Q2 2023 Rent the Runway Inc Earnings Call
Hello, and welcome to rent a one way second quarter 2023 earnings results Conference call. At this time all participants are any of US can 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 as a reminder.
Under this conference is being recorded I'll now turn the call over to rent one way your general Counsel Carlos Henri Tara. Please go ahead.
Good morning, everyone and thanks for joining us to discuss rent the runway two.
2023 results joining me today to discuss our results for the quarter ended July 31, 2023, our CEO and co founder Jennifer Hyman and CFO Sid backer. During this call we will make references to our Q2 'twenty three earnings presentation, which can be found in the events and presentations section of our Investor Relations website.
Before we begin we'd 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.
Risks uncertainties and assumptions are detailed in today's press release as well as our filings with the SEC, including our Form 10-Q that will be filed later today, 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 and the presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP reconciliations of GAAP to non-GAAP measures can be found in our press release slide presentation posted on our investor website and interest.
You see filings.
I'll turn it over to Josh.
Thanks, Kara and thank you everyone for joining.
I want to start by talking about our progress in Q2, starting with our strong bottom line performance and momentum towards profitability.
I'm pleased that we exceeded our Q2 profitability items by remaining disciplined adjusted EBITDA margin today Historic high of 10.2% in Q2, driven by some film inefficiencies strong gross margins and fixed cost control and notably today, we announced that we have accelerated our plans to be free cash flow breakeven.
But for cash interest expense full year 'twenty four for some time now we've been focused on taking decisive action all the brain rent the runway to profitability and we believe now is the right time to accelerate our efforts our growth and improvement story starts with our cash where we have made immense progress we've transformed the business.
That consumed almost $100 million in cash in full year 'twenty two to a business that will consume around $50 million in cash in full year 'twenty three and we will break even next year less cash interest expense.
We believe that a key part of getting to profitability is also making decisive choices that are prioritizing the medium and long term health of the business over short term revenue gains and lower margin customers.
Next Q2 was the fifth consecutive quarter of positive adjusted EBITDA, We've made significant improvements over the past several years, but using both our both our fixed and variable cost structure and growing our margins cost discipline continues to be firmly embedded into rent the runway <unk> culture R. 22 restructuring was clearly in.
An important step and we've continued to make progress on optimizing costs. During the first half of full year 'twenty three.
Our teams are continuing to examine our cost structure to assess additional steps, we can take to remain agile flexible and able to achieve our profitability goals in a range of revenue scenarios.
Going up to gross margin, we've continued to improve performance in our fulfillment operation and in how we acquire inventory even as we changed our subscription programs to offer customers, 25% more value in every shipment in Q1, our fulfillment costs have improved primarily like.
Focusing on labor productivity and transportation efficiencies the strength of our inventory expense is a reflection of the continued impact of product acquisition mix changes towards more efficient channel.
Lastly, I want to acknowledge our Q2 Miss on revenue, we had a slight revenue miss due to lower than expected active subscriber counts, primarily driven by lower early term subscriber retention, which we believe to be attributed to inventory depth level that were too low.
Reserve are one time event rental business also declined year over year, which we believe was the result of greater focus on subscription and our marketing efforts and all our sites as we discussed last quarter as well.
Our goal is driving this business to free cash flow profitability less cash interest expense next year to do so we are making deliberate choices that we anticipate will negatively impact short term revenue and subscriber counts.
We're planning to be less promotional and focus more on rebuilding our high margin reserve business. We also plan to pull back on marketing spend to prioritize inventory in stock rate.
Above all we're empowering our leaders to make the right choices to drive profitability, we do not waiver from our long term belief in the enormous market opportunity for rental as a result, we are focused on creating a sustainable business. So that we can control our own destiny and capture as much of the large and growing market as possible over the up.
The coming years.
Before I discuss the positive improvements we've made to the customer experience in the first half I wanted to discuss what we believe are the two biggest challenges we had.
Lower inventory depths than needed and a softer reserve business we.
We learned a lot in Q2 about the criticality of inventory depth to the customer experience we.
We started Q2 with a record number of subscribers and on the heels of our extra item plans launch in April while we had enough inventory overall to serve our customer base during the quarter. We did not have enough depth in new styles and as a result, our in season in stock rates went down 17%.
Versus Q2 last year.
We have data that indicate that at inventory depth issue with the primary driver of lower early term subscriber retention and therefore lower active sub count.
To take a step back we fully transitioned from our unlimited swap program fixed swap plans in 2021 and.
2022 with their first year of operating these programs in a more normalized environment, where customers were going to offices and out two events again in.
In 2022, we revamped the success metrics for inventory and fixed swap program shifted our go forward strategy away from a breadth strategy to focus on the depth strategy and established inventory availability at one of our key strategic pillars for 2023.
Most important component of this strategy is greater investment in depth of styles and brands. We know she wants so we are in stock more of the time.
Given the nature of a six month fashion buying cycle, we were able to implement our learnings from 2022 and impact our Q3 and Q4 2023 buys with fire death, which is now coming to life in our fall 2023 assortment.
As we shared previously we expected that the customer impact would begin to be felt on this timeline, which was keen informing our original back half weighted growth expectations for full year 'twenty three.
However, we believe that the lag between the time of the bi and live to site impacted the customer experience more than we expected in Q2, particularly for new customers given the high growth we experienced in Q1.
