Q4 2022 Rent the Runway Inc Earnings Call
Welcome to rent the runway is fourth quarter and full year 2022 earnings results Conference call.
At this time all participants are in a listen only mode.
A 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.
I would now like to turn the call over to rent. The runway is vice president of Investor Relations Jackie Black. Thank you you may begin.
Good afternoon, everyone and thanks for joining us to discuss wrapped around my fourth quarter and full year 2022 results.
Joining me today to discuss our results for the quarter and fiscal year ended January 31, 2023 our CEO and co founder, Jennifer Hyman, Chief Financial Officer, Scarlet or Sullivan and SVP of SPN eight did backer. During this call we will make references to our Q4 2022 earnings presentation, which can be found in the events.
And presentations section of our Investor Relations website before we begin we would like to remind you that this call will include forward looking statements. These statements include our future expectations regarding financial results guidance and target market opportunities and our growth. These statements are subject to various risks uncertainties and assumptions that could cause.
Our actual results to differ materially these risks uncertainties and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our Form 10-K that would be filed in the next few days, we undertake no obligation to revise or update any forward looking statements or information, except as required by law. During this call. We will also reference.
Certain non-GAAP financial information.
<unk> 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 in our SEC filings and with that I'll turn it over to Jen Hyman co founder M C.
E L a rent the runway.
Thanks, Jackie and thank you everyone for joining our earnings call today I'm really excited for 2023 as I believe it will be a transformative year for rent the runway.
We have entered a new era for the company for the majority of our internal resources are focused on investment for our customers.
We've shared before the market for fashion subscription rental, which we pioneered is taking off and is expected to see massive growth over the next decade. It's our belief that we have built the brand and infrastructure to capture this opportunity we have conviction that the way, we grow and become a profitable business.
And by ensuring that we are adding tangible value to our customer experience quarter over quarter, we already kicked off the strategy in early March of this year by changing all our subscription program to offer more items for the same crime with minimal impact to our gross margins anticipated versus fiscal year 'twenty two and then.
Our response has been incredible I'm excited to share more throughout this call, but first let's close out 2022.
I'm pleased to report that we had a strong finish to fiscal 2022, and we exceeded guidance on both the top and bottom line on our earnings call at the beginning of fiscal 2022, we laid out two key priorities for the year, one to grow revenue, 45% to 50% in fiscal 2022.
To show progress on our path to profitability I'm proud to share that we achieved both goals.
Fiscal 2022, we grew annual revenue, 46% year over year to 296 million $296 4 million, which accelerated up from 29% revenue growth in fiscal 2021.
We posted three consecutive quarters and our first full year of positive adjusted EBITDA since IPO generating adjusted EBITDA of $6 7 million for the year.
Fiscal 'twenty two with notable for the decisive actions to position rent. The runway is a financially stronger business we.
We right sized our fixed cost base cutting approximately 25 million in fixed operating expenses versus our Q2 2022 run rate.
Financial discipline is firmly embedded in our operating culture.
And at our debt maturity and substantially reduced cash interest expense by over $20 million.
During the next two years.
The cumulative impact of the decisions. We have made since 2019 is highlighted by our 40% gross margin after fulfillment and protocols that are better than many traditional retailers and online peers on a comparable basis.
Equally important is the progress we have demonstrated on product acquisition, we acquired almost 60% of our rental product in full year 'twenty two either on consignment through our share by RTR program or through lower cost exclusive designs.
Our product acquisition success provides a powerful competitive advantage for our business. We believe our gross margins are healthy our cost structure is right sized and a rental product acquisition is increasingly efficient our primary task is to grow a larger subscriber base at our current <unk>.
Margin structure leads to improved free cash flow.
The thing we were not satisfied with fiscal 2022 with our subscriber growth.
We ended the year with 127000 active subscribers.
We've mentioned before that we believe the price increase we took in April 2022, they'll beneficial for revenue and profitability hurt our subscriber growth, especially given that the price increase does not correspond to meaningful improvements in customer value where experience.
Have long term relationships with our customers via our subscription product and it's critical that they feel that their experience is always getting better which is our strategy for 2023 and beyond.
As of April eight 2023, we've already rebounded to an all time record high of over 141000 active subscribers, which gives us early signs that our growth strategies, which I will discuss later on this call in greater detail our working.
Before I discuss our plans for fiscal 2023, I want to discuss our path to free cash flow profitability.
As the founder of this business, who sees rent. The runway is my life's work. It's my number one goal to create a self funding company that generates cash and captures the massive global opportunity for a closet in the cloud.
The customer thinks about building her wardrobe it in a way that is completely different than just 10 years ago. She's open to secondhand. She is willing to subscribe to and rent and it's our job to capture the growing market rebuilds.
Good news is that these schools are consistent or larger subscriber base at current gross margins and fixed costs should lead to free cash flow profitability.
Well Scarlet will walk through more detail, we are making rapid progress.
This free cash flow in fiscal 2023 is at least $42 million better than in fiscal 2022, a reduction in cash consumption of approximately 15%.
As we will discuss shortly with 158000 average active subscribers a level consistent with our minimum 25% subscriber growth guidance for this year, we might expect a further $20 million improvement in the cash consumption from our base business.
The details of our business can be complicated to understand so we are providing additional information to help illustrate the important strides we are making towards generating free cash flow.
