Q3 2023 Rent the Runway Inc Earnings Call
Welcome to the two rent the runway <unk> third quarter 2023 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.
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As a reminder, this conference is being recorded.
I would now like to turn the call over to rent the runway General Counsel Paris Schembri.
Thank you you may begin.
Good afternoon, everyone and thanks for joining us for this best friends of runways third quarter 2023 results joining me today to discuss our results for the quarter ended October 31, 2023, our CEO and co founder of Jennifer Hyman and CFO did backer. During this call we will make references to our Q3 23.
Earnings presentation, which can be found in the events and presentation 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 this afternoon's press release as well as our filings with the SEC recruiting or Form 10-Q that will be filed within 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 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.
A GAAP to non-GAAP measures can be found in our press release slide presentation posted to our investor website and in our SEC filings with that ill turn it over to John.
Hi, everyone and thanks for joining.
With a sub dollar stock price and very little support from the public markets. My goal. This evening is to address the elephant in the room when it comes to rent the runway with transparency and convey that we believe that we've reached a positive important turning point, where our business can hopefully start to be evaluated on its.
Strong business model and the vast opportunity ahead of us as opposed to our challenged balance sheet.
As of the end of Q3, 2023 rent the runway has $312 million that's out of outstanding debt, which obviously is a large amount, especially compared to our current equity value.
Before COVID-19 rent the runway helped significantly less debt with a sizeable portion of it at low rates beyond I sat backbone, which used our inventory as collateral.
After COVID-19 hit in mid March 'twenty, 'twenty, we needed to move very quickly to refinance to secure the business and address the fact that our inventory was now being appraised at a small fraction of its pre COVID-19 value and we faced serious consequences under the term of our ABL.
This pressure alongside our precipitously declining revenue due to Covid lockdowns meant that we had to take on a higher quantum of debt at high picks to save the company and repay our ABL.
All the debt amount was always in our view high it was essential to stabilize the business for the duration of the pandemic and support our post COVID-19 recovery and it felt manageable at a $1 7 billion dollar IPO valuation.
I believe it's clear based on many conversations with public investors, but a key reason why our stock prices declined into sub dollar territory is because of this debt.
Because of our balance sheet, we believe that the market lacks confidence in our viability.
Today, we are announcing significant modifications to our debt terms that we believe provide meaningful flexibility and will allow the company the opportunity to generate significant free cash flow before the deaths maturity date.
First both the Pik and cash interest have been eliminated for six quarters, beginning with Q4 2023, reducing total interest expense by $66 million over this period.
18 million of which is cash and trust. This means that the debt will remain flat at $312 million. During this period, which is intended to allow equity value to accrue as we grow and to reduce drain on company cash while we are driving the business to free cash flow breakeven.
In addition, the minimum liquidity covenant has been reduced from 50 million to $30 million, which provides additional cushion even insignificant downside scenarios we.
We have also mutually agreed on spend tops in fiscal year 'twenty 'twenty four for inventory Capex marketing and fixed operating expenses, which align with our profitability goals.
I encourage you to read the full details of the amendment that had been filed in a form 8-K prior to this call.
While the quantum of that still needs to be addressed we believe that these modifications provide significant breathing room. While we are laser focused on significant free cash flow generation and proving the strength of our business model to the market simply.
Simply put don't believe everything you read in the press rent. The runway is here to stay and I'm confident that 'twenty 'twenty four is going to be a big year for us.
The other significant elephant in the room has been a question mark as to whether rent the runway to grow.
The market has lost confidence in our growth opportunity because the business is expected to be more or less flat this year at around $300 million in revenue.
I want to be clear that we believe our lack of growth in 2020 three is a temporary problem, primarily driven by the inventory depth issue that we explained in detail last quarter.
Lack of depth in the styles customers wanted to run led to elevated rates of churn.
And as a result, we enacted strategies to pullback acquisition, while we solve this problem.
In Great news the actions, we have already taken to fix our assortment and greatly improve inventory depth in the second half of 2023 have already made market improvement on our customer experience. We are seeing positive green shoots and momentum in the most important input and output metrics of the comes.
Any including subscription net promoter scores that are both the highest we've seen since pre COVID-19 and that continue to climb weekly.
Global churn is down since last quarter and the churn of our post 90 day subscribers is amongst the lowest levels. We've seen since Q4 2021 with.