In a fashion rental business availability changes moment to moment and we have observed that new customers are more likely to be disappointed by lower in stock rates because they expect to see the items. They got excited about while browsing its prospect.
Retention of tenured customers continued to be strong because they understand when they don't see something they part of one day.
They're confident there'll be able to run through June .
We believe that this issue is temporary in nature depth of our to age 2023 by are expected to be approximately 1.7 ex the depth of our one each twenty-three buys which would increase our in stock rate by seven to 1700 to 1000 basis points.
We have acquired even higher in depth in our most popular brands and key items, we have confidence our customers will want this fall and winter.
Functionally we expect this will be felt by customers throughout the second half of Q3 as they're refreshing their fall wardrobes and through to Q4, we anticipate that this will result in a meaningfully better customer experience and improve retention in the near to midterm.
While two weeks jobs will be a huge improvement over one age customer behavior in Q2 illuminated that we should go even further on our desk strategy.
To that end, we have further expanded our depth plans for 'twenty four we expect that we will see continued improvement on in stock in the first half of 2024 as a result of that.
The nature of our business model dictates, but any significant transition and inventory strategy must be done in multiple phases, given that we monetize the inventory over multiple years and it stays in our rental ecosystem for multiple seasons to be clear, while we have made significant improvements already we expect the lion's share of the pot.
The impact of our debt strategy and therefore, the positive impact to revenue and subscriber growth to be in 2024, one significantly more of our inventory tranches have appropriate deaths.
Our data thus far indicate that we should see loyalty gains from all customers with the greatest gains coming from early term customers.
For reserve, we believe we have great opportunity here are one time rental business is what we launched this business with 15 years ago. It's the easiest value proposition for customers to understand every woman find yourself, having to buy office every year for events, you rarely whereas again.
We've made three exciting changes to our reserve business over the past quarter last month. We debuted we debuted a distinct product experience for reserve, which separates the reserve funnel from the subscription funnel. This is intended to make it easier for customers to understand the reserve value proposition locking in a look in advance.
And getting the second size for free.
It also clarifies how the pricing compares to subscription.
Second we started acquiring distinct inventory for the reserve business, mostly on consignment focused on premier designers that elevate our reserve assortment.
Finally, we've shifted our org design to add new leadership focus on reserve intended to ensure we can grow both this business and subscription side by side, we believe that the appetite for rental writ large is big enough for both of these offerings can grow and we expect this change to the funnel to benefit both reserve.
And subscription from a conversion standpoint overtime.
Beyond our inventory depth strategy and focus on improving reserve. The teams have continued their work across our other strategic pillars.
And easy to use experience and best in class product discovery and have been successful in the first half of 2023 and markedly improving our overall customer experience.
We believe we will see more of the full retentive impact of these changes to customer experience and discovery when your in stock rates or higher let me share a few were those initiatives here.
Related to our pillar on efficient and easy to use experience. We've seen early success with our SMS based concierge program that is leading to improvements in loyalty amongst those who sign up.
Seres has already accelerated our learnings from early term customers and priority areas to improve their experience.
Given its success, we put we plan to continue to invest in comes years in full year 'twenty three to expanding this program to more customers and probably more true yeah.
Yesterday, we launched a new subscriber onboarding experience based on our learnings from concierge to help lead them to inventory they love quickly and pick their first shipment there.
This also includes the creation of an interactive customer.
Filing profile and encouraging sign up into our concierge program to aid with live one on one system.
Finally, we continue to drive major improvements in site performance and reliability, improving lighthouse scores of key acquisitions agents like 50% year over year.
Our lighthouse scores the rating Google gifts to websites based on a combination of criteria, including performance accessibility S. C O and other best practices.
Related to best in class product discovery, we introduced multiple improvements during the quarter, which have driven reductions in time to select shipments for our customers. We achieved this by one launching a fully redesigned app product detail page experience. The features more detailed larger product images clearly displayed fitted by it makes the availability.
Do you have that item more obvious to the customer to we're elevating the look and feel of our Brandon site across all touch points from photography to design and creative which is intended to ensure that our premium positioning as clear to our customers and brand partners three we created more visibility for editorial curation.
Throughout our site and accelerated our scheduled for refreshing them, we've seen high engagement with our editorial suggestion for we improved filter, making it easier for customers to search with specificity and finally, we rolled out our AI search feed up to 20% of our customer base.
We're using this data to get user feedback and iterate on the best and quickest way to search our catalog I firmly believe that we are making the right decisions for customers and that our customers will reward our product improvements additional items and improved experience with inventory I'm excited about our plans for the remainder of full year 'twenty three and into <unk>.
Full year 'twenty for.
Most importantly, we are excited to drive this business to free cash flow profitability, excluding cash interests with that I'll hand, it over to bill.
Thanks, Jen and thanks again, everyone for joining us.
After reviewing second quarter results I would like to provide some perspective on the significant acceleration in our timelines of free cash flow breakeven before cash interest expense wildly inventory depth issue that John just described is expected to affect revenue growth negatively. This year, we continue on a steady path to providing more value in it.
Better experience for our customers, we're confident that with a favorable market backdrop. These improvements will translate to stronger revenue growth in.
Fortunately slower revenue growth will not be slower progress on profitability for rent the runway in fact as John outlined earlier, one reason for a reduction in revenue guidance for fiscal 'twenty. Three is our decision to prioritize more rapid progress on profitability by reducing promotion and therefore subscriber acquisition.