Finally, our Scarlet will outline we think we are well within reach of an active subscriber base that is able to generate enough cash to sustain itself and begin to contribute towards our growth requirements.
It's imperative that we capitalize on the significant growth opportunity that lies ahead of us.
Let me walk you through how we plan to grow in fiscal 2023 and beyond.
Our growth plans revolve around our customer and seeking to improve every facet of their experience with rent the runway.
We believe doing so provides important benefits to retention as well as the organic customer acquisition.
Well you can see in our earnings presentation that we enjoyed strong revenue retention, we believe that focusing on customer experience can drive further improvements to retention.
About half of the total subscribers to lever do you so within their first 90 days in.
Improvements to their experience can be powerful drivers of growth.
Well, we aim to retain more of those customers the benefits go well beyond that.
Tenured subscribers leave us at a fraction of the rate of the newer subscribers. Thus retention improvement would not only add more customers, but also keep them significantly longer.
Finally, more satisfied customers are key to driving organic growth for our business.
The majority of our historical subscriber acquisitions have been organic.
Almost 60% of customers here about us from someone they know.
Our customers have always been our best marketers new customers will undoubtedly hear about the more positive experience, we were trying to create a word of mouth.
He started off our year with a bad by changing all of our subscription programs to include an extra item in every shipment offering 25% more value for the same price.
With this launch our base programs shifted from four item to five items per shipment. So for the substantial majority of subscribers, who pay a $144 for two shipments per month. They are now receiving 10 item versus eight items previously the mouth is simple for customers in our 10 items that each day.
Under item now costs $14.
This pricing is meant to go head to head with fast fashion, but of course, we believe rent the runway destock fashion by offering the quality of real designer fashion more variety with our hundreds of brands and constantly rotating style and of course, a more sustainable way to get dry.
We have data from years of testing across various economic environment, demonstrating the subscription loyalty directly related to how many items customers were from US every month, giving.
Giving her more items per shipment means there's a higher likelihood more items with it. So we're more items in her rental behavior will be cemented.
Thus far we've seen exciting results from our extra item launch.
Highlights are active subscriber count has grown to over a 141000 subscribers as of April eight 2023, our highest number of active subscribers ever had.
We are seeing significantly higher loyalty improvement amongst our full customer base than we had expected meeting both completely new customers to rent the runway and tenured customers have all been churning less.
Former subscribers are rejoining our program acquisitions of church for the month of March were up 24% from what it was just prior to watch.
Pass subscribers have reacted extremely positively we have seen a several percentage point decline in our population as a percentage of total subscribers from 26% at the end of fiscal 2022% to 22% as of April eight 2023.
Theres one Great example of how far we've come over the past few years.
Following the launch we've seen some of the highest volumes of units processed in our DSD since the fall and winter of 2019, However, our ops productivity rates. So far this year are nearly double what they were three years ago, meaning to process. The same volume we need 43%.
Send fewer associates.
Looking ahead for the rest of 2023 to drive improvements in loyalty, we are investing deeply into our customer experience. This makes sense because rent the runway has a fundamentally different models and the other retailers where experience is our product.
Typical e-commerce sites see clients purchasing a few times per year, whereas rent the runway subscribers are interacting with our website and app and selecting receiving wearing and returning multiple pieces several times per month.
The physical and digital experience of a subscription to fashion matters.
It's our job to continue making it easier and more delightful for our customers over time.
There are three pillars of our strategy in 2023.
These pillars are informed by rich data, we have collected from current and former customers around what drives their loyalty and our biggest opportunities for improvement.
Our three strategic pillars are in service of those opportunities.
First is getting her more of the inventory she wants when she wants it.
Best in class product discovery, and third is increasing the efficiency and ease of use of our experience.
Regarding the first pillar of getting her more inventory she wants when she wants it in 'twenty two 'twenty three we are planning to invest $69 million to $72 million in rental product capex to support our existing customer base and anticipated growth in subscribers. We are focused on the use cases that are <unk>.
All of his or her today that just workwear.
You're investing in greater job among brands and styles customers love, so that more of her desire and styles in stock when she's browsing and picking for her next shipment.
I also have a renewed focus on inventory freshness and are strategically exiting inventory at the right moment in its lifecycle, leveraging our pricing algorithms to optimize monetization of our inventory days.
Our second pillar is best in class product discovery right now rent the runway is at par with fashion retailers related to help customers find filter and search for inventory on our platform.
Wanna be we'd better given how many items of subscriber has left from us each month.
Giving women asked us to variety and bounty is the basis of my vision for a closet and the cloud the freedom to try something new and express yourself through fashion. However, you want is powerful.
At this point rent the runway already has an awesome matrix of designer brands and styles and my opinion is that this closet and the cloud is one of our biggest competitive advantages.
To fully capitalize on this advantage, we want to make it way easier and more fun for customers to access and fashion.
This pillar invest in tools feature an algorithm that will bring our competitive advantage the forefront of our customer experience.
We need our customers to understand that we have just as many options for her day in the office as we have for our upcoming beach vacation and that we are the very best place to access trends and keep her wardrobe update it.
This closet product discovery will come to life across three areas on runs a runway first pass of discovery, which means she doesn't know what she wants and needs to be inspire we plan to create a large set of immersive durations of our products created by human powered by AI tool. This will allow prospects in subscribers.
