Q4 2021 Rent the Runway Inc Earnings Call

Welcome to rent the runway its fourth quarter and full year 2021 results conference call. At this time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

A reminder, this conference is being recorded I would now like to turn the call over to Vice President of Investor Relations Janine Stichter. Thank you you may begin.

Okay.

Good afternoon, everyone and thanks for joining us to discuss about the friendly's fourth quarter fiscal year 2021 .

Before we begin we'd like to remind you that this call will include forward looking statements. These statements include our future expectations regarding financials and guidance market opportunities and aircrafts.

These statements are subject to various risks uncertainties and assumptions that could cause actual results to differ materially.

The risks uncertainties and assumptions are detailed in this afternoon's press release and the other filings with the SEC, including our Form 10-K they'll be out in the next few days.

We undertake no obligation to revise or update any forward looking statements or information, except as required by law.

This call 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.

Reconciliations of GAAP to non-GAAP measures can be found in our press release slide presentation posted on our Investor website, and our SEC filings and with that I'll turn it over to Jim.

Hi, everyone. Thanks for joining us today.

Our team executed very well in Q4, despite a very challenging macro environment, driven by a significant and unanticipated COVID-19 resurgence.

Cancellations as well as offices remaining closed we exceeded our revenue guidance exceeded our average revenue per subscriber expectation grew subscribers, 110% year over year and drove better than expected bottom line performance.

Scale improves our model and we thought in the strong progression on our gross margins adjusted EBITDA and free cash flow throughout 2021.

Even better this momentum continues to carry over into fiscal 'twenty two.

Before we move forward I want to affirm that my top priority as CEO is to bring rent the runway to profitability, while continuing to grow our business and the unique value we deliver to our customers.

Specifically, we believe that we can produce positive free cash flow with the cash we currently have we.

We have developed a number of levers we can and are pulling to attain this goal and we're focused on managing the growth of our business to hit this target.

While I'm pleased with our strong growth and anticipate that continuing I recognize the world for what it is and path to profitability is our number one priority in addition to serving our customers.

In 2021 in addition to going public we had five significant priorities first to meet or exceed our financial expectations, which I'm happy to say we did it.

Second to broaden our subscription offering and deliver more value to our growing subscriber base.

Throughout 2021, our subscription programs drove increased customer engagement and loyalty.

Third to translate the aforementioned increased value, we provided our customers into improved financial performance, namely higher margin, improving our pool and higher profit per subscriber.

Fourth to add more technology automation and use of data into our warehouses to improve non transportation fulfillment expenses, which helped us mitigate the impact of industry wide labor and transportation challenges.

And last to increase the efficiency of our rental product investment by further shifting spend into lower cost channels like consignment and exclusive design that are equally if not more desired by our customers.

The strategic priorities that we put in place are paying off and we believe we will continue to positively impact our top and bottom line in 2022.

I want to thank our team who stayed focused throughout this very challenging time and deliberate on some incredible improvements, which we believes that rent the runway up for an even bigger future.

I'd like to provide a bit more context around these accomplishments first on our subscription plans and how they translate it into financial value for us last year, we completed the full rollout of our personalized subscription program.

Plans are built to give our subscribers complete flexibility in how they use their chosen plan.

The result has been that customers increased spend per month and retain longer.

As an example, a subscriber who needs an extra outbid in a given month can now seamlessly add additional paid items into their subscription and then upgrade to more shipments per month, which increases the value to them and increases their value to us.

In Q4, 2021 over 30% of our subs added incremental paid items into their subscription, which increased our pool and improved our profitability.

It's clear that our customers are seeing increased value and becoming even more loyal and our new plans.

The Best example of this is how even during the omicron search many subscribers, who suddenly we're sheltering at home chose to pause rather than cancel their subscriptions, which is a great indication of how important rent the runway is in our customers' lives.

Midway through Q4, our momentum was strong and we had exceeded our active subscriber expectations for the quarter.

After the unanticipated impact of Omicron, we ended the quarter with more subscribers and pause been planned but even then we saw the strength of Adams, and resell and driving <unk> and revenue.

Importantly, the omicron disruption was short lived and we've seen strong momentum as this variant has subsided.

As it relates to our fulfillment expenses, we drove innovation within our operation in 2021, which we plan to build upon in 2022 and beyond this innovation deepens, our moat in logistic and enhances our ability to mitigate some of the macro increases in cost of transportation and labor within transportation.

We launched at home pick up in nine markets covering a quarter of our subscriber base at home pick up is less expensive than shipping with a national carrier and it greatly improves the customer experience by dramatically simplifying the returns process.

On the non transport cost side, we launched RFID automation and other projects, which reduced non trans fulfillment cost per unit more than 30% year over year in fiscal 'twenty, one with room to further reduce overtime.

And last regarding increasing the efficiency of our rental product investments. Our focus has been on expanding product selection to meet growing demand, while reducing use of cash.

