5 million to be largely recognized in Q3. For full year '23, in addition to headcount reductions, we anticipate a $5 million to $7 million reduction in tech and G&A expense relative to the Q2 '22 run rate. Though we are largely focused on fixed costs, I want to touch on our variable expenditures. We have a business model where we can react to demand changes. Two of our larger variable cash outlays are marketing and product CapEx and we intentionally did not touch either of them as we continue to prioritize growth and customer experience. On marketing, we expect to keep spend, excluding head count at approximately 10% of revenue as we continue to prioritize efficient spend and growth. Product spend for this year remains at our last guidance of approximately $60 million. It's very important for us to be prepared with the right product assortment for our customers. As for the remainder of our variable costs, that fulfillment costs, customer service costs, credit card fee and revenue share payments to brands, they all largely flex with demand. Taken together, we now expect our fiscal '22 free cash flow margin to be slightly better than in fiscal '21, which, as a reminder, includes a more normalized level of product acquisition versus last year. Now let's turn to the review of Q2. We are very pleased with our Q2 financial results, with revenue hitting a record of $76.5 million, up 64% year-over-year and up 14% quarter-over-quarter. Active subscribers increased 27% year-over-year to 124,000 but declined 8% quarter-over-quarter. As Jen mentioned, in the second half of the quarter, like many companies in the sector, we saw weakened demand. This was in addition to the seasonality we typically see with slower acquisition and a higher rate of pause in Q2 versus Q1. Total subscribers increased 37% year-over-year to 173,000 subs and declined 2% quarter-over-quarter. Although active subs was down sequentially, we beat our revenue guidance due to strength in customer engagement and ARPU or average monthly subscription rental revenue per subscriber. Q2 ARPU benefited from both a full quarter impact of price increases and high add-on rates, with 30% of active subs paying for 1 more add-on. We reiterate our outlook for ARPU to be up approximately 5% for fiscal year '22 versus last year. In addition, even in this difficult environment, we saw high subscriber monetization with subscribers continuing to buy items at healthy levels, driving strong retail revenue and resulting in 87% of total revenue being generated by subscribers. Reserve was up 9% versus Q1 '22. Though we had planned for high demand for special occasions, party and going out items this year, we saw even higher usage than expected of these items by subscribers, which may have constrained our reserve business in the quarter. We see this as an opportunity and are planning our assortment for this year and next with an even higher proportion of rental items for social use cases. Our Q2 gross margin of 42% was 3 percentage points higher than prior year and nearly 9 points higher than Q1. Some of this benefit has to do with seasonality. Fulfillment cost as a percentage of revenue came in at 31% versus 34% in Q1, partly due to lower shipments per average subscriber, which we typically see in the summer. We would expect average shipments per subscriber to increase seasonally in Q3. But there are 2 factors that we believe will persist. One, we had higher revenue per shipment versus last year, due to both the price increase and high add-on activity; two, rental product depreciation was 18% of revenue versus 24% in Q2 '21 as it was absorbed over a higher revenue base. We are improving our target for fulfillment costs as a percentage of revenue to be approximately 33% for full year '22, and we expect gross margin for the full year to be a couple of hundred basis points higher than full year '21. We are very pleased with our adjusted EBITDA this quarter, which was positive for the first time since we went public, coming in at $1.8 million versus negative $1.9 million in Q2 last year, representing a positive 2.4% margin and a 6-point improvement versus negative 4.1% last year. Our total operating expenses, marketing, technology and G&A represented 70% of revenue compared with 79% in Q2 '21. We expect quicker OpEx leverage with the cost reductions we just discussed. Let me now turn to guidance. Our historical seasonality would typically lead us to expect strong subscriber acquisition and sequential revenue growth in Q3. And as Jen said, we have seen an uptick in subscriber acquisition and unpausing activity in the last few weeks. However, we think that changing consumer behavior post pandemic and the macroeconomic environment continues to be uncertain. For instance, higher remote work trends may have contributed to the demand impact we experienced this summer and could change the seasonality patterns of our subscription business. As a result, we've reflected this uncertainty in our guidance for Q3 and the rest of this fiscal year. We also continue to monitor COVID variant and have modeled Q4 after the last 2 years, where we saw COVID impact, and we currently expect Q4 revenue to be slightly lower than Q3. For Q3, we expect revenue of $72 million to $74 million. This guidance reflects ARPU that is lower in Q3 versus Q2. In Q3, we expect a positive adjusted EBITDA margin of 1% to 3%. A reminder that we again expect Q3 to include our typical higher marketing or seasonal customer