To better understand a myriad of ways she could use for a subscription.
Second active discovery is when she knows what she wants and she wants to find it sufficiently.
Leveraging foundational technology product catalog and database work done in 2022, we aim to improve search and filters. So it's much quicker to get exactly what she's looking for third installed discovery. This is somewhat unique challenge to rental when she wants something but it's not available right.
Now we.
We plan to ensure she never hits the dead end and we are always recommending similar items to satisfy her needs.
We have already made progress on discovery in 2023 in March we rolled out a much a sport feature called rental work, which showcases how to rent the full outfit the style of the model and present similar items. If any item is unavailable to read right. Now this feature coupled with an overall shift in style.
Images on site is up level, the usability of the site and we've been seeing higher engagement on our product pages just in the few weeks since launch.
We've also completed the integration of our new product catalog into new search service.
As a result, we can tap into the richer and fresher set of product attributes to yield better search results and over the coming months customers will see improvements to other discovery features like filters powered by this more robust dataset.
Our third strategic pillar for 2020 three is improving the efficiency and ease of use of our experience. One way. We are tackling is by making our site and app much faster.
Site speed is an area, where we lagged behind our competitors today.
We've already made improvements to two key entry points to our funnel that have improved speed and performance of these pages by over 30%.
Another focus area for us is completely revamping our subscriber onboarding process. So the new subscribers have deeper education at their fingertips and how to use our programs and direct shocked if needed with CX associates to ensure they are receiving what they want right from the beginning of their experience would read the run.
Why.
As you know we launched at home pick up in 2021 and the service is now available in 34 markets, serving 60% of our subscriber base.
At the end of Q4 2022, we saw 37% adoption among subscribers, who had access to our at home pickup offering Chris.
Transportation cost per shipment continues to benefit from at home pickup and for the 29% of that home pick up in Q4 that were alive swap where the delivery and return happen simultaneously the transportation savings is higher we've.
We've always believed in a strong correlation between home pick up in loyalty and the data shows that customers, who use at home pick up churn at significantly lower rates than those who do not.
The three strategic pillars, we're focused on this year are emblematic of a new era for rent the runway, where we've transitioned the majority of our energy and attention to continuous improvement of the customer experience.
Now that the market for circular fashion is robust and growing and we've built the technology and the infrastructure we need to scale. We believe extreme customer focus will help enable us to capture the multibillion dollar opportunity of fashion subscription.
While our customer economics are already strong and our subscribers are profitable we expect that the loyalty improvement from our 2023 strategy should make our customer unit economics, even better over time, we believe our plans will bring our business back to at least 25% active subscriber growth.
Growth in 2023, and with that I'll turn it over to Scarlett.
Thanks, Jan and thanks again, everyone for joining us I will provide an overview of our fourth quarter results for fiscal 'twenty, two and then move to guidance for the full year and first quarter of 'twenty, three including outlining the impact of the recent change to our subscription program.
First here are the financial takeaways for fiscal 'twenty, three we are guiding to accelerated active subscriber growth this year in excess of 25%.
There will be a revenue revenue lag relative to subscriber growth that's primarily due to building from the subscriber counts at the end of fiscal 'twenty two we're going to go into more detail on this.
We expect strong adjusted EBITDA and margin that partly fund products.
And therefore, you see that this year, we're planning on putting cash consumption nearly in half versus last year.
We believe we're close to a turning point of being able to cover not only our variable and fixed cost, but also the product spend required to maintain our existing subscriber base. In fact, as we grow subscribers more that means the existing base should generate cash to fund growth.
And now onto our Q4 results.
In Q4, we generated revenue of $75 $4 million up 18% year over year and ahead of our guidance we.
We had 127000 active subscribers at the end of the year up 10% year over year and down 6% sequentially.
Our active subscriber count at year end is a function of where we ended Q3, which in turn was impacted by the price increase in Q2.
And second we saw our typical higher rate of pause insurance seasonally in Q4.
Our record high active subscriber count of 141000 at April eight 2023 up 14000 from yearend indicates that we have seen a strong pickup in Q1, so far.
We are providing average active subscribers as we believe it gives a better indication of revenue in the period and ending active subscribers, which measure of subscribers on a specific day.
Average active subscribers for a quarter is calculated as the average of the beginning of quarter and end of quarter active subscribers.
And for the year is calculated as the Mi of average active subscribers for all quarters in that year.
For Q4 average active subscribers with 130000 compared with 116000 in the same quarter last year or an increase of 12% year over year.
While the large majority of subscribers still enter our mid tier 144 dollar program. During Q4, we saw a slightly higher proportion of new subscribers entering our lower priced one swap program, which we factored into our expectations for this year.
Our revenue beat versus our guidance was primarily due to strength in average monthly subscription rental revenue per subscriber or are too driven by add on spot.
28% of active subs pay for one or more add ons in the quarter, even in this inflationary environment.
Other revenue represented 9% of revenue in Q4 versus 8% in Q4, 'twenty, one and up 32% year over year.
Other revenue included a carryover of $27 million from the pilot to sell brand new exclusive designs to Amazon, which we had anticipated.
