Rent the Runway, Inc. (NASDAQ:RENT) Q1 2023 Earnings Call Transcript

Rent the Runway, Inc. (NASDAQ:RENT) Q1 2023 Earnings Call Transcript June 7, 2023

Rent the Runway, Inc. misses on earnings expectations. Reported EPS is $-0.67 EPS, expectations were $-0.49.

Operator: Welcome to the Rent the Runway’s First 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. [Operator Instructions] As a reminder, this conference is being recorded. I would like to — now to turn this call over to Rent the Runway’s General Counsel, Cara Schembri. Thank you. You may begin.

Cara Schembri: Good afternoon, everyone, and thanks for joining us to discuss Rent the Runway’s first quarter 2023 results. Joining me today to discuss our results are CEO and Co-Founder, Jennifer Hyman; and CFO, Sid Thacker. During this call, we will make references to our Q1 ’23 earnings presentation, which can be found in the Events & Presentations section of our Investor Relations website. Before we begin, we would like to remind you that this call will include forward-looking statements. These statements include our future expectations regarding financial results, guidance and targets, market opportunities and our growth. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially.

These risks, uncertainties and assumptions are detailed in this afternoon’s press release, as well as our filings with the SEC, including our Form 10-Q that will be filed in the next few days. We have 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. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information that’s presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in our press release, slide presentation posted on our investor website and in our SEC filings. And with that, I’ll turn it over to Jen.

Jennifer Hyman: Thanks, Cara, and thanks, everyone, for joining. As I shared on our last call, our 2023 growth strategy is focused on improving our customer experience. To do that, we are focused on delivering more value to customers quarter-over-quarter in the areas that matter to them most. It’s an exciting time for Rent the Runway. We’re delivering tangible momentum in executing against our customer-centric vision, as evidenced by our strong Q1 results. We delivered a new record active subscriber count of 145,220, representing 15% growth quarter-over-quarter, while posting a beat on the top- and bottom-line. Revenue came in at $74.2 million, a 10% increase year-over-year. We continue to hold our gross margin above 40%, at 42.3%, and posted a strong adjusted EBITDA margin of 6.1%, well above guidance.

I’m particularly proud of the progress on profitability metrics paired with strong subscriber growth, because I believe that it demonstrates our ability to manage costs effectively while making important investments into the customer experience. We have conviction that our subscriber growth and margins in Q1 provide a strong foundation towards the goals we shared last quarter, which we are reiterating now, growing ending active subscribers by over 25% and reducing cash consumption by almost 50% in fiscal 2023. We have confidence in these goals because of the laser focus we’re maintaining on our customer. Our team has demonstrated agility and is focused on execution. Our customers are beginning to feel a real difference and we’re going to spend much of this call detailing some of the key improvements we’ve made so far this year.

Having said that, I also want to emphasize that transforming our customer experience is not a one quarter endeavor. We will be updating you on impact over the next several quarters. Our goal is to maximize customer love and retention, and we’ll do that by making their experience easier, more valuable and more fun. We’ll know that we’re successful if we inspire more women to buy less clothes and rent instead. We see that the market for fashion rental is growing all over the world and believe our opportunity has never been greater. Now I want to talk to you about what our team has already accomplished related to our three customer-centric strategic pillars, which are: one, getting her the inventory she wants when she wants it; two, providing an efficient and easy to use experience; and three, offering best-in-class product discovery.

These pillars are key due to the frequency with which our subscribers use Rent the Runway. And this is what we have to get more and more right over time. As a reminder, the majority of our team is focused on customer-facing initiatives this year. We kicked off the year by permanently adding an extra item to every shipment of our subscription programs, and we’ve been happy with the results of our launches since then. One, on inventory she wants when she wants it. In support of getting her the inventory she wants when she wants it, inventory availability continues to be a top priority. We know our customer is here for the fashion and her ability to access it is one of the key ways she evaluates the value of her subscription. We’ve expanded and grown an ongoing strategy to acquire more of the styles our customers are telling us they want in real time.