With higher M. P S and higher loyalty, we believe that our positive customer growth flywheel to be re engaged.
As a result, we're highly confident that we're on the right track. We believe we're focused on the right priorities in 2023 to fix the foundations of our customer experience and we want to update our commitment to being a fully cash flow breakeven business in 2024.
I want to be clear, we are laser focused on driving this business to free cash flow breakeven next year.
That's why we were setting up a cost structure that is designed to enable us to do so even in a zero growth scenario.
Zero growth is clearly not our goal, but we think best to plan conservatively when it comes to call.
I firmly believe that creating a sustainable business will enable us to control our own destiny and capture as much of the large rental market as possible over the upcoming years, but.
The rental market continues to grow at eclipse far faster than the overall fashion market in the U S and around the world as demand for subscription to fashion and normalization of rental has never been higher.
While we believe there will be many winners we have generated the highest revenue in any fashion rental platform and we believe this is due to our positioning as the premium service for the more premium professional customer with the premium brand relationships.
Regarding this quarter, specifically, we met expectations on the top and bottom line. We ended the quarter with an active subscriber count of 131725, we shared with you last quarter that we plan to make deliberate choices that we anticipated would negatively impact short term revenue and subscriber count.
To drive profitability, we believe that the sub count as a result of our strategic decision to hold the line on lower promotions and lower marketing spend to prioritize inventory in stock rate in.
In other words, we acquired fewer customers by design, but the customers. We have acquired are more profitable.
As we shared last quarter for rent the runway or customer experience. It's all about her ability to access the fashion. She wants when she wants it which is where our focus on the inventory depth and our in stock rate comes into play.
The fashion informs her satisfaction with and loyalty to our offering.
Thus far in the second half of 'twenty three we've improved the fashion on our platform in terms of deaths selection that is significantly more aspirational and birth of a child and importantly in line with what our core professional female customer is looking for.
The Green shoots we are seeing in the data are as follows.
First as we've shared the most important component of our inventory strategy is greater investment adaptive styles and brands. We know she wants so we are in stock more of the time, we told you that jumps up our second half twenty-three bi were expected to be approximately 1.7 acts the depth of our first half biased.
Which would increase our in stock rate by 712000 pets.
We have over delivered against our plan.
As of Q3 in stock rate with 1400 basis points higher than Q2, and 1200 basis points higher than Q3 last year contributing to increased customer satisfaction and retention rates.
Beyond buying at greater depth, there had been several additional important strategies, we have deployed to improve the customer experience with passion on our platform, including consolidating key styles by warehouses, better site and App merchandising and creating a unique onboarding experience for early term subscribers.
Loyalty is highly correlated to in stock rates and we have early data to show that the focus on depth is working as of October inventory as a reason for churn has gone down by 40% over the past six months.
Additionally, parental satisfaction rate has increased year over here not only is it easier for her to rent the items. She wants the assortment is resonating with her even more hearts on our new inventory or over 30% higher this year.
Over last year.
Workwear is a key driver of the satisfaction you.
Utilization of Workwear is a 1000 basis points higher than last year, which is great for our business as there's less seasonality seasonality involved and people who use our service to dress for work.
We're also seeing that he'd add on rates have gone up as in stock rates have improved and are at the highest level since before we launched our extra item plan. It's.
It's great that when our inventory availability is higher she will pay more to get more of it in our pool increases.
We're also pleased with our purchase rate this past quarter, we think that one of the most compelling elements of our business model for customers and for US financially is when customers use their subscription to try pieces and then purchased them from us when they are ready have them at home.
In Q3 purchase rate is up 50% and units sold versus last year, indicating that the pricing and assortment is resonating and we're getting better at positioning try before you buy as a key value proposition of having a subscription with us.
We think about the try before you buy channel as a retail 2.0 experience, where we're bringing the store directly into the customer's home in a dressing room. She tries out the product and get the brief sensors fit into aesthetics, but with rent the runway she experiences how the product fits into her life received validation from people she knows.
And determines whether she wants to make it a permanent part of her closet.
The vast majority of these at home sale have recovery rates far above what we paid for the item.
And we see higher loyalty rates and subscribers who purchase from them.
Expect us to continue to push on this developing channel and a much bigger way in 2024.