For the year, we generated $296 $4 million in total revenue up 46% versus 'twenty 'twenty. One we had 129000 average active subscribers over the year up 38% year over year with RPM for the year at $147 up 9% year over year.
Are aided by the April price increase.
86% of total revenue in fiscal 'twenty, two came from subscribers or about 1900 and $80 per average active subscriber for the year.
Our Q4 gross margin of 44% was seven five percentage points higher than prior year.
Well, it's only cost as a percentage of revenue came in at 30% versus 32% in Q4, 'twenty, one primarily due to higher revenue per order.
For full year 'twenty two it came in at 31%.
Only slightly higher than full year, 'twenty, one as we offset higher shipping and wage costs with transportation efficiency and labor productivity.
Setting us up well to be able to offer an additional item per shipment to customers with minimal impact expected on fulfillment cost.
Total product costs came in at 26% of revenue in Q4, 'twenty two versus 32% in Q4, 'twenty, one and at 28% for full year versus 35% for full year 2021.
This gross margin for the year at 40% and up over 600 basis points versus full year 'twenty one.
Q4, adjusted EBITDA came in significantly ahead of our guidance at $7 $1 million versus negative $5 $5 million in Q4 last year, representing a positive nine 4% margin and an 18 percentage point improvement versus negative eight 6% in Q.
For last year.
Our total operating expenses marketing technology, and G&A represented 60% of revenue compared with 76% in Q4 'twenty one.
Employee expenses in Q4, so nearly the full impact of the restructuring.
For the year, we had an adjusted EBITDA of positive $6 $7 million, representing a positive margin of two 3% versus negative nine 4% in 2021.
As we mentioned on our last call, we opportunistically pulled forward approximately $4 million.
X span into fiscal 'twenty, two as we were able to access highly desirable desirable products at discounted prices.
Putting total purchases of rental product at $62 million for full year or 21% of total revenue versus 15% in fiscal 'twenty. One as we increased product spanning 22 to support a higher subscriber count.
Or a more capital efficient non wholesale channel represented 60% of total spend excluding the FY2023 pull forward versus.
65% in fiscal 'twenty one.
Even with the pull forward on rental products than our fiscal 'twenty two free cash flow margin was better than anticipated and came in at negative 31% ahead of last year's margin of negative 32%.
A couple of housekeeping items I want to call out for the quarter.
The restructuring related severance charge came in at $2 4 million for the year. In addition, we decided not to move forward with another long term warehouse Capex project as part of our restructuring work.
Recognize a noncash loss of $1 $5 million in Q4 due to the asset impairment.
Let's now shift to fiscal 'twenty three guidance.
As I outlined earlier he highlights are the significant acceleration than expected subscriber growth and substantial reduction in cash consumption.
Probably our subscribers are the most important input towards free cash flow profitability.
We're very pleased to have started fiscal 'twenty three on strong footing.
Let me walk through the detail.
First let's start with subscribers and revenue.
We expect the extra item plans to have a positive impact on subscriber retention and have incorporated this change along with the impact of our customer experience initiatives into our guidance for fiscal 'twenty three.
We expect ending active subscriber growth in excess of 25% compared to end of fiscal 'twenty two with average active subscriber growth for the year in the range of 16% to 18%.
We see average active subscriber growth being back half weighted as we build subscribers throughout fiscal 'twenty, three and due to the anticipated impact of our customer experience initiatives in the second half.
Let me touch on seasonality again.
We see our highest subscriber acquisition in March to May and September through November was.
We therefore expect the highest sequential growth in active subscribers in Q1 and Q3.
We believe the price increase last year significantly impacted Q2, leading to the first sequential decline inactive subscribers in Q2 in the last four years.
This year, we expect to see Q2 axis up flat to slightly higher than Q1.
As for Q4, we have for the last few years seen a sequential decrease in active stuff and have assumed the same for fiscal 'twenty three.
You can take a look at the slide we added in our earnings back to highlight seasonality.
We expect our goal for full year 'twenty three to be down approximately 4% versus fiscal 'twenty two.
We anticipate continued high add on purchases, though at a lower rate than last year.
Also incorporated a slightly higher mix of our lower priced program into our expectations for this year versus last year, reflecting recent trends.
These elements, we are guiding to full year revenue for fiscal 'twenty three of $320 million to $330 million, representing 10% growth at the midpoint of the range versus full year 'twenty two.
We expect the 2023 will be a story of two halves with stronger revenue growth in the second half of the year.
The first half of 'twenty three is impacted by the strong subscriber growth. We saw in Q1 of 'twenty to postpone my Brian .
Note that we expect higher revenue growth in Q1, 23 versus Q2 'twenty three F Q1, 'twenty three will still benefit from the price increase we took last April .
Given our focus on growing our promoting subscription we expect to see lower reserve revenue this year versus fiscal 'twenty two.
For Q1, 'twenty, three we expect revenue of $72 million to $74 million, representing a 9% year over year growth at the midpoint versus Q1 'twenty two.
We anticipate gross margin for the year to be slightly down versus fiscal 'twenty. Two is 40% with typical pressure in Q1 and Q3 due to seasonal product acquisition.
So we're offering customers an extra item per shipment, we do not expect an increase in transportation cost due to minimum wage increases in shipments.
And we intend to continue transportation optimization to absorb carrier price increases.
