Q3 2021 Rent the Runway Inc Earnings Call
Good afternoon, and welcome to rent the runway is third quarter 2021 earnings conference call.
Speaker 1: Good afternoon and welcome to Rent the Runway's 3rd Quarter 2021 Earnings Conference Call. Today's call is being recorded. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Today's call is being recorded.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
We have allocated one hour for prepared remarks and Q&A.
At this time I'd like to turn the conference over to Karen Schembri General counsel at rent. The runway. Thank you you may begin.
Speaker 2: Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway's third quarter 2021 results. Before we begin, we would like to remind you that this call will include forward-looking statements.
Good afternoon, everyone and thanks for joining us to discuss rent the runway its third quarter 2021 result.
Before we begin we would like to remind you that this call will include forward looking statements.
Speaker 2: These statements include our future expectations regarding financial results and guidance, market opportunities, and our growth.
These statements include our future expectations regarding financial results and guidance market opportunities and are aggressively these.
Speaker 2: These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially. These risks, uncertainties, and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including our final perspective dated October 26 in the Form 10-Q that will be filed in the next few days. We undertake no obligation to revise or update any forward-looking statements or information except as required by law.
These statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially.
The uncertainties and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our final prospectus dated October 26, and the Form 10-Q that will be filed in the next few days, we undertake no obligation to revise or update any forward looking statements or information, except as required by law.
Speaker 2: During this call, we will also reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP.
During this call we will also reference certain non-GAAP financial information.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or the substitute for financial information presented in accordance with GAAP.
Speaker 2: Reconciliations of GAAP to non-GAAP measures can be found in our press release, slide presentation posted on our investor website, and in our SEC filings.
Reconciliations of GAAP to non-GAAP measures can be found in our press release.
My presentation posted on our Investor website and in our SEC filings joining.
Speaker 2: Joining me on the call today is our co-founder, chair, and CEO , Jennifer Hyman, and our CFO , Scarlett O'Sullivan. Following our prepared remarks, we'll open the call for your questions. And with that, I'll turn the call over to Jeff.
Joining me on the call today is our co founder Chairman and CEO, Jennifer Whalen, and our CFO Scarlet is Taliban following our prepared remarks, we'll open the call for your questions and with that I'll turn the call over to Jeff.
Speaker 2: Thanks, Kara. Good afternoon, everyone. Thank you for joining Rent the Runway's third quarter 2021 earnings call. I'm Jen Hyman, co-founder, chair, and CEO .
Thanks, Kara and good afternoon, everyone. Thank you for joining rent the runway third quarter 2021 earnings call I'm Jen High Man co founder chair and CEO.
Speaker 2: With our IPO on October 27th, we raised $357 million in capital and we believe we have ample cash to invest in our priorities for growth, namely growing subscribers and deepening our competitive moats as we innovate our technology, data, and operating platforms.
With our IPO on October 27th we raised $357 million in capital and we believe we have ample cash to invest in our priorities for growth, namely growing subscribers and deepening our competitive moats as we innovate our technology data and operating platform we all.
Speaker 2: We also used a portion of our IPO proceeds to pay off approximately one-third of our debt.
So we used a portion of our IPO proceeds to pay off approximately one third of our debt.
Speaker 2: In the third quarter of 2021, we achieved strong active subscriber growth, up 78% year-over-year, revenue growth up 66% year-over-year, and strong margins. At the end of Q3, active subscribers were back at 87%, and total subscribers were back at 101% of the level at the end of fiscal 19.
In the third quarter of 2021 we achieved strong active subscriber growth up 78% year over year revenue growth up 66% year over year and strong margin.
At the end of Q3 active subscribers, we're back at 87% and total subscribers went back at 101% of the level at the end of fiscal 19.
Speaker 2: Moreover, gross margins in 2-3 were 20 points higher than in the same period of fiscal 2019, demonstrating a significant improvement in the profitability of the business. We believe that our metrics this quarter are a good indication of the continued re-acceleration of our business.
Moreover, gross margins in Q3 were 20 points higher than in the same period of fiscal 2019, demonstrating a significant improvement in the profitability of the business. We believe that our metrics. This quarter are a good indication of the continued reacceleration of our business we.
Speaker 2: We think that rapid consumer behavior shifts towards online commerce, access models and sustainability, along with our compelling value proposition, will be macro drivers of our growth.
Think that rapid consumer behavior shifts towards online commerce access model and sustainability, along with our compelling value proposition will be macro drivers of our growth.
Speaker 2: Because many of you might be new to the Rent the Runway story, I'd love to share our mission, strategy, and key competitive advantages.
Because many of you might be new to the rent the runway story I'd love to share our mission strategy and key competitive advantages.
Speaker 2: 13 years ago, I watched my sister go into debt buying a dress she couldn't afford that she knew she'd only wear once.
13 years ago I watched my sister go into debt buying a dress she couldn't afford that she knew she'd only where once.
Speaker 2: The feeling of having a closet filled with clothes but nothing to wear is ubiquitous.
The feeling of having a closet filled with close but nothing to wear is ubiquitous.
Speaker 2: Driven by the consumer desire for variety and newness, closets have been growing with the average American buying nearly double what we bought 30 years ago. But as we buy more, we wear less.
Driven by the consumer desire for variety and newness clauses have been growing with the average American buying nearly double what we bought 30 years ago.
But as we buy more we're.
Our last 55% of the closet is rarely used filled with items that no longer fit and that we no longer were.
Speaker 2: 55% of the closet is rarely used, filled with items that no longer fit and that we no longer wear. This is financially wasteful and environmentally unsustainable.
This is financially wasteful and environmentally unsustainable.
Speaker 2: Our solution is the Closet in the Cloud, the world's first and largest shared designer closet that has transformed the way that women get dressed by letting them wear whatever they want without having to own it.
Our solution is the closet in the cloud the world's first and largest shared designer closet that has transformed the way that women got dressed by letting them, where whenever they want without having to own. It. Our mission is to empower women to feel their best every day and to encourage millions of customer.
Speaker 2: Our mission is to empower women to feel their best every day and to encourage millions of customers to buy fewer clothes and use our shared closet instead. And by sharing, we can all
One is to buy fewer clothes and use our shared called but instead.
