Q2 2022 Rent the Runway Inc Earnings Call
[music].
Greetings and welcome to the rent the runway second quarter 2022 earnings conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded it is now my pleasure to introduce your host Janine Stichter Vice President Investor Relations. Thank you Julien you may begin.
Good afternoon, everyone and thanks for joining us to discuss went the wrong way second quarter 2024.
Before we begin I'd like to remind you that this call lines led by looking statements. These statements include our future expectations regarding financial results guidance and target market opportunities and our correct.
Statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially.
The risks uncertainties and assumptions are detailed in this afternoon's press release.
As well as our SEC filings, including our Form 10-Q that we filed an S T.
We undertake no obligation to revise or update any forward looking statements or information, except as required by law.
During 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 is of course, but yeah.
Installations 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.
And with that I'll turn it over to John .
Yeah.
Thanks for joining us today I'm going to focus my remarks on two important topics.
First if my confidence in the long term demand outlook and strength of our customer proposition second if my commitment to building rent the runway into a business that is profitable has strong margins and it's self funding.
Restructuring actions you announced today are an important step towards meeting those goals and Scarlet and I will review the details with you today.
Let's begin with the customer our revenue grew 64% year over year to $76 5 million, our highest quarterly revenue to date. We also were adjusted EBITDA positive for the first time since our IPO significantly ahead of plan generating $1.8 million and a two 4%.
Margin.
Subscription and reserve revenue grew 63% and quarter ending active subscribers grew 27% versus the prior year.
We began the quarter with some of our best subscriber acquisition numbers in history, culminating in our strongest ever may acquisition.
Subscribers also reactivated nicely and they.
Our subscriber engagement metrics, such as customer to add items to their subscription we're at strong levels and we saw some of the highest monthly subscription ARPA in our history.
We saw strength in our event based rental business as our customers demanded wedding and party entire black tie and going out clothes.
Our refill business also demonstrated excellent performance.
Starting in mid June we noticed an increase in subscriber pause rate and a decrease in retention along with the delay in former subscribers rejoining versus history.
This combined with seasonally lower acquisition resulted in ending active subscriber count that was lower than expected for the quarter.
Our goal is to be transparent with investors about what we do and do not yet understand about our performance and the evolving consumer environment.
We are highly confident in the long term opportunity for our business and this is unchanged. However in the short term I want to acknowledge that it remains difficult to predict how customers will behave and we want to be measured in our approach and guidance for the rest of the year.
It is becoming clear to us that our customers live work socialize and travel differently in 2022 than they did prior to the pandemic and this influences. What they were we are still learning how these types of changes in customer behavior impact the business, particularly in a challenging macro environment.
At just over 124000 active subscribers at the end of the quarter. We believe that we are in the early innings of our closet and the cloud model for fashion, we have seen positive signs of stability and a strong bounce back in our customer metrics in August and September to date, let me outline just a few reasons.
I'm confident that rent the runway can grow significantly and become an even more important part of our customers' lives.
We think we're only just scratching the surface of initiatives to improve every customer metrics from organic acquisition and conversion to retention and propensity to rejoin well.
We believe just executing on these initiatives and continuing to invest in our customer experience provides us an opportunity to more than double our business in the years to come let.
Let me highlight just a few examples.
We recently began testing a loyalty program to reward our early term customers with one additional item of clothing for their next shipment. This simple test with one of the most successful drivers of loyalty in our history. Another.
Another successful initiative to improve our customers' conversion and loyalty with giving them an understanding of items that are likely to fit them via fit tags on product pages.
We plan to soon rollout fit tabs on our product grid to expand on our impact here.
We've seen success this quarter in optimizing the way, we display pricing to our customers driving higher conversion and we plan to build on this in Q3.
Given our long history with event based rental we think there is significant opportunity in reactivating some of the more than 2 million customers, who have been onetime rental customers in the past.
In July we launched home pick up in our App and now over 50% of our subscribers access to debt ahead of plan, we continue to see improving customer adoption and satisfaction with won't pick up which both improves customer experience and lowers call.
We believe we can become a much larger business simply by focusing on matters within our control.
Notably the opportunities above don't require any changes in customer acceptance of rental.
We believe the apparel market continues to evolve in a way that's favorable to our business.
Our recent partnership with box office, just felt preloved clothing with our branding was a success and highlights an increased willingness by mainstream customers to wear secondhand clothing.
More of the biggest apparel retailers in the world sell pre own close these trends should only strengthen at first we would expect greater usage in our events business retailers around the world billions of dollars of outfits that customers, where the social world that.
We want to capture this demand and grow a bent based rentals into multiples of where it is today.
As acceptance grows and as event based customers become subscribers, our subscription business should benefit.
Even at the everyday nature compared to the event based rental business, we see an even larger opportunity I truly believe that our best days lie ahead.
Let me now turn to profitability.
I want to be clear that in order for rent the runway to be successful.
Rent the runway must be profitable and able to fund itself.
Other given our superior monetization of inventory versus traditional retailers, we have a significant gross margin advantage.