acquisition and also higher product spend and upfront revenue share payments to the brand as we receive new fall winter products. Though typically Q3 profitability is lower than Q2 profitability, we now expect it to be higher than planned due to the impact of the restructuring on part of the quarter. In terms of full year, we now expect revenue in the range of $285 million to $290 million, representing 40% to 43% growth versus full year '21. The low end of our range reflects a continuation of the summer trends, and the high end reflects slightly improved trends and more normalized seasonality in Q3. Both the low and the high end also reflects impact from COVID variant like we saw in the last 2 years. We are revising upwards our prior guidance for adjusted EBITDA margin for fiscal '22 to negative 2% to 0% from the prior negative 6% to negative 5%, which largely reflects our cost discipline throughout the year and the reduced cost base in Q4. We continue to be intensely focused on balancing robust growth with profitability and will seek to strike the right balance to attain both objectives and maximize the long-term value of Rent the Runway. With that, we are happy to open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Ike Boruchow with Wells Fargo. -------------------------------------------------------------------------------- Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [2] -------------------------------------------------------------------------------- Jen, I wanted to ask you, just back to the cost initiatives. Maybe can you elaborate a little bit more, the cuts, they seem fairly deep. I'm just kind of curious the timing, why now especially given signs of positivity in the business that you guys are seeing. So just kind of curious if you could elaborate a little bit more on the cost initiatives. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Ike, for the question. So the reductions are just as much about growth as they are about efficiency. So this was the result of rigorous analysis, a rigorous process. We benchmarked against group companies, and we saw the opportunity to become more efficient, which form the size and scope of the cut. But because they're easily about growth, this gives us the ability to reinvest in customer experience and place significant offense. We're a proactive organization, and we follow the data. This is what we did when we saw the very early impacts of COVID, and we acted early and meaningfully. And as promising as the bounce back has been in August and September, we simply can't predict what's going to happen in the next 12 months. These changes put us in a strong position to continue to grow both in the immediate and once the environment is fully recovered. On the financial front, we think this is transformative for the business. We go from a business that's been burning a lot of cash to one that has much tighter cost structure in the short term can fund product costs for its existing customer base and reduce burn to approximately $30 million before interest at approximately $400 million in revenue. In terms of why now, we're confident in Rent the Runway's ability to grow significantly in the coming years. We took these actions for 2 reasons. First, we wanted to ensure that we can navigate potentially tougher economic and financial conditions; and second, we wanted to pull forward the path to profitability and improve Rent the Runway's medium-term profitability. So this truly allows us to reinvest in our customer and create shareholder value. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Our next question is from Ashley Helgans with Jefferies. -------------------------------------------------------------------------------- Ashley Elizabeth Helgans, Jefferies LLC, Research Division - Equity Analyst [5] -------------------------------------------------------------------------------- Scarlett, this is for you. Can you please walk us through in like a little bit more detail your near- and medium-term margin target? And just how you're planning on getting there? -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [6] -------------------------------------------------------------------------------- Sure. Thank you for the question, Ashley. So maybe just a little bit of kind of redefinition of what we talked about on the call. I mentioned a couple of things. The first thing I mentioned is our near-term goal, which is at approximately $400 million. We would expect to generate a mid-teens adjusted EBITDA margin, and that would translate to be breakeven after product depreciation. So a couple of things there. First of all, adjust EBITDA was a very important first milestone for us to show our ability to generate cash from operations to cover our OpEx, which we did in Q2, ahead of our plan even before all these cuts. Looking at EBITDA after product depreciation is really about measuring our profitability, taking into account basically the full annual cost of products for existing subscribers. So we've said that getting to approximately $400 million, and that's a number that's well within our reach in the short term, we can get there. So let me walk you through how we would get to that first target. So first of all, starting with the cost of fulfillment, that implies that it stays pretty similar to where it was in Q2 at about that 32%. Our rev share similarly -- very similar levels to where we are in Q2. Our depreciation in Q2 came in at about 18% that we're talking about a