Because of real-time data signals we get on actual and unmet demand, we are one of the few retailers that is structured to chase and refresh inventory mid season. This gives our buying team significant leverage on pricing. We believe the next step in this effort will be felt deeply by our customers in the back half of the year as we are focused on significantly increasing depth in the key styles and trends we know our customers want. Next, I want to share some of the actions we’ve taken in Q1 to make Rent the Runway easier to use for our customers. In early May, we launched a luxury-style concierge service to help new subscribers onboard with Rent the Runway more seamlessly. Rent the Runway Concierge provides free one-on-one interaction via text with our customer service team to help new subscribers get the most out of their membership, from building their first shipment to styling tips or solving a fit or shipping issue.

We believe this program has the potential to be an important retention driver. Our customers have incredibly busy lives; 90% of them work, a third have kids, and 85% socialize more than twice a week. So, the easier we make the experience, the more it can be cemented into her life. As we’ve shared previously, we’ve enjoyed strong long-term customer loyalty, but we also know that majority of subscribers who churn do so in their first 90 days. By providing a concierge experience in her early months of membership, we aim to delight her with an effortless introduction to rental. We think this will improve retention and make her a loyal customer sooner. You’ll see us integrate this offering more deeply into our product experience in the quarters to come.

Next, we’re making our site and app faster. As an example, we drove a 48% improvement in average load time on a key entry point into our conversion funnel, which resulted in an 89% lift in conversion on that page. Last, we made two improvements to our delivery and returns experience, that directly speak to the premium level of service Rent the Runway offers. One, we launched a new tool to drive further adoption of at-home pickup, which has led to an increase in in-market adoption of the service by nearly 4 percentage points from the end of Q4 ’22 to the end of Q1 ’23. Second, last week, we launched Saturday delivery to more than half of our subscribers, a big unlock for customers who can now receive their deliveries on the weekend. We plan to continue to enhance all aspects of our experience to make it as easy as possible for customers to navigate their subscription.

Finally, I’m going to share recent accomplishments related to our strategic pillar on best-in-class product discovery, where our goal is to be even better than a typical retailer and how our customers find the inventory they love. First, we shared during our last call that we launched Rent the Look and Similar Items in late March to enable customers to easily find a complete outfit or a visually similar option based on the styling we provide on our product display pages. The introduction of these features has increased member engagement, particularly when members landed on pages with unavailable styles. Now she is served similar substitute items through this feature directly on the product display page, leading to a 34% increase in engagement with substitute items among members.

Last, and something I’m personally very passionate about, we’re excited to announce that in the coming weeks, we plan to launch an AI-driven search beta. This will allow customers to search common fashion terms or use cases and is intended to make searching our sites more intuitive and natural. For example, she will be able to write Miami vibe, Clam bake in Nantucket, or tropical motifs, and our AI-powered discovery engine will serve her relevant inventory. We see this as a first and important step in Rent the Runway using AI models to improve our product experience and we expect to build on this launch in the months and quarters to come. We believe that AI has the potential to directly support our 2023 strategy of delivering more value to the customer and leapfrog ahead of the experience that we deliver today.

Fashion as an industry serves to benefit from AI to narrow the endless aisle problem of ecommerce. But we believe that Rent the Runway is uniquely positioned to be a significant beneficiary of AI because of: one, the frequency with which she interacts with our product; and two, our unique and rich data catalog which includes her frequent site behavior and all of the data we gathered from her on fit, inventory quality, occasion and more every time she rents. The majority of subscribers are reviewing 10-plus items per month. This dataset gives us a head start on any future innovation we’ll endeavor in the AI space. We also believe that our opportunity in AI is bigger than product discovery. We are exploring how it can impact our concierge experience and onboarding to deliver an even more personalized experience to enhance customer loyalty.