Along with growth, we intend to maintain strict cost discipline in order to generate above average profitability in the medium term.
Today, we announced a restructuring plan to reduce 25% to 27 million of annual operating cost and streamline our org structure, we made the difficult decision to reduce our corporate head count by about 24%.
The head count measures will be largely complete in Q3, and we expect to realize savings beginning in Q3 and into fiscal 'twenty 'twenty three.
We took a deep and rigorous look at our business benchmarking ourselves to other companies and realized that we had the potential to improve efficiency and drive profitability sooner, while continuing to grow revenue.
Despite almost 45% incremental flow through margins on additional revenue growth in our relatively high fixed cost base prevented more rapid gains in profitability. We believe that our customers are best served by investments that focus on them and by simple and quicker decision making.
Let me discuss the financial implications of these actions once implemented we expect these actions to positively impact adjusted EBITDA by approximately $4 million to $5 million in Q4, and $25 million to $27 million in fiscal year 'twenty three.
Scarlet will outline we expect to generate a mid teens adjusted EBITDA margin and cover our product depreciation at approximately $400 million in revenue.
At this revenue base, which we think is well within our reach in the short term. We believe we will be able to fund product capex for our existing customers and reduced cash burn before interest expense to approximately $30 million.
We also expect to maintain a healthy cash position, allowing us to navigate potentially tougher economic conditions. Our medium term target is to generate a 15% margin on adjusted EBITDA less product depreciation I Wanna be open about the possibility that the path to this 15% margin may not be linear well we.
Tend to clearly demonstrate that rent the runway can be a profitable company with attractive margin, we may decide to reinvest in growing the business, where it makes sense.
That said, we remain steadfast in our commitment to efficiency and further prioritizing investments that benefit our customers.
Ultimately, we believe the strength of our offering continued growth in the business and are focused on removing costs in areas that don't affect the customer will result in value creation over time.
I want to end my remarks by acknowledging the contributions that all of our employees have made to the success of rent the runway and by saying a heartfelt. Thank you to the employees, leaving that.
These actions are difficult.
However, they are necessary for rent the runway to become a healthier company.
As a company, we are resilient and innovative and have always been willing to make difficult decisions that are right for the business.
As an example during COVID-19, we fundamentally changed the way, we acquire rental product changed our subscription programs to be higher margin and drove efficiencies in our warehouses through technology and automation.
Our challenge is to capitalize on the many opportunities in front of us, while making rapid progress towards being a self funded business, we intend to meet that challenge and provide our customers with the experience and product they deserve with that I'll turn it over to Scarlett.
Thanks, John and Thanks again, everyone for joining us I will start today with an overview of the restructuring plan, we just announced and what it does for our profitability profile.
And we will follow with a short review of our second quarter results for fiscal 'twenty two.
And with guidance for the third quarter and full year.
As we've discussed our number one goal is to drive our business to profitability and demonstrate our compelling business model, which we believe can deliver 15% margin on adjusted EBITDA less product depreciation in the midterm.
As John outlined we are confident and rent the runway is ability to grow significantly in the coming years.
We are taking restructuring actions now for two reason.
First we want to ensure that the business can navigate potentially tougher macro conditions in short they are intended to provide a margin of safety.
These actions improve our medium term profitability they allow us to reinvest in our customers and create shareholder value.
It's apparent that economic and financial conditions are uncertain, our job is to position to rent the runway to emerge from a tougher environment with shrink.
However, our actions aren't just a response to this environment. We believe we have high gross margins and the potential to be a very profitable business.
We can make faster progress on profitability by focusing on our fixed cost base.
These actions are intended to allow rent the runway to become more efficient and customer focused.
We believe they will set the stage for significant margin improvement in the coming years.
Let me now outline what these actions mean for our business first the immediate impact this.
This plan is expected to result in a $25 million to $27 million improvement in adjusted EBITDA in fiscal 2023.
Head count reduction is expected to be largely complete by Q3 and positively impact adjusted EBITDA in Q4 by $4 million to $5 million. All of these figures are versus the Q2 level.
To our near term goal at approximately $400 million in revenue, we expect to generate a mid teens adjusted EBITDA margin and to be breakeven. After product depreciation. This means we are able to find product spend for existing customer base with the only cash outlays being for growth for example, if.
We funded 20% growth in our customer base, we would reduce cash burn before interest expense to approximately $30 million.
Three our medium term goals, we intend to maintain strict cost discipline, approximately 45% incremental flow through on revenue and generate approximately 30% adjusted EBITDA margin.
That represents a 15% margin on adjusted EBITDA less product depreciation. This is in our view solid profitability that is considerably better than traditional retailers and online peers.
At that level, we believe we would be free cash flow profitable fully internally self funding the business even at strong growth rate and we aim to get there with the cash we have on hand.
Now, let me give more detail on the reduction and restructuring plan I've already mentioned that we expect approximately $25 million to $27 million in annual cash savings in fiscal 'twenty, three compared with Q2 'twenty two run rate nearly all of which are fixed costs.