Happy to say, we did that via our consignment channels share by our T. R. We significantly reduced the amount of cash spent upfront, which allows us to acquire more overall product at low risk given payments are largely performance based via exclusive design, we use our data advantage to develop collections.

With our designer partners that our customers love, our around 50% lower cost than wholesale and have higher rois than other styles on our site.

In 2020 , one we drove these non wholesale channel to represent 55% of our rental product acquisition. In addition, we continue to advance our garment science expertise and our 'twenty 'twenty. One initiative showed a 30% reduction in the product the activation rate year over year, which.

Means we are extending the useful life of unit and will lead to fewer total unit needing to be procured in the future.

Our priority in 2022 is to grow revenue, 45% to 50%.

And to progress on our path to profitability.

I view of free cash flow profitability as a way station rather than a destination and I'm confident that rent the runway will be a high free cash flow margin business as well as a high growth business over the long term.

We believe the key to attaining free cash flow profitability, then delivering attractive and expanding free cash flow margins is primarily through scale via a higher subscriber counts we.

We've built an opex cost base intended to support a multiple of our current subscriber base. We built this opex base, because we're confident that we will attract a multiple of our current subscriber base overtime.

While we believe subscriber growth alone can get us to our goals. We are focused on a lot more than subscriber growth. We believe that these other initiatives will get us to our goals faster and can lead to even more attractive long term margins.

One of these other initiatives is to increase the value of our subscription programs and therefore, our revenue and loyalty per customer by making it easier for customers to use our service and to discover great products that fit them well.

Another key initiative is focused on driving moderate year over year improvements in fulfillment expenses as a percent of revenue through increased labor productivity automation and use of data and technology in our warehouses.

Another key initiative is increasing the efficiency of our rental product investment by shifting a greater percentage of our assortment into consignment and our exclusive designs.

We plan to host an analyst day over the next year to provide more detail around the concept that I've discussed today.

And now the Covid rates have subsided. We also are looking forward to bringing investors on a regular basis to our distribution facilities to see firsthand the unique insignificant moat we felt.

In 2022 we plan to continue to execute on our core priorities from 2021 and capitalize on some key trends and investment.

We have three key business strategies intended to adopt to impact the top line and three impacting the bottom line I'll start with our strategies related to topline growth and engagement.

First 2022 is expected to be a banner year for special about them and we plan to capitalize on it.

We think that there will be unprecedented demand for going out clothes and event dressing this year with $2 6 million weddings plant, a new office wardrobe and closet, but need a serious refreshed after two years at home.

We believe that 2022 's record number of events can directly translate into extremely attractive and cost efficient subscriber acquisition.

Over 50% of rent the runway traffic comes to our site because they have an upcoming occasion and we've proven our ability to convert this would be one off renter into a long term subscriber.

As an example, we have successfully positioned our subscription as a value oriented way to dress for multiple events in a month and are leaning into this more in our marketing, we're increasing the amount of content and creative geared towards events with two to three times the volume across social CRM performance media.

And SCO optimized onsite content. We are also focused on strengthening our funnel from onetime rentals into subscription.

Second we will continue to make important investments into our customer experience to make it faster and easier for customers to find clothing, they loved by improving search and product discovery on our site and App.

Because our subscribers visit our app multiple times per week, we want to make it easier for them to browse and find what they're looking for quickly. These efforts are long term in nature, but we believe we can make annual progress to increase customer discovery acquisition and retention.

Third we plan to improve how well our clothing fits our customers.

Fear of perceiving items that won't that is one of the top reasons why new traffic doesn't convert.

We plan to enhance our tool to improve confidence and success, which should in turn drive conversion.

Examples of this include expanding our customer reviews to cover more products and prioritizing the best fitting items for new customers. We introduced a product we introduced a proprietary fit algorithm in 2020 , one that recommend sizes to customers that are most likely to fit.

This has already driven 40% lower fit issues higher customer satisfaction and fewer customer service calls amongst customers, who take our recommendations.

And as our top line scale, we're focused on making our bottomline even more efficient.

First we intend to increase the penetration of at home pickup and expect more than half of our subscriber base to have access to at home pick up by year end.

Don't pick up isn't important cost mitigation strategy against rising transportation costs, as we shipped shipments towards cheaper and more nimble last mile and regional carriers.

And we plan to continue to build on top of the technology and automation, we put into our facilities in 2021 to drive further productivity gains and reduction in labor cost.

Third we plan to make deeper investments to grow exclusive designs, while maintaining share by our T. R. At around 30% of units acquired for exclusive designs. We have a strong lineup of nearly 20 designer partners around half of which are new for 2022, including asked about Cortazar blue style as Len.

And our first celebrity designed collection launching later this year.

I'm happy to share that we launched our impact strategy last month, which builds on years of work and it has been core to our mission. We conducted a third party lifecycle assessment in 2020 , one that found that renting close on our platform drives net environmental savings across water energy and.

Carbon emissions compared to purchasing new clothes.

Even when accounting for shipping cleaning and our other operations.