Over the past few quarters, we have made significant changes to our fixed cost structure improved our variable cost structure by finding efficiencies across both aluminum product costs and fundamentally changed how we approached promotions and customer acquisition.
On account of these changes we now expect to be free cash flow breakeven before cash interest expense for fiscal year 2024. This relies on only modest levels of subscriber growth in fiscal 'twenty for <unk>.
Trying to provide more details later this fiscal year, but we expect these results at subscriber levels that are much lower than our previously communicated level of 185000 subscribers free.
Free cash flow breakeven before cash interest expense is an important milestone for rent the runway and one that we think will demonstrate the attractive underlying economics of the business our focus on profitability and the progress our teams have made on improving efficiency throughout our business. Let me now provide commentary on second quarter results and guidance for two.
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We ended Q2 with 137566, ending active subscribers up 10, 8% year over year.
Average active subscribers during the quarter, well 141393 versus 129565 subscribers than the prior year, an increase of nine 1%.
Ending active subscribers declined from 145200 Twenty's subscribers at the end of Q1, 2023, which we believe is primarily due to inventory depth.
Active subscriber levels were also affected by promotional experiments during the quarter.
Total revenue for the quarter was $75 $7 million down 1% year over year.
Shortfall versus guidance was primarily driven by lower than expected subscriber growth.
Subscription and reserve rental revenue was $68 million versus $70 million last year, a decrease of two 9% subscription.
Subscription and reserve rental revenue was negatively impacted by a decline in our reserve business versus last year.
Revenue per average subscriber for the quarter was negatively impacted by lower add on rates changes in the subscriber program mix and promotional testing.
During the quarter, we tested the effects of both increasing and reducing promotions.
Learnings from these tests have informed our go forward promotional strategy and revenue guidance for the remainder of the year.
Other revenue was $7 $7 million, an increase of 18, 5% versus $6 $5 million last year.
Other revenue represented 10, 2% of revenue during the quarter versus eight 5% of revenue last year.
Fulfillment costs were $22 $5 million in Q2, 'twenty three versus $23 $4 million in Q2, 'twenty two fulfillment.
Fulfillment cost as a percentage of revenue improved to 29, 7% of revenue in Q2, 'twenty three from 36% of revenue in Q2 'twenty two.
Fulfillment costs as a percentage of sales benefited from continued processing and transportation cost efficiencies.
In August we entered into a new transportation agreement with UBS to lock in competitive rates and consolidate the vast majority of our shipping needs, while continuing to serve our customers with premium delivery and return service.
Gross margins were 43, 9% in Q2 20 feet versus 42, 4% in Q2 'twenty to.
Q2, 'twenty three gross margins reflects both the aforementioned fulfillment cost improvement as well as lower rental product depreciation due to our ongoing progress in procuring more confinement and exclusive designs inventory.
As expected gross margin improved sequentially due to seasonally lower product acquisition costs compared to Q1 'twenty three.
Operating expenses were about 12% lower year over year, primarily due to the favorable impact of about 2022 restructuring plan.
Total operating expenses, including technology, marketing, G&A and stock based compensation, well about 62% of revenue versus approximately 70% of revenue last year.
Adjusted EBITDA for the quarter was $7 $7 million or 10, 2% of revenue versus $1 $8 million and two 4% of revenue in the prior year.
Adjusted EBITDA margin reflects improved operating and fixed cost efficiencies along with lower promotion.
Free cash flow for the six months ended July 31, 2023, with negative $30 million versus negative $54 million for the same period.
'twenty two.
Let me now turn to Q3 and 2023 guidance.
We are reducing revenue guidance for 2023, and now expect that 2023 revenue will be at least $296 $4 million for our fiscal 2022 revenue. We expect Q3 revenue to be between $72 million and $74 million, we are not providing specific active subscriber.
Guidance for Q3 for fiscal year 'twenty three as our general expectations are reflected within our revenue guidance, we no longer expect ending active subscriber growth of more than 25% for fiscal 'twenty three.
Let me outline the rationale and underlying assumptions behind our lower physical twenty-three revenue guidance.
First I'll start experimentation with promotions in Q2, we expect to be significantly less promotional for the remainder of the year.
So I would believe a lower level of promotions will improve customer experience retention profitability over time, we expect lower subscriber acquisitions in the near term.
Second revenue guidance reflects the timing of inventory in stock improvement that we believe will impact customer experience towards the end of Q3 and into fiscal 'twenty. Four third we are not reflecting all potential improvements from our strategic pillar initiative to improve customer experience or from our increased focus new leadership.
And more optimal inventory for our reserve business as we saw in Q2 inventory in stock rates have to improve before we see the positive impact from these initiatives.
Finally, we ended Q2 with lower than expected active subscribers. We believe our second half plan. Despite the expected negative impact on short term subscriber growth are a key pillar to our path to positive free cash flow and strengthen the health of the business.
<unk> also provide business leaders with the flexibility needed to make the right decision for the long term health of our business.
Despite lower revenue, we expect to maintain our adjusted EBITDA margin guidance of between seven 8% of revenue for fiscal 2023.
Note that due to significantly higher seasonal inventory acquisition costs in Q3, we expect higher adjusted EBITDA margins in Q4 versus Q3, we expect Q3, adjusted EBITDA margins to be between three and 4% primarily as a result of approximately 300 basis points of sale and higher revenue share payments in Q3 versus.
