00:04 Good afternoon and welcome to Rent the Runway's Third Quarter twenty twenty one Earnings Conference Call. Today's call is being recorded. [Operator Instructions] We have allocated one hour for prepared remarks and Q&A. 00:23 At this time, I'd like to turn the conference over to Cara Schembri, General Counsel at Rent the Runway. Thank you. You may begin.

00:31 Good afternoon, everyone and thanks for joining us to discuss Rent the Runway's third quarter twenty twenty one results. 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 and guidance, market opportunities and our growth. 00:48 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 final prospectus dated October twenty six, in the Form 10-Q that will be filed in the next few days. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. 01:16 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 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. 01:40 Joining me on the call today is our Co-Founder, Chair and CEO, Jennifer Hyman; and our CFO, Scarlett O'Sullivan. Following our prepared remarks, we'll open the call for your questions. 01:50 And with that, I'll turn the call over to Jenn.

1:56 Thanks, Cara. Good afternoon, everyone. Thank you for joining Rent the Runway's third quarter twenty twenty one earnings call. I'm Jenn Hyman, Co-Founder, Chair and CEO. With our IPO on October twenty seven, we raised three hundred fifty seven million dollars in capital and we believe we have ample cash to invest in our priorities for growth, namely, growing subscribers and deepening our competitive moats as we innovate our technology, data and operating platform. We also used a portion of our IPO proceeds to pay-off approximately one-third of our debt. 02:35 In the third quarter of twenty twenty one, we achieved strong active subscriber growth up seventy eight percent year-over-year, revenue growth up sixty six percent year-over-year and strong margins. At the end of Q3, active subscribers were back at eighty seven percent and total subscribers were back at one hundred one percent of the level at the end of fiscal nineteen. 03:01 Moreover, gross margins in Q3 were twenty points higher than in the same period of fiscal twenty nineteen, demonstrating a significant improvement in the profitability of the business. We believe that our metrics this quarter are a good indication of the continued reacceleration of our business. We think that rapid consumer behavior shifts towards online commerce, access models and sustainability, along with our compelling value proposition will be macro drivers of our growth. Because many of you might be new to the Rent the Runway story, I'd love to share our mission, strategy and key competitive advantages. 03:41 Thirteen years ago, I watched my sisters going to Jack, buying a dress she couldn't afford, that she knew she'd only wear once. The feeling of having a closet filled with clothes, but nothing to wear is ubiquitous. Driven by the consumer desire for variety and newness, closets…

18:01 Thanks, Jenn and thanks again everyone for joining us. I will provide an overview of our third quarter results for fiscal twenty twenty one and then follow with guidance for the fourth quarter and the full year twenty twenty one. 18:13 Before I get into the numbers, let me remind everyone of our roadmap for how we plan to drive shareholder value. Subscriber growth and engagement will drive revenue growth. The combination of strong unit economics, improving fulfillment efficiencies and operating leverage from increased scale, is expected to drive improving margins and profitability. Margin increases combined with increasing capital efficiency in our product acquisition will drive improving free cash flow. 18:43 Let's start with subscribers. We had a strong Q3 and ended the quarter with a one hundred sixteen point eight thousand active subscribers, up seventy eight percent year-over-year and up twenty percent versus the end of Q2. We had a one hundred fifty point one thousand total subscribers at the end of Q3, representing a one hundred and one percent of total subscribers at the end of fiscal twenty nineteen. 19:08 We continue to see a high proportion of our subscribers joining at the one hundred and thirty five dollars eight-unit program. Historically, approximately fifty percent of acquired subs (ph) pro forma reserve or subscription customers. And this quarter this percentage was sixty two percent, showing our success in reactivating former customers and the stickiness of our subscription product. 19:31 As is typical in the third quarter, we saw strong seasonal acquisition, which was higher than total acquisition in Q3 of twenty nineteen. We saw strengths in all channels and were especially strong at reactivating churn subscribers from fiscal twenty nineteen cohorts. Our investments in our content marketing, media and our referral product have bolstered organic acquisition, which…

33:22 This is the beginning of a new chapter for Rent the Runway. Thank you to our team members past and present for building a pioneering company that is poised to capture a market that's inevitable, a more sustainable, affordable, asset-light and joyful way to get dressed. 33:38 Thank you. We're looking forward to hearing your questions.

