Rent the Runway Inc. moved closer to profitability in the second quarter as it continued to rein in spending — but missed its sales mark as inventory fell short of demand and new users churned quickly.
Net losses narrowed to $26.8 million from $33.9 million a year ago. And the adjusted EBITDA margin tallied 10.2 percent, better than the 7 percent to 8 percent margin projected in June.
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But revenues for the three months ended July 31 slipped 1 percent to $75.7 million, where the company had forecast revenues of $77 million to $79 million.
The revenue forecast for the back half was also cut. That was enough to spook investors, who sent shares of the company down 27.9 percent to 98 cents on Friday for a market capitalization of $66 million.
Part of the problem was a mismatch in timing. Rent the Runway looked to build up its customer base this year by offering them more, most prominently a 25 percent increase in the numbers of items subscribers could rent each month. But then it didn’t have enough looks on hand to keep many subscribers happy.
Jennifer Hyman, cofounder and chief executive officer, told WWD in an interview that the rental pioneer’s broader plan remains in place and that it is now charging toward profitability more quickly with a leaner business.
“We really accelerated the timeline to profitability so that we can have more control over our own destiny,” Hyman said.
“We’re empowering our leaders to make choices that are in favor of the medium and long-term health of the business, but really detract from short-term revenue,” she said.
That means fewer promotions and less marketing until the company has the inventory depth to meet incoming demand.
“The revenue miss in the second quarter was primarily due to an inventory depth issue,” Hyman said. “We came into the second quarter with a record amount of subscribers. The depth per style in the second quarter was lower than it should have been and therefore we saw higher early-term customer churn.”
Hyman said new customers were frustrated.
Rent the Runway plans to fix in-stock rates with second-half inventory levels that are 1.7-times first-half stock.
“We had enough actual inventory, we’re not spending more on inventory, we’re spending the dollars we have differently,” Hyman said. “We’re buying fewer styles at much higher depth.”
The CEO said inventories need to get right before any big push to bring in new customers.
For the full year, Rent the Runway is now looking for revenues of at least $296.4 million — the company’s 2022 top line — where it had been looking for revenues to range from $320 million to $330 million.
“Part of why we wanted to take down our revenue guidance for the back half of the year is because our business is very organic and historically, 80 percent of all our customers have come to us from that positive flywheel of word of mouth,” Hyman said. “We think that rebuilding that positive flywheel will happen, it’s just not going to happen overnight. The [inventory] depth really needs to be there.
“You don’t want to add more customers until the depths are really there, so we’re making decisions now that are very much around driving the business to profitability much more quickly,” Hyman said.
The company now plans to be free cash flow break even — before cash interest expense — for the full year 2024.
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