We prioritize continuing to focus on growth and delivering the best customer experience and targeted or cuts in other areas.
About $20 million relates to a reduction in head count of approximately 24%.
We anticipate a related severance charge of approximately two and a half million dollars to be largely recognized in Q3.
For full year 'twenty three in addition to head count reductions, we anticipate a $5 million to $7 million reduction in tech and G&A expense relative to the Q2 'twenty two run rate.
Though we are largely focused on big path I want to touch on our variable expenditures.
We have a business model, where we can react to demand changes do.
Two of our larger variable cash outlays, our marketing and product Capex and we intentionally did not touch either of them as we continue to prioritize growth and customer experience on.
On marketing, we expect to keep spend excluding head count at approximately 10% of revenue as we continue to prioritize efficient spend and growth.
Product spend for this year remain at our last guidance of approximately $60 million, it's very important for us to be prepared with the right product assortment for our customers.
As for the remainder of our variable costs.
Fulfillment cost customer service part credit card fees and revenue share payments to brands, they all largely flex with demand.
Taken together, we now expect our fiscal 'twenty, two free cash flow margin to be slightly better than in fiscal 'twenty, one, which as a reminder includes a more normalized level of product acquisition versus last year.
Now, let's turn to the review of Q2.
We are very pleased with our Q2 financial results with revenue hitting a record of $76 $5 million up 64% year over year and up 14% quarter over quarter.
Active subscribers increased 27% year over year to 124000, but declined eight 8% quarter over quarter.
As Jen mentioned in the second half of the quarter like many companies in the sector, we saw weekend demand.
This was in addition to the seasonality, we typically see with slower acquisition and a higher rate of pause in Q2 versus Q1.
Total subscribers increased 37% year over year to 173000 sub and declined 2% quarter over quarter.
Although active subs was down sequentially, we beat our revenue guidance due to strength in customer engagement and argue or average monthly subscription rental revenue per subscriber.
Two arm, who benefited from both a full quarter impact of price increases and high AD automate with 30% of active starts paying for one or more add on.
We reiterate our outlook for <unk> to be up approximately 5% for fiscal year 'twenty two versus last year.
In addition, even in this difficult environment, we saw high subscriber monetization with subscribers continuing to buy items at healthy levels, driving strong resale revenue and resulting in 87% of total revenue being generated by subscribers.
Reserve was up 9% versus Q1, 'twenty two though we had planned for high demand for special occasion party and going out items. This year, we saw even higher usage than expected. These items by subscribers, which may have constrained our reserve business in the quarter we.
We see this as an opportunity and are planning our assortment for this year right next with an even higher proportion of rental items for social use cases.
Our Q2 gross margin of 42% with three percentage points higher than prior year and nearly nine points higher than Q1.
Some of this benefit has to do with seasonality fulfillment cost as a percentage of revenue came in at 31% versus 34% in Q1, partly due to lower shipments for average subscriber, which we typically see in the summer we would expect average shipments per subscriber to increase seasonally in Q3.
But there are two factors that we believe will persist one we had higher revenue per shipment versus last year due to both the price increase and higher add on activity.
Rental product depreciation was 18% of revenue versus 24% in Q2 'twenty one as it was absorbed over a higher revenue base.
We are improving our target for fulfillment costs as a percentage of revenues to be approximately 33% for full year 'twenty two.
We expect gross margin for the full year to be a couple hundred basis points higher than full year 'twenty one.
We are very pleased with our adjusted EBITDA This quarter, which was positive for the first time since we went public.
Coming in at $1.8 million versus negative $1 $9 million in Q2 last year, representing a positive two 4% margin and a six point improvement versus negative four 1% last year.
Our total operating expenses marketing technology, and G&A represented 70% of revenue compared with 79% in Q2 'twenty one we.
We expect quicker opex leverage with the cost reductions we just discussed.
Let me now turn to guidance.
Our historical seasonality, which typically lead us to expect strong subscriber acquisition and sequential revenue growth in Q3, and as John said, we have seen an uptick in subscriber acquisition and unplugging activity in the last few weeks.
However, we think that change in consumer behavior post pandemic and the macroeconomic environment continues to be uncertain for instance, higher remote work trend may have contributed to the demand impact we experienced this summer and could change in seasonality patterns of our subscription business.
As a result, we have reflected this uncertainty and our guidance for Q3 and the rest of this fiscal year.
We also continue to monitor Covid variance and have modeled Q4. After the last two years, where we saw Covid impact and we currently expect Q4 revenue to be slightly lower than Q3.
For Q3, we expect revenue of $72 million to $74 million. This guidance reflects argued that it's lower in Q3 versus Q2.
In Q3, we expect a positive adjusted EBITDA margin of 1% to 3%.
A reminder, that we again expect Q3 to include our typical higher marketing for seasonal customer acquisition and also higher product spending and upfront revenue share payments to brand as we receive new fall winter product.
So typically Q3 profitability is lower than Q2 profitability. We now expect it to be higher than planned due to the impact of the restructuring on part of the border.