Q4.
We expect continued operational and fixed cost efficiencies along with lower promotions in the back half of 2023.
Note that our expectations for adjusted EBITDA margins reflect lower gross margins in the second half of 2023 compared to fiscal 2022 on account of higher rental product depreciation and revenue share costs as a percentage of sales.
We now expect fiscal year 'twenty, three rental product purchases to be between 74 and $77 million as we expect to shift dollars between marketing and rental product acquisition to further improve in stock levels. As a result, we expect cash consumption for the year to be approximately $2 million to $3 million higher on the range of 50 million to 50.
$3 million.
While Q2 was challenging we have transformed that we can be confident we continue to make the right decision for our customers.
Financially, we have transformed the business that consume almost $100 million in cash in fiscal 'twenty two to a business that we expect will be free cash flow breakeven before cash interest expense in fiscal year 'twenty four we will now take your questions.
Yeah.
Thank you, we'll now be conducting a question and answer session. We ask you. Please ask one question and one follow up if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to live your question from the queue for participants using speaker equipment it may be necessary.
To pick up your handset before pressing the star one and as a reminder, please ask one question and one follow up then return to the queue. Our first question today is coming from Rick Patel from Raymond James.
My life.
Thank you and good morning, everyone can you talk about the assumptions underpinning the third quarter revenue guidance right as you reduce promotions and marketing.
What's the right way to think about the subscriber count in the quarter I know you're planning for it to be lower but just any any guardrails. There as we think about modeling and if you can elaborate a bit trends that would be great.
Sure.
So if you look at our subscriber guide it for you. If you look at our revenue guidance, we're obviously not providing subscriber guidance for Q2 Q3, specifically, but if you look at our 72 to 74 million dollar revenue guidance that is obviously down from Q2 levels and that would have you know you can run your math, but that would imply.
You know the subscriber count that you can determine now but I wanted to do is try and give you a sense of the changes, we're making and why we're issuing the guidance that we we are we're making a lot of changes to promotion for the year and just to give you a sense of the magnitude of what we have decided to do historically our promotions have been two one.
Along the current level of promotions that we're running essentially only one month. So we have made very significant changes in promotions and importantly, these promotion promotional changes one of them a very key part of our progress the profitability in fiscal 'twenty four we're changing a you know a significant amount is it and it has to do with the reserve fund.
And so our guidance encompasses a whole range of scenarios and we want to be prudent and not really factor in all of the benefits of the improved in stock the reserve funnel and so that's the underlying premise.
Premise behind the guidance, which is we want to be prudent we want to make sure that we factor in all possible scenarios.
And we also want to be mindful that it's going to take a little while for in stock levels to improve and to be felt by customers and some of the initiatives that we have may not be quite felt until until in stock improve so.
It's just a matter of encompassing all possible scenarios and being prudent.
Can you also touch on marketing I believe you talked about pulling back a little bit on the near term. But then you also talked about shifting some of that focus to reserve revenue just some additional color there would be great.
Yeah, we really learned in Q2, just the criticality of inventory depth to the customer experience, especially among early term customers.
So.
Because we learned that what well depth is up in second half 1.7 ask what the depth was in first half.
We weren't we should've gone even further and 1.7 acts. So we thought that it was a smart decision to take some dollars away from marketing put it towards reorders in the back half of this year that could further accelerate in stock rate. Another way to think about this is we don't want a market or promotional lives into it.
Spear in with inappropriate levels of in stock rates because early term subscribers are the ones who.
Our affected the most by not seeing the inventory that they want it when they were a prospect.
So this is really in favor of.
The top priority, which is getting me in stock rates higher, which we know really positively affect retention of early terms that's.
Thanks very much.
Thank you. Your next question is coming from Ike <unk> from Wells Fargo. Your line is now live.
Yeah.
Okay.
Good morning sit a couple of questions around the longer term commentary you provided so the free cash flow breakeven before interest expense in fiscal 'twenty. Four it can you just give me just a reminder, what is the expectation for cash cash interest expense.
What is that going to be in fiscal 'twenty. Four and then is there any help you can give us around what is the revenue number that is associated with that we got assumption that you guys have next year. Thanks.
Sure so.
So let me.
Let me answer the first part of your question, which is about $12 million and we expect about $12 million in cash interest expense in our fiscal 'twenty four.
The next part of your question, let me just address what gives us confidence that we'll get the free cash flow breakeven in fiscal 'twenty four right. So there are few key pillars here.
The first is we expand it and let me just bridge effectively where we will end up in fiscal 'twenty three to where we expect to end up in fiscal 'twenty four.
The first thing we expect it to be and we'll provide a lot more detail later this year on all of this but first we expect to realize fulfillment efficiencies versus fiscal 'twenty three.
Currently we expect lower fixed costs versus fiscal 'twenty, three and fiscal 'twenty four.
And this is where the promotions and all of the customer acquisition to work. We're doing plays in that we expect rental product spending in fiscal 'twenty four to benefit both from provisioning for much more modest levels of revenue growth as well as continued increases in mix towards more non wholesale channels. So I think it's important to realize that when we promote and we get.
Customers not only do we require a bunch of customers that stay with us for shorter periods of time, because they are less qualified but we also go out and buy inventory and provision inventory for those customers. So in some ways as we attract them and really focus on a higher qualified customers.