And we have the team to do this. We’ve been harnessing machine learning for a decade, employing data to power personalization within our consumer experience, our operation and across our business. So, we’re looking forward to continuing to build this muscle at Rent the Runway. I’m truly energized about the progress we’ve made so far this year and everything that lies ahead. Most of all, I’m looking forward to continuing to deliver for our customers. And with that, I’ll turn it over to Sid.

Sid Thacker: Thanks, Jen, and thanks again, everyone, for joining us. Since our 2021 IPO, investors have asked us two key questions. First, can Rent the Runway grow? Second, how profitable can the company be? Our first quarter results demonstrate solid progress on both fronts. As Jen outlined, we believe deeply that the customer experience improvements we are making are key to driving improved retention and faster growth. At just over 145,000 ending active subscribers at the end of Q1, we are making progress to 25%-plus active subscriber growth in fiscal 2023. Our path to profitability is focused on free cash flow. Last quarter, we outlined the almost 50% reduction in cash consumption we expect for fiscal ’23. We believe that our margins in Q1 provide a strong foundation for progress towards that goal.

Let me now review our Q1 ’23 results. We ended Q1 with 145,220 ending active subscribers, up 7.6% year-over-year. Average active subscribers during the quarter were 135,966 versus 125,119, an increase of 8.7% year-over-year. Total revenue for the quarter was $74.2 million, up 10.6% year-over-year. Subscription and reserve rental revenue was $66.8 million versus $61.4 million last year, an increase of 8.8%. As we discussed last quarter, we did see weakness in our reserve business in Q1. Subscription ARPU for the quarter was slightly higher year-over-year, primarily due to the impact of the April ’22 price increase, partially offset by changes in program mix and add-on rates. Other revenue was $7.4 million versus $5.7 million last year, growing 29.8% year-over-year due primarily to increased purchases of rental products.

Note that the timing of these purchases can vary from quarter-to-quarter depending on the assortment available for sale. Other revenue represented approximately 10% of revenue versus 8.5% of revenue in Q1 ’22. Fulfillment costs were $21.9 million in Q1 ’23 versus $22.9 million in Q1 ’22. Fulfillment cost as a percentage of revenue improved from 34.1% of revenue in Q1 ’22 to 29.5% of revenue in Q1 ’23. As a reminder, Q1 ’22 results did not benefit from our April ’22 price increase. We were able to offset the impact of higher shipped units per order on account of our five-item, launch with efficiencies in both processing and transportation costs. Gross margins were 42.3% in Q1 ’23 versus 33.5% in Q1 ’22. Q1 ’23 gross margins reflect the impact of the April ’22 price increase, the fulfillment cost improvements discussed above, as well as lower product depreciation due to the continued impact of product acquisition mix changes towards more efficient channels.

As expected, gross margins were lower than Q4 ’22 levels, due to seasonally higher product acquisition we typically see in Q1 and Q3. Operating expenses were 5% lower year-over-year and about 13% lower year-over-year before stock-based compensation, primarily due to the favorable impact of our 2022 restructuring plan. We continue to expect about $25 million in restructuring related savings in fiscal ’23 compared to the Q2 ’22 run rate. Total operating expenses, including technology, marketing, G&A and stock-based compensation, were 66% of revenue versus 77% of revenue year. Adjusted EBITDA for the quarter was $4.5 million or 6.1% of revenue versus negative $8.8 million and negative 13.1% of revenue in the prior year. Adjusted EBITDA margins reflected strong cost discipline that allowed us to offset investments made to improve customer experience.

Free cash flow was negative $12 million in Q1 ’23 versus negative $28 million in Q1 ’22. We continue to expect significant improvement in cash consumption in fiscal ’23. Let’s turn to guidance. For the full year, we continue to expect revenue of between $320 million to $330 million, and ending active subscriber growth in excess of 25%. We are also reiterating our full year adjusted EBITDA margin guidance of 7% to 8% of revenue. Our guidance on cash flow remains unchanged and we expect to reduce cash consumption by almost 50% to below $50 million. We are updating our fiscal 2023 product spend expectation to $74 million to $76 million from $69 million to $72 million, as we are seeing increased opportunities to purchase high-quality styles from top brands at deep discounts.