When it comes to labor, we expect continued efficiencies and productivity, mostly offset the additional labor to process additional units.
These factors combined with anticipated lower reserve revenue, meaning we expect fulfillment cost as a percentage of revenue to be slightly higher than in fiscal 'twenty two.
In terms of adjusted EBITDA, we anticipate significant improvement in fiscal 'twenty three.
Yeah, I'm trying to keep marketing spend at about 10% of revenue for the year, excluding employee related costs, having said that if our initiatives. This year result in higher organic growth there could be an opportunity for reduction in paid marketing.
We plan to maintain discipline in our fixed cost, resulting in significant leverage in our operating expenses as we benefited from approximately $25 million and restructuring savings for a full year versus the Q2 'twenty two run rate.
Therefore for adjusted EBITDA for fiscal 'twenty, three we expect a range of 7% to 8% margin.
123, we expect adjusted EBITDA margin of 2% to 3% due to seasonal investments in marketing and timing of revenue share payments I guess lower revenue at the beginning of the year.
In terms of free cash flow, let me give you the main element we.
We anticipate approximately 22% of revenue or 69% to $72 million.
Based on our fiscal 'twenty three guidance.
Combined with our strong guidance on adjusted EBITDA, and the $15 million reduction in cash interest in fiscal 'twenty three from our recent debt restructuring, we anticipate substantially reducing cash burn this year to below $50 million.
Bear in mind, there are from a free cash flow guidance is dependent on product spend which may shift with subscriber growth.
We provided full year expectations for a few other items. So please refer to the guidance page of our earnings deck on our website.
And now I'd like to hand, it over to sit back or our SVP of SG&A to walk you through the details around the capital requirements of our business and our path to free cash flow profitability.
Thank you Paul that we recognize that it can be difficult to understand the capital requirements of our business.
The result, we want to take a moment and give you the tools to do so and have added some illustrative slides in our Q4 'twenty two earnings.
As a reminder, we incurred upfront spend for each of our new subscribers. However, given that we utilize our rental product over three year period subscribers acquired considerably less central product spend uptick.
We believe that our business is making rapid strides towards becoming free cash flow positive. In fact, we think we are approaching an inflection point, where our existing subscriber base will generate cash flow that exceeds both our fixed costs as well as the amount of product spending will require at this point, we expect those subscribers will begin to contribute to funding the capital.
Requirements for growth in new subscribers before I walk through the details I want to outline that this analysis is meant to be illustrative.
Let's begin with slide 29.
As Colin has outlined we expect cash consumption in fiscal 'twenty three to be better than $50 million. This number is it some of the cash required will generated by our existing base of subscribers and the cash required for growth.
Slide 30 outlines the underlying cash a fiscal 'twenty two ending base of approximately 127000 active subscribers would require on a maintenance basis.
The assumptions driving this analysis are listed on the slide in summary, we assume a fiscal 'twenty three expected annual revenue per subscriber along with expected reserve revenue gain.
Variable cost items consistent with fiscal 'twenty two levels as a percentage of revenue the post restructuring fixed cost base and $30 million in marketing spend.
Spend requirements for maintenance purposes is estimated to range from 300 to $350 per subscriber per year after that for sure.
As you can see these hundred and 27000 subscribers are expected to require approximately $42 million in cash annually.
Slide 31 demonstrates the rapid progress people leave we can meet with growth in our subscriber base at a minimum guidance level of 25% growth in active subscribers or approximately 158000 average subscribers for a year, we believe that our cash consumption from improved by more than $20 million on an.
Lives basis.
With 185000 average subscribers, we anticipate that we would be free cash flow breakeven on a maintenance basis, meaning that we fully cover our variable costs are fixed costs as well as a product replenishment spend required for these subscribers.
Note that we don't assume any growth in our reserve business or flow through margins at that point, our capital requirements, primarily to fund growth in new subscribers.
Slide 16, and 30 to illustrate that our business benefits from strong revenue retention across historical cohorts as well as favorable customer acquisition costs.
Start with slide 16.
We have a large and loyal base of customers that support revenue each year and in fact <unk>.
About one third of fiscal 'twenty to revenue was generated by cohort at a more than five years old.
Let's speak for a moment about subscriber growth.
Jim outlined our strategies to grow revolve around improving the customer experience.
And driving retention and organic acquisition.
As outlined on slide 32, we believe our cumulative LTV to CAC indicate that our paid marketing spend has been efficient.
Our data shows that we breakeven on our paid marketing spend within 12 months with the exception of cohort impacted by Covid. It.
He would be happy to walk through this in detail with any of you with that I'll turn it back to Carlos.
Thank you said.
We believe that we can grow at a 25% sustainable revenue growth rate in the long term and continue to be intently focused on balancing robust growth with profitability.
We will seek to strike the right balance between both objective and maximize the long term value of bunch of Huawei.
Before I hand, it back to John I wanted to acknowledge the news, we announced earlier today I'm going to be transitioning out of the CFO role over the next few months and sit back or our S. E. T. A S DNA will be promoted to CFO .
My nearly eight years here has been among the most meaningful right and I've experienced incredible professional and personal growth or rent the runway.
Partnering with John This leadership team and the board has been an honor and a privilege.
