COMPANY OVERVIEW
It’s Thanksgiving break and Jenn Hyman’s sister struts in wearing a jaw-dropping designer dress. The catch? It cost her a fortune and was pushing her into credit card debt! That moment sparked a lightbulb in Jenn’s mind. “Why buy when you can rent?”
Back at Harvard Business School, she shared this revelation with her friend Jenny, and the rest is history.
This is how Rent the Runway was born. A company that started a rental revolution, and changed the fashion industry in the United States. Rent the Runway provides online ready-to-wear and contemporary designer apparel services. It rents designer dresses, gowns, and accessories for women. The company was founded by Jennifer Y. Hyman and Jennifer Carter Fleiss in November 2008 and is headquartered in Brooklyn, New York.
Rent the Runway (NASDAQ: RENT) went public in October 2021. The shares opened for trading at $23 apiece, representing a 9% increase from Rent the Runway’s initial public offering price of $21.
BIG PICTURE
Rent the Runway is breaking down the barriers that have confined women’s fashion choices for far too long. With Rent the Runway, women can indulge in the luxury of wearing what they want, when they want, without the burden of ownership.
The apparel rental market in the United States witnessed remarkable growth over the years, with projections pointing towards a significant surge in value. In 2018, the market was valued at approximately USD 1 Billion, marking a substantial milestone in the industry’s evolution.
Value of rental apparel market in the US from 2012 to 2028 (in billion USD). (Source)
Fast forward to the forecast for 2028, it’s estimated that the US apparel rental market will reach a staggering value of around 4.4 billion US dollars by that time. This exponential growth speaks volumes about the increasing popularity and acceptance of clothing rental as a viable alternative to traditional retail and fast fashion.
Consumer preferences are changing by the minute but awareness around sustainability is also growing. Both coupled together are key factors fueling the expansion of the apparel rental market. As more individuals seek access to trendy and high-quality clothing without the commitment of ownership, the demand for rental services continues to rise.
COMPANY PROGRESS HIGHLIGHTS
Rent the Runway made its first big move when it decided to cold-email Diane von Furstenberg, a well-respected Belgian fashion designer. Can you imagine the nerve? But, it paid off. Diane not only agreed to meet them but also offered some invaluable advice and even good luck charms.
Then came November 2009, the big launch. With a small team and a lot of hustle, they got the Rent the Runway website up and running. And just like that, they were off to the races. But they didn’t stop there. Accessories, plus-size options, brick-and-mortar stores – they were on a roll. Each step was about making luxury fashion accessible to everyone, regardless of size or budget.
Looking at the demand, Rent the Runway launched monthly subscriptions. Suddenly, having a designer wardrobe was as easy as Netflix bingeing. But the pandemic stalled the momentum of these subscriptions, but Rent the Runway was determined to stage a comeback.
Rent the Runway completed its IPO in October 2021. Despite initial success, challenges arose as the stock market turned, leading to a significant decline of nearly 90% in its stock value. The company reported growth in active subscribers and revenue in fiscal 2022 but faced pressures due to its lack of profitability.
Once teetering on the edge as a penny stock, it pulled off a staggering feat in April 2024, skyrocketing its share price by a whopping 360%. What caused this remarkable turnaround? Artificial intelligence.
Rent the Runway is focused on evolving navigation across the platform. (Source)
A 1-for-20 reverse stock split saved Rent the Runway from the brink of delisting, but it was the mention of AI during an earnings call that truly sparked investor enthusiasm.
According to the co-founder, Jennifer Y. Hyman, AI is the game-changer for consumer-facing businesses. And Rent the Runway is betting big on AI to propel its resurgence. Like many other fashion brands, Rent the Runway is leveraging AI to redefine the customer experience. No longer are users confined to searching for generic terms like “A-line dress.” Instead, they can explore aesthetics like “Miami vibes,” thanks to AI-powered search capabilities.
But Rent the Runway’s AI ambitions don’t stop there. With the recent appointment of Natalie McGrath as CMO, the company is doubling down on marketing efforts after years of playing it safe.
In a world where innovation is king, Rent the Runway’s remarkable comeback shows that even the most troubled businesses can turn around and end up giving returns that multi-million dollar companies might never give.