And by sharing you can all have more <unk>.
Speaker 2: more fashion for less money. Our average customer gets $4,000 of clothing per month 20 x the retail value
More fashion for less money, our average customer gets $4000 of clothing per month 20 ex the retail value for her spend.
Speaker 2: more designer brands that many of us couldn't otherwise afford, and more opportunities for self-expression. We carry nearly 19
More designer brands that many of us couldn't otherwise afford.
And more opportunities for self expression.
We carried nearly 19000 styles.
Speaker 2: and millions of items for almost every use case in a woman's changing life.
And millions of items for almost every use case in a woman's changing life.
Speaker 2: We are going after a big opportunity. Our goal is to transform an almost $300 billion annual US apparel market in which online, secondhand, and access models are still in early stages of development, but growing much faster than the overall market.
We are going after a big opportunity our goal is to transform and almost 300 billion dollar annual U S apparel market in which online secondhand and access models are still in early stages of development, but growing much faster than the overall market now.
Speaker 2: 91% of women have purchased or are open to purchasing secondhand clothing.
91% of women have purchased or are open to purchasing secondhand clothing.
56% of women believes that they will subscribe to fashion over the next five years.
Speaker 2: If you apply that 56% to the 38 million women over 25 in the U.S. today who are college educated and working, that equates to an opportunity set of 21 million women.
If you apply that 56% to the 38 million women over 25 in the U S. Today, who are college educated and working that equates to an opportunities that of 21 million women.
Speaker 2: We only need to capture about three and a half percent of this opportunity set to get to five times our current subscriber base.
We only need to capture about 3.5% of this opportunity set to get to five times, our current subscriber base and we believe we can capture substantially more of this market overtime and estimate a long term durable growth rate in excess of 25%.
Speaker 2: And we believe we can capture substantially more of this market over time and estimate a long-term durable growth rate in excess of 25%.
Speaker 2: Another way we think about how big this business can be is by looking at the $120 billion U.S. mass and fast fashion market.
Another way, we think about how big this business can be just by looking at the 120 billion dollar U S mass and fast fashion market.
Speaker 2: Customers go to Fast Fashion for variety, value, and designer copycats. And many of these items are worn minimal time and end up in landfills.
Customers go to fast fashion for a variety value and designer copycat.
And many of these items are worn minimal time and end up in landfills over.
Speaker 2: Over the past few years, we have seen the consumer start to rethink fast fashion given their desire to be more sustainable. Having a subscription to Rent the Runway is a substitute for fast fashion, as 83% of our subscribers buy less of it when they use Rent the Runway. We believe we can capture a significant portion of this market over time.
Over the past few years, we have seen the consumer start to rethink that fashion given their desire to be more sustainable.
Having a subscription to rent the runway is a substitute for fast fashion as 83% of our subscribers buy less of it when they use rental runway. We believe we can capture a significant portion of this market over time.
We measure the health and growth of our business by a simple framework, how we grow subscribers and how we grow engagement when.
Speaker 2: We measure the health and growth of our business by a simple framework, how we grow subscribers, and how we grow engagement. When we do these two things well, we grow our revenue and scale profitability. We are a subscriber.
When we do these two things well, we grow our revenue and scale profitability.
We are a subscription business.
Speaker 2: 82% of our revenue comes from our subscribers. Our subscribers are extremely high value given their $100 plus per month subscription fee, utility-like usage of our product, high loyalty, and ARPU that generally increases over time.
82% of our revenue comes from our subscribers.
Our subscribers are extremely high value given their hundred dollar plus per month subscription fee utility like usage of our product.
Loyalty and our pud that generally increases over time.
Speaker 2: Engagement, measured by the number of items subscribers receive and wear per month, is a leading indicator of retention.
Engagement measured by the number of items subscribers, receiving where per month is a leading indicator of retention.
Speaker 2: As our subscribers learn rental behavior, we see them spend more with us and add additional items into their monthly plans. These additional items allow us to capture higher margin revenue.
As our subscribers learn rental behavior, we see them spend more with us and add additional items into their monthly plans. These additional items allow us to capture higher margin revenue in.
Speaker 2: In Q3 2021, 24% of our subscribers paid for one or more additional items, reflecting strong engagement and driving higher ARPU.
In Q3, 2021, 24% of our subscribers paid for one or more additional items, reflecting strong engagement and driving higher ARPA.
This is a strong indicator of the product market fit of our customizable subscription programs rolled out in 2020, where subscribers paper increased usage. These programs generate significantly higher margins as well as higher loyalty than we were seeing pre COVID-19.
Speaker 2: This is a strong indicator of the product market fit of our customizable subscription programs rolled out in 2020 where subscribers pay for increased usage. These programs generate significantly higher margins as well as higher loyalty than we were seeing pre-COVID.
We are focused both on growing our subscriber base and driving higher monetization from existing subscribers.
Speaker 2: We are focused both on growing our subscriber base and driving higher monetization from existing subscribers.
Speaker 2: During 2021, we've been successful at growing and re-engaging customers while we've spun back up our marketing engine. Looking ahead, we will continue to grow subscribers by leveraging reserve and resale as strong funnels, scaling our full funnel marketing, and driving conversion funnel improvements.
During 2021, we've been successful at growing and re engaging customers, while we spun back up our marketing engine.
Looking ahead, we will continue to grow subscribers by leveraging reserve and resell a strong funnel.
Scaling our full funnel marketing and driving conversion funnel improvement.
Speaker 2: Over the last 12 months, which continue to be impacted by COVID, we've had 400,000 customers, the majority of which were reserve and resale customers. This audience of 400k recent customers provides a large and growing funnel to acquire new subscribers.
Over the last 12 months, which continued to be impacted by Covid. We've had 400000 customers. The majority of which were reserve and resell customers. This audience. A 400 K recent customers provides a large and growing funnel to acquire new subscribers.
Speaker 2: And given the backlog of events into 2022 and 2023, we believe our funnel will see an accelerated rate of growth in the coming years. We plan to grow engagement by continued innovation of our customer experience, as well as by strategically expanding our product assortment. These strategies are largely proven for us.