33:45 At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Sheridan with Goldman Sachs. You may proceed with your question.

34:21 Thanks so much for taking the question and thanks for all the detail on the conference call. Maybe if we could take a step back and think about the drivers of growth going forward, as we move out of twenty twenty one and into twenty twenty two. I want to understand how you're thinking about the levers that are within your control, like allocating marketing dollars and improving funnel conversion versus the things that maybe are outside of your control, like return to work or return of large events. And how we should be thinking about those variables as we look out over the next sort of twelve to twenty four months, in terms of thinking through subscriber growth? Thanks so much. Appreciate it.

34:59 Yeah. Thanks, Eric. So, there is basically three main ways we grow our subscribers and we saw strength across all during the quarter. The first way is reengaging our funnel of former customers and partners. And as we just discussed, we've had four hundred thousand customers over the past twelve months and this funnel is growing and we expect it will continue to grow with events coming back and the macro environment normalizing. We were particularly strong in Q3 at reactivating churn subscribers from our fiscal twenty nineteen cohorts. 35:36 The second way we grow is organic acquisition. A large majority of our customers come to us organically and not by accident. So, we've made investments into content, media and community to ensure organic growth rate remains strong and we continue to see strong organic acquisition. In fact, in Q3, organic acquisition was roughly flat with Q3 of twenty nineteen. 36:00 And then the third way we grow is by paid acquisition. So, we turned back on our marketing engine after the pause we took in twenty twenty and we continue to see that the marketing investments drove productive results in line with twenty nineteen. We also successfully diversified our channel mix and saw early success with OTT and a brand campaign that drove a ten percent traffic lift to the site. So, we intend to make both of these part of our mix going forward. So, these three channels are largely proven strategies for us.

36:37 Thanks so much.

36:40 Our next question comes from the line of Lauren Schenk with Morgan Stanley. You may proceed with your question.

36:48 Hey. This is Nathan Feather on for Lauren. Just on the at-home pickup offering, can you all contextualize the difference in margin between that and other inbound methods? And then with customer adoption already above one-third, how high do you think that could go? And then lastly, how many markets do you believe you have the subscriber density to grow on the profit here? Thank you.

37:11 Thanks, Nathan. So, from a cost standpoint, we've found that the at-home pick up is actually much more cost effective for us. This is why we're really pleased with the early results that we've seen over this past quarter. We're already in five markets as you heard us talk about and we do plan on increasing that. We already have a higher number that we're at today and we plan to do even more of that, especially as a way to combat some of these increases that we're seeing in the industry from a transportation standpoint. 37:37 Interestingly, the markets that we launched at-home pick up in, one of those markets being Los Angeles, are not dense markets. And we've seen the most success in markets that are not dense, because at-home pickup becomes even more convenient for you if you would have otherwise had to drive a few minutes to get to a drop-box or a UPS return point. So, we see application for at-home pick up in, not only many cities around the country, but also expanding into suburban regions as well.

38:12 Great. Thank you.

38:15 Our next question comes from the line of Ross Sandler with Barclays. You may proceed with your question.

38:24 Hey, everybody. It's Ross on for Ross. Just one question, Jenn, high level on Exclusive Designs, you said there twenty two percent of items acquired right now. How big can that figure become long term and is there like a natural limit in terms of the size of how big Exclusives could be for you guys? And then the second question more of a nit-picky near term one for Scarlett, the 4Q sub guidance 122K active assumes like a pretty small five thousand net adds. Pretty well below the last three quarter average, so is there some conservatism in that or is there like some catch-up factor that's happening these last couple of quarters that you don't have in the fourth quarter? We know you're running some holiday promos, so just any color on that active sub guide for 4Q. Thanks a lot.