Finally, there is no change to our expectation for gross margins to be slightly lower on a year-over-year basis. We expect Q2 revenue to be between $77 million and $79 million. This represents about 5% growth sequentially versus Q1 ’23 and approximately 2% growth versus Q2 ’22 at the midpoint of the guidance range. Let me talk about the factors affecting Q2. First, as some of you may have noticed, we are experimenting with being less promotional with our new customer offer pricing. We think this will improve retention and allow us to invest in improving the customer experience. We do expect these experiments to reduce acquisitions in the short term, especially in our lower priced programs. As a result, we expect lower ending active subscribers in Q2 versus Q1.

We think these are the right decisions for our customers and have factored these changes into our full year guidance of 25%-plus subscriber growth. Second, both sequential and year-over-year growth are expected to be negatively impacted by the decline in the reserve business. Finally, we also expect other revenues to be relatively flat quarter-over-quarter due to higher units sold in the first quarter of this year. Q2 ’23 adjusted EBITDA margins are expected to be between 7% to 8% of revenue as we expect a higher revenue base versus Q1 to improve leverage on our fixed cost base. I’d like to end by saying that we remain confident in the trajectory of our business, and we have a very clear sense of how to improve the customer experience. The second half of fiscal ’23 should see us make significant progress across inventory, onboarding and product initiatives.

We believe these changes will be noticeable to our customers and make it easier for them to find and experience our inventory and product in a more seamless manner. With that, we’re happy to open it up for questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Rick Patel with Raymond James. Please proceed with your question.

Rick Patel: Thank you, and good afternoon, everyone. I have a question on “getting better at giving customers what they want, when they want it.” How do we think about this from an inventory management perspective? Does it mean that you’ll be buying more inventory as you get a read on fashion? Does it mean that you’ll be leaning more on your share by RTR partners? Just curious how to think about the mechanics of chasing high-demand products? And as a follow-up, what are the financial ramifications from ramping up this initiative on gross margins and working capital?

Jennifer Hyman: I think there’s two main ways we’re addressing it, and you’ve seen us really deploy one of the ways thus far in Q1 and early Q2. So, the first way is, we get these real-time data signals in season on what’s doing well, what’s highly demanded. And number one, we’re able to respond to them in season, get competitive pricing, reorder pretty aggressively against top styles. And that’s kind of — because of both the real-time data that we get, but it’s also because of the business model that we have, where we can continue to monetize inventory over three-plus years as opposed to being held to kind of a traditional retailer 12-month — 12-week of full price selling kind of calendar. So that’s number one. The second aspect of this is really focusing on depth.

We know that our customers come to Rent the Runway. They heart styles that they love, and we want to give them more ability to get those products that they heart way more frequently and way more often. So, we are making significant changes to the depth of the styles that we acquire from our partners. And that’s going to really start to show up in the second half of this year. And we think that it will make a noticeable impact on customer experience. We have great data on what she wants. I think that we’re solidly in now this post-COVID world where she’s really using us again for workwear, for weekends and for special occasions. And so, we’re able to increase the depth across the styles that matter to her most.

Sid Thacker: Yes, Rick, and thanks for the question. I think in terms of the financial impact of this move, look, it’s obviously, number one, factored into the guidance that we have provided for product spend this year. But more importantly, I would say we always face this trade off, right? How many styles do we want to buy and then how many units of each style that we want to buy, right? So, there is no additional dollars that are required to optimize for depth. I mean, we have a tremendous amount of data when we look at how easy it is for a customer to find items on our site. What is the impact of depth going to do to those metrics. And part of the reason we feel very optimistic about the 25% subscriber growth guidance is we know we have very significant improvements in the customer experience coming as it relates to inventory, because of these optimizations on depth and breadth that Jen mentioned.

Rick Patel: Thanks very much. All the best.