decline of percentage points. And you would get there through a mix of products as well as volume discounts that we would expect. And then G&A and tech are going to see some significant leverage at higher revenue as the fixed cost remains essentially flat, right? We intended to keep very tight cost discipline. So combined, you would see them at about 40%. That's about 60% in Q2, and we'll see that reduce pretty significantly even in Q4 as a result of this restructuring plan. Marketing, which consistently said will stay at about 10%, and that gets you to about 15% adjusted EBITDA margin and implies, like I said, an adjusted EBITDA minus product depreciation that will be breakeven. We also said that at this level, we believe that our cash burn would be about $30 million, excluding interest expense. And the way that you get there is you think about the cost after that, which are product CapEx, we think that's about 20%, a 20% growth. Maintenance and other CapEx is a couple more percentage point, and that's how you get to about $30 million in cash burn, excluding the interest expense. From that point to get to the 15% adjusted EBITDA margin minus product depreciation, it's really about a slight more improvement in fulfillment. You have heard us talk before about that getting back to 30% or lower. Rev share pretty much saved at the same level. We would expect to see a little bit more decline in depreciation at larger scale. And then in terms of G&A and tech, we believe that we get even more leverage with higher revenue, and that should get to a combined about 20% of revenue, excluding stock comp, with marketing staying at the same 10% that we've been discussing. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question is from Edward Yruma with Piper Sandler. -------------------------------------------------------------------------------- Edward James Yruma, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [8] -------------------------------------------------------------------------------- I guess 2-parter for me. First, maybe just a double-click on some of the restructuring commentary. Can you give a little more specificity as to kind of where you made the cuts? I know you protected certain areas of the firm that you want to invest in, but are there specific initiatives that you're not doing now? Or kind of like where did the bulk of the cuts sit? And then as a longer-term question, particularly we have what could be tougher macro, I guess, how do you feel today about the price value relationship or maybe better yet, or how do you think your customers feel about it? And are you considering any adjustments there? -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [9] -------------------------------------------------------------------------------- So because we feel very confident in the continued growth in our business, we were intentional of -- with this restructuring plan to not cut in areas which impact the customer. So we still feel confident in our ability to deliver on initiatives that are going to impact -- positively impact all of the metrics within our control, whether that's acquisition, conversion, rejoin rate or loyalty of our customers. So we cut relatively more in back office functions than we did in customer-related functions. We also very -- intentionally, as Scarlett mentioned, didn't touch our variable costs. We're continuing to invest in our marketing budget, in our rental product budgets. We've actually seen that the demand for social occasions and kind of casual occasions is even higher than we had anticipated. So we're going to do work to kind of reallocate some of our inventory dollars going into the back half of the year and next year. So the goal was really about continuing to focus on growth, continuing to focus on delivering the very best customer experience because we think that we're really in the early days in rental and resale and that the industry is just getting started. -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [10] -------------------------------------------------------------------------------- Yes. And Ed, maybe just a little bit more in terms of example. So just one thing I wanted to add, which is even before this restructuring, we had already eliminated significant expenses in CapEx that was originally planned for our budget for this year. Some examples there, we got out of one of our floors in our headquarters as an example, there was some CapEx plan in our warehouses and corporate being much tighter in terms of discipline on hiring and backfilling in areas outside of growth and customer experience. And then we're seeing some really nice productivity in our customer service agents as well that's beyond volume benefits that we would typically be able to benefit from as well. And then I'd say on a go-forward basis, the $5 million to $7 million reduction in tech and G&A, think of it as being in areas like third-party fees, consulting, some tech expenses, discretionary corporate and occupancy-related expenses, and we continue to look at additional opportunities to reduce our expenses. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [11] -------------------------------------------------------------------------------- And then Ed also asked about the price value equation. And what we can say is that we've been monitoring our customers for pricing sensitivity. We've seen pricing sensitivity noted slightly more than in the past. But consumers tend to be more price sensitive overall in the summer, that is historical patterns of what we've seen. So we've continued to lean into our value messaging and invest behind the customer experience. We've done a lot of work over this past quarter to remind the customer of how much retail value she's receiving when she rents, how renting is a better financial equation versus buying. I think that we're having some nice results on subscribers and customers using us for social occasions across both of those businesses. So I think that some of our work here is kind of having positive momentum and that she's saying -- she's seeing that it doesn't really make sense to buy a dress that you'll only wear once. So we're working with a boosting total marketing efforts that highlight the value of renting over buying, and we think we're also kind of the early innings of this as part of our core brand messaging. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question is from Lauren Schenk with Morgan Stanley. -------------------------------------------------------------------------------- Lauren Elizabeth Cassel Schenk, Morgan Stanley, Research Division - Equity Analyst [13] -------------------------------------------------------------------------------- I wanted to dig in on the subscriber net adds, if I could. Obviously, lots of different moving parts. But if you had to hypothesize what the 1 or 2 largest factors of the June and July slowdown are, what would you say those are? And then just on the reserve strength, is there anything further you can share on the profile of that customer during the quarter? Between those customers that were maybe previously subscribers versus new to Rent the Runway? Just trying to understand if there's maybe a bit of a trade-down effect happening there on the subscriber side. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [14] -------------------------------------------------------------------------------- Yes. So in terms of what we saw this summer related to the sub count, I think I'm going to talk to you about the short term as well as the long term. So as it relates to kind of performance this summer and short-term performance, we don't know exactly why subs were down. It could be a combination of many factors. First and likely most significantly, it's becoming very clear to us that our customers live, work, socialize and travel differently in 2022 than they did in 2019 or throughout the pandemic, this certainly influences what they wear. So we're starting to learn how these types of changes in customer behavior impact the business. So as an example, in 2019, over 1/3 of subscriber activity was related to closely rented for the office. If this year -- and in 2021 and first half of 2022, only 20% of what she wear was related to clothing she wore for work. So if return to office maintains the status quo or remote and hybrid work trends increase, our subscription business might become more socially and casually oriented, as it has been in 2021 and 2022 to date. And therefore, we might experience more seasonal peaks and troughs. We also think that there could be some impact of the macroeconomic environment on our performance. And it's hard to be precise about what that impact is. So we're continuing to monitor this. One of the reasons why we don't have the exact answer right now is that we've seen some positive signs of stability and a strong bounce back in our customer metric in August and September to date. And then while we can't predict what happens in the short term, we're very confident about our prospects over the next few years. So we believe this market is in its infancy and customer adoption of rental and resell will continue to grow. And there's so much here that's in our control. Just by focusing on the metrics that are in our control such as acquisition and conversion and rejoin rate and our loyalty, we can more than double the business in the upcoming years. So our goal with this restructuring is really -- has been to position the company to have the strongest financial profile to invest in the customer, invest in this growth and capture what we think is an enormous opportunity. In terms of reserve in the quarter, Scarlett mentioned this in her comments. But what we saw is that for both our reserve customers and our subscribers -- so let's start with subscribers. Subscribers used more special occasion inventory in the quarter than even we had been planning for. And remember, we planned for a massive event boom this year, and they took even more. And when I say special events, inventory, I mean everything from clothing they were wearing to casual social events like going out to dinner, going out on dates to parties to cocktail events to black tie, so because subscribers took relatively more of this more formal kind of going out inventory than we had anticipated. We think that it could have impacted our reserve business, and we potentially didn't capture as much of our reserve business as we could have in the quarter. So we're making changes to the inventory assortment in the back half of the year in 2023 to ensure that we can deliver on social occasions, even more robustly for both subscribers and for reserve customers. We don't see any different profile in our reserve customers. We don't think that there is a trade down effect that's happening. That's not what we're seeing in our data right now, especially given that we are seeing again some positive signs of bounce back in August and September in our subscriber numbers. -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [15] -------------------------------------------------------------------------------- Yes. And I would say in terms of like new versus existing customers, we're seeing a similar proportion in this quarter as we saw last quarter of new versus returning customers. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question is from Ross Sandler with Barclays. -------------------------------------------------------------------------------- Ross Adam Sandler, Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst [17] -------------------------------------------------------------------------------- Just a couple of follow-ups to the last question, and I think the one before. But did the April price increases have any impact on that the June churn that you were talking about or the re-subscriber rate? And then, Jen, when you talk about macro, do you mean like higher gas prices or people getting laid off or whatever, I thought we were kind of a great value prop during a tougher kind of consumer pinch given the cost savings here. So yes, just any elaboration on that macro, that would be great. And then Scarlett, it sounded like the product depreciation would go down to 15% of REV in that medium-term goal. So is that from better terms in wholesale and exclusives? Or is that mix shift to Rent the Runway or share by RTR? Would -- can you walk us through that reduction on that one important line? -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [18] -------------------------------------------------------------------------------- Why don't I -- thanks Ross, for the question. Why don't I start off with the product depreciation? So yes, in terms of the reduction. You've seen it reduce over the last couple of years really as a result of the fact that we now have kind of the more appropriately sized revenue to that supply, right? So we've seen kind of consistent decrease in product depreciation as a result of better matching of supply and demand. So that's kind of point number one. And then point number two is that we also see benefits as we see continuing shift away from wholesale, and that has a good impact on product depreciation, both because of the fact that you have a lower percentage of wholesale. But as you have a higher percentage of exclusive designs, remember that those items are about 50% of the cost of the wholesale item. So that benefits us. Then of course, as we get larger, we also should get volume discounting, and therefore, to your point, better terms and better pricing on the individual kind of pieces of that product assortment. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [19] -------------------------------------------------------------------------------- So Ross, in terms of the first part of your question, price increases might have had an impact on churn, but there might also be increased seasonality that we saw that affected the near-term numbers. On the macro and its impact, it's really hard to tell because we saw some weakness in the summer, but we've seen strength more recently. So our objective here is to put the company in the healthiest financial position possible so that even if negative macroeconomic conditions persist, that Rent the Runway can continue to drive the business to profitability in much lower growth scenarios that we could pull forward that path to profitability. And at the same time, we've not cut in areas that are related to growth. So we're continuing to invest in growth. We're investing the same marketing dollars. We're investing the same inventory. We have the personnel here, the engineers here that are going to be -- continue to build out better product discovery, better fit, all of the things that we have been discussing. So we're planning for the downside scenarios. But at the same time, we want to continue to ensure that the business is building for the long term. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question is from Michael Binetti with Credit Suisse. -------------------------------------------------------------------------------- Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- I guess, first, I'm curious on ARPU. You mentioned -- I think you said it was up 5% in the quarter on a year-over-year basis, driven by price increases and higher add-on given the decline in active subs. Could you maybe break down the contribution by each of the components and the 5% increase just to -- I'm curious which of the inputs you see as most sustainer inputs that were more affected by some of the macro cross-currency pointed to in the quarter. And then bigger picture, Net Promoter Score was a topic we talked about through the IPO process. Can you speak to trends in the NPS score from the subscription consumer today? They've been through quite a bit of change with the program from unlimited swaps to sunsetting unlimited swaps, price increases in the program, lots of changes in the use cases and kinds of different occasions that they're using the product for and now they're facing some pressure across their household budget. I'm curious what you know about the path of NPS through all of that change. -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [22] -------------------------------------------------------------------------------- Michael, thanks for the question. Maybe I'll kick it off with ARPU. So your question on what part of ARPU persists in terms of the increase that