Rent the Runway S-1
It needs to grow.. a lot. Can it?
1/ TLDR @renttherunway S-1. I try to look through rose colored glasses in analyzing the path to ubiquity for a brand. In this case, it’s hard to see a strong sustainable future unless A LOT goes right
2/ Let’s start with brand - starting with a formal wear rental option, @renttherunway has expanded into an unlimited subscription to expand your closet. Similar to @therealreal @thredup, taps into the consumer desire to shift from ownership to access; to reuse vs buy new.
3/ COVID hit the business hard. Revenue shrunk from $256.9 million in 2019 to $157.5 million in 2020. Revenue fell again YoY in 1H 2021, from $88.5M to $80.2M.
4/ Some green shoots after COVID. Ending subscribers grew 80% from 54,228 at the end of 1H 2020 to 97,614 at the end of 1H 2021
5/ @therealreal is sub-scale and if you add cash flow from operating activities and investing activities, burn is about $100M in 2019 and ~$185M in 2020. Before we assess future potential, let’s take a look at the underlying business, namely how much revenue do they need to even get to breakeven.
6/ Contribution margin was ~30% in 1H 2021. Marketing is 9.2% of sales. So assume 20% of purchases convert into cash
7/ But they need to spend money on purchasing fixed assets, which I understand to be gigantic custom dry cleaning equipment - asset purchases were 18.6% of sales in 2019 and 15% in 2020. Let’s assume they get a lot more efficient and this can get to 7% over time
8/ So after all variable cost (and I consider the dry cleaning machines to be variable as there are no efficiencies of scale), 13% of purchases convert into cash
9/ The company has high G&A and tech costs, which are fixed and a combined $120M a year
10/ So you need $923M in revenue to get to breakeven (almost 4x today!) assuming (1) marketing & fulfillment are steady as a % of sales; (2) you don’t add a dollar to G&A or tech as you scale; and (3) you can reduce asset purchases as a % of sales by half
11/ Scale cures all woes, so a high fixed cost business like this one needs to have the potential to deliver well over a billion in revenue to be compelling. Let’s look at its marketing potential
12/ CAC has been consistently below $55, with payback of < 3 months at a contribution margin of 30%. But they need to increase new subscribers by many multiples of where they are today, and I have big questions on the actual addressable market
13/ Despite starting way back in 2008, @renttherunway has very little social media presence. On millennial friendly Instagram, @renttherunway has 384K followers v. 836k for stitch fix, 510K for therealreal, 2.1M for Olaplex, 21.9M for Shein, 641K for thredup
14/ Gen Z focused TikTok is even more abysmal for @renttherunway. There are 11.2M views of #renttherunway v 31M for #Stitchfix, 28.6M for TheRealReal, 388M for #Olaplex, 4.3B for #shein, 6.3M for thredup
15/ The macro feels hard - a game changer for RTR was their subscription closet, which was largely for workwear for millennials. Work wear had been forever changed by covid and imho unlikely to go back to the formality pre 2020
16/ Millennials have also gotten older and can more likely purchase full price now that they’re well into their 30s. Open question on how many millennials actually want an unlimited closet
17/ The other piece here is Gen Z, which shops with depop and thrift in mind. Buying a $300 dress, isn’t actually $300, it’s $150 because they wear it once or twice and sell it on depop or the realreal for $150
18/ So who is the audience for @renttherunway, how will they efficiently grow their revenue 4x+ in a very different post-COVID world.
19/ The value proposition feels like it certainly works on certain use cases (renting formalwear or for some percent of women who want an unlimited closet). But, net net, it feels like this company needs to reinvent itself to reach scale. This is an existential issue best dealt with outside the scrutiny of the public markets