And given the backlog of events into 2022 and 2023, we believe our funnel with Phoenix salary that rate of growth in the coming years, we plan to grow engagement by continued innovation of our customer experience as well as by strategically expanding our product Assortments. These strategies are.
Largely proven for us.
Speaker 2: We've been building an operating platform with deep competitive modes to help enable sustained growth and profitability of the closet in the cloud. First is our.
We've been building an operating platform with deep competitive moat to help enable sustained growth and profitability of the Clos in the cloud.
First is our brand partner advantage, we fully control our supply given our direct partnerships with over 780 designer brands. We've invested in building deep partnerships with brands. So that we can access the newest most desirable designer fashion to drive customer LTV.
Speaker 2: We fully control our supply, given our direct partnerships with over 780 designer brands.
Speaker 2: We've invested in building deep partnerships with brands so that we can access the newest, most desirable designer fashion to drive customer LTV. As a reminder, we have retained nearly 100% of our brand partners over the past decade. Brands work with us to discover new customers and get unique data, and they see us as being strategic to their businesses.
As a reminder, we have retained nearly 100% of our brand partners over the past decade brands work with us to discover new customers and <unk>.
<unk> unique data and they see us as being strategic to their businesses.
Speaker 2: We have been able to leverage our strong brand partnership to significantly improve our unit economics.
We have been able to leverage our strong brand partnerships to significantly improve our unit economics.
Speaker 2: Since 2018, we've innovated how we acquire product via two capital light models that are unique to Rent the Runway.
2018, we've innovated, how we acquire product via two capital light model that are unique to rent the runway.
Speaker 2: For fiscal year 2021, we are estimating that we will have acquired 56% of our rental product via these capital life strategies ahead of last year.
For fiscal year 2021, we are estimating that we will have acquired 56% of our rental product via these capital light strategy ahead of last year.
Speaker 2: Share by RTR is our consignment model, where we pay nothing or very little for product upfront, and then revenue share with our designers.
Sure by our T. R is our consignment model, where we pay nothing or very little for product upfront and then revenue share with our designers exclusive.
Speaker 2: Exclusive designs are collections that we manufacture in collaboration with our key brand partners that cost 50% less than wholesale units and utilize our data to maximize desirability and longevity.
Exclusive designs, our collections that we manufacture in collaboration with our key brand partners that cost, 50% less than wholesale units and utilize our data to maximize desirability and longevity.
We have seen significant cash flow benefits from these models and we expect further positive impact on free cash flow as they become a larger proportion of our total procurement.
Speaker 2: We have seen significant cash flow benefits from these models, and we expect further positive impact on free cash flow as they become a larger proportion of our total procurement. Exclusive designs have the highest profit potential of all of our units, and as a result, we intend to increase penetration of these styles to one-third of our product acquisition over the medium term.
Exclusive designs have the highest profit potential of all of our units and as a result, we intend to increase penetration of these styles to one third of our product acquisition over the medium term.
Speaker 2: Growing our assortment attracts new customer segments and can widen our TAM over time. We onboarded 30 new brands onto our platform in Q3. Some highlights include AltaZara, Laquan Smith, Rachel Antonoff, and Rotate.
Growing our assortment and attract new customer segments and can widen our tam over time.
We on boarded 30, new brands onto our platform in Q3. Some highlights include Ultra Zara Macquarie Smith, Rachel on to now and rotate.
For sure by our T are nearly 100% of brands. We have worked with in the second half of 2021 are coming back again to do share by our PR in the first half of 2022 as.
As of Q3 2021, we have over 250 share by RTR brands on site, which has nearly tripled since 2019.
Sure by our TR brands are also increasing their units on the rent the runway platform by 60% on average between first half 'twenty, one and first half 'twenty two.
Second is our continued investment in proprietary technology and data products that power. The closet in the cloud we are able to leverage our data and technology infrastructure to drive continuous improvement in our customer experience and the value we deliver to our brand partners and in our unit economic.
The tens of millions of data points, we collect from our customers and within our facilities as we restore these items give us significant advantages as we get smarter every day about what products to put on our platform in the first place who to show them to how to price them and how to turn them more.
Times, we have used our data to develop both a highly personalized experience and to build proprietary products around fit community and product discovery.
All of which drive higher subscriber growth and engagement.
As an example, we launched an algorithm enhancement in Q3, which drove a meaningful improvement in item fit rate, which in turn increases customer loyalty.
Third and final is our operational mode. We've built the operating system to power the sharing economy of physical goods with deep expertise in single SKU reverse logistics and item restoration.
While we're focused on clothes and accessories today, we see our platform as being extensible to many other categories over the medium term.
During 2021, we further innovated our operations through the addition of automation that sorts garments into 26 unique cleaning methods to maximize lifetime turns per garment. These.
These innovations allow us to improve operational efficiency and increase the profitability of our garments.
In Q3, we also expanded our delivery offerings, including the launch of at home pick up in five major metros, which makes it easier for our customers to return items to us it is lower cost to us than traditional return method.
Since launch we have seen quick adoption with over one third of customers in these markets using at home pickup.
With that overview, let me turn to what we're seeing in the current market environment, which is factored into our Q4 outlook. We believe we're seeing clear indications that our customers have adapted to new hybrid world in which Covid is still present, but fashion is as important as ever.
We've been successful at diversifying how our subscribers use RTR at 50% per use cases are for more casual locations.
We carefully monitor the delta area and have been pleased with our growth in Q2, and Q3 as the delta variance spread and peach throughout the U S to date, we've seen a similar trend that <unk> is not specifically impacting customer demand or engagement patterns.
With fewer holiday and special events due to Covid generally we also believe we will benefit from pent up demand for special events and leisure travel that had been backlogged into 2022, and 2023 as well as return to offices that had been pushed to 2022.
We are seeing that all major metros throughout the U S are back to approximately 90% or more of their pre COVID-19 subscriber count would be exception of New York D C and San Francisco, many major markets in the South Atlantic South and mountain regions are significantly larger.
Then they were pre COVID-19, demonstrating our increased relevance to a new audience.
The geographic distribution of our subscriber base continues to diversify as subscribers outside of our top 20 markets now comprise 29% of our subscribers up from 23% pre COVID-19.
To sum up we're very excited about what we've built and the opportunities ahead.