39:25 Thanks. Thanks, Ross. Why don't I start with the second part of the question first, so in terms of our guidance, our seasonality patterns as we said are back to pre-COVID levels and we've typically seen that subscriber acquisition is higher in Q3 versus Q4. In Q4, the growth of both of our reserve and our subscription business historically centers around customers having a lot to do, and their socialize, gathering for large holiday events, traveling, going to shows and big parties. So, we obviously are still showing growth for Q4, but likely not as much as we would have seen if more of these large-scale events were happening which are more typical in this time frame. So, we're excited to guide to a sixty seven percent quarter-over-quarter revenue growth for Q4 and we do expect, as Jenn said, that there will likely be a backlog of social events into twenty twenty two and twenty twenty three. 40:19 And then in terms of the guidance around the Exclusive Designs, we are estimating to be at twenty two percent as you just heard for this full year and we do believe, as Jenn just mentioned, that we are on a good path to get to a third -- a third across our three acquisition channels. We obviously have quite a lot of visibility into our spring twenty two orders already since we've already placed a number of them. So, we know where our expectations are going to be for twenty two, both in terms of overall mix as well as our Exclusive Design partners. So, we'll share more on that front in our Q4 earnings call.

40:58 And in terms of how big this could be over time, of course, over the long term, if we see continued success in Exclusive Design, it could be far larger, because this is something that's great for our customers, great for our brands and great for us.

41:16 Thank you.

41:20 Our next question comes from the line of Michael Binetti with Credit Suisse. Please go ahead. Your line is open.

41:26 Hey, guys. Thanks for all the detail and taking our question here. Jenn, I just wanted -- I want to hear maybe a little bit on -- I know, Eric -- I think Eric asked about this a little bit, but plans for marketing and the reopen in the first half of twenty twenty two. I know, we talked through the IPO about having a big installed base of two point five million customers in your full database that you have versus the just over one hundred thousand in the subscriber program. It seems like a very -- you mentioned a few comments that it was -- you've had a lot of luck taking those customers that know you and converting them into the subscriptions. I'm curious how you -- how the marketing to them will look in the first half as we move into the reopening? 42:07 And then I was also curious on New York being one of the markets you called out, it not being quite back at ninety percent of twenty nineteen levels yet. You don't look -- it just looks like that market is moving back to work and social pretty well. I wonder if there is any push back that you're seeing that's specific in that market, perhaps legacy, unlimited subscribers, any push back from them as you pivoted to monthly plans, a fixed item monthly plan in the post-COVID world. Thanks.

42:37 Yeah. So first for New York, we had been seeing week-over-week growth in the market and we feel good about it accelerating back to pre-COVID levels. Certainly, and just some external data right now in New York and in San Francisco on any given week day, only twenty five percent and twenty eight percent of people are in the office on average. So, they are certainly lagging behind in return to office which probably also indicate their comfort level with social interactions as well. So, we do think that we'll benefit from just kind of backlog of events and return to office into twenty twenty two and into twenty twenty three. 43:26 In terms of how we think about specific near-term growth, of course, there is this kind of funnel of our recent customers. We have been very successful in the task at converting not just recent customers, but even customers from prior cohorts into being subscribers. One of the areas that we're going to be investing in, in twenty twenty two is just continued testing of our conversion funnel to get more of our customers to try subscription. We also have historically been focused on core digital marketing channels in the mid-to-bottom of funnel primarily social and Google SCM. And we began diversifying a few years ago into new channels like brand ambassadors and affiliate marketing, which have all been efficient for us. 44:11 And then as we've ramped back our efforts this year, we further diversified our channel mix into YouTube, TikTok, OTT, while also adding top of funnel spend and we feel very good about the results that we're seeing. So, I think the combination of all that gives us a lot of confidence in our guidance.

44:30 That's great. Thanks. Sorry.

44:33 Sorry, the one last thing I would say is that, our loyalty across the Board is higher for our fixed swap programs than we saw with our previous unlimited program. So that's not playing a part at all in the macro environment.

44:49 Okay. Great. Thanks so much, Jenn.

44:53 Our next question comes from the line of Erinn Murphy with Piper Sandler. Please go ahead. Your line is open.