I appreciate their continued belief in me in support of my decision I could not be prouder of what <unk> built and accomplished together, having moved from an Ala Carte business model.
So subscription first offering leading the business through the pandemic and transforming the business financially so that we're well positioned for free cash flow profitability.
From day, one I've been a huge believer in the vision of the closet in the South we created an industry that is growing and thriving and I have deep conviction that the opportunity for rent the runway has never been greater.
It has been a pleasure working with our investors and analysts I value the relationships, we built and I. Appreciate the perspective, you continue to bring to the business I have every confidence that it will be an exceptional financial leader for rent the runway at this point in our journey and I'm. So excited to see the business continue to win.
Thanks Scarlet.
So Roland has been instrumental in bringing rent the runway to where we are today.
Carla it leaves rent the runway a fundamentally different larger and financially strong for business then when she joined up nearly eight years ago.
He's a true strategic partner, a passionate business leader and she is just a fantastic human being.
Our hard work has set us up to squarely on the customer experience and she's passing the baton to a new leader at an important inflection point, where we've reached a record high number of active subscribers and have demonstrated significant.
Path to profitability.
You Scarlett for always acting like a true founder of the business.
With that I'm excited to introduce you to Scarlett six doctors did docker, whom you just heard from today, we brought him on over nine months ago and he has already made a deep impact on our business.
It comes to rent the runway on the heels of a 20 plus year career as a public company investor and brings with him data driven analytical thinking amazing curiosity and fresh is challenging us to look at our business in new ways.
Just me most about that it's just inherent understanding that the best financial outcomes for rent the runway will come from staying laser focused on our customer and improving her experience I believe deeply in his ability to serve as our finance leader through this next chapter and I'm looking forward to you all getting to know him in the months.
Hours to come with that we're happy to open it up for questions.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session.
I'd like to ask a question you May press star one on your telephone keypad a.
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You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key in the interest of time, please limit yourself to one question and one follow up.
Our first question comes from the line of Ross Sandler with Barclays. Please proceed with your question.
Oh, Hey, everybody.
Just a question on the extra items slides. Thanks for all the color on the.
Higher retention rate it looks like.
It's actually having a huge impact given the.
Chicken and active subs as of.
April so just a question on I guess.
The overall way to think about the unit economics of adding that one extra item per shipment or two per month.
So we're retaining better it's not really costing us anymore and transportation costs.
That's all net positive, but it looks like maybe some of the subs are coming in at that lower price tier versus the.
144 plan. So could you just walk us through with a little more detail I guess, what you've seen since the.
The change and is that the right take in terms of the improvement in unit economics that you're you're seeing from all the extra items. Thanks a lot.
So let me start it off first of all we're seeing incredible customer response.
There was a record high number of active subscribers as of April eight the 141000 subscribers and that's kind of a net addition of 14000 subscribers in just the first two months of the quarter not only are we seeing higher loyalty improvement than we originally even anticipated.
Our full customer base, we're seeing improvements in our rejoin rate and those are the folks that had previously churned theyre coming back we've seen a decline in the poise population, we've seen some of the highest traffic right.
In kind of company history, we've seen higher customer engagement, and we're seeing higher shipment volume, which means that they are engaged in these new you know an enhanced program.
In terms of the financial impact and the relationship to gross margin well I'll just start off to say that the slight decrease that we're expecting in gross margins in fiscal 2023 does not have to do with the extra item program. It has to do primarily with our.
Believe that we'll see some lower reserve revenue this year because of our focus on promoting subscription and marketing subscription.
So cedar Scarlet can take you through the exact reasons why the extra item program has had minimal impact to the gross margin sure. So I'll kick it off so Ross thank.
Thank you for the question.
As John mentioned, we don't expect to see much in terms of impact on the gross margin from the five item programs as you already called out the transportation is largely cover because theres no additional weight for the additional item, we do see a little bit of extra labor, which is mostly offset by our efficiencies as we talked about on the call and then when you think about product.
And the thing that we're doing is that we don't need to purchase an extra unit to support this additional item right. We're seeing obviously the benefits of continued mix towards capital efficient model, we are optimizing our organization and what that means is that we're actually saving her having more items at home rather than on our shelves and that's great for us and for the business. So even.
From a product standpoint, we're able to absorb that within the gross margin, which is why really as you know. This this recent trend on reserve that we have been saying we wanted to be prudent incorporated that in our guidance for this year and that's why we see you know as I said, a slight decrease in the gross margin versus last year I do want to just touch on one other point that you brought up.
Which is a you asked about the penetration of the one swap program I actually mentioned this on the last call that we were seeing a slightly higher proportion of subscribers coming into our one swap program. So it is not a new trend, but it was something that we felt was appropriate to incorporate into our guidance for this year. The very large majority of subscribers are still coming in to our Tucson.
Our program at $144 and just so we're clear I mean, we haven't seen any noticeable change in the one swap penetration identified item and now so there's nothing that final item in doing that.
It changes that so far.
Thank you.
Our next question comes from the line of Arc patrol with Wells Fargo. Please proceed with your question.
Yes, hi, good evening. This is Kate on for Ike Thanks for taking our question.
I was hoping if you could just maybe elaborate with the strong Q1 trends that you're seeing I'm curious if you're seeing any impact from the on the add the extra item onto the swaps just given the change in the plan dynamics. There and then just at a higher level as we're looking out to next year.