we saw. So obviously, the price increase is one that we would expect to persist, right? That hit us for 3 quarters of the year or will be for 3 quarters of the year, given that we launched that in April. Having said that, we've pretty consistently seen really nice add-on activity from our subscribers over the full year, hovering around that kind of 30% level for most of the year. So that early to tell, but it seems to be hanging in there quite nicely, and we would expect continued good engagement there. One thing that I do want to call out is Q3 in a period when you see higher acquisition, you would expect ARPU to come down. And I think I mentioned it in my point, which is that we would expect to see ARPU come down a little bit in Q3, really because you have a higher percentage of the customers and therefore, a slightly better price point as they come into the program with a discount. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [23] -------------------------------------------------------------------------------- So on Net Promoter Score, it's remained broadly stable. We have very loyal customers, our older cohorts who you know stayed with us through COVID continue to love the product and the service. We don't really have any new information to share on Net Promoter Score, but a few things that we look at as kind of leading indicators of Net Promoter Score. One is the fact that the business remains largely organic. It remains it's growing through word of mouth. We see that our customers continue to post reviews to post on social media. We're seeing that during these periods of kind of strong seasonal bounce back that our customers are finding out about us from other customers. We also know that -- these are customers who are engaging with us more and more. So to your question on ARPU, ARPU is driven both by the price increase, but it's driven by the fact that our customers are choosing to pay for even more items in their subscription, and we saw some of the highest ARPUs that we've ever seen in the summer. So even though there were seasonal impacts of the summer, the 124,000 ending subscribers we had at the end of the quarter were more highly engaged with the product than we had kind of seen before. So we feel very good about kind of all the leading indicators of NPS, about how customers are engaging with us, them choosing more brands, falling in love with those brands. And that's why we're focused on providing for the very best experience. We're building on our brand relationships, providing her the best product, making the experience more and more seamless for her to use so that we become more of a daily utility in her life. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question is from Rick Patel with Raymond James. -------------------------------------------------------------------------------- Rakesh Babarbhai Patel, Raymond James & Associates, Inc., Research Division - MD & Research Analyst [25] -------------------------------------------------------------------------------- I'm hoping you can give us more color on the improvement in subs that you're seeing for early in the third quarter. Are you doing anything different from a marketing or customer experience perspective that you be benefiting the business beyond the normal seasonality? And second, I'm hoping you can help us with the outlook for marketing. So you're sticking with the target of 10% of revenue for the year. Curious what's earmarked for performance spend versus top of funnel. And if macro has become more of a headwind, do you see the potential to flex this line to protect your margins? -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [26] -------------------------------------------------------------------------------- Okay. So just to start with, like in a normal year, which again, we haven't been in since 2019. But in a normal year, we would typically see that the summer has lower seasonality for us. We've shared that before. Now why does the summer have lower seasonality for us? Because in the middle of the summer, high to the summer, when lots of customers are just on vacation, they're at the beach, they're addressing way more casually. They can just throw something casual over their bathing suit and kind of call it a day. We carry 800 of the top designers in the world. So even though, of course, we carry casual inventory, we carry the whole gamut, she's not necessarily thinking as much about her self-presentation in the middle of July as she is in September. So typically, when we think about marketing, we do a lot more marketing in the ramp-up towards the fall. When everyone is basically back to school, back to life, back to events, back to offices. And so -- we've not done anything differently this summer. We've linked into the same kind of seasonal marketing that we would expect. I would say that the layer on top of this year that is slightly different is that we are emphasizing value-oriented messaging across the board in every marketing communication. So just a small example. Now in every e-mail communication that you get from us on a monthly basis, you're reminded of the value of the $4,000 of designer product you receive that month. We're reminding you of if you sign up for this subscription, it costs you $140. And if you -- so each item only cost you $18 as part of subscription, compare that to buying a dress for an event, and that can run us $200, $300. So the value-oriented messaging is certainly different. In