In terms of full year, we now expect revenue in the range of $285 million to $290 million, representing 40 to 40, 43% growth versus full year 'twenty one.
The low end of our range reflects a continuation of the summer trends and the high end reflects slightly improved trends and more normalized seasonality in Q3.
Both the low and the high end also reflect impacts from Covid variants like we saw in the last few years.
We are revising upwards, our prior guidance for adjusted EBITDA margin for fiscal 'twenty, two to negative 220% from the prior negative six to negative, 5%, which largely reflects our cost discipline throughout the year and the reduced cost base in Q4.
We continue to be intently focused on balancing robust growth with profitability and will seek to strike the right balance between both objectives and maximize the long term value of rent the runway with that we're happy to open it up for questions.
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One moment, please while we poll for questions.
Yeah.
Thank you. Our first question is for Mike or General with Wells Fargo.
With your question.
Hey, Thanks [laughter] Gen. I wanted to ask you just I'll go back to the.
Hum.
Initiatives, just maybe can you elaborate a little bit more that could be fairly deep I'm just kind of curious on the timing why now.
Given signs of positivity in the business are you guys are seeing so I'm just kind of curious if you could elaborate.
On the cost initiatives. Thanks.
Thanks for the question. So the reductions are just as much about growth as they are about efficiency. So this was the result of rigorous analysis of rigorous process, we benchmarked against a number of companies and we saw the opportunity to get become more efficient, which informed the size and scope of the call.
But because they're equally about growth. This gives us the ability to reinvest in the customer experience and played significant offense.
We are a proactive organization and we follow the data.
This is what we did when we saw the very early impacts of Covid and we acted early and meaningfully and.
And as promising as the bounce back has been in August and September we simply can't predict what's going to happen in the next 12 months.
These changes put us in a strong position to continue to grow both in the immediate and once the environment has fully recovered.
On the financial front, we think this is transformative for the business. We go from a business that's been burning a lot of cash to one that has much tighter cost structure in the short term confront product cost for its existing customer base and reduce burn to approximately $30 million before interest at approximately 400 million.
And revenue.
So in terms of why now you know we're confident in rent the runway is ability to grow significantly in the coming years.
We took these actions for two reasons first we wanted to ensure that we can navigate potentially tougher economic and financial conditions.
And second we wanted to pull forward the path to profitability.
And improved rent the runway is medium term profitability. So this truly allows us to reinvest in our customer and create shareholder value.
Thanks, John .
Thank you. Our next question is from Ashley Hogan with Jefferies. Please proceed with your question.
Hey, Thanks for taking our question Carla. This is for you can you. Please walk us through a little bit more detail your near and medium term margin targets and just how you're planning on getting there.
Sure. Thank you for the question Ashley So maybe just a little bit of a redefinition of what we talked about on the call I mentioned a couple of things. The first thing I mentioned is our near term goal, which is net of approximately $400 million, we would expect to generate a mid teens adjusted EBITDA margin and that would translate to being breakeven after product depreciation.
So a couple of things there first of all adjusted EBITDA was a very important first milestone for us.
So our ability to generate cash from operations to cover our Opex, which we did in Q2 ahead of our plan even before all of these cuts.
Looking at EBITDA after probably depreciation is really about measuring our profitability taking into account.
Basically the full annual cost of products for existing subscribers.
So we've said that getting to approximately $400 million and that's a number that's well within our reach in the short term we can get there. So let me walk you through how we would get to that first target. So first of all starting with the cost of fulfillment.
That implies that it stays pretty similar to where it was in Q2, you know what are about that 32%.
Rev share similarly, very similar levels to where we are in Q2.
Our depreciation in Q2 came in at about 18% and we're talking about it to find a couple of percentage points and you would get there through a mix of products as well as volume discounts that we would expect.
And then G&A and tax are going to see some significant leverage at higher revenue as the fixed costs remained essentially flat right, we intend to keep very tight cost discipline.
So combined you would see them at about 40% that's from about 60% in Q2, and we'll see that reduce pretty significantly even in Q4 as a result of this restructuring plan.
Marketing and we've consistently said will stay at about 10% and that gets you to about 15% adjusted EBITDA margin and by like I said, an adjusted EBITA of minus body depreciation that would be breakeven.
We also said that at this level, we believe that our cash burn would be about $30 million, excluding interest expense and the way that you get there as you think about the cost after that which our product capex do.
We think that's about 20% and 20% growth maintenance. Other capex is a couple of more precise point and that's how you get to about $30 million in cash burn excluding the interest expense.
From that point to get to that 15% adjusted EBITDA margin minus product depreciation.
Really about slight more improvement in fulfillment you haven't heard us talk before about that getting back to 30% a lower Rev share pretty much saying at the same level, we would expect to see a little bit more decline in depreciation at larger scale and then in terms of G&A and tech, we believe that we get even more leverage with higher revenue and that.
To get to a combined about 20% of revenue excluding stock comp with marketing staying at the same 10% that we've been discussing.
Great that was super helpful. Thank you.
Okay.
Thank you.
Our next question is from Edward your ruble with Piper Sandler. Please proceed with your question.