How should we think about maybe the change how should we think about RPT just at a higher level as we're lapping maybe some of the the planned initiative changed here and you know how should we think about the spread between average subs and revenues once we lock that down at that time. Thanks.
Thanks, Keith for the question, maybe I'll I'll kick it off so as we mentioned we are expecting to see and argue that it's down about 4%. This year for 23 versus fiscal 'twenty. Two we are continuing to see high on add on purchases, but we did our model at slightly lower rate this year.
So our guidance as I mentioned, obviously, we are including a slightly higher mix of the lower priced programs. So that's that's what we see in terms of the <unk> impact and then on your question of the revenue lag relative to subscription I do think that's a bit of a dynamic of this year and lapping against last year and also the.
Subscriber count that we entered the year with that is not a dynamic that I would expect to persist in the future and you should see kind of a more even a correlation between subscriber growth and revenue growth in the future. Yes. In fact, as we outlined we expect revenue growth to be significantly stronger in the back half of the yogurt the front half of the year so that directly.
Addressing your question on we should see that go away through the course of the year I'm, sorry, I should clarify I mean average active subscribers. So as we said earlier in the call revenues correlated to average active subscribers and less so to the end of the year number.
Great. Thanks very much.
Our next question comes from the line of Lauren shrink with Morgan Stanley . Please proceed with your question.
Hey, He's got Nathan feather hub for Lauren.
I just wanted to get a touch more on the extra spots. So clearly seeing a lot of benefits without that much investment from a gross margin perspective, I guess, where does that put the product utilization at today and is there still excess capacity in product utilization and as you go forward you know understandably, there's a digestion period.
But he has five items per swap the right number or would you hope to continue growing that over time. Thank you.
Well, we've seen some healthy increases to product utilization related.
Related to our five item program as I mentioned, one of the most important strategic initiatives. This year is getting our customers more of the inventory. She wants when she wants it. She just simply she comes to rent the runway for fashion and so giving her more items directly.
<unk> impact.
For loyalty when she has more items more items fit her she wears more items and she stays with us significantly longer one of the things that we went into in more detail on this earnings deck that we published with that.
Over 50% of subscriber churn happens.
90 days after she joins us and so much of that is actually just related to how many items. She wears from us. So we're really encouraged that by focusing on not only adding new brands new styles also upping for utilization of the product that we have that we are increase.
Going to loyalty rates, which also helps us increase the organic growth of rent the runway.
I mean, if you think about our inventory.
Five items allowed us to do is to.
Through a number of things that worked well for us.
The first thing it does is.
It allows us to bring a lot of units a lot of freshness to widening.
Every piece of inventory is not treated the same as we grow off this fiber base and that is clearly something that five items, allowing us to do we bring in a lot of new inventory for our customers. So that creates a tremendous amount of excitement with our customer base.
We outlined that John outlined in her remarks is we're working to improve and optimize that's been our assortment. So that our customers can more easily find the items that they're looking for so I think we're being strategic about our choices on inventory and I think our customers are noticing and.
And I think that's the question of like is this the right number.
Our strategy is.
Need to tangibly improve her customer experience and the customer value that we're delivering every quarter it should be obvious to customers that we're innovating in her experience is getting better.
We don't know what that will mean for the future if it needs. The five items at a time is the right number we know what it will very quickly see the data with our customers I know you know how we should continue to push it entity, but we feel very confident that the three pillars. The three strategic pillars that we've really aligned our resources to this year.
We are going to contribute to even higher retention and even higher organic growth of our business because they align with the top reasons why customers have told us they.
But the top opportunities for us to improve their experience and the top reasons why customers that.
Super helpful. Thank you.
Yeah.
Our next question comes from the line of Andrew Boone with JMP Securities. Please proceed with your question.
Good afternoon, and Charlotte all the best and whatever comes next I'm sure if I may please.
One is Jan you talked about a change in the Onboarding process can you just flush that out for us.
Is there any cheese that you're really focused on to getting subs Paas day, Mark with this new thing and then secondly, really a big picture question is Jim, let's let's step back Ryan it's been about a year or more.
Can you talk about the Tam and just any changes that you feel in terms of the overall opportunity.
As you've just seen more of the market and investors have talked to you mark. Thanks, So much.
Yeah. So I think that the town is really proving itself out to be a much bigger and more robust and faster growing more than even when we IPO at 18 months ago.
One of the things that we're really excited about is that we're not the only game in town and not there are other companies that are offering subscriptions to fashion and it's really proving out that hundreds of thousands of women in the United States every single year want to subscribe to fashion and that this is a real market and it's growing really quickly now.
What we're excited about is that we really hold the place as the premier player in fashion designer rental and what that means to US is we have the highest value brands.
Had the highest spend customer base.
It sets us up really well for the current macro so.
Our customer strategies are focused on delivering for the customer and delivering her more value, which by the way. These strategies are working he.
These strategies are also in tune with how do we take the competitive advantages that we have and how do we continue to expand them and continue to drive more value at this kind of premium end of the market that we uniquely own.
So we feel fantastic about this market and our shift toward putting the majority of our company resources into improving and innovating the customer experience comes at a time when I think the customer overall is more open to considering a fashion a subscription to fashion then she has ever been.