fact, we now have a brand marketing campaign up around the country, that's very clearly emphasizing to customers why buy a dress you're only going to wear once. So we've leaned into value-oriented messaging. We certainly have emphasized for this fall, we're really excited about showcasing how incredible our designer assortment and product assortment is. We've seen strength in our customers using us for their social lives. So we've leaned into that in our marketing. But we haven't really seen anything else that would be that different as it relates to how we think about the summer and kind of build back into the fall. -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [27] -------------------------------------------------------------------------------- And then just maybe to touch on your second question. The guidance that we're providing is obviously a little high and both of those sides assume that we would spend is approximately 10% of revenue that we've been talking about, right? So our intent is to maintain that spend at about 10% for the whole year. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question comes from Andrew Boone with JMP Securities. -------------------------------------------------------------------------------- Andrew M. Boone, JMP Securities LLC, Research Division - MD & Equity Research Analyst [29] -------------------------------------------------------------------------------- You talked about keeping marketing at 10% of revenue despite seemingly less revenue visibility. Can you talk about this the decisioning of keep marketing at that level in a tougher macro environment? And then as it sounds like use cases are changing, can you just touch on assortment? How do you think about '23 and potentially '24 in terms of what you guys keep as items as the customer is not returning to work as you have a more casual customer, how do you think about actually making sure you do have the right inventory on hand? -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [30] -------------------------------------------------------------------------------- And the great thing about marketing is that it's discretionary. And that if we see signs that what we experienced the negative trends that we experienced this summer if they come back, if we see trends that they were related to macro, which, again, we think could be a factor, but we're not -- we need more data to confirm that, like we can use our discretion and cut back when appropriate. For now, we continue to invest in growth and we see a huge amount of opportunity in the upcoming months and into next year to grow the business. -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [31] -------------------------------------------------------------------------------- And in terms of the assortment for '23 and '24, we -- as Jen just mentioned, I think one of the biggest changes is leaning in even more on special events. And we did find it interesting how much we saw our subscribers take some of the special event apparel over the summertime and this is for us showing up as an opportunity to do maybe a bit more of that, and that's one of the things that we are planning for. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [32] -------------------------------------------------------------------------------- And I'll just add as well on marketing. We're extremely disciplined on our marketing spend. We measure the ROI of our marketing. We're not seeing signs that our marketing isn't effective. Our marketing remains as effective as it's ever been. So for the time being, we're going to continue to invest behind marketing because it's been very positive for our business. And we think that there is huge opportunity to gain market share and to get more and more customers in this environment to try rental either via reserve or via subscription. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question is from Dana Telsey with Telsey Advisory Group. -------------------------------------------------------------------------------- Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [34] -------------------------------------------------------------------------------- As we go towards the third and fourth quarter and you look at the cadence of each, what do you see as key differentiating factors this year in Q4 versus last year, whether it's for product, whether it's for -- given you have at-home pickup now, what could be the surprises one way or the other on the delta? -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [35] -------------------------------------------------------------------------------- So we've mentioned for Q3 and Q4, we are taking a measured approach, right? In spite of some of the positive signs that we've seen over the last few weeks, we do think that there's some uncertainty. So I think one of the positive factors is to have a little more certainty around some of these things that we're looking at, especially over the next few weeks. So that's kind of point number one. Point number two is Q4 does have incorporated in it, a similar type of impact as what we saw last year. From a COVID standpoint, that could be something else, that impacts how that comes out as well. -------------------------------------------------------------------------------- Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [36] -------------------------------------------------------------------------------- Got it. And then on at-home pickup, what have you been