As of the end of Q3, we had 87% of the active subscribers. We had at year end 2019, and not put a time when we're still in the very early stages of returned to work and the resumption of major social events, we have a larger presence in many more markets than we did in 2019 and our subscription.
<unk> are substantially better we're excited about the significant opportunity ahead, because we believe that women care about making more sustainable choices.
Want to experience more variety and one less want more convenience and care about financial value.
Only need to capture a very small share of our opportunity set to be a very large business and we're confident that our value proposition positions us to capture much more than that over time.
With that I'll turn it over to Scarlett.
Thanks, Jen and thanks again, everyone for joining us I will provide an overview of our third quarter results for fiscal 2021, and then follow with guidance for the fourth quarter and a full year of 2021.
Before I get into the numbers, let me remind everyone of our roadmap for how we plan to drive shareholder value.
Subscriber growth and engagement will drive revenue growth.
Combination of strong unit economics, improving fulfillment efficiency and operating leverage from increased scale is expected to drive improving margins and profitability.
Margin increases combined with increasing capital efficiency, and our product acquisition will drive improving free cash flow.
Let's start with subscribers, we had a strong Q3 and ended the quarter with $116 8000 active subscribers up 78% year over year and up 20% versus the end of Q2.
We had $150 1000 total subscribers at the end of Q3, representing a 101% of total subscribers at the end of fiscal 19.
We continue to see a high proportion of our subscribers joining of the $135 eight unit program.
Historically, approximately 50% of acquired sub pro forma reserve or subscription customers and this quarter. This percentage was 62%.
Showing our success in reactivating former customers and the stickiness of our subscription products.
As is typical in the third quarter, we saw strong seasonal acquisition, which was higher than total acquisition in Q3 of 19.
We saw strength in all channels and were especially strong at reactivate insurance subscribers from fiscal 19 cohorts.
Our investments in our content marketing media and our referral product have bolstered organic acquisition, which was roughly in line with Q3 2019 levels.
We also did a brand awareness campaign in Q3, which drove more than a 10% lift in traffic during the campaign.
22% of total subscribers at the end of Q3, we're in a pause mode.
<unk> subscribers are automatically rebuild them 30 days unless they choose to repass, making pause or is the very bottom of our acquisition funnel and a great signal of short term growth.
Total revenue was $59 million for Q3 up 66% year over year and up 26% from Q2.
Rental revenue represented 92% of total revenue and increased 78% versus the same period last year.
We continue to see high engagement from our subscribers with average revenue per subscriber higher in Q3 versus Q2, both on rental revenue as well as retail revenue.
Reserve is not back to 2019 levels, given fewer large events being planned and we expect this dynamic to persist into Q4.
Shifting to our costs and margin.
My call is an important way to understand our efficiency and are shipping items joined from customers as well as restoring returned items.
We continue to see improvement in this metric.
Fulfillment costs were $19 2 million or 33% of revenue in Q3, compared with 31% in the same quarter last year and 52% in the same quarter of 2019.
The significant reduction as a percent of revenue since 2019 is largely due to the structural changes we made to our subscription program.
And to improve fulfillment efficiencies.
When compared to Q3 of 2020 fulfillment cost as a percent of revenue increased 160 basis points as we benefited last year from lower shipments during COVID-19, while most subscribers are paying the higher price of our prior unlimited program.
As we had anticipated like many company, we started to see transportation headwinds during Q3 with price increases from national carriers, and we expect to see the full impact of these headwinds in Q4 and fiscal 'twenty two.
We have implemented several strategies to mitigate rising transportation cost.
The first is reducing our dependence on national carriers, and moving towards regional carriers local courier and consolidation place.
At the beginning of 'twenty, one approximately 70% of outbound shipments for Saturday of National carriers, and we reduced it to 52% in October you just heard about at home pick up.
Third in Q3, we opened two inbound consolidation centers and national in San Francisco, where we direct a portion of our return shipments and consolidate them to reduce shipping costs.
In terms of rising labor costs, we have been increasing wage rates and our fulfillment centers over the past several years and increase them further in the last two quarters.
We expect to continue to be impacted by rising labor costs as we communicated during our IPO.
We are proactively begun to address this over the past 12 months by automating additional elements of our operation and implementing process enhancements to improve productivity.
Labour processing cost per unit in Q3 is down significantly versus Q3 of 2019, and we expect to see further improvement as we continue to invest and conveyance robotics, RFID and the digitization of environment data.
Gross profit during Q3 was $19 9 million.
Compared with $2 4 million in the same period last year.
Representing a gross margin of 34% versus 7% in Q3 last year and 14% in Q3 of 19.
This is the result of driving structural subscription program changes strong fulfillment efficiency and total cost product costs on the P&L at 34% of revenue during Q3 compared with 62% in the same period last year.
We increased product spend during the quarter as Q1 and Q3 are typically when we see.
Our higher purchases are lower total product costs as a percent of revenue versus last year reflects revenue being more rightsize relative to product on hand, and higher capital light product acquisition.
As John mentioned, we expect 56% of units acquired this year to be two non wholesale channel up from 54% in 2020 and meaningfully up from 26% in 2019.
We estimate 22% of acquisition to be via exclusive design from.
From 11% in 2019.
These units are owned and depreciate it similar to the accounting for wholesale units, however, big costs, approximately 50% of wholesale costs.
We also expect 34% of units acquired this year, two bvs share by RTR up from 15% in 2019.
Sure by our TR is our consignment model. So these units are not in capital expenditures and instead are paid for over time, primarily through performance based revenue share reflected on the P&L.
Sure by our chart provides a significant cash flow benefit compared to wholesale units, which need to be paid for entirely upfront.
Our total operating expenses that includes marketing technology, and G&A or <unk> $59 4 million for Q3.
This includes a $14 $4 million, one time noncash charge associated with the satisfaction of the liquidity based vesting condition for certain artist used upon our IPO.
Excluding that charge, our operating expenses were $45 million.
Representing 76% of revenue compared with 79% in Q2 and 81% in Q3 of last year, demonstrating our increased ability to absorb our fixed costs with higher revenue.
A couple of highlights on some of these line items in.