Just on these findings we estimate that our model has displaced the need for production of over one 3 million new garments since 2010.

This matters because clothing production accounts for the vast majority of negative environmental impact in the apparel industry.

Our impact strategies hero goal is to encourage customers to rent not buy and to displace the need for production of half a million new garmin by full year 'twenty six.

We also have a goal to divert 90 per cent of waste from landfill from our warehouse operations, which includes continuing to divert 100% of unusable clothing from landfill last month, we began offsetting 100% of carbon emissions from shipments to and from customer.

We are also committed to achieving net zero carbon emissions by 2040, we plan to report progress against our goals beginning in 2020 Threes annual report to sum up we believe we are in the early innings of a huge market for fashion subscription and rental and our goal is to invest behind the strategy that will continue to improve customer.

Value and experience, while while simultaneously improving our margins.

We're excited about the opportunities in the year ahead to grow our business significantly are back to life back to work macro environment, that's more conducive for us and the plans we have in place to capitalize on these opportunities and with that I'll turn it over to Scarlett.

Thanks, John and Thanks again, everyone for joining us I will provide an overview of our fourth quarter results for fiscal 'twenty, One and then follow with guidance for the full year in the first quarter of 2022.

Before I get into the numbers I want to reiterate what John said around our focus on growing revenue, while driving rent the runway towards profitability.

This is a financial framework, we use for our business. We are focused on growing revenue by growing subscribers and growing barbu from both add ons and mid single digit price actions from time to time as we increase subscriber value.

We also derived revenue from our Ala Carte reserve rental and our retail businesses, both of which are important customer funnel into subscription.

We continue to move towards free cash flow profitability by increasing expense leverage in our three major cost buckets, which are fulfillment that includes transportation and non transportation expenses operating expenses and investments in rental products.

Phase one is to cover our Opex, which we plan to do in the next three to five quarters.

I will highlight progress in all of these areas.

Q4 revenue of $64 $1 million was up 91% year over year and came in above our guidance.

We achieved this by generating higher revenue per subscriber via paid AD onslaught, which are higher margin and we had higher resale revenue than planned.

The unanticipated effects Oh, my God negatively impacted us in Q4 in three key ways.

One by significantly decreasing revenue from our reserve business as most holiday events were canceled.

By reducing subscriber acquisition in the back half of the quarter and three by driving a higher rate of subscriber pause.

As a result as of January 31, the end of our fiscal Q4, we had 115000 active subscribers total subscribers increased to $160000 up 6% quarter over quarter and up 68% year over year.

For the year we.

We generated $203 $3 million in total revenue up 29% versus 2020.

Average monthly subscription rental revenue per subscriber or argue for the year was $135 and higher in age two versus age one due to strong subscriber add on rates.

Our Q4 gross margin rose 24 points year over year to 37% for the full year gross margin was 34% versus 10% in 2020.

The significant improvement in Q4 versus last year is due to higher revenue per shipment higher subscription gross margins and product cost that's the rental product depreciation and revenue share line item at 32% of revenue versus 59% in Q4 of last year.

We entered 2021 with a high supply of products due to COVID-19 and benefited from products being better matched to demand throughout the year.

We were able to achieve this improvement in gross margin, even with fulfillment costs higher at 32% of revenue in Q4, compared with 27% in Q4 last year largely due to the transportation price increases we had anticipated.

We mitigated this with shipping diversification and with significant productivity improvements in our warehouses.

Our total operating expenses marketing technology, and G&A represented 76% of revenue.

Compared with 85% in Q4, 'twenty and 87% for full year 'twenty, one demonstrating our ability to absorb fixed costs with higher revenue, even as we invest in the business.

Adjusted EBITDA for Q4 was negative $5 $5 million versus negative $4 $3 million in Q4 last year, representing negative eight 6% margin and a four point improvement versus negative 12, 8% last year.

For the year, we had an adjusted EBITDA margin of negative nine 4% versus negative 12, 9% in 2020.

We chose to spend slightly more than originally anticipated on marketing in Q4 to set up the business for a significant ramp into 2022, resulting in higher than planned marketing expense, excluding employee related cost at 10% of revenue.

Moving to free cash flow rental part of Capex is our largest investment and cash expenditure.

The clothing and accessories, we procure it can be monetized over multiple years, which is a key competitive advantage versus traditional retail.

We significantly reduced our upfront cost of units from $111 to $95 or 14% between 2019 and 2021.

This is due to a mix shift towards more capital efficient channels, which represented 55% of our product acquisition in 2020 one.

We assess total cash out labor products by looking at both purchases of rental product.

I'm sure by RTR revenue share payments.

On that basis as you see on slide 23 of our earnings deck, we spent $52 million or 26% of revenue on products in fiscal 'twenty, one versus $127 million and 50% in fiscal 19, that's a significant reduction in cash outlay.

This result in free cash flow or CFO of CSI, improving to negative 32% for fiscal 'twenty, one compared with negative 64% in fiscal 'twenty.