Hey, good afternoon. Thanks for taking the questions guys I guess, a two parter for me first maybe just to double click on some of the restructuring commentary can you give a little more specificity as to kind of where you made the cuts I know you're protected certain areas of the firm that you want to invest in but are there specific initiatives that you're not doing now are kind of like where where did the bulk of the debt and then there's a longer term.
In particular, we have what could be tougher macro I guess, how do you feel today about the price value relationship or maybe better yet how do you see your customers feel about it and are you considering any adjustments there. Thank you.
Oh.
Because we feel very confident in the continued growth in our business we were intentional.
With this restructuring plan.
Do not cut any areas, which impact the customer.
So we still feel confident in our ability to deliver on initiatives that are going to impact positively impact all of the metrics within our control whether that's acquisition conversion rejoin rate our loyalty of our customers. So we cut relatively more in back office functions than we do.
Good in customer related functions. We also very intentionally Scarlet mentioned Didnt touch you know our variable costs, we're continuing to invest in our marketing budgets in our rental product budgets, we've actually seen that the demand for.
Social occasions, and kind of casual occasions is even higher than we had anticipated. So we're gonna do work to kind of reallocate some of our inventory dollars going into the back half of the year and next year.
The goal was really about continuing to focus on growth continuing to focus on delivering the very best customer experience because we think that we're really in the early days on in rental and retail and not the industry is just getting started.
Yeah, and maybe just a little bit more in terms of examples. So just one thing I wanted to add which is even before this restructuring we had already eliminated significant expenses in capex that was originally planned for our budget for the year. Some examples there you know we got out of one of our Florida and our headquarters as an example, there was some capex plan and our warehouses and corporate.
Being much tighter in terms of discipline on hiring and back filling in areas outside of growth in customer experience and then we're seeing some really nice productivity and our customer service agents as well that would be on a volume benefit that we would typically be able to benefit from as well and then I'd say on a go forward basis, you know the board that's fine.
The $7 million reduction in Tech and G&A, you know think of it as being you know in areas like you know third party fees consulting some tech expenses discretionary corporate in occupancy related expenses and we continue to look at additional opportunities to reduce our expense base.
And then I had also asked about the price value equation.
And.
What we can say is that we've been monitoring our customers for pricing sensitivity, we've seen pricing sensitivity noted slightly more than in the past.
But consumers tend to be more price sensitive overall in the summer that is historical patterns of what we've seen so we've continued to lean into our value messaging and invest behind the customer experience. We've done a lot of work over this past quarter or two.
To remind the customer of how much retail value. She is receiving once you run how renting is a better financial equation versus buying I.
I think that we're having some nice results on subscribers and customers using us for social occasions across both of those businesses. So I think that some of our work here is kind of having.
Positive momentum in not cheap.
She's seeing that you know it doesn't really make sense to buy a dress that you'll only where one so we're working with.
Boosting total marketing effort that highlight the value of renting over buying and we think we're all still kind of in early innings of this is as part of our core brand messaging.
Thank you.
Thank you. Our next question is from Lauren shrink with Morgan Stanley . Please proceed with your question.
Great. Thanks, I wanted to dig in on the subscriber net adds if I could I'm seeing lots of different moving parts, but if you had to hypothesize what the one or two largest factors of the student's life slow down or what would you say those are and then just on the reserve strength is there anything further you can share on the on the profile of that customer during the quarter.
Or between those customers that were you know maybe previously subscribers versus new to rent. The runway just trying to understand if there's maybe a bit of a trade down effects happening there on the subscriber side. Thanks.
Yeah. So in terms of what we saw this summer related to the sub count.
Thank you know I'm going to talk to you about the short term and.
As well as the long term so as it relates to kind of performance. This summer in short term performance. We don't know exactly why subs were down it could be a combination of many factors no first and likely most significantly it's becoming very clear to us that our customers live work socialize.
And travelled differently in 2022 than they did in 2019 or throughout the pandemic. This certainly influences what they were so we're starting to learn how these types of changes in customer behavior impact the business. So as an example.
In 2019 over a third of subscriber activity was related to close you rented for the office. If this year it and in 2021 and first half of 2022, only 20% of what she wore was related to clothing. She worked for work.
So if returned to office maintains the status quo or remote and hybrid work trends increase our subscription business might become more socially and casually oriented as it has been in 2021 and 2022 to date and therefore, we might experience more seasonal peaks and troughs.
We also think that there could be some impact.
The macroeconomic environment on our performance and it's hard to be precise about what that impact it. So.
So we're continuing to monitor this one of the reasons why we don't have the exact answer right. Now is that we've seen some positive signs of stability and a strong bounce back in our customer metrics in August and September to date.
And then while we can't predict what happens in the short term, we're very confident about our prospects over the next few years. So we believe this market is in its infancy and customer adoption of rental and resell will continue to grow and there is so much here that's in our control just by focusing on.
The metrics that are in our control such as acquisition and conversion and rejoin rate and our loyalty we can more than double the business in the upcoming years.