Next exclusive designs continue to be beloved by our customers as evidenced by utilization where rate and love rate all up year over year. As a reminder, we create these designs in close collaboration with brand partners and leverage our own unique data.
Today, just in time for holiday rent the runway introduced the vault a new category of luxury evening wear styles from 20 of the top brands and fashion, including many new decided designers like a true Oscar de La Renta branded Maxwell and on October <unk>.
But he used to valley, Rachel Gilbert Paris, Georgia, and more available exclusively for four and a day rentals. We view. This launch of luxury is a key step in reinvigorating or special events rental business, which was always based on renting aspirational brands that you couldn't afford where it didn't make sense to us.
By and solidifying our premium positioning in the market.
Overall, our brand relationships continues to be one of the resounding strength of our business model even in this complex macro environment brands see us as a powerful marketing partner the nudist say designers I just mentioned are a testament to that.
Over the past few years, we have managed to continue reducing the input costs per unit, while increasing the MSR piece of the fashion on our site.
<unk> our costs are decreasing while the aspiration and premium nature of the assortment is increasing.
Our pay for performance revenue share model continues to scale in terms of the number of partners and in the percentage of the overall buy.
Based on our buys to date, we currently expect that in the first half of 'twenty, four but almost 50% of our inventory acquisition will be acquired via a pay for performance.
Beyond our success and our inventory pillar. The teams have continued their work across our other strategic pillars efficient and easy to use experience and best in class product discovery. We are pleased with the strides we've made across the rent the runway ecosystem and our offering of high touch luxury style experience that we believe our customer.
We are noticing.
Related to an easy to use experience our S. M. S. B styling and support service rent. The runway concierge has reached an all time high adoption rate with over 30% of new subscribers opting in as of the end of Q3, we have seen sustained retention improvement not only for customers who use concierge.
In their first 30 days, but also in their second and third months with us.
Early term customers, who opt into computers has 15% lower churn rate and those who do not so our plans are to continue to scale. This program.
Our in product on boarding has also seen encouraging results, 95% of new subscribers completed leading to a 33% drop in the time. It takes her to please her first order.
I mean, she is more of a month to enjoy her about the runway items, we've come a long way in 2020 three and feel excited about the path ahead.
Thanks, Jen and thanks again, everyone for joining us.
While we met our third quarter guidance and Jen mentioned, we're disappointed with revenue that will essentially be flat this year and a growing fashion rental market.
Despite this we have continued to make underlying improvement to a financial model that may not be as apparent.
In the context of a rental product issues. This year, it's easy to overlook at most of our rental product today is procured using cost advantaged non wholesale channel.
Due to the near term gross margin impact of right sizing our inventory that is easy to overlook kind of year to date gross margins of approximately 40%, including both production and fulfillment cost point to strong underlying unit economics.
Also understandable that both our $27 million reduction in our fixed cost base from the Q3 22 restructuring program as well as the incremental $5 million in annualized fixed cost reduction this quarter might go unnoticed.
These building blocks in combination with our current plan give us confidence that rent. The runway is on track to reach free cash flow breakeven in fiscal year 'twenty.
We expect to bring our business to breakeven sooner entity far lower level of subscribers than we had initially announced.
As we plan to outline next quarter many of the actions that allow us to reach this milestone have already been taken.
Our rental product spend is known and is expected to be considerably lower than fiscal year 'twenty three level that were impacted by the need to make inventory adjustments we.
We have reduced our fixed cost base in the third quarter and expect to continue to find ways to optimize it further.
Consultation expenditures have good visibility there.
Balance sheet actions, we announced today result in no interest expense for fiscal year 'twenty four.
Do not assume a significant growth is required to reach our free cash flow goals. So let me now turn to our Q3 results.
We ended.
131725, ending active subscribers down one 9% year over year.
Average active subscribers during the quarter, but 134646 versus 129186 subscribers in the prior year, an increase of four 2%.
Ending active subscribers declined from 137566 subscribers at the end of Q2 2023.
As previously disclosed we tested varying levels of promotions during Q2 and decided to be much less promotional in Q3, a lower Q3, ending subscribers primarily reflected these promotional test ending in Q2, Q2, and lower ongoing new customer promotion during the third quarter.
