Greetings. Welcome to the Rent the Runway First Quarter 2022 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host Janine Stichter, Vice President of Investor Relations. You may begin.

Good afternoon, everyone and thanks for joining us to discuss Rent the Runway's first quarter 2022 results. Before we begin, we'd like to remind you that this call will include forward-looking statements. These statements include our future expectations regarding our financial results and guidance, 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 undertake no obligation to revise or update any forward-looking statements or information except as required by law. During this call, we'll 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 our SEC filings. And with that, I'll turn it over to Jenn.

Hi, everyone. Thanks for joining us today. We are very proud of our strong Q1 performance which showcases our accelerated business momentum, robust subscriber engagement and improved year-over-year profitability. We exceeded our Q1 guidance across all key metrics both on the top and bottom line. We grew revenue 100% year-over-year and grew gross margin by 9 points year-over-year. Adjusted EBITDA margin came in five points above Q1 2021. We finished Q1 with 135,000 ending active subscribers, hitting a new record high for quarterly ending active subscribers. Additionally, our subscribers are increasingly more profitable for three key reasons. One, the margins of our new subscription plans, whose rollout was completed last year in May 2021, are nearly double what they were in 2019. Two, subscribers are more loyal than pre-COVID. And three, they are highly engaged, evidenced by the rate at which they opt to pay for additional items in their subscriptions, meaning they rent many items from us for more use cases. In sum, we see continued evidence that the strategies we have in place are paying off and we are on track for a record 2022. We remain confident in achieving free cash flow profitability over the medium term with the cash we have on hand as we laid out in our Q4 earnings call as well as with our more near-term goal to cover our operating expenses over the next two to four quarters. In April, I laid out three key business strategies intended to drive top line and three intended to impact the bottom line in 2022. While these initiatives are just gearing up, I wanted to provide updates on our progress in Q1 and how they're impacting our financials. The first top line initiative is events. We believe the boom in events this year gives us…

[Operator Instructions] And our first question comes from the line of Lauren Schenk with Morgan Stanley.

I just want to ask a little bit more explicitly. I guess, given the better 1Q results and the better second quarter outlook, is the maintained full year guidance just assuming some conservatism given the more uncertain macro backdrop? And is it fair to say you're not embedding any potential upside from sort of a trade-down like benefit, if you will? And then just one on at-home pickup. I guess, how much of the transportation cost savings or margin benefit are you seeing from that? And then ultimately, what percentage of the subscription base do you ultimately think you can serve with at-home pickup long term? Scarlett O’Sullivan: Yes. Thanks, Lauren, for the question. Why don't I start with the guidance. So we just reported a strong quarter. We feel really good about the guidance that we're giving for Q2. And given the volatile macro environment and potential COVID impact for the rest of the year and it's really based on what we've seen in the last two years and also the fact that we're really early in the year, we think it's best to maintain our prior guidance for the full year. So that's really why we're keeping the guidance where it is. And then in terms of at-home pickup, Jenn, do you want to maybe answer that one around what our potential targets could be there?

I mean we continue to see both very high engagement with at-home pickup and stronger growth in markets in getting this activated than we had planned. It's going to be embedded into our app over the next few quarters. And again, this is a cheaper way for us to pick up the units from customers versus the customers kind of shipping them back via national carrier. So I think that it remains to be seen how big it can get but we are looking for this to get as big as possible for as many subscribers as possible to have access. We had given a goal that 50% of subscribers would have access to at-home pickup by the end of the year. We hope to be able to beat that. And for customers, this is just a much more convenient experience. Scarlett O’Sullivan: Yes. And I would say, we also just don't know yet what it will mean to have the experience in the app. But right now, we're hoping the customers are seeing the stickers on the bag and we've seen good pickup there but we're excited about the opportunity when we really build that into the app over the next few months.

And our next question comes from the line of Ike Boruchow with Wells Fargo.

I guess, Scarlett or Jenn, I'm kind of curious, you guys were founded effectively after the last recession. I feel like we're kind of willing a recession into existence the way you all talk about it. So how do you -- if we were to see that kind of an economic slowdown, can you kind of talk about -- I think, Scarlett, you alluded to this in your prepared remarks. But more specifically, what levers would you guys be able to pull? And then how much would it potentially throw off your path to profitability at a high level?