So our goal with this restructuring is really has been to position the company to have the strongest financial profile to invest in the customer invest in this growth and capture what we think is an enormous opportunity.
In terms of reserve in the quarter Scarlet mentioned this.
In her comments, but what we saw is that for both our reserve customers and our subscribers well.
Well, let's start with subscriber subscribers.
Used more special occasion inventory in the quarter than even we had been planning for and remember we had planned for a massive event boom. This year and they took even more and when I say special events inventory I mean everything from clothing. They were wearing two casual social events like going out to dinner.
They're going out on dates to parties to cocktail events to black tie. So because subscribers took relatively more of this more formal kind of going out inventory than we had anticipated we think that it could have impacted our reserve business and we potentially didn't capture as much of our <unk>.
Is there a business as we put up in the quarter.
So we're making changes to the inventory assortment in the back half of the year in 2023 to ensure that we can deliver on social occasions, even more robustly for both subscribers and for reserve customers, we don't see any different profile in our reserve customers.
We don't think that there is a trade down effect, that's happening and that's not what we're seeing in our data.
Now, especially given that we are seeing again, some positive signs of bounce back in August and September in our subscriber numbers, yeah, and I would say in terms of like new versus existing customers. We're seeing a similar proportion in this quarter as we saw last quarter.
Of new versus returning customers.
Great. Thanks, so much.
Thank you. Our next question is from Ross Sandler with Barclays.
With your question.
Oh, Hey, guys just a couple of follow ups to the last question and I think one of them.
Sure.
Did the April price increases have any impact on that.
June churn that you were talking about or subscribers.
Subscribe rate.
And then John when you talk about macro do you mean like higher gas prices or people getting laid off or whatever.
We're kind of great value prop M. During a tougher consumer pinch given the cost savings here. So just.
Any elaboration on the macro.
Would be great and then just growing with the.
It's kind of like the depreciation would go down to 15% of revenue in that.
Medium term goal to go from a better terms and wholesale exclusives or is that mix shifting.
We're on the runway for sure sure Barbara Archie or.
Could you walk us through that.
A reduction on that won't don't want important line. Thanks a lot.
I Wonder why don't I and thanks, Rob for the question why don't I start off with the product depreciation so yeah in terms of the reduction you've seen it reduce over the last couple of years really as a result of the fact that we now have kind of the more appropriately sized revenue to do that supply right. So we've seen kind of consider that decrease and probably.
Nation as a result of better matching of supply and demand that's kind of point number one and then point number two is that we also see benefits as we see a continuing shift away from wholesale and that has a good impact on product depreciation both because of the fact that you have a lower percentage of wholesale but as you have a higher bar.
Sage of exclusive designs remember that those items are about 50% of the class as a whole so item so that benefits US and then of course, you know as we get larger we also should get volume discounting and therefore, it to your point better terms and better pricing on the individual.
Pieces of that product assortment.
So Ross in terms of the first part of your question you know price increases might have had an impact on churn there, but there might also be increased seasonality that we saw that affected the near term numbers on the macro and its impact it's really hard to tell because we saw some weakness in the summer, but we've seen strength more recently.
Lee.
So.
Yeah.
Our objective here is to put the company in the healthiest financial position possible, so that even if <unk>.
Negative macroeconomic conditions persist that rent the runway can continue to drive the business to profitability and much lower growth scenarios that we could pull forward that path to profitability and at the same time, we've not caught in areas.
Is that right.
Related to us so we're continuing to invest in growth. We're investing the same marketing dollars. We're investing Hussein inventory, we have the personnel here. The engineers here that are going to be continue to build out better product discovery better fit all of the things that we've been discussing so we're planning for them.
The downside scenarios, but at the same time, we want to continue to ensure that the business is building for the long term.
Yeah.
Thank you. Our next question from Michael Binetti with Credit Suisse. Please proceed with your board.
Hey, guys. Thanks for taking our question.
I guess first I'm curious on the <unk> you mentioned I think you said it was up 5% in the quarter on a year over year basis, driven by price increases and higher add on.
Given the decline in active subs could you maybe break down the contribution by each of the components in the 5% increase just to I'm curious which of the inputs you see she is most sustainable over simplistic more affected by some of the macro crosscurrents you pointed to in the quarter and then bigger picture.
Net promoter score was a topic, we talked about through the IPO process could you speak to trends in the NPS score from the subscription consumer today, they've been through quite a bit of change with the program from unlimited swaps to sunsetting unlimited swaps price increases.
The program lots of changes in the use cases that kinds of different occasions that they're using the product for and now they are facing some pressure across your household budget I'm I'm curious what you know about the path of NPS through all of that change.
Michael Thanks for the questions, maybe I'll kick it off with <unk>. So your question on what part of Art Cooper says in terms of the increase that we saw so obviously the price increase is one that we would expect to persist right that hit us for you know.
Three quarters of the euro will be for three quarters of the year given that we launched that in April having said that we know we've pretty consistently seen really nice add on activity from our subscribers over this whole year hovering around that kind of 30% level for most of the year. So that you know early to tell but it seems to be hanging in there quite nicely.