Operator: Thank you. Our next question comes from Andrew Boone with JMP Securities. Please proceed with your question.

Andrew Boone: Good afternoon, and thanks for taking my questions. I’d like to talk about the guide for 2023. Just given the guidance for 2Q and thinking about the back half of the year, can you talk about your confidence in the reacceleration of subscriber growth to hit that 25%-plus number?

Sid Thacker: Sure. Look, I think we had to go back a little bit. We always — this year was always supposed to be a year of two halves, right? So, when we provided guidance last quarter, we’ve said revenue growth in the back half of the year was supposed to be significantly stronger than the first half, right? So, we still believe that’s going to be the case. But I think fundamentally what underpins our confidence on the growth for this year is, of course, number one, we’ve had a strong start to the year, but secondly, it’s our confidence in the data that we have behind all of the key initiatives that we have lined up for the back half, right? So, we think, number one, the inventory changes are going to be significant, because ultimately, people come, customers visit Rent the Runway to rent the products they want, right?

And if we make it very easy or much easier to find those products, to interact with our website very easily, I mean that is going to pay dividends in terms of the retention and the loyalty customers have, right? The other very significant change that we — or the improvement that we’ve made to the site is, this personalized onboarding and RTR Concierge service, right? So, 55% of all subscribers will leave us do so within the first 90 days. So, we think it’s been — it’s quite critical to address the pain points in those first 90 days. And here, we are providing a very personal SMS-based — it’s almost like your personal stylist and we’re seeing very encouraging results from customers. So, I think fundamentally, we have very significant product improvements that we always had planned for this year that give us a lot of confidence that we’re going to get to 25% subscriber growth.

Jennifer Hyman: Yes. I think our results in Q1 show that the strategic pillars that we outlined this year are working, and they are being felt by the customer. And I think more importantly, what you’re seeing across the organization is you’re seeing an agile organization that has an execution orientation. So, we’ve actually done a lot over the first four months of the year. We’ve launched a lot. We’ve iterated a lot. And this was within a plan where we knew that the majority of the transformative product experiences would really be showing up in the back half of the year. So, we already feel good about how the customer is experiencing Rent the Runway differently to date, and we know that we have some really exciting things lined up over the next few months.

Andrew Boone: Jen, I wanted to ask specifically about AI to that last thing that you said. I think you talked about AI as a first step. Can you talk about the vision in terms of how AI can be incorporated more broadly across the platform, just a little bit more beyond search? Thanks so much.

Jennifer Hyman: Yes. So first, I just want to talk about AI and what it can do to the fashion industry in general. I think that fashion e-commerce is one of the most cumbersome customer experiences that exists. You are searching through pages and pages and pages of content to find the items that you like and no one likes doing this. And so, first of all, as an industry that still is selling physical products, AI is going to be — fashion is going to be a major beneficiary as an industry. Now, why is Rent the Runway like uniquely positioned here? Rent the Runway is different than traditional fashion in two ways. Number one is she’s using us all the time. So, making the experience much easier for her is even more important for us to do than a retailer that you’re going to once or twice a year where you’ll slog through the experience of the customer and kind of put up with it.

At Rent the Runway, if we can make this a seamless experience because we’re a utility, it will be appreciated even more. And second, because of how frequently she uses us, we have real-time information on what she’s doing tomorrow, on how she liked or disliked the items she received yesterday, on fit, on how exactly she wants to dress this weekend. And therefore, the data set that we have, we think is highly unique in terms of how we could power against AI. Now, if we are utilizing AI appropriately over the next few years, there — I see no reason why someone even has to come to our website. We talked about the fact that she’s already texting one-on-one with someone from Concierge, that’s really today about her onboarding experience. We talked about a beta launching over the next few weeks around AI search, which would be fundamentally about new ways that you could discover product on the site.