This significant improvement reflects our product acquisition shift and a reduced need to invest in product in 'twenty, one and more importantly, showcases our ability to manage cost and drive towards profitability, even with a difficult environment backdrop.

We ended the year with $248 million in cash and cash equivalents.

As you look at 2022 here a few things to think about and then I'll end with guidance first as it relates to revenue we expect continued high subscriber engagement.

Last week, we announced a price increase for new customers, which will go into effect for existing customers in Q2.

The impact of this increase is incorporated in our subscriber acquisition and retention expectations for this year and in our guidance.

We expect <unk> for full year 'twenty, two to be up approximately 5% versus fiscal 'twenty one.

We anticipate gross margin for the year to be flat to slightly up versus 'twenty, one with pressure in Q1 due to seasonal products acquisition.

We expect that higher ARPA and fulfillment productivity will be largely offset by approximately 200 basis points of pressure on annual fulfillment cost of revenue versus Q4, 'twenty one due to continued transportation headwinds.

In addition, we expect higher rental product depreciation and revenue share expense in dollars due to growth in assortments as.

As we drive a higher percentage of consignment revenue share is expected to represent a higher percentage of revenue and 22 versus 21.

Adjusted EBITDA and how we gauge our ability to cover operating expenses and we maintain our previously stated estimate of adjusted EBITDA breakeven in the next three to five quarters.

One is typically our lowest profitability quarter and we expect this again this year.

We plan to keep marketing spend at about 10% of revenue for the year, excluding employee related costs, though we anticipate a higher proportion in the first half as we pull forward spend to drive subscriber growth and higher recurring revenue earlier in the year.

We expect high higher technology expense as a percentage of revenue in Q1 due to strategic investments such as head count for search discovery and fish.

This should result in some opex deleveraging in Q1, but we anticipate significant leverage over the year.

Overtime, we believe G&A and tech, which are largely fixed could represent less than 30% of revenue with scale.

In terms of free cash flow, we maintain our focus on reaching free cash flow breakeven in the medium term and believe we can get there with approximately 300000 average active subscribers.

We intend to further lower the upfront cost of acquired products in fiscal 'twenty, two by acquiring approximately 60% to non wholesale channels.

And we remain on our midterm path to drive over two thirds of a product acquisition through these channels.

As anticipated due to a more normalized investments in product in fiscal 'twenty two compared to 21, we expect the free cash flow percentage of revenue for the year to be slightly lower than in 'twenty one.

Measure ourselves on free cash flow on a yearly rather than quarterly basis due to seasonal fluctuations.

Before we go onto guidance I want to clarify the seasonal pattern that impact rent the runway.

Subscriber acquisition is typically highest march through May and September through November when customers naturally think about changing over their wardrobes.

We see higher pause right in the summer and mid December to end of January . So Q4 active subs, usually peaked mid quarter before we see an uptick in faas by the end of the quarter.

Transportation expense and therefore fulfill my boss is typically highest in Q4, given higher service levels and competition during the holidays.

Finally, Q1, and Q3 is when we typically invest in rental products. So you'll see that impact gross margin and investing activities on the cash flow statement the impact on cash could be on a lag depending on timing of receipts.

This means that you should expect higher overall spend in Q1, and Q3, which negatively impacts margin in those quarters as.

Our subscriber count grows through the year later quarters benefit for more operational leverage due to higher revenue scale to absorb earlier investments.

Do you think your guidance the midpoint of the range reflects our current base case with the low reflecting more COVID-19 impact and the high reflecting a more normalized environment.

We're generally focused on margins and percentages of revenue rather than dollars and we may choose to reinvest dollars into the business.

We are anticipating a return to normalized seasonality pattern starting in the second half of Q1 as omicron started to abate.

The business has shown progressively greater resilience to COVID-19 variance over the last 24 months, though we will continue to closely watch V. A two other variants and potential impact.

We expect full year revenue for fiscal 'twenty, two at $295 million to $305 million, representing 45% to 50% growth versus full year 2020 one.

This year, we anticipate benefiting from a COVID-19 bounce back and longer term. We believe we can sustainably grow revenue in excess of 25% annually.

For Q1, 'twenty, two we expect revenue of 63.5 to $64 $5 million, representing 91% year over year growth at the midpoint.

When we entered the year with a lower sub count than expected. We recently experienced a quick bounce back coming out of Oman, and we expect ending active subscribers of 130 to 132000 at the end of Q1, representing 77% year over year growth at the midpoint.

For full year 'twenty, two we are actively managing to overall free cash flow dollars and margin as moving towards profitability is our top goal.

We are prioritizing investments in Opex for technology, and customer experience and are able to invest lesson to capex. This year due to our successful product acquisition shifts Osama.

Fulfillment continues to be a headwind therefore for adjusted EBITDA for fiscal 'twenty, two we expect a range of negative six to negative 5% margin.

For Q1, 'twenty two we expect adjusted EBITDA of negative 11 two.