And we would expect continued good engagement there one thing that I do want to call out is Q3 and in periods when you'd be higher acquisition, you would expect <unk> to come down and I think I mentioned it in my and my point, which is that we would expect to see our book them down a little bit in Q3 really because you have a hybrid.
And the customers and therefore, a slightly better prices when they come into the program with a discount.
So net promoter score. It's remained broadly stable you know we have very loyal customers. Our older cohorts, who you know stayed with us through Covid continue to love the product and the service we don't.
Really have any new information to share on net promoter score, but a few things that we look at as.
Kind of leading indicators of net promoter score one is the fact that the business remains largely organic it remains its growing through word of mouth, we see that our customers continue to post reviews to post on social media. We're seeing that you know during these periods of.
Kind of strong seasonal bounce back that our customers are finding out about us from other customers. We also know that.
These are customers, who are engaging with us more and more so to your question on arc <unk> arc is driven both by the price increase but it's driven by the fact that our customers are choosing to pay for even more items in their subscription and we saw some of the highest <unk> that we've ever seen.
In the summer so even though their worst seasonal impacts of the summers the under 24000 ending subscribers. We had at the end of the quarter were more highly engaged with the product than we had kind of seen before so we feel very good about kind of all the leading indicators of N. P asked about how customers are engaging with us.
Them choosing more brands falling in love with those brands and that's why we're focused on providing for the very best experience. We're building out our brand relationships, providing her the best product, making the experience more and more seamless for her to use so that we become more of a daily utility in her life.
Thanks Lucas.
Thank you. Our next question is from Rick Patel with Raymond James. Please proceed with your question.
Thanks, Good afternoon, everyone I'm, hoping you can give us more color on the improvement in shops that you're seeing for early in the third quarter are you doing anything different from a marketing or a customer experience perspective.
He benefiting the business.
The normal seasonality and bucking.
I hope you can help us with the outlook for marketing so you're sticking with the target of 10% of revenue for the year I was curious what's earmarked for performance and versus top of funnel and then if macro that's become more of a headwind do you see the potential of what's this phone to protect your margins.
Okay. So.
Let's just start with like in a normal year, which again, we havent been in since 2019, but in a normal year.
We would typically see that the summer has lower seasonality for us we have shared that before now why just the summer have lower seasonality for us because in the middle of the summer height of the summer when lots of customers or just on vacation there at the beach, they're dressing way more casually. They can just throw something casual over their bidding.
And kind of call it a day.
We carry 800 of the top designers in the world. So even though of course, we carry casual inventory, we Kaiser we carry the whole gamut, she's not necessarily thinking as much about her self presentation in the middle of July as she is in September . So typically you know what.
We think about marketing, we do a lot more marketing in the ramp up.
Towards the fall when everyone is basically back to school back to life back to even back to offices and so.
We've not done anything differently. This summer we've leaned into the same kind of seasonal marketing that we would expect I would say that the layer on top of this year that is slightly different is that we are emphasizing value oriented messaging across the board in every marketing communication. So just a small example, now and every E.
Mail communication that you get from us on a monthly basis, you are reminded of the value of the $4000 of designer product you receive that month were reminding you will you know if you sign up for the subscription.
It costs, you 140 Bucks and if you.
So each item only coffee $18 as part of the subscription compare that to buying a dress for an event and that can run U 200, and $300. So the value oriented messaging is certainly different in fact, we now have a brand marketing campaign.
Around the country, that's very clearly emphasizing to customers why buy a dress you're only going to wear what.
So we've leaned into value oriented messaging, we certainly have emphasized for this fall where.
Really excited about showcasing how incredible our designer assortment and product assortment is we've seen strength in our customers using us for their social lives. So we've leaned into that in our marketing but.
We haven't really seen anything else that would be.
That difference as it relates to how we think about the summer and kind of build back into the fall.
And then just maybe to touch on your second question you know the the guidance that we're providing you know there's always a little low and a high in both of those sides.
Soon that we would.
There's approximately 10% of revenue that we've been talking about right. So our intent is to maintain that spend at about 10% for the whole year.
Got it good luck this fall.
Yeah.
Thank you. Our next question comes from Andrew Boone with JMP Securities.
With your question.
Thanks for taking my questions you talked about keeping marketing at 10% of revenue.
Seemingly less revenue visibility can you talk about this decision in keeping marketing at that level in a tougher macro environment.
And then as it sounds like it use cases or changing can you just touch on assortment. How do you think about 'twenty 'twenty potentially 24 in terms of what you guys keep X items as the customer is not returning to work as you would have a more casual customer how do you think about actually making sure you do have the right inventory on hand, thanks, so much.
And the great thing about marketing is that is discretionary and not if we see signs that what we experienced with the negative trends that we experienced this summer if they come back if we see trends that they were related to macro which again, we think could be a factor.
But we're not.
We need more data to.
Confirm not like we can use our discretion and cut back when appropriate for now we continue to invest in growth and we see a huge amount of opportunity in the upcoming months and into next year to grow the business.