Really do accelerate our progress towards being free cash flow and that's going to be reflected in rental product spending in fiscal 'twenty four versus 'twenty three.
Obviously, the promotional changes do result in improved profitability per subscriber.
And then finally, we expect a modest subscriber and revenue growth we have in fiscal 'twenty four we expect in fiscal 'twenty four to contribute to profitability and cash flow I think the last thing I would point out is that.
A substantial portion of the improvement. So if you think about lower fixed cost the fulfillment cost efficiencies are the plans we have on rental product. The promotional changes. We've made we've already made those decisions and those improvements we have.
So a lot of confidence in and as the last part of it is that we're relying only on relatively modest levels of growth in fiscal 'twenty. Four so we have a you know.
The high confidence that we can get to these numbers in fiscal 'twenty.
Great. Thanks, a lot.
Thank you next question is coming from Andrew Baum from JMP Securities. Your line is now live.
Good morning, and thanks for taking my questions I'm sure you guys have made a number of improvements to the products can you just talk about getting customers past that 90 day threshold are you seeing any improvement there or how do we think about just new customers your ability to turn them into long term customers.
Yeah. So we we saw in Q2 that fundamentally.
The other improvements that we were making to the customer experience.
Were.
Not going to be felt deeply until the in stock rates were higher.
So for early term subscribers.
They come in they expect to see the inventory that they signed up for if they don't see that inventory.
They have a much higher probability of churn and these were the lowest.
You know you can ask well why didn't we know this before I think the confluence of the highest subscriber count we had ever had coming into Q1, I mean coming out at the end of Q1, coupled with the launch of our extra item plan and the fact that we already knew the depth would be a problem. We just didn't realize how big of a problem as it was.
We saw that in stock rates were 17% lower year over year.
And so well.
Well the retention of the longer term customers continued to remain strong. They responded very well to the customer experience improvements we were making we essentially saw like in stock has to go up and has to be at a better level.
For these improvements will start to impact those early term customers. So we still have a lot of confidence that we're making the right changes for early term customers. As an example, we mentioned not amongst those people who sign up for our concierge program. They have higher loyalty rate than those that don't sign up and those are teams.
Zero customers, but the in stock right now were really those improvements are in flight depths are gonna be up 1.7 acts in the second half where they were in the first half we're going even deeper for 2024, and we think that the full extent of all of the changes, we're making on customer experience.
We will be felt by those early term subs 11, the in stock rate is higher and they're getting me inventory that they really signed up together.
And then as we get further away from the launch of the Arab extra can you talk about just top of funnel trends. What are you guys seeing now versus say last year or how does top of funnel for weight and then how are you thinking about top of funnel now that your point about marketing for the back half of this year and potentially into 'twenty four thanks, so much.
Yeah, I mean top of funnel continues to be strong.
We continue to see very high interest for subscription for our reserve offering when we feel that the market is growing and that's why it's so critical for us to have an offer an experience that continues to improve now of course.
Over 80% of our acquisitions come in via word of mouth.
And so it's even more important for us to have that positive flywheel coming out of those early term customers.
So the focus on improving in stock rate, which improves the experience of early term customers. We think will help to accelerate the organic growth of the business taking away. Some marketing dollars marketing dollars. You know traditionally have been kind of a small percentage.
How we acquire customers. We also feel that right now is not the time to promote people into an experience where the in stock rate really isn't there yet so we feel good about <unk>.
Top of funnel, we think that the market continues to be there. It continues to grow and now we're making the right changes for the medium and long term health of this business to drive it to profitability.
Yeah, I think it's useful to just leave at least some context right. Obviously, we're changing.
Our promotional strategy.
We talked about the marketing changes, we're making and it's I wonder if it's helpful to reiterate how we're thinking about this business.
One way to grow this business and get this business to free cash flow would be acquire lots and lots of customers. Yes, you'd have we'd report you know very high subscriber growth with record high revenue growth, but we'd also have to provision significant amounts of inventory and a portion of those customers that we acquire are less qualified them or provisioning. All this inventory, it's just been a less efficient.
We need to grow and in some ways. What we have now is are we where we recognize that we have limited resources, we recognize that we want to get to free cash flow breakeven as quickly as possible and for us that means in fiscal 'twenty four and so we're taking the actions that we need to.
I'm mentally not only improve the quality of acquisitions coming in.
Being more efficient about product acquisition for those qualified customers.
And then making sure that we can actually deliver the best experience possible for both customers. If we do all of those things right that feedback loop, given that 80% of our customers come to us organically.
We'll end up driving additional organic acquisitions in a more efficient way I mean, you know I spent many years in investment business and <unk>.
I saw lots of them.
Situations, where companies ranging from mcdonalds to others that well I mean.
We're very focused on growth at points in time that actually win and thought about that business critically thought about what really mattered and actually fundamentally.
Stopped grocers are slowed growth down to improve the quality of the business in both businesses came out significantly stronger and for US. This is an opportunity to breakeven before cash interest in 'twenty four create a very solid foundation and and create the best experience for our customers and if we do that well, but pretty confident.
And given the market opportunity that we have that we can grow.
You know significantly well into the future.