Total revenue for the quarter was $72 $5 million down $4 $9 million or six 3% year over year.
Revenue in Q3, 22 benefited by approximately $1.6 million for my exclusive design pilot program with Amazon.
Subscription and reserve revenue was $64 $7 million versus $68 $8 million last year, a decrease of 6% driven by continued weakness in our reserve business and lower average revenue per subscriber.
The lower average revenue per subscriber was primarily driven by fewer full priced subscribers from the promotional testing previously discussed along with expected declines in add on revenues year over year. These declines were partially offset by higher average revenue per subscriber due to lower new customer promotion.
Fulfillment costs were $21 $5 million in Q3, 23 versus $23 $2 million in Q3 'twenty two.
Fulfillment cost as a percentage of revenue was slightly lower year over year at 29, 7% of revenue in Q3 23 compared to 30% of revenue in Q3 'twenty to.
Fulfillment cost as a percentage of revenue was flat to Q2, 'twenty three despite higher annuity processing call.
Fulfillment cost benefited from a new transportation contract with UBS, which locked in competitive rate and consolidated the vast majority of our shipping.
Gross margin was 34, 8% in Q3 23 versus 41, 1% in Q3 'twenty to Q3 'twenty three gross margin reflects higher rental protocol due to increased investment in inventory year over year. The increase investment year over year is largely a one time correction of inventory.
Tori depth to increase inventory in stock rate, which are essential for fueling customer satisfaction and growth.
Gross margins were negatively affected by approximately 400 basis point versus Q2, 23 due to seasonally higher revenue share expenses attributable to new receipt.
Operating expenses were about 11% lower year over year, primarily due to the favorable impact of about 2022 restructuring plan.
Further fixed cost actions, we have taken this year and lower marketing spending.
Total operating expenses, which include technology marketing G&A and stock based compensation were about 60% of revenue versus approximately 63% of revenue last year.
Adjusted EBITDA for the quarter was $3 $5 million or four 8% of revenue versus $6 $6 million and eight 5% of revenue in the prior year.
In Q3, 2022, adjusted EBITDA benefited by $4 $6 million from the launch of the exclusive designs pilot with Amazon and significantly higher inventory liquidation to third party.
Adjusted EBITDA was $4 $2 million lower in Q3, 2023 versus Q2 2023, largely due to seasonally higher revenue sharing fees, which peaked in Q1 and Q3.
Free cash flow for the nine months ending October 31, 2023 was negative $47 $3 million versus negative $69 $9 million for the same period in fiscal year 'twenty. Two we continue to expect significant improvement in cash consumption in fiscal year 'twenty to be versus last.
Sure.
Let me now turn to guidance.
We are maintaining revenue guidance for fiscal year, 'twenty, three and expect that FY2023 revenue will be at or above fiscal year 'twenty two revenue of $296 $4 million with Q4, 'twenty three revenue at or above $74 million.
We are also maintaining our fiscal year 'twenty three adjusted EBITDA margin guidance of 7% to 8% of revenue.
We expect Q4 23, adjusted EBITDA margin to be at or about 7% of revenue.
We are no longer providing fiscal year 'twenty three free cash flow guidance, while we still expect significant improvement in cash consumption versus fiscal 'twenty two as evidenced by year to date results. We are focused on ensuring that fiscal year 'twenty for its free cash flow breakeven, we anticipate incurring cash expenditure in Q4.
In preparation toward meeting those goals as an example, we expect to incur capital and operating costs. During Q4 to improve warehouse operations that we expect will drive savings in fiscal year 'twenty. Four we think these are rational business decisions and a part of our fiscal year 'twenty for free cash flow breakeven roadmap.
While this year has had its challenges we believe we are making meaningful progress.
Our balance sheet actions have been designed to provide us with greater financial flexibility our.
Inventory strategy has yielded results and customer retention has improved.
We're also making further improvements to our fixed cost structure during the third quarter.
Finally, we are working to bring rent the runway to free cash flow breakeven for fiscal year 'twenty four we will now take your questions.
Yeah.
Thank you.
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One moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Hi, good afternoon, everyone on the debt restructuring that you announced in the amended facility and the amended facility as you think about the go forward I mean, obviously you have six full quarters, beginning with the fourth quarter of 'twenty three how do you see the continuation of all of the debt how do you think that.