In Q3, we spent $8 $8 million and marketing excluding employee related costs or 15% of total revenue with.
With the brand campaign impacting marketing as a percent of revenue by four percentage points.
We feel confident in our ability to scale marketing beneficially, given the lifetime value and higher profitability of customers with our new subscription program.
Our plan is to keep marketing spend at approximately 10% of revenue annually, though there may be quarterly fluctuations.
We expect continued strong organic acquisition.
They see us lean more on marketing opportunistically to capture market share and we will be disciplined about our spend.
With respect to technology and G&A, we will continue to invest though we anticipate significant cost leverage as we scale as these investments are largely fixed.
As a reminder, our existing infrastructure has the operational capacity to support five time today's active subscriber count. So we have a lot of runway without significant incremental investment in facilities.
We have also begun to incur some new public company costs, most of which will hit in Q4 and in fiscal 'twenty two.
Now, let's move to adjusted EBITDA, which adds back product depreciation and is how we measure cash profit from operations available to cover operating expenses.
This measure excludes the cash cost of our owned rental product, which is captured in capital expenditures and reflected in free cash flow.
I'll come back to free cash flow in a minute.
Adjusted EBITDA for Q3 was negative $5 $6 million.
First is negative $5 4 million in the same period last year, representing negative nine 5% margin versus negative 15, 2% margin last year.
We believe we remain on a trajectory to achieve adjusted EBITDA breakeven and four to six quarters.
In terms of other items to call out in the P&L in Q3, we incurred a $17 $4 million loss on the revaluation of prior lender warrants that were re measured concurrent with the IPO.
This loss was noncash and nonrecurring.
We also incurred a nonrecurring $12 $2 million loss on extinguishment of debt Paydown concurrent with the IPO. This expense was primarily noncash.
Moving over to the balance sheet and cash flow statement.
Current with our IPO, we reduced our total debt by a third or $141 million that includes all of our prior first lien debt and $60 million of principal on our remaining facility.
We evaluate on an ongoing basis, how we can continue to improve our debt position in term.
We ended the quarter with $279 million in cash and cash equivalents, which includes $181 million in net proceeds from our IPO. After the repayment of debt and Youll expenses, some of which will get paid in Q4.
Note that per GAAP, the product capex in our cash flow statement only reflects items that had been paid for during the period.
We included supplemental information. So you can calculate total product acquired in the period, regardless of payment timing and a reconciliation in our earnings deck.
Year to date total purchases of rental products were $24 million, including amounts not paid for in the period.
For 17% of revenue compared with $52 million and 42% of revenue in the same period of fiscal 'twenty.
We do know that in fiscal 'twenty, one our total product spend a percentage of revenue is benefiting from excess product on hand relative to subscriber count due to COVID-19 and we expect this percentage to increase in fiscal 'twenty two.
Coming back to free cash flow, we define as net cash used in operating activities plus net cash used in investing activities and we're focused on reaching free cash flow breakeven in the medium term.
Free cash flow as a percent of revenue improved to negative 24% for the first nine months of fiscal 'twenty, one compared with negative 64% in fiscal 'twenty and negative 69% in fiscal 19.
Our differentiated business model works to our advantage in the current macro environment and we believe that this provides a unique growth opportunity.
First we have a large assortment of items both in terms of quantity and selection to support customer growth. We are not constrained from an inventory standpoint, like many others in the apparel space.
And we are significantly less exposed to risk from late deliveries because we already have tremendous selection acquired in prior years that we monetize over many years.
Given that consumers are challenged finding enough apparel selection in traditional retail and E. Commerce channels. We believe they may turn to rent the runway, where our selection is as high as ever.
Secondly, with pricing quality apparel sector are meaningfully higher than it's been in recent years, we believe the relative value proposition to the consumer of our rent the runway subscription is better than it's ever been.
Taken together, we believe these macro dynamics create even more of a reason for consumers to turn to rent the runway and see this as a chance to accelerate market share gains.
Now I'd like to shift gears to guidance.
We remain focused on driving subscriber growth and increased engagement of our subscriber base and expect to see continued growth in Q4.
Our seasonality patterns are back to pre COVID-19 levels, where subscriber acquisition is typically higher in Q3 versus Q4.
As John noted, we are seeing fewer large scale holiday and special events than we typically saw during Q4 pre COVID-19, which we expect to impact both subscription and reserve bookings.
And finally, we are closely watching COVID-19 and the omicron variant and potential impact.
For Q4, we expect ending active subscribers of 121000 to 122000, representing 122% year over year growth at the midpoint.
For revenue, we expect Q4 at $62 8 million to $63 3 million, representing 88% year over year growth at the midpoint.
For full year 2021 at the midpoint this represents 28% year over year growth in.
77% growth for the second half of 2021 versus the second half of 2020.
For adjusted EBITDA for Q4, we expect a negative 8% adjusted EBITDA margin.
For the full year 2021, we expect an adjusted EBITDA margin of negative 9%.
We plan to guide to full year 2022 numbers on our Q4 call next year.
Our philosophy continues to be to balanced growth and profitability as we invest in the long term value of rent the runway.
I'd like to end by introducing our new VP of Investor Relations Janine Stichter, who just joined US from Jefferies, where she was a senior research analyst covering retail apparel and footwear, welcome Janine and with that I'd like to hand, it back to John.
This is the beginning of a new chapter for rent the runway. Thank you to our team members past and present for building a pioneering company that is poised to capture a market thats inevitable, a more sustainable affordable asset light and joyful way to get trust. Thank you. We're looking forward to hearing your questions.
<unk>.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that Youre line is in the question queue and you May press star two if he would like to remove your question from the queue.
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We ask that you limit yourself to one question and a short follow up please.
One moment, please while we poll for questions.
Our first question comes from the line of Eric Sheridan with Goldman Sachs.
With your question.
Thank you so much for taking my question and thanks for all the detail on the conference call.
If we could just step back and think about the drivers of growth going forward as we move out of 'twenty one into 'twenty, two what I understand how youre thinking about the levers that are within your control like allocating marketing dollars and improving funnel conversion versus the things that maybe you are outside of your control like return to work or return.
Large events and how we should we simply about those variables as we look out over the next sort of 12 to 24 months.