Startups like Rent the Runway exemplify the ability to make bold leaps from loss to profitability, showcasing resilience and adaptability that is often characteristic of smaller, more agile enterprises. By capitalising on such turnarounds, these companies can generate significant profits, providing them with the resources to reinvest in new opportunities and fuel rapid growth.
This dynamic stands in stark contrast to larger, more established companies that may have already reached their peak. Unlike these giants, startups have the flexibility to pivot, innovate, and explore new avenues for expansion, propelling them forward at a pace that their larger counterparts may struggle to match.
WHY WE LIKE RENT THE RUNWAY
COMPANY’S FUNDAMENTALS
Rent the Runway (RENT) reported impressive financial results for the fiscal quarter and fiscal year 2023.
RENT has improved its financials over the past few years (Source)
Despite a net loss of $24.8 million in Q4 2023, the company exceeded revenue and adjusted EBITDA guidance, with revenue up 91% year-over-year.
For the full fiscal year 2023, Rent the Runway achieved revenue growth of 0.6% year-over-year, reaching $298.2 million. The company reported a net loss of $113.2 million, an improvement from $138.7 million in fiscal year 2022, and a significant increase in adjusted EBITDA to $26.9 million with an adjusted EBITDA margin of 9.0%.
Chief Financial Officer Sid Thacker labelled fiscal 2024 as a pivotal year, anticipating the company’s transition to a free cash flow breakeven status.
RENT’s primary focus in FY24 is to FCF breakeven. (Source)
Looking ahead, Rent the Runway anticipates revenue growth for the current fiscal year to range between 1% and 6%, with an adjusted EBITDA margin projected at 15% to 16%. This positive forecast, coupled with improvements in customer retention and satisfaction metrics such as the net promoter score (NPS), propelled investor confidence, driving the stock to its highest level since September.
Analysts’ Views
Analysts that track the stock also seem positive on the stock’s potential with 3 out of 4 recommending buying the stock at current levels. The highest target in the next 12 months assigned for the stock by the analysts is 28.
However, if the company manages its execution well, then the stock can start trading into three figures for investors with a view of 2-3 years thus offering a potential of 10-bagger returns from the current levels. The highlighted levels are Fibonacci Retracement levels for target assigning using technical studies.
TECHNICALLY SPEAKING
Just like the company’s fundamentals, the stock on charts also seems poised to lead higher as its turnaround narrative gets stronger and agreeable to investors.
Since its public float, the stock has been on a downward journey acting as a poster child of post-Covid bull run wealth destroyer. Its deep dive from all-time highs means such massive underperformance of the stock will require sustained buying en masse from deep-pocketed investors to keep propelling the stock higher.
It is worthwhile to note that there are signs emerging for accumulation of the stock at the bottom levels but chart followers would like to see more strength before initiating technical buying.
The stock saw a commendable 300% rise in a week after the company’s commentary on leveraging AI to fuel its growth. The up move supported by all-time high volumes gives us high conviction about the stock’s bottom being printed on the chart and bargain hunters can consider adding stock to their growth portfolio.
FUTURE PLANS
Rent the Runway is strategically enhancing its marketing efforts to drive customer engagement and conversion. This includes developing mid-funnel consideration marketing plans that emphasize customer value propositions and encourage incremental conversions. Additionally, the company is expanding its presence across new marketing channels, prioritizing a social-first approach to reach and resonate with its audience effectively.
Furthermore, Rent the Runway is revamping its lifecycle engine and customer marketing approach to optimize customer retention and loyalty. This involves tailoring marketing strategies to different stages of the customer journey and fostering long-term relationships with its clientele.
Rent the Runway aims to achieve revenue growth ranging between 1% to 6% compared to the fiscal year 2023. Additionally, Rent the Runway targets an adjusted EBITDA margin of 15% to 16%, with the ultimate goal of achieving free cash flow breakeven on a full-year basis.
The company is also expanding its reach to new cities to broaden access to its rental services.
GENERAL RECOMMENDATION
Considering the economic tailwinds due to the inevitably low-interest environment alongside the company’s bet on leveraging AI, we are adding RENT into our high-conviction call and offer a general recommendation to accumulate the stock at current levels with a view of 24-36 months. We are expecting the stock to generate multifold returns for its patient investors.