I just wanted to add one thing to what they said, which is that the nature of our business model is we have one pool of inventory right. So if we promotional lives of lower margin customer to come into rent. The runway not only are we provisioning extra inventory for them, but they may very well take them back inventory and they may take the best inventory away.
<unk> from some of our more loyal higher margin customers. So it's really about thinking that we are prioritizing the higher emerging customers were prioritizing the overall customer experience and we don't want to kind of either market into where promotional lies into lower margin customers coming in and robbing cause there.
Inventory that is critical for the customer experience of the better customers.
Thank you.
Thank you next question today is coming from Ross Sandler from Barclays. Your line is now live.
Oh, Hey, guys.
Just one for John and one for CIT Gen. So long as the new customer retention is there like a precedent looking back.
At different times in the past when you've had better you know depth of inventory for in season.
Around like how far off is the retention rate today versus back then and then subsequently like how quickly do you expect that to kind of pick back up to a normal level is that a matter of a couple of quarters are going to take longer than that.
And then you talked about reducing fixed costs and also some variable cost and fulfillment could you just elaborate on both of those like the U P. S deal, that's allowing better fulfillment leverage or or.
Walk us through what those assumptions for 'twenty four thanks a lot.
Sure.
So let's start with the fulfillment expenses.
So its two fold right. So there's the the first there is an impact from the UBS contract that will be felt into the back half of this year and into next year. That's one the second thing is if you look at what we've done historically and this is not just true for fiscal 'twenty three but it's true for a number of years now which is we have fundamentally improved our ability to protest.
Units with the same labor pool continually right. So I think we can we are continuing to make.
Progress on efficiencies and we expect it to continue on that path in a and we have some specific initiatives that we're working on now that we think will impact our fiscal 'twenty four so that's fulfillment.
On the fixed cost side, our teams have reviewed.
We're reviewing our cost structure, we want to make sure that we.
We get the free cash flow breakeven in fiscal 'twenty for under a variety of sale scenarios and we're going to take the right actions to make sure that that happens.
So on the in stock rate first of all the in stock grade already is going up between 701000 basis points in the second half of the year in terms of.
Tactically when that's going to be felt by customers. We think it's gonna be felt towards the end of Q3 and into Q4. When all of that inventory is really innerwear husband kind of circulating amongst the customer base.
Yeah.
We're making even more improvement.
In this first half by we're making for 'twenty four to get in stock rate up even further than that 700 to 1000 basis points. We think that the combination of the changes that we're making for second half and first half of 'twenty 'twenty four will have market improvement on customer experience year over year.
That these are fundamentally you know the right levels of in stock now when we when we look historically the reason I kind of brought up in the earnings script.
Kind of this transition away from unlimited plans is because the unlimited plan business actually had.
Pretty equivalent to lower in stock rates than we had in the first half of this year, but it wasn't.
Something that was negatively impacting customer experience now why if you're in a program, where you can swap and unlimited times per month and you're an early term customer you can come in you might not see the inventory you want today, but you feel like well I could swap again tomorrow I could swap the next day I can swap the day after that so you're less.
Precious about each individual shipment that you're making in stock is something that is essentially a new metrics that we started to study in 2022, we knew the importance of in stock and therefore, we made plans at the end of 2022 to increase our depth coming in the second half of the year by 1.7 acts.
But it's critical to a fixed swap program. So we have now done enormous amount of data analysis on essentially the relationship between churn and in stock rate, we have a plan to significantly reduce churn by in stock rate alone and I want to mention that.
Buying inventory and deeper depths are switching from a breadth strategy too in depth strategy is not the only lever that we are deploying there was a lot of levers that we're deploying to to increase the in stock rate. So other things that we're doing right now we're consolidating dialed into single warehouses, So theres more units in both styles.
And single warehouses, what inventory, we merchandise on the site to what customer makes a huge difference to in stock rate. So there's a lot that we're doing that is boosting up this in stock rates and really Q2 was tremendous learnings for us on the criticality of this metric, especially for those first 90 days.
Okay.
Thank you. Your next question today is coming from Warren Cheng from Morgan Stanley . Your line is now live.
Hey morning, everyone. This is Nathan feather on for Lorraine.
So first I was just thinking about increasing definitely platform to what extent does that impact your ability to shift away from wholesale either either faster or slower.
Sorry, I didn't hear the second half of the question Nathan.
Yeah, just a shift between them.
Yeah, increasing depth in the platform and your ability to shift away from wholesale and whether those are connected.
Oh.
Increasing depth is something that is fantastic for us from a inventory acquisition standpoint, whether it be a wholesale the consignment or the exclusive designs. So when you buy things in higher depth, you've got higher discounts, whether your manufacturing those items, whether you're buying them from our brands.
Whether you're getting them on consignment because.
Yeah.
Essentially it is easier for the designer to produce those items. So in depth strategy actually is way more financially beneficial for us than a breadth strategy.
So we see no.
Difficult Ts in getting there. The challenge is of course that our inventory is one that we monetize over multiple years, so making a changeover one half is the only one tranche of inventory, which is why we're saying that more impact is going to be felt in 2002.
24, when more of our tranches of inventory really transitioned over to a higher depth strategy and I want also want to note that.
We're not changing the total dollar amount spent on inventory, we're just spending those dollars differently. So we're buying fewer styles at higher deaths.
Okay, Great. That's helpful and then for the changes in marketing is that just a temporary pullback until in stock rates and Cryo force, we expect lower marketing over the medium term and just how to think about those updates to the long term strategy on the marketing side. Thanks.
