Business context and reporting period
Rent the Runway, Inc. filed this unaudited Form 10-Q for the quarter ended October 31, 2021, its fiscal 2021 third quarter, and the nine months then ended. This differs from the request metadata of “2020 Q3.” The company operates subscription, a-la-carte rental (Reserve), and resale offerings; revenue is generated in the United States. It reported 116,833 ending active subscribers, up 78% year over year, and 150,075 ending total subscribers, including paused members, up 45%.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2021 | Prior-year quarter | Nine months ended Oct. 31, 2021 | Prior-year period |
|---|---|---|---|---|
| Revenue | $59.0 million | $35.5 million | $139.2 million | $124.0 million |
| Gross profit / gross margin | $19.9 million / 33.7% | $2.4 million / 6.8% | $46.2 million / 33.2% | $11.1 million / 9.0% |
| Operating loss | $(44.2) million | $(32.0) million | $(96.0) million | $(100.7) million |
| Net loss | $(87.8) million | $(44.3) million | $(172.5) million | $(132.3) million |
| Adjusted EBITDA | $(5.6) million | $(5.4) million | $(13.7) million | $(16.0) million |
| Operating cash flow | Not presented quarterly in this filing | $(23.5) million | $(33.9) million |
Quarterly revenue grew 66.2%; nine-month revenue grew 12.3%. Subscription and Reserve rental revenue increased 78.0% in the quarter and 18.9% for nine months. Other revenue declined to $4.7 million in the quarter and $12.2 million for nine months, reflecting reduced resale initiatives and promotions. Gross-margin improvement reflected higher revenue relative to rental-product depreciation and some fulfillment efficiencies.
For the nine months, investing cash flow was $(9.4) million and financing cash flow was $215.7 million. Operating and investing cash use combined was $32.9 million, improved from $87.2 million in the prior-year period. At October 31, cash and cash equivalents were $278.7 million, restricted cash was $13.3 million, and total cash and restricted cash was $292.0 million. Total liabilities were $373.5 million; long-term debt, net, was $256.4 million. The amended Temasek facility had $271.6 million principal outstanding before the $15.3 million unamortized debt discount.
Material changes and unusual items
- The company completed its October 2021 IPO, selling 17.0 million shares at $21.00 per share and receiving $327.1 million net proceeds. Preferred shares converted into Class A common stock.
- It repaid the Ares facility and $60.0 million of Temasek debt, totaling $140.7 million in debt repayment, and amended the remaining Temasek facility. The amended facility matures in October 2024, bears 12% interest with up to 5% payable in kind, and includes a $50 million minimum-liquidity covenant. The company reported covenant compliance at quarter-end.
- Quarterly general and administrative expense rose 100% to $35.8 million, including $14.0 million of share-based compensation. Total quarterly share-based compensation was $17.1 million, including a $14.4 million IPO-related charge for RSUs.
- Non-cash warrant remeasurement losses were $17.4 million for the quarter and $24.9 million for nine months; all outstanding warrants were equity-classified at October 31 and require no subsequent remeasurement. Debt extinguishment loss was $12.2 million, primarily associated with the Ares repayment. Nine-month other income included a $4.0 million insurance recovery.
Outlook, management commentary, and risks
The filing provides no specific financial guidance. Management expects operating losses and negative operating cash flows could continue as the company invests in product, marketing, technology, personnel, and operations. It believes available cash and expected operations will cover obligations and covenant requirements for at least 12 months from issuance of the financial statements. Management cited continued COVID-19 uncertainty, wage inflation, higher transportation costs, carrier delays, and hiring challenges. It described subscriber recovery and demand growth, while noting Reserve activity remained below pre-pandemic levels in some respects. The company may reduce labor, operating expense, or capital spending if recovery falls short of expectations.
Key risks include ongoing losses and reliance on external financing; the substantial debt and restrictive debt covenants; uncertain pandemic recovery and discretionary consumer demand; competition and subscriber retention; product forecasting and brand-partner supply; shipping, fulfillment, and technology disruptions; privacy and cybersecurity exposure; and the dual-class voting structure. Disclosure controls were not effective as of October 31, 2021 because of identified material weaknesses in control documentation and monitoring, segregation of duties, journal-entry review, and IT general controls. Remediation was in early stages and its timing was uncertain. The filing reported no litigation or contingency with at least a reasonable possibility of material loss. An additional insurance purchase commitment carried an approximately $5.0 million premium.
Important facts for investors to verify
- Confirm the reporting period: this filing covers the quarter ended October 31, 2021, not 2020 Q3.
- Track whether subscriber growth converts into sustained revenue growth, improving GAAP losses, and positive cash generation; adjusted EBITDA is a non-GAAP measure.
- Review the amended Temasek facility’s principal, effective interest cost, minimum-liquidity covenant, and future refinancing or repayment needs.
- Monitor execution and independent validation of internal-control remediation, given the disclosed ineffective controls and material weaknesses.
- Assess the effects of COVID-19, labor and shipping cost inflation, and the 20-vote-per-share Class B stock structure on operating performance and shareholder influence.