So negative $10 $5 million. This is a result of higher fulfillment expense early investments in marketing and higher technology expenses against a lower revenue at the beginning of the year.

We are intently focused on balancing robust growth with profitability and we will seek to strike the right balance to attain both objectives and maximize the long term value of rent. The runway finally I want to note that we have provided guidance on a few more metrics on slide 25 of our earnings deck with that we're happy to open it up for <unk>.

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Thank you. Our first question is from Lauren shrink with Morgan Stanley . Please proceed with your question.

Great. Thanks, so much for the color two questions. One is there anything you can comment on in terms of more of the short term any potential headwinds that you've seen from BH you. Thus far I'm just curious if there's been any notable change and then secondly, you know rising risk of a slowing consumer backdrop.

And in the back half of the year, how do you think about this business performing in that sort of macro environment is this a service that people you think will will continue to hold on to them as its value is very important to it to them I'm just any color that was really helpful. Thank you.

Sure Hi.

Hi, Lauren we haven't seen any impact to date of be a too and the business continues to get more and more resilient when it comes to Varian.

As it relates to our growth this year, we feel very confident that's why we issued full year revenue guidance.

We're benefiting from and events boom, you know people have talked a lot about $2 6 million weddings, but that means two 6 million rehearsal dinners bachelorette parties honeymoons.

Sunday Brunches, we're benefiting from people returning to the office, even in a hybrid manner and we're seeing that they are actually dressing even more fashionably for the office and then inflation for US is a competitive advantage because it actually increases the value that the subscriber.

Is getting from rent the runway so even prior to inflation and she is paying about $140 a month and receiving 20 ex the value she's getting $4000 worth of designer product and its cost of products are going up she's seeing even more value, which is why we've seen higher geographic diversity in our sub base higher age Dover.

Our city and we anticipate that continuing I'll also note that you know our business is.

Very different and hasn't tracked with apparel or retail peers.

So over the last two years for instance, we didn't see any stimulus benefits, but others thought because number one we're not something that you can purchase today and use later and number 280% of our customer base had the household income over 100, K. So they didn't even receive the stimulus.

Our business does trap just spend on services and experiences so when things like Uber ride concerts restaurant bookings more people returning to opposite more vacations as those things resume and go up our business benefits. So we feel really good about the year.

Very helpful. Thank you.

Thank you. Our next question comes from Mike Baur Chow with Wells Fargo. Please proceed with your question.

Hey, there Scarlett two questions for you. So the price increases go through your existing customers. In Q2 are you baking in any expectation.

Expectation for some customers to drop off but maybe it wouldn't be okay with that.

With the price increase and then just the second question is can you just elaborate on how you get to a free cash flow breakeven over the medium term on the 300000 active subs that you referenced earlier.

Sure. Thanks, Thanks for the question or the questions I should say, so yes happy to give you a little bit more detail on the price increase yes, we have incorporated some assumptions around impact on acquisition impact on retention as well. So that's all reflected in our expectations and also in our guidance that we've provided for the year.

Okay, and then in terms of the 300000 average subscribers and really the path to profitability. So for first let me say that there there were really a number of levers that we can use to get to free cash flow profitability in the midterm and then we'll go into a lot more detail on that at an analyst day, but to give you a framework on the math now.

At an average of 300000 subscribers, let's use the 2022 expected <unk> and moderate growth in resale and reserve that would result in.

In total revenue of over $600 million.

And the way that I would think about it there really are the five key assumptions in this exercise. The first one is <unk> right. So I just said to you that we've not included an increase but we would anticipate increases in our pool, so revenue would be even higher than that but for simplicity I'll just use this as kind of a million dollars.

The second is fulfillment. So we feel confident that we can reduce overall fulfillment cost as a percentage of revenue by a few percentage points over the next few years.

Putting us lower than where we were in 'twenty, one which was about 30% of revenue.

So the way that we get there is we assume that trans prices continue to go up and we partly offset the way that we've been doing that which is with diversification.

And then on the non Trans died we believe that we can continue to improve that slightly every single year.

The third is revenue share so I mentioned that we anticipate that higher this year.

We do expect that to normalize at 10% to 12% as we had said in the IPO.

Before they got backs so theyre on the more fixed parts. So, let's let's talk through technology and G&A, you know and I would say excluding stock comp right, because they're really trying to understand cashier or opex space currently supports a much larger subscriber counts.

We expect these two lines to grow moderately in 'twenty, three and beyond you know I talked to what we think will happen this year and it's certainly slower than revenue growth.

So at $600 million of revenue, we expect tech and G&A to be about 30% or less of revenue.

Then on the marketing we're confident we can continue to spend at 10% or less of revenue.

So that results in an adjusted EBITDA margin, which is basically again the ability to cover our operating expenses of around 20%.

And that leads us to the final item and really the largest cut back which is b product capex.

So we expect that to be as you saw in the guidance at about 20% of revenue this year and that's with non wholesale at 60% of acquisition.