Yes at this moment the only decisions, we expect to make our decisions we've announced for the back half.
Fiscal 'twenty three we have not made specific plans are not changed specific plans on fiscal 'twenty four.
But I think I'll point, you back to the underlying philosophy of what we're trying to do and hopefully that will provide some context in terms of how we think about.
Growth and promotions and marketing in 'twenty four.
Yeah.
I think I think the you know I think the one thing that.
I'll add to this is you know.
We haven't really seen any changes in terms of the effectiveness of our marketing or the efficiency of our marketing. We believe our marketing is as strong we have high LTV to CAC to me there is no.
Issue in terms of the.
Marketing itself.
But there are two ways to grow our business. One is we can certainly acquire more customers and bringing them in the other ways. We can improve the experience of our customers and actually affect retention more positively and we want to test and see how.
How that works out.
Yeah.
Thank you. Your next question is coming from Edward <unk> from Piper Sandler Your line is my wife.
Hey, guys. Thanks for taking the questions I guess first just you know given the materiality of the of the shortfall I, just maybe get a little more comfortable on why exactly you think it was it was inventory depth that was the primary culprit.
And why this isn't just a macro issue and then maybe more of a follow up on Ross's question.
So you know like maybe this is not a great analog but when when someone churns off because of inventory availability like what what do you have to do to get them to turn back on again or kind of what's your experience been there and kind of when would we expect you to run that play.
As inventory levels normalize thank you.
Yeah.
And so.
One of the.
Yeah.
Things that was really important when we analyze what happened in Q2 was that we saw it very different outcome.
Amongst early term subscribers among subscribers, who had been with US post 90 days or.
So.
The impact of in stock rate was fundamentally different as I mentioned, we continue to see strong retention of our more loyal customers.
Saw that they in stock rate decline really affected the churn rate of the early term subs and that those churn rates had increased year over year. So had it been a full macro issue all customer cohorts wood.
Experiencing decline had it been a macro issue we'd be experiencing what were we to be experiencing topline issue, which is not.
The issue that we are facing are issue that we isolated in Q2 was really about early term chart.
We went into the second half of your question I'm sorry, what was the can you just repeat your second question. Please yeah, just trying to understand so I think there was a moment in time, where like reserve had low inventory when everyone's doing special events and you saw high churn because there wasn't available there wasn't enough inventory depth I guess when you when you think.
About the foreign situation kind of what do you have to do like what what does it take to reactivate somebody that turned off because of a lower inventory depth and kind of what would the timing of that be.
Yeah look I think the.
Well, obviously acquiring customers every single month, right and those customers are going to choose to stay with us based on whether they had a great experience or not but have been able to find the inventory they love and whether that inventories and so on and so the way. We can start affecting this positively is actually providing the customers who stay with us who come to us with.
A much more positive experience and.
No that is then going to funnel into word of mouth and you know the organic kind of flywheel that we always expect now it's important to realize that.
We actually do get a relative you have a relatively strong track record of reactivating customers and customers come back to us.
Who are former customers and so on so that's an ongoing process.
I think customers recognize that we provide a really valuable service.
You know there are moments in times when they can be disappointed because we don't quite have the bulk of that that is right for them and we're making those fundamental changes to make sure that they have a much better experience I mean, one of the strongest parts of our experienced for years has been the strong reactivation of former customers now why is that number one is that.
<unk> see that our experience and continuously improvement improving number two this is a business that benefits from word of mouth. So you start to make a positive change and that word of mouth benefit your rejoined rates even more than it benefits your necessarily your new acquisition right because people are saying hey, they brought a new inventory they have a better.
Syrians, they're doing home pick up now and so those people come back and.
We feel very confident that this issue of in stock was one that was temporary it's one that we are already in flight on a lot of the improvements that we're making those improvements are significant.
710000 basis point change in in stock rate between one half of the year in the second half of the year is highly significant and we think that it'll have huge benefits to rejoin rate. So we certainly do not exist in a business, where if someone insurance they don't come back.
We exist in a business, where when you improve your experience you have a high probability of people coming back and giving this another try the other thing I'll say is that we are the only ones who do what we do.
In terms of offerings the level of premium ness of the experience.
As you know subscription to the type of closet and the cloud that we have which are the top brands in the top designers in the world the premium.
Of the actual experience how quickly you receive the inventory how easy it is for you to return the inventories. It was the very high end experience that our customers crane.
And we feel that making these in stock changes will then have a halo effect on this rejoin rate that we should expect to benefit from.
Great. Thank you.
Hi, Good morning, it's Blake on for actually most of my questions have been answered I wanted to ask on <unk>.
Just a couple of clarifying questions on the lower subs expectation this year versus prior seems like the two big buckets, there or the lower promos you discussed and then a lower.
Tori availability just wanted to make sure those are probably the two big items, Rob, Michigan any others, and then could you rank or just discuss the magnitude of each of those impacts.
Yeah.
Yes, you have the two big.
Big items here, we're not disclosing the exact magnitude of these impacts I mean some of them are.
You know, we think both are really important and.
We expect to make significant progress obviously on.
The inventory in stock rate into Q3, and Q4 and into 2024, we're just a guidance and and subscriber expectations are just reflecting the possibility that those take a while to build and we're gonna be prudent about that.
