Rent The Runway, Inc. annual report, FY2022

Business context and reporting period

Rent the Runway, Inc. operates a designer apparel and accessories rental subscription business, with a-la-carte rentals and resale. This is the annual Form 10-K for the fiscal year ended January 31, 2023 (the filing calls this fiscal 2022), not a 2021 Q4 filing as indicated in the request metadata. Revenue is generated in the United States.

Financial and operating performance

Revenue grew 45.8%, reflecting post-pandemic demand recovery, more average active subscribers, and higher revenue per subscriber following the April 2022 subscription price increase. Active subscribers at year-end rose 10% to 126,712; average active subscribers increased 38% to 128,586. Subscribers generated 86% of revenue, versus 84% in the prior year.

Gross margin improved as higher revenue per shipment, fewer shipments per average subscriber, and lower owned-product depreciation as a share of revenue more than offset higher fulfillment costs. Fulfillment expense rose to $92.2 million from $61.9 million, driven mainly by shipment volume, transportation costs, and wages. Rental product purchases were $62.1 million; combined operating and investing cash use was $92.0 million, versus $64.8 million in the prior year.

At year-end, debt was $272.5 million, all classified as noncurrent, and stockholders’ equity was negative $35.3 million. The Temasek facility matures in October 2026 and has a $50 million minimum-liquidity covenant. Cash interest was reduced to 2% through July 2024, then rises to 5%; the total interest rate is scheduled to rise from 12% to 13% in February 2024 and increase by 1 percentage point annually thereafter. The company reported compliance with applicable covenants at January 31, 2023.

Material changes, outlook and risks

• In September 2022, the company announced a restructuring that reduced corporate employees by approximately 24%. It recorded $2.4 million of severance charges and $5.3 million of impairment-related charges. Management expects approximately $25 million of annual operating expense savings in fiscal 2023 versus the second-quarter fiscal 2022 run rate.
• Beginning March 2023, subscription shipments include one additional item at no added price. Management expects improved retention and acquisition, but anticipates higher fulfillment and product costs with minimal gross-margin impact; it also expects fiscal 2023 gross margin could be lower than fiscal 2022.
• Management expects fiscal 2023 revenue and active subscribers to increase, but revenue growth to decelerate, partly due to slower average-subscriber growth and an anticipated decline in Reserve revenue. It expects rental-product purchases as a share of revenue to remain near fiscal 2022 levels in the near term.
• Macroeconomic uncertainty, inflation, consumer price sensitivity, changing post-pandemic behavior, higher wages and transportation costs, seasonality, competition, subscriber churn, and supply/logistics disruption may pressure results. Management says operating losses and negative operating cash flow could continue; it believes available cash and expected operating cash are sufficient for at least 12 months from issuance of the financial statements.
• Material weaknesses in financial reporting controls remained unremediated at year-end; management concluded internal control over financial reporting and disclosure controls were ineffective. The auditor issued an unqualified opinion on the financial statements but did not audit or opine on control effectiveness.
• A putative shareholder class action filed in November 2022 alleges misleading IPO-related statements concerning growth. The company intends to defend the case; it says loss is not currently probable and any range is not reasonably estimable.
• Adjusted EBITDA included $5.1 million of contribution from an Amazon-related wholesale Exclusive Design sales and liquidation pilot. This non-GAAP measure excludes specified expenses and should be considered alongside GAAP results.

Important facts for investors to verify

• Whether subscriber retention and growth improved sustainably after the April 2022 price increase and the March 2023 extra-item change.
• Whether the expected $25 million restructuring savings are achieved and whether fulfillment, product, and marketing costs allow gross-margin gains to persist.
• Cash burn, rental-product investment needs, and compliance with the $50 million minimum-liquidity covenant as debt interest rates step up.
• Progress and independent validation of remediation of the financial-reporting material weaknesses.
• Subsequent developments in the shareholder lawsuit and the contribution and repeatability of pilot-related earnings.