You just heard me say that our goal is for non wholesale to be more than two thirds in the midterm. So that would put product capex below 20%, making us free cash flow profitable.

Now a reminder, that I haven't included the ARPA increases, which we do anticipate and would be margin accretive driving higher free cash flow profitability and maybe what I'll do is I'll turn it over to John to talk a little bit about you know.

Revenue per customer in ARPA, and how we think about that yeah. So you know our pool for US is from two things one are price actions, which we could take from time to time as we increase subscriber value, but the second is through continued engagement. So one of the things we've done really well with these personalized subscription.

Graham is we've increased the level of customer engagement and loyalty, so theyre, adding more paid items and more paid shipments into their subscription what that means in real terms are they're actually using us more days of the month, they're deciding I need an extra outbid. This week I need an extra few outfits because I'm traveling this month and.

We saw the highest rate of paid incremental items into our subscription in Q4 at 30% of our subs in a quarter, where six to seven weeks of our quarter was impacted by omicron and people were sheltered at home.

So we feel great about our pool going up primarily actually through two due to increased customer engagement, which is why we're focused on continuous improvement to the customer experience and we have the ability to also take price actions from time to time.

Awesome. Thanks, so much.

Yeah.

Thank you. Our next question comes from Michael Binetti with Credit Suisse. Please proceed with your question.

Hey, Good afternoon. This is Dan Goldstein on for Michael Congrats on the progress.

Two quick questions from us.

First actually you've noted in the past there's been some really solid progress extending rent the runway geographic reach beyond the major coastal cities like L. A or New York can you speak to how your subscriber demographics have evolved recently in terms of geography, and then how your customer acquisition strategy might be different in these markets to capture all of the pent up rental demand in 'twenty two.

And then secondly, it's very encouraging to see the progress.

In front from a non wholesale channels, especially from exclusive is there anything that was pulled back.

Over one third of supply longer term given such strong progress so far.

So you know in other words are there any constraints are limiting factors to onboard more brand over the next few years if any thanks.

So on geography.

Our business has certainly diversified we're seeing more subs in the south and South East then that's great. Because those places also have less reaction to Covid case rates. So for example in places like Texas, Georgia, Florida active sub counts are approximately 135% larger for us.

Then they were pre COVID-19 and they continue to grow really fast and one of our kind of big strategies. This year in local marketing and focusing on Sunshine States and areas that are always on and had been more resilient during COVID-19 . So you'll see us kind of just.

Focus more of our paid marketing dollars and our owned and earned channels into some of those geographies and we're finding that.

That kind of geographic diversification and growth is continuing at a nice pace.

And then maybe I'll kick it off on the exclusive designs down and answer the question. There. So you know if you look at last year, meaning 2021, our exclusive design penetration for acquisition was already at 22% and we've stated that we think that that will be approximately 30% for this year you know as you can imagine.

We have to plan for this quite a bit ahead of time. So the 30% we feel very confident in and we're really close to that of third goal that we have in mind in terms of overall you know two thirds of the business going on wholesale so we feel really good about getting towards or yeah, and just as a reminder.

In 2018, we basically have zero percent of our business that was consignment or exclusive designs and this year, we'll be at 60%. So we drove tremendous change in how we acquire our product in a very short period of time, So I see no reason why we.

We will not kind of continue to build upon these winning strategies. Our designers also really benefit from exclusive designs and consignment and loved it. So we're excited about kind of the new designers that we're bringing on the platform. These are some of the most prestigious and coveted brands that we have and we're actually excited for all of you.

To visit us in our facilities and kind of show off some of the new styles for the year and how do you see how.

Amazing kind of the quality is and the trends and we think it's going to continue to be great.

Thanks, a lot.

Thank you. Our next question is from Eric Sheridan with Goldman Sachs. Please proceed with your question.

Thanks for taking the question, maybe if I can follow up on the wall students. So we talked about towards growth investments you wanted to move into the back of calendar 'twenty one into 'twenty, two and then the Valeant played out a little bit.

The balance sheet would you execute on those growth investments, what youre learning from those investments and how should we be thinking more broadly about slope in depth I'll build it once and we answer so for again the reopening dynamics on these special changing dynamics as we proceed through 'twenty two thanks, so much.

Yeah, So we have.

Hmm.

Really strong plan for.

What we're doing to capitalize on this.

Market environment, So like let's talk specifically about events for a moment so across earned and paid.

And one channels, we are doing things like increasing our event focused content and creative by two to three X across social CRM paid media SCO optimized content why.

Why are we doing this because we have a track record already of being able to convert would be one off event rental renters into long term subscribers.

And so utilizing this period of time to cost efficiently increase the funnel into rent the runway will not only drive our growth for this year, but we believe for many years to come. We've also started in a remarketing to very intentionally position our subscription as a cost efficient way to get dressed for.

Multiple events in a month, we recently launched a wedding comps years. So that you can call us and very easily you know have a stylus helped you book looks for all of your upcoming wedding events, even if you're just a guest so we're trying to do everything we can to make it really easy for people to think about us as a high value.