The more medium- to long-term vision is really the marriage of these two things that there can be through any modality, however you want to communicate to Rent the Runway, a way for you to constantly access a stylist that can help you with everything from picking out new inventory to you, to solving problems, to answering questions, and you can do it asynchronously when it makes sense for you on your own time. So, we’re really excited about the progress that we’ve made towards this beta that will go live over the next few weeks. It’s really interesting, because I think that across all fashion sites, all over the world, the way that people are searching for product is fairly vanilla, it’s fairly functional, right? You can go to a site and search for a T-shirt, you can go to a site and search for a black-tie gown, the fact that we’re going to be able to enable our customers to search how they actually want to use this closet in the cloud.

To search for items to wear to my beach bonfire this weekend, that is a completely different way to search, and I think that it really brings out the value proposition of what a closet in the cloud is all about. So, we’re really excited by that.

Andrew Boone: Thank you.

Operator: Thank you. Our next question comes from Ike Boruchow with Wells Fargo. Please proceed with your question.

Unidentified Analyst: Hi. Good evening, everyone. This is Kate on for Ike. Congratulations on the improvements in [indiscernible] in Q1. I guess just first, Jen, we’re now three months post the extra items announcement. You guys obviously had a lot of initiatives in place to improve the customer experience. I am curious with this latest cohort. If you can share any more color or numbers behind what you are seeing from a retention basis out of that tranche of consumers? And then, Sid, you noted your confidence in the active subs accelerating into the back half. Just from a seasonality perspective, just looking back the last few years, you guys have tended to lose active subs quarter-over-quarter in Q4. Just anything we should consider between 3Q and 4Q, especially as you’re more confident behind some of these initiatives around subscriber growth? Thank you.

Jennifer Hyman: Yes. So, to address the first part of the question, through Q1, we saw better churn, better rejoin rates and better conversion rates. And as we get further away from the launch, it’s harder to say what’s related to five-item versus other experience improvements that we’re making across the board, but we feel really great about what we saw in Q1.

Sid Thacker: Yes. And in terms of active subscribe, look, you got 100% right. Last year, we did see a decline in Q4. I mean, if I look at the pacing of product improvements and the inventory build that we have this year, I feel very optimistic that the entirety of the second half is going to be positively affected by that, right? So, I’m not going to sit there and guide necessarily to what Q4 is going to look like relative to Q3, except to say that we’ve already provided confidents — a confident outlook in terms of plus-25% subscriber growth. So, we’ll leave it at that. So that’s what we expect to hit. And I think we feel, given the product improvements we have, very confident in that outlook.

Unidentified Analyst: Great. Thanks very much.

Operator: Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.

Eric Sheridan: Thanks so much for taking the question. I want to know if we could maybe just talk about the broader environment that you’re operating in generally. We’ve talked in the past about return to work, the return of big events, elements of possible rationalization of spend by the consumer and shift into a model like yours and away from a purchase model. Can you just give us a sense of where we can level set in terms of the thinking around the headwinds and tailwinds you face in the business as we go deeper into 2023 across those themes that we’ve talked about before and how those might impact elements of paused subscribers or net adds or purchasing behavior? Thanks.

Jennifer Hyman: Yes. So, first, we’re not seeing evidence based on our acquisition numbers that we were impacted by the macro environment in Q1. So, we’re confident that we know what we need to do with this business. The strategic pillars are in line with things that our customers care about. We made huge progress in Q1, and clearly, we’re reiterating our guidance for the year. So, some things that we are seeing that could be very positive for Rent the Runway is we’re seeing demand for workwear is continuing to increase and demand over-penetrates into workwear relative to active units on our site, very similar to pre-COVID for the first time since COVID has occurred. And so, we think that because of the macro environment as CEOs are calling their workforce back into offices and demanding more that they’re there, that this is a very positive tailwind for our business. And it feels great to see workwear back up to similar utilization than we saw pre-COVID.