Is positioned as we go through the next four quarters and given the expense structure of the business, which is where you're managing and looking to reduce the cost what should we be seeing whether it's full from fulfillment expense and the cost structure that you mentioned that it sounds like still has opportunity to address in the face.
Some of the enhancements that you're making to the model like with the luxury vault and looking to improve active subscribers. Thank you.
Hi, Dana Thanks, so much for the question. So first of all we think that focus on the business model in general has been tremendously clouded by the fact that we we did have and we do have this that now by essentially reducing all interest or eliminating all interests for the.
Six quarters by reducing the minimum liquidity covenant what it does is it allows the business to drive to breakeven next year. It allows us to be in a position, where we can generate significant free cash flow profitability before the data is due which is around three years from now and in so doing really show the market.
The strength of this business model, we have high margins, we continue to improve those margins we have high flow through margin and we are excited to deliver a breakeven business in 2024, and I really am encouraged by the fact that the growth you know flash.
And is that we've experienced this year that we were able to identify the problem that we were able to start to make significant corrections to that problem in terms of our depth strategy in the second half and that we're really seeing green shoots in the data that give us confidence going into next year.
Yeah, I would say the only thing I would add here are number one what do you take away from the debt modifications you've announced the first thing is that we actually have a very supportive lending partner, who understands the business and is willing to work with us.
That's important the second thing is that that doesn't mature until October 2020 States and what we're focused on what's in our control is to deliver the best business results possible.
Prove the strength of the business as the market and I think we've taken.
Ken outlined very important steps along this path this year.
Yeah.
Got it and just general health of the consumer what are you. What are you seeing as we go into this holiday season, that's the same or different to last year.
Well one of the most encouraging things that we're seeing in our business is this.
Significant increase year over year in workwear, and we started to see that last quarter, we mentioned that but it has continued to accelerate which to US is really just what the pre COVID-19 run through runway behavior was where women utilized our service throughout the year to get there.
First for work in addition to her everyday life and special occasions.
So for US we feel encouraged by the fact that behaviors that are customers are using now feel more normalized to a pre COVID-19 kind of set of behaviors.
We're also seeing that we've.
We've continued to.
Steve Nice impact to improve the attention we can.
To see you know good acquisition, despite the macro environment and the fact that we have.
Significantly decreased both our marketing spend and our promotions over the last few quarters, because we didn't want to intentionally bring people into an experience where the inventory depth was not there and we feel that we feel very encouraged by the results that we're seeing thus far.
Yeah, I think so.
A couple of other encouraging signs that we've seen are that give us some confidence that the health of our customer is strong number one.
We've improved the inventory assortment, we've actually seen them engage with the inventory more so as Jennifer pointed out we've started to see improvement in our hat on rate people are willing to pay more for inventory. They like the second thing that Jen mentioned in her remarks is we've actually improved and a C.
Encouraging signs in terms of liabilities.
Well inventories while customers in a profitable way. So I think these are just indications of our customer remains healthy retention is improving during easy would be inventory in a in a way that benefits all and.
<unk> the value that we provide.
Thank you.
Okay.
Yeah.
Thank you.
Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question.
Thanks, so much for taking the questions two if I could just coming back to the inventory issue is there we would either put a quantification or maybe duration around what's left in terms of getting the inventory issue to where you want it to be to invest back in the flywheel for the business as we get into 'twenty 'twenty four it that'd be number one.
As you have this period over the next six quarters, which savings on the capital structure, what are the priorities to invest those savings back into the business to again capitalize on the 'twenty 'twenty four and beyond a potential for momentum. Thank you.
So one of the things that we shared last quarter that were reiterating is that you know.
The improvements that we made in the back half of this year, where we increased jobs by 1.7 X versus the first half of this year was really our first step towards a much broader depth strategy in 2024 and as a reminder, the first half of 'twenty 'twenty four and those orders have already been placed so that's.
Why we had insight into the you know almost 50% that's coming from pay for performance. That's why we can tell you that the depth strategy and in the first half of next year is already more robust than it was in the back half of this year that we've seen that across all cohorts loyalty rates have improved markedly.
And in particular, they've improved significantly amongst folks that have been with us for 90 day, plus and we showed that as of the end of Q3.
Those that loyalty rate is kind of.