In terms of picking through subscriber growth. Thanks, so much I appreciate it.
Yeah. Thanks, Eric So there's basically three main ways, we grow our subscribers and we saw strength across all during the quarter. The first way is re engaging our funnel of former customers and partners.
And as we just discussed we had 400000 customers over the past 12 months and the funnel is growing and we expect it will continue to grow with events coming back in the macro environment Normalizes, we were particularly strong in Q3 at reactivating churn subscribers from <unk>.
Our fiscal 2019 cohort the.
The second way, we grow is organic acquisition.
A large majority of our customers come to us organically and that's not by accident. So we've made investments into content media and community to ensure organic growth rate remains strong and we continue to see strong organic acquisition. In fact in Q3 organic acquisition was roughly flat with Q3 of 2000 new.
<unk> and then the third way we grow is by paid acquisition. So we turned back on our marketing engine. After the pause we took in 2020 and we continue to see that the marketing investments drove productive results in line with 2019, we also successfully diversified our channel mix and saw early success with OTT and the brand campaign.
And that drove a 10% traffic lift to the site. So we intend to make both of these part of our mix going forward.
These three channels are largely proven strategies for us.
Thanks, so much.
Our next question comes from the line of Lauren Schenk with Morgan Stanley You May proceed with your question.
Hey, this is Nathan southern for Loren just on the equity pick up offering can you contextualize the difference in margin between that and other inbound methods and then with customer adoption already above one third how high do you think that could go.
And then lastly, how many markets do you believe you have the subscriber counts Vito growth broke up there. Thank you.
Thanks, Nathan so from a cost standpoint, we've found at the at home pickup is actually much more cost effective for US. This is why we're really pleased with the early results that we've seen over this past quarter were already in five markets. As you heard us talk about and we do plan on increasing that we already have a higher number that we're at today.
And we intend to do even more value, especially as a way to combat. Some of these increases that we're seeing in the industry from a transportation standpoint.
Interestingly the markets that we launched at home pick up in one of those market skiing, Los Angeles are not dense markets and we've seen the most success in markets that are not dense because at home pickup becomes even more convenient for you. If you would have otherwise had to drive a few minutes to get to a drop off.
<unk> or a <unk> return point, so we see application or at home pick up in not only many cities around the country, but also expanding into superb and regions as well.
Great. Thank you.
Our next question comes from the line of Ross Sandler with Barclays. You May proceed with your question.
Oh, Hey, everybody, it's Ross on for Ross.
Just one question Joan high level on exclusive designs just over 22% of items required right now how big can that figure become long term and is there like a natural limit in terms of the size of how big exclusives could be for you guys and then the second question.
Theres, a nitpicky near term one for Scott.
The <unk> guidance.
122 today.
It seems like you know.
Pretty small 5000 net adds.
Pretty well below the last three quarter average. So there is there some conservatism in that or is there like some.
Catcher Proctor is happening people are a couple of quarters that you don't have in the fourth quarter.
Some holiday promos, so just any color on that.
So John Thanks.
Thanks, a lot.
Yeah.
Thanks, Thanks, Ross why don't I, why don't I start with the second part of the question first so in terms of our guide as you know our seasonality burns patterns as we said.
Our back to pre Covid levels, and we've typically seen that subscriber acquisition is higher in Q3 versus Q4.
In Q4, the growth of both of our reserve in our subscription business historically centers around customers, having a lot to do in their social lives gathering for large holiday events traveling going to shows a big party.
So we obviously are still showing growth for Q4, but likely not as much as we would have seen if more of these large scale events were happening which are more typical in this timeframe. So we're excited to guide to a 67% quarter over quarter revenue growth for Q4, and we do expect as John said that there will likely be a backlog of social events into 2022.
In 2023.
And then in terms of the guidance around the exclusive designs.
We are estimating to be at 22% as you just heard for this full year and we do believe as Jan just mentioned that we're on a good path to get to a third a third a third across our three acquisition channels. We obviously have quite a lot of visibility into our spring 'twenty two orders already since we've already placed a number of them.
So we know where our expectations are going to be for 'twenty. Two both in terms of overall mix as well as our exclusive design partners. So we'll share more on that front in our Q4 earnings call.
And in terms of how big this could be over time of course over the long term. If we see continued success and exclusive design it could be far larger because this is something that's great for our customers great for our brands and great for us.
Thank you.
Okay.
Our next question comes from the line of Michael Binetti with Credit Suisse. Please go ahead. Your line is open.
Hey, guys. Thanks for all the detail on taking a question here.
Jim I, just wanted to I want to hear.
Maybe a little bit on I think.
Eric asked about this a little bit, but plans for marketing and in the reopened in the first half of 'twenty. Two I know, we talked through the IPO about having a big installed base of $2 5 million.
Customers in your and your full database that you have versus the just over 100000 in the subscriber program. It seems like there you mentioned a few comments that it was you had a lot of luck.
Taking those customers that know you and converting them into the subscriptions I'm curious how you how are you.
How is the marketing to them will look in the first half.
As we move into the reopening and then I was also curious on New York being one of the markets you called out it not being quite back at 90% of 2019 levels yet.
You don't look at it just looks like that that market is moving back to work and social pretty well I wonder if there's any pushback that you are seeing the specific in that market.
Perhaps you know legacy unlimited subscribers.
Any pushback from them as you pivoted the monthly plans fix.
Fixed fixed Ida monthly plans.
In the post Covid World.
Yes, So first for New York we.
Has been seeing weaker week over week growth in the market and we feel good about it accelerating back to pre COVID-19 levels.
Certainly.
Some external data right now in New York and in San Francisco on any given week day, only 25% and 28% of people are in the office on average. So there are certainly lagging behind in return to office, which probably also indicating their comfort level with social interaction.
<unk> as well so we do think that will benefit from this kind of backlog of events. Then returned to office into 2022 and into 2023 in terms of how we think about.
Specific near term growth of course, there is this kind of a funnel of our recent customers. We have been very successful in the term at converting not just recent customers, but even customers from prior cohorts into being subscribers one of the areas that we're going to be investing in in 2022.