Sid Thacker: And I think that — it’s helpful, I think when you go into — what about the macro? We’re, obviously, in an uncertain environment, and so why do we still feel good, right? And I think probably the biggest reason why we feel good are: number one, we’re addressing these problems that customers have told us they care about; and number two, we actually have data behind the impact of the decisions we’re making, right? So, for instance, we’re rolling out the concierge service as we speak. We see real-time data on how many people have signed up, what impacted that — improvements have on our customers. So, you’re seeing — now it’s just a question of how many customers can we get signed up? How long will that take? And really, it’s just a continuation of data that we’re already seeing, reflecting the improvements that we are making to that customer’s experience, right?

Take inventory, another very important factor this year. Once we actually optimize the breadth and depth and the actions we’re taking, we know what a customer is likely to feel in terms of what’s available to her when she visits the site. Now we also know based on historical data and evidence, how that customer is likely to react, how loyal is that customer going to be because she sees that item more available. It’s much more pleasurable and easier to interact with our site. So, again, these are all of these improvements. This is not something that we’re making an improvement, no idea how it’s going to play out. We actually have relatively concrete data. It’s really just a matter of executing properly and essentially reaping the benefits of the actions that we know our customer care about.

Jennifer Hyman: Yes. We just see this as a market that’s growing. We think that rental continues to offer tremendous financial value, whether you’re renting a-la-carte or you’re subscribing, and our goal is to focus on making our customer experience as positive as it can possibly be and to continuously improve it quarter-over-quarter in a market where there are more customers who are considering rental than ever before.

Eric Sheridan: Great. Thank you for the color.

Operator: Thank you. Our next question comes from Ashley Helgans with Jefferies. Please proceed with your question.

Ashley Helgans: Hey, thanks for taking our question. Anything you can tell us on the composition of subscriber growth trends? Are you activating more reserve users or seeing new subscribers coming to the platform? Thanks so much.

Sid Thacker: Yes. I mean, obviously, look, we’ve called out the weakness in the reserve business. We’ve talked about that, that is affecting performance this year. But — so what that implies is we’re clearly seeing activation across rejoiners, we’re clearly seeing activations across new customers. I mean, this goes back a little bit to two things that are going on, right? The first thing is, customers are embracing rental, right? So with that, you are seeing new customers sign up, and that’s a very positive trend in the business. And then, the second thing you’re seeing is really this impact of loyalty, right? I mean that’s been a pretty strong driver for Q1. And given all of the changes we’re making for the rest of the year should continue to be a pretty strong driver for the rest of the year, right?

So I think those are the two. It’s really a combination of certainly acquisitions and new customers given people embracing rental but also really strong retention that we had in Q1 and expected.

Ashley Helgans: Thanks.

Operator: Thank you. Our next question comes from Lauren Schenk with Morgan Stanley. Please proceed with your question.

Nathan Feather: Hey, this is Nathan Feather on for Lauren. Two quick ones for me. So, first, how is inventory utilization trending with the launch of the five-item plan? And do you feel you have the right mix of inventory or anywhere you see a material gap that you’re trying to fix? Thank you.

Jennifer Hyman: So, as expected, inventory utilization is higher because of the launch of five-item. We do feel that we’re seeing an opportunity in workwear. We’re actually increasing purchases in workwear this year, 50% versus last year. But utilization is in line with where we assumed it would be before five-item. We’re also seeing really nice utilization in weekend wear and accessories, and all of these areas were the areas that we really look to — where we deployed kind of our reorder dollars and access more styles.

Nathan Feather: Great. Thanks. And then, good to hear the [indiscernible] improving churn and rejoin rate. I guess, just thinking about the split between existing and new cohorts, was there any big divergence in trends between those two?

Sid Thacker: Look, I mean, ultimately, the way we think about our business is, retention is very, very important to us in terms of ensuring that the long-term growth of this business, right? You’ve got to remember, 80% of all our customers come to us organically and 60% of all our customers come to us because they heard about us from someone they know, right? I mean, fundamentally what everything — all our strategies at year two is to improve that customer’s experience so that they are delighted and they talk about us. And I think obviously, that has a very mathematical impact on growing subscribers this year. But over time, that feeds through, right? We will get our share of growth in organic acquisitions simply because our customers [bought in and tell others] (ph) they had a great experience. I mean, that is fundamentally the core to the experience. And the nice thing about loyalty and the initiative is that we’ve got a lot of data behind what we’re doing.