And then in terms of your assortment for 'twenty three 'twenty four you know we as John just mentioned I think one of the biggest changes is leaning in even more on special events and you know we we did find it interesting how much we saw our subscribers.
Take some of the special event apparel over the summer time and this is you know for us showing up as an opportunity to do maybe a bit more of that and that's one of the things that we are planning for and I'll just add as well on marketing we're extremely disciplined on our marketing spend we measure the ROI of our marketing, we're not seeing signs that our.
Marketing isn't effective or marketing remains as effective as it's ever been so for.
At the time being we're going to continue to invest behind marketing because it's been very positive for our business and.
And we think that there's a huge opportunity to gain market share and to get more and more customers in this environment to try rental either via reserve or via subscription.
Thank you.
Thank you. Our next question is from Dana Telsey Telsey Advisory group.
With your question Hi, Good afternoon, everyone as we go towards the third and fourth quarter and you look at the cadence of eat what is what do you see as the key differentiating factors. This year in Q4 versus last year, whether it's sports.
Product, whether it's for giving you have at home pick up now what could be the surprises one way or the other on the delta. Thank you.
So as we've mentioned for Q3 and Q4 you know we are taking a measured approach right. In spite of some of the positive signs that we've seen over the last few weeks you know we do think that there's some uncertainty. So I think one of the positive factors as to have a little more certainty around some of these things.
We're looking at especially over the next few weeks. So that's kind of point number one point number two is Q4 does have incorporated in it you know a similar type of impact as what we saw last year from a COVID-19 standpoint that could be something else.
That impacts you know how that how that comes out as well.
Got it and then on at home pick up what have you been seeing there as you expand it from the territories that you had previously.
Okay.
Well, we were able to expand it to over 50% of our subscribers.
Kind of meeting her ended the year goal two quarters early we're seeing that adoption rate amongst our subscribers continues to improve that there's very high customer satisfaction with this and we think that it.
Continues to be a win win the big launch that we had related to asthma and pick up in Q2 would be launched at.
I don't pick up in the yeah. So now it is right in your face to customers. When they are returning their clothing that they could have that clothing picked up at their home that they can schedule that pick up as a reminder, this is more cost effective for us, it's better and more convenient for our customers. So these aren't just again.
Points of customer delight that we continue to add into the experience removing friction from her everyday experience and we think that over time. This adds up to improvements in these metrics again that are in our control loyalty is one of those metrics within our control, making small modest improvements in loyalty makes a huge difference and <unk>.
Laos off alongside small improvements in acquisition or small improvements in conversion to double the business in upcoming years. So we're using these strategic initiatives that.
Are all still focuses of the business product discovery search fed home pick up all of these things should lend themselves to improving the core metrics of the business that are in our control and getting us to the place where we can kind of more than double the business in the upcoming years.
Thank you.
Okay.
Thank you. Our next question comes from Noah Buckskin with Keybanc. Please proceed with your question.
Hi, Thanks for taking my question I'm, just just to drill down a bit off on reserve again, I guess in terms of your comments around adjusting the assortment for social occasion use cases, I think in part due to stronger than expected reserve trends I guess going forward has anything changed in terms of how you're thinking about the size of the reserve business long term.
I guess relative to maybe how you're thinking about it previously.
And then second just in terms of where you're absorbing as a funnel for subscription if you could provide any color on those dynamics playing out during the quarter and how you're thinking about that dynamic through 2022, and if anything's changed longer term. Thanks.
And so we think the reserves can be several times its current size.
We are planning to significantly increase high formality inventory as a percentage of inventory in full year, 'twenty, three which by the way should not only benefit the reserve business, but it'll benefit the subscription business because subscribers also take this inventory and see it as a huge value for why they would sign up for a subscription.
We're counting on both higher consumption of this inventory by subscribers and leaving room in there for higher consumption by reserve customers.
We think that reserve continues to be the easiest way to come into the business, it's such a clear value proposition why buy a dress you're only going to wear one you're renting it from us that you know what.
Proximately, 10% of the retail price, there's billions of dollars of dresses sold every single year in the U S for social occasions, and we're leaning in kind of to take this on head to head in our marketing because we've done we seen that.
Those reserve customers.
Can become future subscribers as a reminder, 50% of our subscribers are our former rent the runway customers primarily reserved. So this is a great funnel into our business and so we're investing behind it.
And maybe just to add a little bit to what Jens Bad you know the other thing is we've seen some really nice upticks in terms of reserve customers converting over to subscription over the last six months or so so that is obviously very encouraging that that first important rental behavior. So socialized.
Is the customer to this market and then we have an ability to then convert or any description.
Thank you.
Yeah.
Thank you there are no further questions a good poem.
Like to turn the floor back over to John Hartman for any closing comments.
So I just wanted to thank everyone for joining us today.
And.
Listening to our Q2 call I'm very excited about our plans to accelerate our path to profitability and the long runway for growth ahead. So we look forward to continuing to update you on our progress on our Q3 2022 call and thanks again for joining us.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.