15% better than last year, which is really a significant increase for the segment. That's the majority of our customer base of.
Our subscriber base kind of thus far so our strategy is to continue to.
Push on them to continue to buy a selection that resonates more with who our core customer is who is this more aspirational woman in her thirties and 42 is professional who is educated and we see that it's not just about the job. The fact that the selection is resonating more.
Then before hearts are up 30% and she's buying more inventory she is adding more inventory into her cart, which is obviously, increasing our our pools again in our margins. So we feel really good about the continuation of the strategy, leading to even higher rates of loyalty, but even more so we feel that the <unk>.
This is poised to really step on the gas pedal as it relates to marketing and growth and acquisition, but this is the customer experience based on improved you know net promoter scores that are some of the highest net promoter scores we've seen since pre COVID-19 that we feel excited about bringing new customers into.
What was your second question.
Just a generally over the next six quarters, how do you think about the priorities to reinvest the savings from the capital structure changes how to think about the priorities there.
Well I would say, we're very clear about our priorities for fiscal 'twenty four and the priority for fiscal 'twenty. Four are number one to ensure that we bring this business to free cash flow breakeven, but that is a.
Non negotiable really important initiative for us next year.
So that's the that's the first thing the second thing I would say is that if you actually look at fiscal 'twenty three.
We have done you know given the results and so on some of these things perhaps on you get lost sometimes but we have done a huge amount to invest in the customer experience. This year all the way from rolling out a program that is tailor made for individual subscribers style.
Styling one on one interaction I mean these are things we never had before but now are available to everyone who joined the program.
We have invested you know 70.
$70 million in inventory capital. This year are now all customers have access to amongst the newest inventory they've had in a long time, the freshest inventory inventory de la and it heightens talk right. So I think if you. If you think about our mindset and think about investment in the customer.
Yes, it's true that the modifications in the that will free up some resources there.
Really we have never stopped investing in the customer experience and I think that is going to continue wherever you will see.
Additional focus next year. In addition to obviously getting the cost structure, right and making sure we breakeven on a free cash flow basis is on the growth side really turning our attention to making sure more people and more customers experienced the program and we drive excitement amongst the potential customers that have yet to try rent the runway.
The strength of our brand relationships as well as helping us to deliver you know incrementally more value to the customer.
Month over month I mean, one example of that is the launch that we did today of luxury evening wear on our platform, which not only is the first launch of luxury even where for us but it's the first time that many of these brands have ever participated in rental before we're starting to rent you know gowns and dresses on our site that retail.
For up to 8000 dollar MSR piece at Reed at rental price points that are you know quite accessible and affordable and so this is really continuing to offer our customers even more and doing it.
Oftentimes.
On a pay per performance model with the vendors that we're working with.
So that everyone really got it.
Thanks for the detail.
Thank you. Our next question comes from the line of Ike for a child with Wells Fargo. Please proceed with your question.
Hi, everyone. Thank you for taking my question. This is Giuliano I am sorry, I am just awesome Uh huh.
How are you thinking of P&L am I can own tech spending efficiencies moving forward I know you mentioned about tangible points.
I'm, especially pleased that this quarter, it's just amazing to me some more color on that.
Sure I think so.
I see you obviously called out to June numbers are on the in the prepared remarks. The first is we say $27 million and fixed costs.
As a result of the Q2 'twenty two restructuring so far are in.
In the third quarter, we enacted further changes primarily affecting the technology line that will we expect will save another $5 million on an annualized basis.
Starting the fourth quarter.
And I think the message that we're sending.
To you is.
It's not we're continuing to focus on our cost structure, we continue to look at.
Every spend no matter, how small it is and making sure that we bring that fixed cost structure to a level, where if we don't rely if you don't want to rely on any sales growth can we get this business to breakeven and physical 24. So that is our aim and we'll make sure that the cost structure reflects those ambitions.
Great. Thank you and then just one follow up are there any thoughts on subscription pricing, taking price there or maybe tying that into you know if theres any updates on market share and how you're feeling like a position in the market overall.
We think our subscription pricing is in a really good place of course as Sid mentioned, our goal is to continuously be offering our customers more and more value quarter over quarter. We started this year with that philosophy in mind by launching an extra items.
For all of our customers really giving them, 25% more value for the same price we've got a.