Way to get dressed this year, we're seeing really strong kind of momentum and success in a lot of these efforts and I think that we're also seeing that we're kind of being buttressed by a group of customers that is going.

Back to the office and hasn't bought workwear in two years.

And now there's kind of a new dress code for works I think that there is a dress code that is certainly more fashionable than it ever was before so I think theres been a myth that offices have gone Super casual we're actually finding that you know she's still wearing blazers to work actually blazer usages up a hunch.

<unk>, 66% year over year, but she's renting blazers and pastel colors than with floral prints than she is willing to take more fashion risks that work and she certainly doesn't have the stuffing in her closet, so whenever trends change whenever.

This change whenever whenever customer preferences change we are a more.

Value oriented solution, that's when we really hold the most value to the customers. So we're really trying to just capitalize on this environment. Another thing that is interesting is that a third of.

Americans have changed side since the pandemic, we view that as another opportunity for us as well so you've probably already seen this in some of our targeted marketing that we've been sending out this focus on events. This focus on return to work focus on kind of how to dress for travel and it's been very successful and we're going to continue it.

And Eric I think one of your questions is also in the beginning around you know the productivity of these investments and we continue to operate at a really efficient overall blended CAC and we you know we break even on customer acquisition costs within months and as a reminder, our subscribers are generating approximately $500 on average and a cumulative revenue.

In just six months.

Thank you. Our next question comes from Ross Sandler with Barclays. Please proceed with your question.

Hey, guys.

I wanted to ask about this.

The slides had 50% or the goal to reach 50% of subs with at home pick up in 'twenty two.

So I guess first question is just.

How is that a game changer from a frequency or retention or just behavior standpoint for sub to the order more do they kind of.

Do more Ala Carte et cetera, and then how does that change like.

Like the per unit transportation costs.

On your side, and then Scarlet and it sounded like a good amount of the EBITDA.

Deleverage in 'twenty twos coming from that transportation inflation, we're seeing everywhere.

In the system, but can you just elaborate a little bit on how much of that is relative to you know more.

Marketing or other cost items in terms of the.

EBITDA deleverage this year thanks.

Yeah. So first of all not home pick up it is really a win win it's.

Keeper for us than working with national carriers.

And it dramatically simplifies the customer experience because she no longer has to pack up a close in the blue bag and drive to a U B S depot and drop at all so we have seen that our customers love. This.

And right now is not integrated into our App or site experience. So it's a fairly clunky experience and we're still seeing crazy adoption what.

What we're doing over the next few months is seamlessly integrating this into a product experience. So you can't Miss it that you have this option to schedule a pick up and people can come to your home.

And where.

Feeling very excited about this you know reducing friction from the experience, which we think has impacts on customer loyalty and is just one of the many things we're doing to improve that customer experience now, it's not leading to more shipments because remember these personalized subscription program.

We.

Fully rolled out last year, you're paying for your shipments.

So.

Every time that you might want to add a shipment it's higher margin for us and it's more revenue for us, but it's certainly reducing the friction in the seats that scores on at home pick up are you know off the charts. So we set this goal of 50% of subs, having access of course, we're going to try to beat that goal and we think integrating it into our product.

Periods will be a no brainer and hopefully we'll see higher adoption.

Oh, Great and then in terms of your question Ross on adjusted EBITDA and how we're planning for this year you know a couple of things just again, you know I I just want to be really clear that we are managing to overall free cash flow dollars for this year and and margin and what you know in terms of our adjusted EBITDA.

<unk> targets and being breakeven you know we are maintaining that you know in three to five quarters and the way that you should think about this year is we've shifted dollars right, so where we're spending slightly more on opex.

But we are able to invest less in capex for product you know as a result of the successful shifts in our acquisition and product.

And then in terms of what's going on you know on the income statement part. So yes fulfillment expenses one of the reasons that we see you know some of that impact on adjusted EBITDA as I said, we expect that to see a couple of hundred basis points of pressure for the whole year versus Q4 and.

And that's really largely due to transportation of course, you know we deflect some of that with what John just talked about we did mention that we are investing in technology. In fact, we started doing that in Q4 and really want to make sure that we set up the business with the investments to be able to really invest in the customer experience. Those are really strategic investments for us so you'll see that actually.

Earlier in Q1, as well and Thats reflected in head count really against search discovery and fit as we just talked about and then marketing you'll you know should stay reasonably close in terms of the percentage of revenues. So there you know we are there's not much of a change there. So it's really those two items, but do you take a look at the overall business and the overall free cash flow margin in dollar.

As you know that's really what we're focused on first.

Thank you. Our next question comes from Andrew Bloom with JMP Securities. Please proceed with your question.

Hi, guys. Thanks for taking my question two please the first is as we think about the strong calendar for this summer and for for many consumers and increasing activity can you talk about any strategies specific turf resurrecting past customers and then second just more in marketing can you double click on customer personalization and maybe this is more of a product question.

Where can you take this process.