seeing there as you expand it from the territories that you had previously? -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [37] -------------------------------------------------------------------------------- Well, we were able to expand it to over 50% of our subscribers kind of meeting our end of the year goal 2 quarters early. We're seeing that adoption rate amongst our subscribers continues to improve, that there's very high customer satisfaction with this. And we think that it continues to be a win-win. The big launch that we had related to at-home pickup in Q2 as we launched at-home pickup in the app. So now it is right in your face to customers when they're returning their clothing that they could have that clothing picked up at their home that they could schedule that pickup. As a reminder, this is more cost-effective for us, it's better and more convenient for our customers. So these are just, again, points of customer delight that we continue to add into the experience, removing friction from her everyday experience. And we think that over time, this adds up to improvement in these metrics, again, that are in our control. Loyalty is one of those metrics that's in our control. Making small, modest improvements in loyalty makes a huge difference and allows us alongside small improvements in acquisition or slow improvements in conversion to double the business in upcoming years. So we're using these strategic initiatives that are all still focuses on the business, product discovery, search, find, home pickup all of these things should lend themselves to improving the core metrics of the business that are in our control and getting us to the place where we can kind of more than double the business in the upcoming years. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question comes from Noah Zatzkin with KeyBanc. -------------------------------------------------------------------------------- Noah Seth Zatzkin, KeyBanc Capital Markets Inc., Research Division - Research Analyst [39] -------------------------------------------------------------------------------- Just to drill down a bit on the reserve again. I guess in terms of your comments around adjusting the assortment for social occasion use cases, I think in part due to stronger-than-expected reserve trends. I guess going forward, has anything changed in terms of how thinking about the size of the reserve business long term, I guess, relative to maybe how you were thinking about it previously. And then second, just in terms of reserve serving as a funnel for subscription if you could provide any color on those dynamics playing out during the quarter and how you're thinking about that dynamic through 2022 and if anything has changed longer term? -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [40] -------------------------------------------------------------------------------- So we think the reserve can be several times it's current size. We are planning to significantly increase high formality inventory as a percentage of inventory in full year '23, which by the way, should not only benefit the reserve business, but it will benefit the subscription business because subscribers also take this inventory and to get a huge value for why they would sign up for a subscription. We're counting on both higher consumption of this inventory by subscribers and leaving room in there for higher consumption by reserve customers. We think that reserve continues to be the easiest way to come into the business. It's such a clear value proposition. Why buy address you're only going to wear once. You're renting it from us at approximately 10% of the retail price, there's billions of dollars of dresses sold every single year in the U.S. for social occasions. And we're leaning in kind of -- to take this on head-to-head in our marketing because we've done -- we've seen that those reserve customers can become future subscribers. As a reminder, 50% of our subscribers are former Rent the Runway customers, primarily reserve. So this is a great funnel into our business, and so we're investing behind it. -------------------------------------------------------------------------------- Scarlett O'Sullivan, Rent the Runway, Inc. - CFO [41] -------------------------------------------------------------------------------- And maybe just to add a little bit to what Jen said. The other thing is we've seen some really nice upticks in terms of reserve customers converting over to subscription over the last 6 months or so. So that's obviously very encouraging that, that first important rental behavior socializes the customer to this market and then we have an ability to then convert her in new subscription. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- There are no further questions at this time. I would like to turn the floor back over to Jen Hyman for any closing comments. -------------------------------------------------------------------------------- Jennifer Y. Hyman, Rent the Runway, Inc. - Co-Founder, Chairman & CEO [43] -------------------------------------------------------------------------------- I just wanted to thank everyone for joining us today and listening to our Q2 call. I'm very excited about our plans to accelerate our path to profitability and the long runway for growth ahead. So we look forward to continuing to update you on our progress on our Q3 2022 call, and thanks again for joining us. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.