Followed that up by now giving them free concierge and freestyling via text you know now expanding the MSR piece of our selection source selection has continued to become more high N overtime, even as they're getting more items.
So for US right now it is about delivering a better experience and more aspirational and premium experience to our user base. It is not going to be about increasing price and I think the one important clarification might be answering the earlier question is that on marketing.
Not at this point expect to have any changes in marketing spend for fiscal 'twenty. Four so we do not expect to reduce our fixed cost reduction plans do not involve reductions in marketing spend in fact, as we pointed out earlier, we want to expose more people to a significantly improved.
In fiscal 'twenty one.
Got it thank you so much.
Yeah.
Thank you. Our next question comes from the line of Lauren Schenker with Morgan Stanley. Please proceed with your question.
Hey, Thanks for taking my question. This is Nathan feather on for Lauren.
On the purchase rate for resale being up 50% year over year, what has really been the key drivers moving that up and then any plans or how are you thinking about driving that up further in fiscal 'twenty four and then as you transition to greater depth across the inventory base. How are you using retail as a method if at all to kind of trim that exist.
Staying lower duct inventory. Thank you.
Yeah. So number one we've seen a lot of success, but as the selection has become more attractive to the user demand to purchase the inventory has gone up number two we've gotten even more sophisticated with our pricing algorithms. So we know exactly how to price the inventory.
So that we're still you know selling it profitably, but doing it in a way that is compelling to our user base I would say that both of those two.
Improvements are within a strategic channel that is really unique to a subscription a rental model you think about other companies that are selling items that had been warned before.
They don't have the advantage of the fact that our customers always have at least five things at home in their closets already they've already warn them they've already experienced them they've already falling in love with them. So if we're able to price it at the right price point, both for them and for US there's a much higher likes.
We've heard that they will convert on you know that inventory. The other thing that we started to do quite honestly has started to tell customers, but this was a benefit of their program.
So one of the reasons why some of our customers might sign up for a subscription is that they're busy they're professional women. They have kids. They have other things going on and this is an easier way for them to kind of shop, because they can try things before they buy it so just by nature of positioning this as a value.
You said of the program is also another benefit.
The last thing I'll say is that in the past we used our try to buy channel primarily around much older inventory. So inventory that was in our base for two or three or four years and kind of.
They had it at home we have started to really build the muscle around using.
Current season inventory as part of our try to buy.
And building replenishment businesses around that inventory, so really understanding that our customers might want to buy for example, denim from us.
And as opposed to just selling it.
Two of them and depleting the amount of denim we have on our platform instead, just replenishing that denim with our partners. So that we're both you know providing a customer value, making money off of the inventory and not depleting the supply of important categories.
Yes, I would say, there's three things that.
And we think about when we think about retail the burst is.
No. We have now there's this quarter this past quarter actually become quite surgical at looking at category by category brand by brand trying to understand.
Age of inventory, what we can tell a lot of inventory for how much that matters to customers and thought so we're utilizing some of those lessons and actually drive some good decisions in terms of what we can sell to who the second thing is we've actually made product enhancement.
To the customer experience and to the technology backbone here, where we can target specific items that customers have at home and convince them to try that item in an upside if they like it.
And then the third thing is you got to remember all of it.
This year has been about making sure that the inventory spend for our customers and in stock rate is in good shape. So well we want them also make sure is we protect that so all of the increase in resale.
Then essentially dovetailed at the same time with a real protection of the in stock rates that our customers are experiencing and so we are working on a replenishment type system that ensures that we can not only sell items that customers want and pud loyalty for them, but also of course maintain the inventory experience that they're now becoming a customer.
Yeah.
Thank you. Our next question comes from the line of Andrew Boone with JMP Securities. Please proceed with your question.
Thanks for taking the question I wanted to ask about promotions.
Really the question.
Have you seen me Andrew we can't hear you can you can you repeat what you were saying.
I wanted to ask about bonus promotions over the last.
And how we should think about that.
Right.
Sorry.
We couldn't quite hear you, but if I understand your question correctly, it's to do with how are we thinking about promotions going forward is that right.
And what I see in the last quarter.
Yes.
I think what we have seen is so if you look at the big changes be made right. We used to have promotions that span several months.
And we have shrunk those last quarter to essentially a one month promotion we've changed some of the promotional pricing for new customers and enter into the programming and what we have found is.