It's just continued testing of our conversion funnel to get more of our customers to try subscription. We also have historically been focused on core digital marketing channels in the mid to bottom of funnel, primarily social and Google SCM and we began diversifying a few years ago into new channels like brand ambassadors and affiliate Mark.
Fitting which have all been efficient for us and then as we've ramped back our efforts. This year, we further diversified our channel mix into Youtube Tictoc OTT, while also adding top of funnel spend and we feel very good about the results that we're seeing so I think the combination of all of that gives us a lot of confidence in our guidance.
That's great and then.
Oh, sorry, sorry, one last thing I would say is that our loyalty.
Across the board is higher for our fixed swap program than we saw with our previous unlimited program. So that's not playing a part at all in the macro environment.
Okay, great. Thanks, Thanks, so much John.
Yeah.
Our next question comes from the line of Erinn Murphy with Piper Sandler. Please go ahead. Your line is open.
Great. Thanks, Good afternoon, a couple of questions for me first maybe just on the guidance for 2021, you guided scarlet with a very tight band of just five.
$500000 between the top and bottom and can you just share a little bit more about your level of visibility and the predictability that you have in the model even with seven to eight weeks left in the quarter and then if there was some upside do you see it coming more from the top line or the adjusted EBITDA just given some of your comments around the fourth quarter and I'm kind of.
The lack of social engagement or some of their holiday parties. This quarter. Thanks, so much.
Thanks, Darren so interim in terms of the guidance.
We do have pretty visits by RMC. We just also went through the Black Friday, cyber Monday and product perform as we had expected it to so we had good visibility into that and that's baked into our numbers as well.
I think the thing I would come back to what I was saying, which is really more about these these large events and that kind of hampering what we normally see in Q4, historically more seasonally having.
Having said that we're really excited about we have good visibility into is the engagement of the subscribers right. So we're seeing that 24% of our subscribers are adding at least another unit, which has been great from an RP standpoint, and we're seeing that behavior. Continuing so we're really excited about the engagement of.
Of the subscribers.
Great and then maybe just following up on that point Scarlett how do you how should we think about the incremental flow through of that 24% attach rate that are kind of adding that extra item in their cart. Thanks. So much.
Yes, so the way that you should think about that is that typically when they're adding another item is going into an existing shipments and so from a gross margin standpoint, it's actually really good for US right. It allows us to be able to derive more revenue over a base of costs, that's already kind of predefined in the shift in the shipment that she is already getting.
Excellent. Thank you so much.
Our next question comes from the line of Boris <unk> with Wells Fargo. Your line is open you May proceed with your question.
Hey, Thank you, Hey, Jim and Scarlet and Janine Congrats on your first quarter out of the gate I guess scarlet on fulfillment margin I mean.
I wanted to kind of go through this a little bit you guys have done phenomenal job over the last two years I think 15 to 20 points of scale just from the shift in the offering and some of the strategic changes you guys made so that's great I guess two questions. As one now you are having some year over year pressure because of inflation, which we all understand in the third quarter should we expect that inflation of that cost pressure.
Billed in the fourth quarter, we're kind of fulfillment margin are we thinking there and then what are the drivers now that we've seen the benefits from them from a from a big strategic shift a year or two ago. What are the drivers now to get broker with margins, 70% and above over the medium term. Thanks.
Yeah, So maybe I'll.
To start I'll kick it off in terms of some of the pressures on our fulfillment margin I'd say the two pressures are transportation and the labor wage rate increases, which we just talked about a moment ago. So we had anticipated both of those macro trends and we did see that start to show up in our numbers as I mentioned from a wage rate standpoint. This is something that we have been increasing.
Over the last couple of years and we continue to do that this year. So you should think about the fact that while we're guiding to for EBITDA for this quarter reflects.
Some of those increases in some of those headwinds.
On the labor side part of the reason that we are we have already begun doing a lot of process improvements in the warehouse is really be up because we are looking for more efficiencies right. So that's something as you know that we started to do 12 months ago, we're going to be doing even more of that in fact, probably bringing forward some of our plans to do a bit more inbound automation.
In our warehouse as a way to combat some of those wage pressures and then maybe I'll turn it over to John to talk a little about inflation and what we're seeing there.
Yes, so we actually believe that the rising prices and inflation in the wider apparel space create a big competitive advantage for rent the runway because it makes our financial proposition, even more compelling and the prospect of buying something you are only going to wear a few <unk>.
<unk>, even more nonsensical. So we believe number one we have pricing power given the significant value that the customer receive she is receiving 20 ex the GMB value for her spend and Theres no. Other place you can get that kind of this kind of value for her money and while we don't have plans at this point to increase.
Our program prices will continue to evaluate that over time.
And because we're not increasing pricing again, we believe this makes us very competitive in the market now just to gain share.
Great and I guess, just a quick follow up because of all the pressures that you guys are calling out and again very macro understood.
Should we expect fulfillment margins too.
Do you have an ability to take them up year over year, when we get into 'twenty, two or should we just expect more pressure to just kind of curious as to the direction on.
On the margin itself.
Yes so.
Over time, we do think that we have an ability to continue to increase fulfillment margins in the short term clearly macro trends are here and we are.
Working on transportation strategies, and as well some of the transfer and some of that labor strategies in the warehouse as well to combat some of that you can see that we've been successful this quarter and combating some of those macro trends and we'll continue to do that and then obviously from a revenue standpoint, which also impactful from a margin. The fact that <unk> is higher.
Is beneficial to the business as well.
Great. Thanks.
Our next question comes from the line of Andrew Boone with JMP Securities. Please go ahead. Your line is open.
Hi, good afternoon. Thanks for taking the question two crews for me first can you talk about your learnings from the brand marketing campaigns and then how do we think about that continuing or perhaps growing into 2022.
And then secondly, as we think about kind of the assortment and selection being 50% casual how do you guys think about the assortment for 2022 and are reopening world right. How do you align yourself with what.
Assuming we could be.
A very varied.
Assortment of what women could one 2022, just given the trajectory of army chrome in Cogs.
Thank you.
So in terms of how we align our assortment because of how much data, we're getting from our customers real time, we're able to use that to affect.
What merchandise, we're bringing onto our platform and because we now have these capital efficient channels with which to increase our selection in our assortment. It gives us a lot of ability to react very quickly to the market. So as an example in Q3, we saw that the customer.
