I talked to a few friends today about the Rent The Runway IPO, and soon I tried in a possibly premature Western movie to isolate my hot movie from the good, the bad and the ugly…
The stock started trading at $23 a share, nearly 10 percent above its IPO price of $21. Retail investors appreciate the vision and spirit of the incredibly charismatic founder, Jennifer Hyman. It’s also an organization that has made history: Rent the Runway is the first company to go public with a founder/CEO, COO and CFO. #girl power. It’s also a relatively small initial public offering for this model of company, proving that there is room in the public markets for the most diverse entrants.
In addition, RTR has very adeptly developed its product assortment with brands and has proven to be a major driver of brand discovery. According to S-1, 36% of products are sourced through RTR Share, where they “acquire items directly from brand partners upon shipment, from zero to low initial cost and profit sharing with our brands every time an item is rented. You pay. Our brands also have logistical expenses per rental.” An additional 18% of the product is private label, or exclusive designed by RTR brands, which drives margin and customer satisfaction in the business.
Beyond brand partnerships, there may be more room for RTR to grow as many believe the rental market is in its infancy. why? Well, many reasons. A greater concern for sustainability has prompted customers to rethink their purchasing behaviors (even if some of these efforts are washed out to be sustainable). This has only been accelerated by COVID; In the LEK survey, 57% of respondents said that COVID-19 helped them realize that some of their discretionary spending prior to the pandemic was unnecessary. In addition, with the rise of the stock economy, the idea of normalization Access to the property With consumer brands like Netflix and Airbnb, consumers are less interested in keeping something in their wardrobe if those same dollars can provide better and more plentiful access.
RTR cites a few other key drivers in the cultural zeitgeist, including costume stress and social media peacocks. One study in S-1 showed that “33% of women consider an outfit to be ‘old’ after wearing it less than three times.” Another, that “one in seven women consider it pseudo-fashion to be photographed in costume twice”. Social media has increased the pressure on the need for luxury and variety in our wardrobes, and other companies have taken notice. Urban Outfitters introduced their rental service, Nuuly, in 2019, and other brands such as Vince, Rebecca Taylor, Ganni, Ralph Lauren, and Selfridges have created high-profile rental programs. Coresight Research estimated the size of the US rental apparel market at $1.3 billion in 2019, and said it fell to $1.1 billion last year. The company expects a recovery to “at least” $1.2 billion in 2021 and reach $2.5 billion by 2023 according to research firm GlobalData. For luxury brands, rent could account for 10 percent of revenue by 2030, according to a recent Bain & Company report.
my partner, David Goldberg, has been upbeat in this space since starting his own men’s rental business: “As someone who’s built a rental business before, I can attest to the complexities. So I’m not surprised that even after 11 years and $700 million in venture funding, they’re still racking up Huge losses. But they have also built an amazing operation and client base that will serve them well as a leader in a movement that is still in its infancy.”
The stock finished the day 8% below the opening price at $19.29.
Let’s talk about some of the reasons why some investors are less optimistic about rents. First, sustainability. There is good research that says that renting clothes is worse for the environment than just throwing them away. This is because, from an emissions point of view, leasing is based on the concept of trading multiple products that are trend driven and have a life cycle defined in terms of wearability and fashion. The transportation cost of getting these goods to and from consumers is very high, and no better than fast fashion from an environmental impact perspective.
Second, the future is working from home, and normal. as lacy wisdom From Eniac Ventures put me: “Comparing the number of active subscribers in the company from fiscal year 2019 to fiscal year 2020 shows a sharp 42% decrease compared to last year. While we can partly attribute this to COVID, there may be something else going on here. The fact that Subscriber count 126,841 including active and paused users (although they do separate and inactive activities later) could also be a negative sign, and likely speak to a larger headwind the company faces in light of changing consumer preferences regarding clothing. As Jennifer Hyman points out, more women are entering the workforce at record rates, but the future of work itself hangs in the balance and the workforce is also increasingly turning to the casual wear, while RTR continues to focus on the formal wear/business casual market. The trend has been accelerated by COVID, it was also in progress long before the pandemic attacked.”
It was the worst year for fashion, ever, largely in recorded history: “The state of fashion is the track pants.” Mocking is the latest trend with workers staying at home longer than they did before the pandemic, and therefore, despite the potential for a fashion revival in the 1920s, there is an increasing need for less.
Third, there appears to be some non-GAAP accounting going on within the walls of this very unprofitable business. The company’s revenue shrank from $257 million to $158 million in 2020, and losses grew from $154 million in 2020 to $171 million in 2021. RTR reported a net loss of $84 million in the first half of 2021, down from $88 million During the same time frame in 2020. And all these losses do not include consumption of the product. According to S-1, they define gross profit as revenue minus implementation expenses and revenue shares for brands. It does not include product consumption, which accounts for about 30% of revenue.
Wait, why is this important? RTR is a company that builds on product shelves after a period of use and time (in this case, they say they keep the product for three years at a 20% savings value, which seems generous considering how easy it is to wear and how quickly fashion is changing trends – a major attraction brand inconsistency). So necessarily, there is a cost of doing business here that involves the deterioration of the rental clothing. However, according to his accountants, that should be stripped of the business. looks fishy? Below is a great and in-depth article on the matter, which impressively demonstrates that product stripping has a real impact on cash flow; For example, RTR purchased $8.5 million worth of new clothing in the first half of 2021, while selling or liquidating $9 million of goods in the same year.
Given that they’ve done so much to improve the inventory acquisition side, why do we think they’d need to delve into such accounting gymnastics to show (more) profits? The answer, I believe, is that their operations are absolutely untenable.
Fulfillment cost, combined with reverse logistics, or return, cleaning, re-stocking and two-way express shipping (often 2-3 returns per order cycle) stacks up the merchandise quickly. There are myriad intricacies involved in building reverse logistics and cleaning operations; Especially when the garment is said to be used for years at a time. Many companies have outsourced just this. Caastle, a rental services company, claims to have a 25% margin on its service, but for many it has proven more difficult. As of July 31, RTR had $104 million in cash and a accumulated deficit of $674 million.
I believe in the idea of access to ownership, very generalizing, but I wonder if some rental companies are unsustainable from an environmental and economic perspective. It can be argued that renting the runway puts more clothing into circulation and degrades them faster through trend-driven marketing and planned obsolescence than non-rental brands. While using more resources to create new clothes, the company is also using more air freight to deliver and return goods, as well as more equipment and chemicals to clean up. Moreover, it will not be profitable even when you subtract the consumption of said clothes from the variable cost pile. I’m happy with the founders, and I’m glad the markets (to a large extent) believe, but just like the company itself, I may return that stock to the sender.