Now the change in the Onboarding process is something that we're really excited about it will be launching over the next few weeks.
It is going to be one one to one communication between them customer service associates and subscribers ensure that their first 60 days with US is perfect that they have someone to ask questions too that we're sending them proactive videos and content that we know is appropriate.
Or they're kind of stage in the journey.
And we again occupy the premium positioning in fashion designer rental.
Buying a subscription to rent the runway should feel like a luxury experience. It should feel like you have your own personal concierge that is guiding us through and ensuring that their cementing this behavior and teaching them how to rent. So we think that the impact that new onboarding can have can be high.
We're very excited by it and we'll be excited to come back and share results as we implement and iterate.
Great. Thank you.
Okay.
Our next question comes from the line of Ed You Rama with Piper Sandler. Please proceed with your question.
Hey, guys. Thanks for taking the questions Carla. Thank you for all the help through the entire process I guess just to cut back on this extra item and sorry to belabor the point, but do you know what somebody will not complaining two things when you saw that the higher number of stuff that the lower price point do you believe at this stage that was driven by the higher item or do you think that there's just something in the consumer.
Hey, that's causing new subs to gravitate to the lower price point plan and then as a follow up mutual funds are cleared so you're.
Not anticipating incremental capital usage as a result of the extra item. It just kind of I guess sweating. The existing assets you have a little bit harder or how should we really think about the cash cost of the extra item over time. Thank you.
And thank you. Thank you for the kind words, I'll I'll I'll kick it off so as we mentioned earlier, we actually started seeing a little bit higher penetration of the one swap program even before we had the extra items. So I do not believe that those are correlated and that was already something that we had mentioned in Q4. So you should not interpret that in any way relate.
Two of the five items and then in terms of cash consumption I think look the best things that I can point you to is the rental product purchases as a percentage of revenue in spite of the fact that we are adding additional items and customer shipment our product spend last year as a percentage of revenue was 21%.
And I had guided to it being approximately 22% so a little bit higher but you can see that we feel still really good about being able to deliver this incredible additional value and still maintaining a very similar percentage of revenue.
And maybe one more if I could sneak one in on the Amazon pilot any kind of update when you move forward with it.
Learning thanks, so much.
So just as a reminder, first like why do we work with partners like Amazon. The first is that it really proves out the market you know arguably the most important retailer.
In the U S and one of the most important retailers globally is making resell a part of their strategy and we want it to be a part of that and it's validating secondhand clothing, and then of course, we want to maintain the salvage value that we've always shared with you that we derive from our products. After they go through their rental lifecycle on their site and really prove out the sustainability in the long.
Full life of the clothing and accessories, we have on our platform. So we gained some really interesting learnings from the Amazon pilot that is going to help us inform our strategy going forward, but it's still early days. So you know stay tuned for.
Data you know as we move forward.
Thank you.
Our next question comes from the line of Rick Patel with Raymond James. Please proceed with your question.
Thank you and good afternoon, everyone. A question on the strategy to accelerate active subs to at least 25% growth. This year does guidance assume that both new customer acquisition and retention rates accelerate or does it reflect a much more meaningful contribution from retention of what we're trying to better understand the assumptions behind the.
<unk> from new customers versus reducing churn.
So I think the two primary assumptions that.
That underlie the extra item logic are number one we expect a significant retention benefit as customers see the value and actually are able to use it.
Extra item as part of everyday life. The second thing, we assumed and seen is a significant increase in the percentage of former customers are rejoining and restarting the subscription side. So that is the both of the two underpinnings of the extra item launch of course, we've seen higher traffic I mean, you've seen lots of other bench.
We see lots of excitement among among our customer base and I think I'd go back to the statistics that we outlined in our earnings deck, 60% of all our customers hear from us.
From a friend or from someone they know right. So I think the more excitement we can generate the more value we buy the better the customer experience. The more people are likely to talk about and you know ultimately we do think that will lead to better organic acquisition, though it is not something we've assumed.
In our in our numbers.
And maybe we could take a step back and just think about the bigger picture like the strategy to grow new customers. How do we think about the white space in terms of people that don't know about rent the runway that could learn from it and become customers and.
And for those that know about and haven't signed on yet what which levers do you have the highest conviction on in terms of getting them off the fence.
We think investing in improving the customer experience is the very best way to drive organic growth of the business. So we shared during our IPO that 80% of our acquisitions historically have come to us organically, we shared in the earnings presentation.
Because again people use the subscription multiple times a week when they are happier they put more reviews they share it more frequently and it leads to more new customers finding out about us enjoying it. So we really think that the key to growth in new customers is just continued investment into customer.
<unk>, which drives retention, which then drives organic acquisition, yeah, just just to be clear, Rick or a 25 plus.
Percentage ACA subscriber growth guidance that we're giving is a combination of those two things right. So it's it's both the retention, but also obviously can change, bringing new customers into the business.
[laughter].
Great wish you all the best Scarlet and Sid Congrats on the neural thank you.
Thank you Rex.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Thank you so much to everyone, who joined US today I'm excited about our plans to accelerate our path to profitability and the long runway for growth ahead, we look forward to continuing to update you on our progress on our Q1.
2023 call in June Thanks, again for joining us.
Okay.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful I have a wonderful day.
Goodbye.