Process, and then help us understand in terms of how this relates back to financials or is it more add ons is it just a better overall consumer experience more loyalty just just helped bring it back to Michael Thanks, So much.

Sure. So let me just start with personalization.

One of the top drivers of loyalty is whether customers.

Where are the items that you rent.

Very simply whether the items that you when you receive them and.

A major driver of conversion as I mentioned on the call is your confidence in these items fitting ya.

So you'll see that we are investing a lot into fit both from an algorithmic perspective, but also making it easier for customers to a kind of submit photo reviews and putting those photo reviews in front of the customer we know.

Dad when she rents are recommended style. She is over 40% less likely to have an issue with fat. So you'll see product features roll out over the next few quarters that are going to especially for unconverted traffic and for new customers kind of prompt her into the stuff that we know is most likely to fit her get her more confidence.

The things will fit her and we view that as being a critical part of personalization, so kind of what items show up for you in the very early days of your journey. Most important part of that initial personalization is stuff that you'll love that'll fit you. So that's why we're investing in that search and discovery this year.

And then on reactivation of former customers, we continue to see that 50% of our acquired subscribers are former reserves for subscription customers. So the business is and this reactivation has always been fairly organic you know are.

Former reserve customers like we don't need to spend paid dollars to get them back they come back organically on what we are doing and investing in is we're building an even better funnel from reserve it into subscription. So we're testing out a lot of ways to do this this year from onsite product experience to offer.

Or because we do think that the amount of people coming to rent the runway with an event in mind is just gonna be higher given the macro environment and we want to use this to kind of fuel subscription boat. So.

Subscription growth this year and for years to come.

Thank you.

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Please proceed with your question. Thank you good afternoon, everyone.

As you think about the pause percentage of total subscribers, which I think was around 28% in this fourth quarter.

What's the how do you see the cadence and bringing them back what kind of investment do you need to do to bring them back and what have you seen or what's the trajectory of subscribers who were paused then comes back what do you see and how is it different this time post the omicron incidents than what you see in the past. Thank you.

Thanks, Dana So I think as you can see from the strong Q1 sub guidance that we've already seen a really nice and quick bounce back and some of that due to great organic pause reactivation. So you know Scarlett mentioned when she was talking about the seasonality that already like.

There is some seasonality to when people part so there's higher rates of pause even in a normal year between December 15th in end of January because people have slightly less going on in their lives, especially in January and this year that was obviously heightened biomarker on but as soon as things kind of pick up and as the environment.

Is that they have things going on we see pause reactivation and we've certainly seen that momentum this quarter.

Thank you.

Thank you. Our next question comes from Ashley Hogan with Jefferies. Please proceed with your question.

Hi, Thanks for taking our question with.

With the 2.6 million weddings. This year do you expect higher growth from reserve users, then and those either users to evolve to subscribers over time and then when do you see a reserve either convert to a subscriber what's the typical timeline of that conversion.

So we feel really fortunate that our brand has always been synonymous with event rental and especially with weddings and wedding guests.

So as I said, you know more than 50% of our traffic comes to the side because they have an upcoming event or occasion now we've done a better and better job of over time and getting that traffic to convert directly into a subscription and I actually think the sheer quantity of wedding oriented events that customers have this year.

Are making it even more kind of financially logical for them to convert into a subscription right away because in any given month you might have two weddings tumor hurtful dinners, a few you know other.

Other kind of wording associated about so you might have seen in our marketing you know over the last few months that we are positioning the subscription as this value oriented way to get dressed for more of that so we actually think that the events boom. This year is going to drive subscription just as much as it drives reserved rental.

Yeah.

And I think that you'll see that the larger kind of events boom is reflected in our full year revenue guidance of 45% to 50% growth, which we feel very good about it.

In terms of the kind of trajectory from converting reserve customers into subscription.

50% of our subscribers come from former customers I think that we.

We have opportunity here, though like we can do a better job via the onsite experience via offers they are getting to a customer right. After she has had a successful reserved experience when she's still excited about us and getting her to try subscription and you're going to see us test over the next few quarters a lot of different types of offers a lot of <unk>.

Types of onsite experience.

Experience is in order to convert her we see interestingly that it doesn't necessarily just have to be recent though so we see that even older customers.

Who rented a few years ago for a special that are still coming back to convert into subscription. So this is where we really.

Kind of leverage the fact that we have a very large first party database, we have lots of data and information on our customers, we're able to highly target or kind of marketing communications to this customer base in order to convert them.

Great. Thanks, so much.

Thank you there are no further questions at this time I'd like to turn the floor back over to management for any closing comments.

Yeah. So thank you guys also much for everyone, who joined today and thank you, especially to the rent the runway team I'm really proud of our execution in a year that proved to be anything but normal.

And as I look ahead, I'm excited about our momentum and the opportunity we have to capitalize on the macro tailwind for rental that we see forming we look forward to updating you on our progress on our Q1 'twenty two call.

Thanks again for joining us.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

Yeah.