45:00 Great. Thanks. Good afternoon. A couple of questions for me. First, maybe just on the guidance for twenty twenty one, you guided with a very tight band of just five hundred thousand dollars between the top and bottom end. Can you just share a little bit more about your level of visibility and just the predictability that you have in the model, even with seven to eight weeks left in the quarter? And then if there was some upside, do you see it coming more from the top-line or the adjusted EBITDA, just given some of your comments around the fourth quarter and kind of the lack of social engagement or some of the holiday parties this quarter. Thanks so much.

45:40 Thanks, Erinn. So, in terms of the guidance, we do have pretty visibility, obviously we just also went through the Black Friday, Cyber Monday and [indiscernible] performed as we had expected it to, so we have good visibility into that, and that's baked into our numbers as well. I think the thing I would come back to is what I was saying, which is really more about these large events and that kind of hampering what we normally see in Q4 historically, more seasonally. Having said that, it’s been -- we're really excited about, we have good visibility into is the engagement of the subscribers, right. So, we're seeing that twenty four percent of our subscribers are adding at least another unit, which has been great from an ARPU standpoint and we're seeing that behavior continuing. So, we're really excited about the engagement of the subscribers.

46:34 Great. And then maybe just following up on that point, Scarlett, how should we think about the incremental flow-through of that twenty four percent attach rate that are kind of adding that extra item in their carts? Thanks so much.

46:48 Yeah. So, the way that you should think about that, is that typically when they're adding another item, it's going into an existing shipment and so from a gross margin standpoint, it's actually really good for us, right. It allows us to be able to derive more revenue over a base of cost that's already kind of predefined in the shipment that she is already getting.

47:07 Excellent. Thank you so much.

47:11 Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open. You may proceed with your question.

47:19 Hey. Thank you. Hey, Jenn and Scarlett and Janine, congrats on the first quarter, out of the gate. I guess, Scarlett on fulfillment margin, I mean, I wanted to kind of go through this a little bit, you guys have done just a phenomenal job over the last two years. I think fifteen, twenty points of scale, just from the shift in the offering and some of the strategic changes you guys made, so that's great. I guess two questions is, one, now you're having some year-over-year pressure because of inflation, which we all understand in the third quarter, should we expect that inflation or that cost pressure to build in the fourth quarter? What kind of fulfillment margin are we thinking there? And then what are the drivers now that we've seen the benefits from that big strategic shift a year or two ago? What are the drivers now to get fulfillment margins seventy percent and above over the medium term? Thanks.

48:06 Yeah. So maybe I'll start. I'll kick it off in terms of some of the pressures on the fulfillment margins. The two pressures are transportation and the labor, wage rate increases, which we just talked about a moment ago. So, we had anticipated both of those macro trends and we did see that start to show up in our numbers, as I mentioned, from a wage rate standpoint, this is something that we have been increasing over the last couple of years and we continue to do that this year. So, you should think about the fact that, what we're guiding to for EBITDA for this quarter, reflects some of those increases and some of those headwinds. 48:42 On the labor side, part of the reason that we are -- we have already begun doing a lot of process improvements in the warehouse, is really be up because we're looking for more efficiencies, right. So that's something, as you know, that we started to do twelve months ago. We're going to be doing even more of that, in fact probably bringing forward some of our plans to do a bit more inbound automation in our warehouse as a way to combat some of those wage pressures. 49:07 And then maybe, I'll turn it over to Jenn to talk a little bit about inflation and what we're seeing there.

49:11 Yeah. So, we actually believe that the rising prices and inflation in the wider apparel space create a big competitive advantage for Rent the Runway, because it makes our financial proposition even more compelling and the prospect of buying something you're only going to wear a few times even more non-sensical. So, we believe, number one, we have pricing power given the significant value that the customer receives, she is receiving twenty times the GMV value for her spend and there is no other place she can get that kind of -- this kind of value for her money. And while we don't have plans at this point to increase our program prices, we'll continue to evaluate that over time. And because we're not increasing pricing, again we believe this makes us very competitive in the market now to gain share.

