Rent the Runway jumps in trading debut

'Rent the Runway' CEO Jennifer Hyman joins Yahoo Finance to discuss the clothing subscription services initial public offering Wednesday.

Video Transcript

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JULIE HYMAN: Rent the Runway, the clothing rental service, has just begun trading a few moments ago. And it is up about 9% from where it sold its shares at $21 each, selling 17 million and raising about $357 million. The CEO of Rent the Runway is joining us right now from the NASDAQ. That is Jennifer Hyman, no relation, by the way, to me, Julie Hyman.

Jen, thanks so much for being here. And first up, I should mention I'm a longtime customer of Rent the Runway. So I know the service well--

JENNIFER HYMAN: Well, thank you.

JULIE HYMAN: --and what you guys do. So talk to me here about growth. Now you've gone public-- big step, obviously, in your growth process. What is the game plan now in terms of further growing the service and further reaching more subscribers?

JENNIFER HYMAN: Yeah, so we are just so proud on this milestone day. You know, we started our business with one dress for one single situation and have expanded into this "closet in the cloud" that women now use for every situation. And our customers use us 83 days per year.

So how we're looking to grow is really offering her the very best customer experience, the very best assortment, so she uses us more days of the year, and growing our subscriber base. And we have 2 and 1/2 million former Rent the Runway customers who have rented for a special event who are really our productive funnel into subscription. So that's one funnel of growth.

And of course, the other funnel is all of the organic virality of our business. Every single subscriber refers 10 of their friends to our service because they love the experience, it's visual, and it really transforms how they feel about themselves every day.

JULIE HYMAN: And you guys, of course, also offer some perks when people refer, which does not hurt matters. Looking at your subscribers here, we're just showing the subscribers as of September 30. That's active subscribers of about 112,000. It's still lower than it was at the end of 2019, which was nearly 134,000. Do you have any goals there of active subscribers you want to get to and need to get to over the next few years in order to also get closer to profitability?

JENNIFER HYMAN: Yeah, so we're really proud that our subscriber growth on the active basis has been up 104% in just the first seven months of our year. We have been experienced continuing momentum throughout the year. And what is amazing is that women did not have to return to the office in order to return to Rent the Runway.

90% of our customers continue to work from home. And we're seeing that our total subscriber count is actually back up to 97% of where it was at the end of 2019. So we think that we will continue to scale beyond those 2019 levels.

One of the exciting things about the subscriber base is who they are right now. It is a subscriber base that's more geographically diverse. She has more diversity in her household income. And she's using us for a more diverse set of occasions.

So 50% of her use case now is for casual, everyday occasions. And that gives us permission to really expand with our subscribers to, really, her everyday life.

JULIE HYMAN: Something that's interesting about the business model that has shifted is that you guys are effectively, yourselves, renting clothing to then rent out. In other words, you're not purchasing most of the clothing that you're renting out outright. You are consigning that clothing. What drove that change? And what is that doing for the business model?

JENNIFER HYMAN: Yeah, so we've transformed the way that we acquire our rental product. And one of the ways that we acquire rental product now is we partner with our 750-plus designer brands. And we share revenue on the performance of that clothing every single time it goes out to a customer.

So it empowers our brand partners to actually, over time, make more than they would have made. It obviously enables us to expand our assortment with far less capital intensity and far less inventory risk than we've ever had before. We also have partnered with our most popular brands to build exclusive collections on our platform that utilize our data.

So they have the highest longevity. They have the highest desirability, and therefore, the highest ROI of any products on our site. So now the majority of our products are acquired in these cost-efficient, capital-efficient ways. And that's dramatically enabled us to expand and drive towards profitability of the business.

JULIE HYMAN: One of the challenges for Rent the Runway, even pre-pandemic, was fulfillment, was supply chain, was getting the stuff to people and then getting it back to Rent the Runway. That was something that was a challenge for you all, going back to 2019. Even earlier this year, you all switched your fulfillment provider from FedEx to UPS.

And that's a switch I believe you've made several times over the course-- over the lifetime of the business. What drives those changes? And how do you get your arms around that delivery issue?

JENNIFER HYMAN: Well, there haven't been delivery issues. We, in fact, have over 10 delivery partners and have expanded to many more throughout the country. We try to deliver in every single region of the country the very best customer experience as it relates to speed, as it relates to accuracy of delivery.

And we've found that there-- as our scale increases, it really enables us to innovate how we get our clothing to and from the customer. When you think about our subscription, what makes it different than a Spotify or a Netflix is the fact that it's a physical subscription. So the better and better we drive our customer experience, the more friction we reduce from our experience, we see that in dramatically higher loyalty rates over time. So as an example, our new subscription programs right now, which have more innovative transportation offerings, such as cross-ship, all have higher loyalty across every single customer cohort then our subscription plans had before.

JULIE HYMAN: Finally, I want to ask you something about ESG, which is a risk factor that you guys highlight in your prospectus also. Again, as somebody who's used this for a long time, obviously, you're using a lot of dry cleaning here. And the stuff comes in the Rent the Runway cloth bag.

But each individual item is still wrapped in plastic. Any plans to change that? Any concerns, any pushback on the ESG front?

JENNIFER HYMAN: So the goal of our business has always been to get women to buy less clothes. That's really the only way to solve the enormous negative emission issue in the fashion industry. 70% of the negative emissions come from the purchase of new clothing and the production of new clothing. So we're in this cycle of overconsumption, overproduction.

We've actually proven that when women Rent the Runway they buy less clothes. So we've conducted an LCA analysis that really takes into account the impact of rental and nets out what could be negative impacts of transportation or negative impacts of cleaning. And we have found two things-- number one, that we've displaced the production of 1.3 million units over the past decade, which means that because of Rent the Runway these-- this clothing didn't have to be produced in the first place, which is really the heart of the problem. And second, on a per-rental basis, it is more sustainable to rent than to buy across water usage, energy consumption, and CO2 consumption.

So we are very proud that our sustainability goals and our financial goals are perfectly aligned. When we rent this dress in additional time, it helps our bottom line. And it helps us to further utilize our shared closet, which is exactly what our sustainability goals are.

JULIE HYMAN: Jennifer Hyman, thanks for being here. Rent the Runway CEO on the IPO day. Appreciate your time.