Wanted with favoring variable styles very daring styles, she was going out more she wanted items.
Items that were more appropriate for nice out and parties and we were able to very quickly go to our 780 brand partners and secure the inventory to match her demand patterns.
And then on our brand campaign.
It was.
One of the first brand campaigns, we've run in many years. It was not only successful in driving additional traffic to the site, 10% incremental traffic, but it also up.
Overall brand awareness and from that campaign, we are evaluating an always on top of funnel.
Brand spend that we would add into our marketing mix.
And then in terms of how we think about marketing overall, Andrew as we've mentioned you know generally speaking we do intend to see continued strong organic acquisition contributing to growth of subscribers and we expect to more or less stay close to that 10%.
Of marketing as a percentage of revenue having said that like you just saw us during Q3, we will look for opportunities to be able to lean in.
From time to time and I would also say that 10% as I mentioned is really more of an annual number as you can think about it there will be some quarterly fluctuation, but we will opportunistically potentially spend a bit more if it makes sense, obviously continuing to be very disciplined about that.
Great. Thank you so much.
Our next question comes from the line of Edward <unk>.
With Keybanc you May proceed with your question.
Hi, Thanks, so much for taking the questions I guess first back to this casual point for those consumers that were loyal customers during COVID-19 and really leaned into casual are you seeing as she add more kind of external use cases going out dresses that she kind of trading up in terms of item count or is it just from mix within the changing and then there's.
A follow up from a modeling perspective, the debt repayment, what what specific contract that did it come from and how should we think about interest expense going forward. Thank you.
We are certainly seeing our customers trade up in terms of item count we've been very pleased with the engagement of our subscribers and we believe that.
As the macro condition improved it's not that that she is going to stop renting casual she's gonna add back many of those more special occasion, and night out and work related items that she.
Had rented from us in the past now interestingly, we've seen a major difference between 2021 and 'twenty 'twenty in terms of how she uses rent the runway to dress for work as you recall work prior to the pandemic was a major reason why she used the subscription and in 2020 the work use case based.
<unk>.
Minimized in 2021, she's back to using us for work, 25% of the time, even though she is using us within the full context of zoom.
So she is still renting she wants to look great and present herself well even in the context of working from home. So I think that this is even more of a symbol of how she is adjusting to this hybrid world. She continues to work from home. She wants to look good she still renting workwear. She is renting actually 25% of our inventory.
That's being rented in Q3 with special occasion inventory, even though she has fewer occasion chief amping up smaller moments. She is using that special occasion inventory to go out to dinner to meet friends and to kind of amp up those casual moments in her life.
And Ed in terms of your question related to the debt and we were really happy that we were able to raise $357 million in the IPO, which allowed us to pay down more debt than we had originally anticipated and obviously to raise more money for the business. So in terms of what we paid down we paid down all of the first lien debt, which was aerie. So that was fully paid.
<unk>.
And then we paid out $60 million of the principal on the remaining debt that was a topic that which was $30 million higher than what we had originally indicated.
So in terms of where we are now we're really focused on running the business for optimizing to grow and capture market share.
And we're going to continue to evaluate on an ongoing basis, how we can improve further our debt position as well as our terms in terms of what you should be modeling now for your model you know from an interest rate standpoint, the remaining debt is at 12%.
And that is two components, 7% of that is kit is cash and 5% is payment in kind and noncash.
Thank you.
Our next question comes from the line of Dana Telsey with the Telsey Advisory Group. You May proceed with your question. Thank you. Good afternoon, everyone. As you talk about subscriber engagement and the 24% of subscribers, adding one or more paid additional item what are they adding how are you thinking about attached.
Rates going forward, and where that's coming coming from and going to and then just secondly on omnicom, which is now out here a couple of weeks or so how does it seem different or the same as what you experienced when Delta was first announced is there any learnings from that that would be informative for this army con.
<unk>.
Hi, Dana I'm, so glad you asked that.
As you know, we've really been through the story of variance before with Delta.
And we were really pleased with our growth in Q2 and Q3 as the Delta variance spread in peak throughout the U S.
We have not seen any impact of OMA chrome.
But this is within the context of <unk>.
Because COVID-19 is present overall, we are seeing.
Fewer large scale events fewer just large scale social interactions than we typically would in Q4 so.
Our business is continuing to grow really nicely, but we believe that the more COVID-19 dissipates the higher the slope of growth may be so we feel really great about the fact that the resiliency of the business. This year in an entirely COVID-19 environment active subs are up.
Hundred 13% year to date, and I think that Thats proof of really this diversification that we've intentionally had on how the subscriber uses rent the runway.
And so she is.
Using us for this hybrid world and we think that any normalization is just upside for us.
And Dana from an <unk> standpoint.
Not really a call out in terms of the additional items being different than what she has in our base subscription. She is really using the add on as a way to have an ability to wear us more days for the months, so nothing different than kind of our main basket.
And for US, it's really about engagement and the fact that we're seeing her spend more with us and is making her even more loyal as she becomes an even bigger daily utility that will become an even bigger daily utility in her life.
And then in terms of Q4.
We expect <unk> to be pretty similar we don't anticipate any significant changes relative to Q3, so anything else you would add on the add ons.
I would just say that this is new.
The add ons are no different than the normal basket. However, the normal basket has actually changed in 2021. She is favoring bolder more colorful or printed more fashion forward styles across the board and not is.
Great for our business because our business is a fantastic platform to have more fun with fashion to experiment with fashion without the inevitable buyer's remorse of buying something that you would only where once or twice. So this.
The trends that we're seeing in the overall apparel market.
Words.
New kinds of bottoms that people are wearing in new categories of clothing in leather and lower acts and metallics like that is I think a fantastic tailwind for our business and really helps us drive share, especially because the selection that we have right now has never been better we have really faced no.
Why chain issues and given our unique business model, where we monetize our inventory over multiple years that puts us at an advantage versus other retailers who.
<unk> selection right now in the selection and they do have their raising prices on it.
Thank you.
At this time, we have reached the end of the question and answer session and this also concludes today's conference call.
You may disconnect your lines at this time. Thank you for your participation and have a great day.
Okay and everyone has disconnected.
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