50:07 Great. And I guess just a quick follow-up. Because of all the pressures that you guys are calling out and again very macro, understood, should we expect fulfillment margins to -- do you have an ability to take them up year-over-year when we get into twenty two, so we can expect more pressure, just kind of curious, just the direction on the margin itself.

50:28 Yeah. So over time, we do think that we have an ability to continue to increase fulfillment margins. In the short-term clearly macro trends are here and we are, working on transportation strategies and as well some of the transfer -- some of the labor strategies in the warehouse as well to combat some of that. You can see that we've been successful this quarter in combating some of those macro trends and we'll continue to do that and then obviously from a revenue standpoint, which also impacts some of the margin, the fact that ARPU is higher is beneficial to the business as well.

51:03 Great. Thanks.

51:06 Our next question comes from the line of Andrew Boone with JMP Securities. Please go ahead. Your line is open.

51:14 Hi. Good afternoon and thanks for taking the question. Two please for me. First, can you talk about your learnings from the brand marketing campaigns? And then how do we think about that continuing or perhaps growing into twenty twenty two? And then secondly, as we think about kind of the assortment and selection being fifty percent cash warp, how do you guys think about the assortment for twenty twenty two in a reopening world, right? How do you align yourself with what seemingly could be a very varied assortment of what women could want in twenty twenty two, just given the trajectory of Omnicom and COVID more broadly? Thank you.

51:52 So in terms of how we align our assortment, because of how much data we're getting from our customers real-time, we're able to use that to affect what merchandise we're bringing on to our platform. And because we now have these capital efficient channels with which to increase our selection and our assortment, it gives us a lot of ability to react very quickly to the market. So as an example, in Q3, we saw that the customer wanted was favoring very bold styles, very daring styles, she was going out more, she wanted items that were more appropriate for nights out and parties. And we were able to very quickly go to our seven hundred and eighty brand partners and secure the inventory to match her demand patterns. 52:46 And then on our brand campaign, it was one of the first brand campaigns we've run in many years. It was not only successful in driving additional traffic to the site, ten percent incremental traffic, but it also upped overall brand awareness and from that campaign, we are evaluating and always on top of funnel brand spend, that we would add into our marketing mix.

53:20 And then in terms of how we think about marketing overall, Andrew, as we've mentioned, generally speaking, we do intend to see continued strong organic acquisition contributing to growth of subscribers and we expect to more or less stay close to that ten percent of marketing as a percentage of revenue. Having said that, like you just saw us do in Q3, we will look for opportunities to be able to lean in from time to time. And I would also say that ten percent as I mentioned, is really more of an annual number as you just think about it, there will be some quarterly fluctuations. But we will opportunistically potentially spend a bit more if it makes sense, obviously continuing to be very disciplined about that.

54:07 Great. Thank you so much.

54:11 Our next question comes from the line of Edward Yruma with KeyBanc. You may proceed with your question.

54:18 Hi. Thanks so much for taking the question. I guess first back to this casual point, for those consumers that were loyal customers during COVID and really leaned into casual, are you seeing as she adds more kind of external use cases, going out dresses that she is kind of trading up in terms of item count or is it just her mix within that's changing? And then as a follow-up, from a modeling perspective, the debt repayment, what specific tranche of debt did it come from and how should we think about interest expense going forward? Thank you.

54:49 We are certainly seeing our customers trade-up in terms of item count. We've been very pleased with the engagement of our subscribers and we believe that as macro condition improved, it's not that, that she is going to stop renting casual, it's just she's going to add back many of those more special occasion and night out and work-related items that she had rented from us in the past. Now interestingly, we've seen a major difference between twenty twenty one and twenty twenty in terms of how she uses Rent the Runway to dress for work. As you recall, where prior to the pandemic, was a major reason why she used the subscription and in twenty twenty, the work use case basically minimized. 55:37 In twenty twenty one, she's back to using us for work twenty five percent of the time even though she is using us within the full context of Zoom. So, she is still renting. She wants to look great and present herself well, even in the context of working from home. So, I think that this is even more a symbol of how she is adjusting to this hybrid world. She continues to work from home, she wants to look good, she is still renting work wear. She is renting actually, since twenty five percent of our inventory that's being rented in Q3 was special occasion inventory, even though she has fewer occasions. She is amping-up smaller moments. She is using that special occasion inventory to go out to dinner, to meet friends and to kind of amp-up those casual moments in her life.

