Rent the Runway IPO filing: S-1 takeaway analysis
- Rent the Runway made public its IPO filing on Monday.
- Business is losing money and subscribers during COVID-19 – but subscribers are coming back.
- It continues to invest in new inventory and execution models.
Rent the Runway went public with its IPO on Monday, revealing key details about its business and ambitions for when it becomes a publicly traded company.
The clothing rental company had confidentially filed for an IPO in July. Goldman Sachs, Morgan Stanley and Barclays are leading work on the deal.
Jennifer Hyman and Jennifer Fleiss founded Rent the Runway in late 2008, when they were both students at Harvard Business School. The original idea was to allow customers to rent designer clothes for a fixed period. Since then, the company has evolved to also include monthly subscriptions and an option to purchase pre-worn clothing.
Hyman is CEO, while Fleiss sits on the company’s board of directors. After its IPO, Rent the Runway will be listed on the Nasdaq under the title “RENT”.
Like many other clothing-focused companies, Rent the Runway has been hit hard by the Covid-19 pandemic, which has decimated demand for clothes consumers should wear for special occasions or in the office. The company has permanently closed its outlets, laid off 33% of its employees and put an additional 37% on leave.
He also lost his unicorn status during the pandemic, raising $ 25 million in April 2020 on a valuation of $ 750 million, down from his valuation of $ 1 billion in 2019.
But Rent the Runway seems bullish it’s poised to take advantage of consumer trends, including the increasingly common second-hand clothing and the shift from ownership to access as a motivation for spending. .
Here are six key points from Rent the Runway’s S-1 dossier:
Even before the pandemic, Rent the Runway was losing money
The company reported net losses of $ 153.9 million on revenue of $ 256.9 million in 2019 and $ 171.1 million on revenue of $ 157.5 million in 2020.
The trend continued into 2021 – Rent the Runway reported a net loss of $ 84.7 million on $ 80.2 million in revenue for the six-month period ending July 31, according to its S-1 .
The company said it expects to continue to incur increasing operational costs as it looks to acquire products, increase customer engagement, use marketing and promotions to acquire new customers, improve its website and mobile offerings, and invest in its logistics and fulfillment operations.
“We may not be realizing the operational efficiencies that we hope to achieve through our efforts to scale the business, reduce friction in the rental experience and optimize costs,” the company said in its prospectus. “As such, due to these and other factors, we may not be able to achieve or maintain profitability in the short term or not at all.”
The majority of Rent the Runway’s revenue comes from its subscriber base, which has plunged into the pandemic but is showing signs of a rebound
Rent the Runway has a tiered subscription system that allows members to receive a set number of items and shipments – called “redemption” – each month. Customers can pay $ 89 to receive four items per month, $ 135 for eight items per month, $ 174 for 12 items per month, or $ 199 for 16 items per month.
Subscribers represented 78% of total revenue in 2019 and 89% of total revenue in 2020. For the six months ending July 31, 2021, subscribers represented 83% of total revenue for Rent the Runway.
Rent the Runway’s subscriber base declined during the pandemic, from 147,866 at the end of fiscal 2019 to 95,245 in fiscal 2020. As of July 31, 2021, however, its subscriber base had rebounded slightly to 126,841.
These figures include members who had suspended their subscriptions. Excluding suspended subscribers, Rent the Runway had 54,797 subscribers in 2020, compared to 133,572 in 2019.
The company says that subscribers sharing their experiences using Rent the Runway with their networks is a key part of their marketing strategy.
“As our community has grown, Rent the Runway has also benefited from powerful virality and word-of-mouth marketing,” the company’s flyer states. “81% of subscribers shared RTR with at least five people; 32% shared with more than 20 people.”
The company also views its reserve and resale offerings as a way to attract new potential customers to the brand and eventually become a subscriber.
General and administrative costs are the biggest cost of Rent the Runway, and they continue to grow
General and administrative expenses accounted for $ 77.2 million of Rent the Runway’s total expenses of $ 288 million for fiscal 2020.
This category includes personnel costs in “customer service, finance, tax, legal, human resources, fashion and photography” as well as “fixed operating costs”, the S- 1 of the company.
He continued, “General and administrative costs also include occupancy costs (including those related to the warehouse), photography costs, professional services, credit card costs, corporate overhead costs. and warehouse, other administrative costs, gains and losses associated with the consolidation of our foreign subsidiary at each period end, and gains and losses related to asset disposals and terminations of operating leases.
This category saw a decrease from 2019 to 2020 as Rent the Runway cut costs by permanently closing physical stores and laying off some employees.
Nonetheless, general and administrative expenses continue to increase as a percentage of total costs, accounting for $ 40.6 million of the $ 132 million in total operational costs for the six-month period ended July 31, 2021.
Rent the Runway experiments with new inventory models to reduce costs
Since the end of 2018, Rent the Runway has acquired rental items through three methods: Wholesale, RTR Share and Exclusive Designs.
Share by RTR enables Rent the Runway to acquire items for rent on a consignment model, entering into a revenue sharing agreement with brands and incurring little or no upfront costs. With its Exclusive Design inventory model, Rent the Runway uses customer data to co-design items with its partner brands.
While in its early days, Rent the Runway acquired all of its items through wholesale, it only obtained 46% of items this way in 2020, up from 74% in 2019. RTR’s share has grown from 15% of item acquisition in 2019 to 36% in 2020. Exclusive designs have also gone from 11% to 18%.
Rent the Runway’s different product acquisition models are “strategic levers for managing our capital efficiency, profitability and product risk,” says the company’s prospectus.
The company said it assumed each item could be shipped to customers an average of 20 times over its lifespan.
“When we multiply the economics of FY2019 and the first six months of FY2021 by 20 turns, that implies total lifetime income of $ 445 and $ 536, respectively, and total lifetime profit of 212. $ and $ 324, respectively, “the prospectus reads.
He goes on to say that he has improved his ROI per item from 4x to almost 6x based on revenue since 2019.
Rent the Runway is positioned as a way for brands to develop their sales
Rent the Runway says it currently rents items from more than 750 partner brands.
He claims that his brand partners benefit from Rent the Runway as a distribution channel.
“According to our Rent the Runway brand survey of June 2021, in fiscal 2019, we were in the top 30% of distribution partners, in terms of revenue, for 64% of our brands,” indicates the company’s prospectus.
It also states that, unlike traditional retailers, it does not require its brand partners to sign return-to-supplier or margin agreements, thereby eliminating some of the risks that brands typically face. Another difference to more traditional retailers, Rent the Runway provides brands with data about their customers.
Rent the Runway co-founders to retain control of the company after IPO
The IPO of Rent the Runway will consist of class A ordinary shares, one share of which is worth one vote, and class B ordinary shares, of which one share is worth 20 votes.
At the time of the S-1 filing, Hyman owned 4.1 million shares, or 84% of the Class B common stock, while Fleiss held 609,081, or 21%.
After the IPO, Hyman and Fleiss “will own all of the outstanding shares of Class B common stock,” the prospectus states.