Got it and then in terms of the impact to subs from lower promotions.
I would guess that's mainly impacting the acquisition of new customers wondering about that impact to the acquisition of new customers versus churn from existing.
I mean promotions don't really have an impact at all on churn from existing because promotions are given to new customers to join.
I mean, we do think that there is a benefit as we acquire more qualified customers. Obviously those customers are likely to stay with us longer. So we should see improvements in churn as you know we attract those customers. So yes, I think ongoing there will be a benefit a hunter attention too.
Okay, So maybe when a customer renews youre not seeing them.
I guess the impact from a renewal isn't as big right now if they're renewing at a lower promotion rate would that impact like a renewal customer.
Oh, you're talking about a rejoin or essentially I mean, you know where we're acquiring all of our customers, whether it's a new customer rejoining customer essentially on a very similar set of promotions. So.
It's affecting the entirety of the.
So it's a fiber acquisitions of yeah.
Okay that makes sense. Thanks, so much.
Thank you. Our next question today is coming from Dana Telsey from Telsey Advisory Group. Your line is now live.
Hi, good morning, everyone given the in stock position in the Ria the improvement that's expected in the back half of the year, particularly in fourth quarter. What are you seeing from your existing customers. The cohort of your best customers and how are they impacted by this and have you seen any update onshore.
<unk>.
Lastly, as you think about the categories what categories are performing and is the in stocks shortage across all categories. Thank you.
Yeah.
Yeah. So we continue to see strong loyalty rates among our more tenured subscribers.
We oh.
Across the board.
Don't think the deaths were high enough in any category and we're being really I think smart about how we increase our depth strategy, where it's not a one size fits all strategy. We do think across the board, we should have less breadth and more depth, but we're also taking into account the most important brands that provide the most.
Its value to our customers. The most important categories that provide the most value to our customers and we're going even deeper there.
So.
In terms of the something that we are excited about in terms of the category, we're seeing an increase and return to work work wear was.
It is now currently as strong as it was in 2019, which is a great thing for our business because it's obviously something that people do you know five days a week.
And then just following up there.
With the in stock position why.
Was it more a macro situation with the brands was it more you're planning what led to the shortage of the in stock position.
I think the 2022 with the full year was the first year that we had these big swap programs any quote unquote more normalized environment, where people were leaving their homes right and that's when we started to kind of really how the new set of inventory metrics that we were using to evaluate our business and in.
<unk> became very important that's why we said inventory availability as one of our most important strategic pillars for this year. So we had already implemented and in stock strategy at the end of 'twenty, two but given the six month fashion buying cycle. It wasn't gonna take effect until the buys that we're now receiving in Q3 and Q4, so we knew.
That in stock was critically important we increased depth.
1.7 acts in the second half of the year versus the first half we made those decisions.
In 2022 to do that so we knew that it was going to be really important to get that in stock rate up based on all of the work and all the analysis that we had done in 2022.
What we learned in Q2 was that we should've gone even further and we could go even further and that's what we're doing for 2024.
So we think that we're gonna see even more we're going to start to see positive impact you know as it relates to the end of Q3 and Q4, but we're going to see the lion's share of that positive impact into 2024.
Thank you.
Thank you next question is coming from Eric Sheridan from Goldman Sachs. Your line is now what.
Thanks, maybe just one if as you move through this inventory strategy for breath to depth.
How should we be figure out product segmentation or product and messaging to make sure that the idea of inventory depth results from the subscriber acquisition, you're looking for the other side of the inventory issues. So it's.
It's sort of incoming users understand that may be that the inventory level is lined up with expectations coming in could that result in new product iteration product segmentation or is it really just an element of executing all the inventory depth and then turning on the subscriber acquisition dynamic again, and then getting back.
The more normalized levels of growth. Thanks, so much.
So the.
Having styles that are more in depth.
Really the biggest impact is on whether customers in early term stay with you as opposed to whether they come in the first place. So why when you're a prospect to rent the runway you're signing up for subscription you're looking at the full category catalog of everything that we have in inventory than.
When you sign up for a subscription and you're seeing what is available today.
And you don't understand that that availability is changing on a day to day basis.
So the higher our deaths are the more likely you're going to be to see those styles that you fall in love with when you were a prospect to see that they're available today. After you've signed up so we have data that shows that it's gonna have a you know quite.
Positive impact on our early term subscribers and that's what we believe and we're being I think prudent around when it's going to start to take effect based on when were receiving the inventory and when it's going to be you know more felt in our inventory base. So it's not related to acquisition and something that is related to retention.
And I think ultimately what we've always said and we always know about our business is that 80% of customers come organically, 60% of customers come because somebody else that what is it called current customers tell them about us. So I think the single most important thing we can do to improve and turn on effectively the acquisition.
Side is to focus very clearly on providing those customers with a great experience. Because then they will go out and become our best advocates and bring new customers in I think you know improving the experience is just always been very fundamental.
So how we grow and yes, I mean of course.
We also are doing in addition to buying additional depth and thorn between consolidating load up items between Reorders merchandising package and a lot of other things that we're doing to improve in stocks, but I think clearly the results of that in stock will itself drive Ah you know, what we think will be significant awareness.
Oh, the better experience that we're providing on the acquisition side.
Yeah.
Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
Thanks for joining us today, and looking forward to chatting more in the weeks to come.
Thank you. Thank you. Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
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