56:23 I'd add, in terms of your question related to the debt and we were really happy that we were able to raise three hundred and fifty seven million dollars in the IPO, which allowed us to pay down more debt than we had originally anticipated and obviously to raise more money for the business. So, in terms of what we paid down, we paid down all of the first-lien debt, which was Ares, so that was fully paid out. And then we paid out sixty million dollars of the principal on the remaining debt, that was the Temasek debt which was thirty million dollars higher than what we had originally indicated. So, in terms of where we are now, we're really focused on running the business. We're optimizing to grow and capture market share and we're going to continue to evaluate on an ongoing basis, how we can improve further our debt position as well as our churn. In terms of what you should be modeling now for your model from an interest rate standpoint, the remaining debt is at twelve percent and that is two components, seven percent of that is cash and five percent is given in kind and non-cash.

57:26 Thank you.

57:30 Our next question comes from the line of Dana Telsey with The Telsey Advisory Group. You may proceed with your question.

57:35 Thank you. Good afternoon, everyone. As you talk about subscriber engagement and the twenty four percent of subscribers adding one or more paid additional items, what are they adding? How are you thinking about attachment rates going forward and where that's coming from and going to? And then just secondly, on Omnicom which is now out here a couple of weeks or so, how does it seem different or the same as what you experienced when Delta was first announced. Is there any learnings from Delta that would be informative for this Omicron? Thank you.

58:08 Hi, Dana. I’m so glad you asked that. As you know, we've really been through this story of variants before with Delta and we were really pleased with our growth in Q2 and Q3 as the Delta variant spread and peaked throughout the U.S. We have not seen any impact of Omicron, but this is within the context of, because COVID is present overall, we are seeing fewer large scale events, fewer just large scale social interactions than we typically would in Q4. So our business is continuing to grow really nicely. But we believe that the more COVID dissipates, the higher the slope of growth may be. So, we feel really great about the fact that the resiliency of the business this year in an entirely COVID environment, active subs are up one hundred and thirteen percent year-to-date and I think that that's proof of really this diversification that we've intentionally had on how the subscriber uses Rent the Runway. And so, she is using us for this hybrid world and we think that any normalization is just upside for us.

59:33 And Dana, from an ARPU standpoint, so there's not really a call out in terms of the additional items being different than what she has in her base subscription. She is just really using the add-on as a way to have an ability to wear us more days for the months. So, nothing different than kind of her main basket and for us it's really about engagement and the fact that we're seeing her spend more with us and it's making her even more loyal as she becomes an even bigger daily utility, that we've become an even bigger daily utility in her life. 60:05 And then in terms of Q4, we expect ARPU to be pretty similar. We don't anticipate any significant changes relative to Q3. Jenn, anything else you would add on the add-ons?

60:15 I would just say that this is no -- that add-ons are no different than the normal basket. However, the normal basket has actually changed in twenty twenty one. She is favoring bolder, more colorful, more printed, more fashion-forward styles across the Board. And that is great for our business, because our business is a fantastic platform to have more fun with fashion, to experiment with fashion without the inevitable buyer's remorse of buying something that you would only wear once or twice. So this -- the trends that we're seeing in the overall apparel market towards new kinds of bottoms that people are wearing and new categories of clothing and full leather and lorex and metallics, like that is I think a fantastic tailwind for our business and really helps us drive share, especially because the selection that we have right now has never been better. We have really faced no supply chain issues and given our unique business model where we monetize our inventory over multiple years, that puts us at an advantage versus other retailers who lack selection right now and the selection they do have, they're raising prices on it.

61:35 Thank you.

61:40 At this time, we have reached the end of the question-and-answer session. And this also concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a great day.