Thanks, Ike. So first, to date, our business continues to grow. Our outlook is positive and that's reflected in our guidance this quarter. But we're closely monitoring. So I want to remind you again that we just navigated two years of COVID impact, where we were significantly impacted by customers in the U.S. sheltering at home. And when people were sheltering at home wearing primarily their pajamas, they had less need for variety in their wardrobe and therefore, for a subscription to fashion. So during that period of time, we reacted incredibly quickly. We made lots of tough decisions to cut costs across every area of our business. And we think that we're ready and able to act with effective tools, with experience to respond to any negative impact on the business. Now kind of also going back to 2020, it's really important to understand that data is core to Rent the Runway. We monitor and analyze data real time. So we have this unique advantage in that subscribers come to our app over three times a week. They're highly engaged. So as soon as there's a change in their behavior, we see it. So we started to see data in early March 2020 that led us to make those really swift and bold decisions to cut costs throughout the business very early on. And we didn't hesitate in making the right decisions for the business. So we know early on when there are shifts in behavior. Now interestingly, right now, we are seeing a shift in behavior in the sense that our customers are actually shifting into more celebratory clothing than we've ever seen before. She is really showing us with what she's renting and how she's engaging that she is ready to get back out into the world.…

One other thing that I would add is that our consumer is slightly different. So 80% of our subscribers have household incomes over $100,000. So this consumer may be less sensitive to changes in the macro environment and we'll continue to monitor that.

Our next question comes from the line of Ross Sandler with Barclays.

Just a follow-up on that macro question. Jenn, you mentioned that when consumers might be trading down, the value prop of the huge savings that they get from Rent the Runway might shine through if we go into a recession. But I'm just curious, what other parts of your business -- I assume customer acquisition costs would improve a bunch if competition in those ad auctions goes down. And then what other recessionary impacts might you see to the positive, like how the conversations with designers change if all of a sudden, they're getting lots of returns from their departments for clients, et cetera? Could you just flesh that out a little bit? And then, Scarlett, you mentioned a bunch of the Share by RTR inventory crossed over the threshold whereby you have to pay the rev share. Just curious, like is that a meaningful percentage of the Share by RTR? And like how do we think about that on a go-forward basis that we kind of permanently crossed and that should be a benefit going forward?

Yes. Thanks, Ross. So I came up with the idea for Rent the Runway in 2008 and really became a student of what was going on in that recession. And one of the things that I found really fascinating was that during that last recession, customers were still buying 65 items of apparel per year which was very similar to what she was buying pre-recession. And we saw at that time, not only was she trading into other retailers like the T.J. Maxxs and Burlingtons and Rosses of the world, she also -- that was the emergence of kind of flash sale sites and really also massive growth in value-oriented retail like fast fashion. So I think the consumer was kind of showing us that she still wanted variety, she's still buying high quantity but she's changing and kind of going for same amount of units at lower price points. So what happened? Well, in that environment, from a brand perspective, I think we would have even more ability to shift more of our inventory acquisition into consignment, where our brands would be able to kind of share in revenue with us and benefits. Their alternative would be to deeply discount their own product and/or to kind of sell it to off-price or kind of flash sale sites for lower take rates. So I think that, as they saw during COVID, when we went into -- we transitioned into revenue share agreements with many of our designers. When COVID hit in 2020, those designers have been getting their wholesale costs are even more back over time. So they trust this kind of consignment channel and I think we'd be able to drive even more consignment in the case of a recessionary environment. To your point as well, I do think…

And our next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe two, if I can. One, is there anything to call out in terms of geographic differences you're seeing in the business in terms of either gross additions or customer behavior that might give us a better sense of how the return to office might be playing into some of the dynamics in the business that could promote future growth? That would be number one. And on prior calls, we've talked a lot about your automation efforts for the long term. Anything to add there as an update about how we should be thinking about automation as a driver of margins over the long term?