Nathan Feather: Great. Thank you.

Operator: Thank you. Our next question comes from Ross Sandler with Barclays. Please proceed with your question.

Ross Sandler: Hey, guys. How do we feel about where we are with the kind of super high demand in season, kind of SKU depth and availability? Is that, at this point, fully optimized and fully built out? Or — Sid you mentioned second half investments around that, but when do we think that will be in the right place to kind of match the size of the subscriber business with your inventory?

Jennifer Hyman: Yes, I think…

Ross Sandler: And then, kind of related to that, but the second part would be, how does AI kind of improve discovery of like hot items that may be aren’t being personalized to the user today and help like solve some of that availability issue? Thanks a lot.

Jennifer Hyman: Yes. So, I think customer is going to start to feel a major difference as it relates inventory availability starting in August, because we made a significant change in our depth strategy for the second half of the year. So that’s when she is going to feel that she is [getting more for heart] (ph), she is finding that more of the items are in stock for her and [indiscernible]. In terms of AI, you correctly pointed out that AI for us helps to even further leverage the [long tale] (ph). If you think about, what I mentioned, how cumbersome any e-commerce experience is, of just [passing] (ph) through many, many pages of result, and on Rent the Runway, there’s hundreds of pages per search result, it could be for you clicked [indiscernible] blazers, et cetera.

And so, to be able to actually have a query that’s related to something that’s going on in your life, like, “What to wear to the University of Michigan Tailgate this weekend?” Like, you’re going to see this [long tale] (ph) of styles that might have taken you many pages of looking at hundreds of hundreds of products otherwise. So I think that this can help in product discovery.

Operator: Thank you. Our next question comes from Ed Yruma with Piper Sandler. Please proceed with your question.

Ed Yruma: Hey, good afternoon, guys. Thanks for taking the questions. I guess first on reserves, just want to click down on that a little bit more. I know you guys are obviously facing some tough compares there. Has inventory been an issue there? I know it was through part of last year. And then, I guess just kind of stepping back and maybe as a follow on to the AI question. I guess, how do we think about the rate by which you can bring some of these innovations to the market? I know you indicated you’re going to have kind of a soft launch in a couple of weeks. But should we think about this as being kind of a couple of quarter phenomenon, or do you think you can implement on these AI search functions relatively quickly? Thank you.

Jennifer Hyman: So, in terms of AI, I think that whatever we do launch will be in beta and we’ll continue to iterate and improve it over time. I think AI is so new to everyone. And I think that what I’m excited about is how quickly we’ve been able to leverage our data here and create a product that we think is going to make a nice difference to product discovery, and we’ll just continue to make that better over time.

Sid Thacker: Yes. And on the reserve, I think, look, it’s a fascinating question, right? So, [as indicated] (ph) last quarter, we’ve been very focused on driving our subscription business. So, everything we did on marketing, on brand messaging, all reflecting that focus on subscription, particularly with the recent five-item launch in Q1, right? But having said that, we think internally see a real opportunity to grow our reserve business over time, and they’re not mutually exclusive business, right? So, we’re working on plans that involve both inventory and product that re-energizes offering and obviously, none of that is factored into the guidance and the expectations for this year, and we’ve just reflected a continuation of trends, but over time, we feel pretty optimistic about our ability to re-energize that business, have it continue to serve us quite [positively] (ph) actually.

Ed Yruma: Thank you.

Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Jennifer Hyman: Thanks so much for joining us today. I’m really excited about our plans to accelerate our path to profitability and the long runway for growth ahead. We look forward to continuing to update you on our progress on our Q2 2023 call in September. And thanks again for joining us.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.