You know a fairly encouraging response in terms of our ability to attract customers.
Price points that don't involve giving away three or four months worth of.
You know.
<unk> for new customers. Obviously these are all.
Subject to change we may decide to to bring more people into the program as the experienced improved and so on but I think that what we have learned is that it is an essential to be as promotional as we want.
As an example, you know this black Friday cyber Monday, we were far less promotional than Black Friday cyber Monday.
In previous years, so as an example, like our promotion this year around 415 fewer days than last year, we spent 40% less promo dollars than last year and we are you know acquiring customers in it in a more profitable way.
Now the fact that loyalty rates are up across all of our cohorts, meaning that L. T. D is up and our margins are improving it means that we have also more room to play around with promotions at different points during the year.
So you know we're going to continue to experiment, but to <unk> point, we do not believe that we have to be as promotional as you know we once were.
Thank you.
Thank you. Our next question comes from the line of Ross Sandler with Barclays. Please proceed with your question.
Oh, Hey, <unk> question on the gross margins. So your pro forma margin looks fine.
Gross margin was down a little bit from the rental depreciation uptick so was that just from the overall aggregate.
The rental product purchases being higher last couple of quarters on the inventory replenishment or was there some mix shift back to a wholesaler.
Channel mix thing, we should be aware about.
I guess, what's the.
Outlook for gross margin for next year.
And the second question for John.
So it's all kind of anecdotally in some of the surveys that you guys are looking for.
For one thing a little bit with lower price points could you just talk about.
What you're seeing there.
And is that part of the strategy.
Thank you.
On the first question.
So, yes, you're absolutely right the gross margin.
Declined this quarter it really reflects a much higher level of inventory spend.
Over the last couple of quarters, and certainly relative to last year, we're not giving specific gross margin guidance for fiscal 'twenty, four but I will say and as you as we pointed out several times on this call. We do expect to be free cash flow breakeven in fiscal year 'twenty four and obviously one part of.
That is our inventory spend is expected to be considerably lower than it is in fiscal 'twenty three as we really adjusted it all of the deaths are issues and fix the debt issues that we needed to address.
Ross I'm I'm not sure what you mean about lower price points, because the MSR piece of our rental products are actually going up meaning we're renting more aspirational higher end product, even though the cost of those products are going down because of the.
Either discounts, we get with our vendors or the pay for performance deals that we have with them.
So.
What are you talking about price points of inventory or or something else.
The inventory.
Just being anecdotal but.
You know are there is there any.
You know the new strategy around lower priced inventory it sounds like no but that that's wrong.
You know if you track our inventory over the last four or five years. The MSR piece have gone up every year, meaning the inventory across all of our categories is actually getting more aspirational. Our brands are better they're more premium and you know while there are you know growing competitors in this space, there's very little.
Brand overlap between rent the runway and.
<unk> rental competitors, we really hold the kind of premium space in the market with the hundreds of designer brands that we have and we kind of further buttress that today with the launch of luxury.
And I think the last thing that clarify that I think I I didn't mention it to you. It's your appointment to answer your question around is the mix changing at all that makes it not changing towards wholesale and factors going the other way as Jen mentioned in our remarks in the first half of fiscal 'twenty four we expect actually almost 50% of our total inventory.
Come on consignment or people and I'll, just kind of remind everyone that when we IPO the business.
Two years ago, we stated that over the medium to long term that we would expect a third of inventory to come and be a pay for performance and we're already announcing that close to 50% of the inventory in the first half of 'twenty four is coming in via paper performance, meaning we do not pay for it upfront.
The only revenue share on the performance. This is no risk inventory for us. So we are really beating the goals that we set out.
Basically the most important category in the most important expense bucket up the business.
Thank you.
Yeah.
Thank you there are no further questions at this time and I would like to turn the call back over to management for any closing comments.
Thanks for joining us today, we were really happy to have the opportunity to really transparently address what we think are the real elephant in the room as it relates to our business.
We are excited about this constructive relationship we have with our with our lender about our debt restructuring, we think that it gives the business opportunity to breakeven to become a profitable business to prove out this model to the market. We're very excited about the path ahead and the data that we're seeing in the business and looking forward to talking to you.
More about it.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.
Goodbye.
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