Yes. So there's actually not much differences in geographic customer behavior that we're seeing. We're seeing across the board that our customers are back in the office a few days a week. We're certainly seeing them be far more resilient to COVID impacts in all geographies and variants. One of the interesting aspects of going back to the office in a hybrid way is that she isn't yet back in the office five days a week. And therefore, just -- and she hasn't bought workwear in the past two years. So justifying purchasing new workwear makes less sense if you're not really going to be there five days a week, if you don't even know what your dress code is anymore. So renting the runway for the office makes more sense now in many cases than in the past. And we believe that a recessionary environment, interestingly, could lead even more workers to be back in the office more days of the week because we think that employers may have more power to request people to come back. And just one of the things I would kind of call out that we think about a lot is during COVID, when people were sheltering at home, people really were not attending events. They were not going into offices. They weren't walking around their neighborhoods. They weren't socializing. In a recessionary environment, people still get married. People still celebrate New Year. People still go into offices and I think they may go into offices more. So we are focused intently here on positioning Rent the Runway as the most cost-effective way to get dressed because we know that people still want and need variety in their wardrobe. And we think that we may be heading into an environment where this becomes even more attractive to more consumers. Scarlett O’Sullivan: Eric and then in terms of your second question, we absolutely think that there is a lot more that we can get out of the automation. As Jenn mentioned on the call, we just finished the rollout of RFID. We just are implementing digital issue tagging which should make us much more efficient when it comes to cleaning and restoration. So this is really why we think that there are good benefits ahead of us, why we feel confident in what we have said last call which is that we believe that the fulfillment cost can get back down to below 30% of revenue over the next few years.

Our next question comes from the line of Michael Binetti with Credit Suisse.

I just want to ask the marketing going -- I think you said 13% to 10% for the year -- 13% the first quarter to 10% of revenues rest of the year. It's been kind of hammered home to us that this is the biggest wedding season in decades and we've heard that through the department store earnings calls and diamond jewelers. And obviously, in this environment, that kind of data point quickly gets connected to questions about how to lap those kind of big comparisons next year. And I don't know how you feel about that but do you think this is a onetime big bump potential for the reserve business this summer that makes you think maybe you should deploy more towards converting some of those onetime-ish reserve customers into that very lucrative LTV of the subscription customer?

We feel really good about our plan to continue to spend about 10% of our revenue on marketing this year, excluding employee-related expenses because, number one, we continue to benefit from this really strong organic growth flywheel. We're doing a lot of marketing that doesn't actually involve paid marketing. So we talked about content. We talked about partnerships. We talked about product improvements that might enhance the virality of our business. So we completely agree with you that this is a really important period of time for us to build the funnel for both current subscribers and subscribers for many years to come. And we're really pleased with our success in Q1 in terms of our reserve business, beating by 20% versus our expectations. We also have this really large first-party database. And we're able to engage with customers from the past who rented for an event and our prospects to really convert them into coming back to rent a la carte again or coming back to a subscription. So we think that we can balance growth with profitability that we don't have to spend more than 10% and that our number one goal is driving the business to free cash flow profitability.

And if I could ask a follow-up. I think you ran a sample sale in New York in the first quarter which probably helped that resale -- the nice resale number in the quarter. Was -- if I'm right on that, was that a good experience for you? Is that something that you feel like you could do again this year to add a little realized three-dimensional aspect of the brand every once in a while and touch consumers and help monetize some of that product that you've deemed good to move over to retail?

Yes. So I'm glad that you asked that because I think it's really important to distinguish between sample sales which are part of our liquidation revenue for inventory and resale. So as you know, we are monetizing inventory over multiple years. We depreciate that inventory over three years straight line and then there's a salvage value that is associated with our apparel that is tested every single year by our accountants. That salvage value is related to how much we can kind of sell the inventory for at the end of its useful life. Now a useful life means to us that it no longer looks brand-new. So once the unit of inventory is not in kind of rentable condition which we consider like new condition, we will take it out of our rentable inventory and we will clear that inventory. Sample sales are one of the channels from which we clear inventory and that really goes into salvage value. But that's not our resale revenue. So resale revenue is the revenue we make from subscribers when they decide to keep units that they already have at home. So as part of their subscription, they have these four units at home. I have a dress at home. I decide I love it. We're dynamically pricing that dress and I can click to purchase it and/or any person can come to our site at any time and see a dynamic price with which to buy the unit which is still in like new condition and that's our resale revenue. Scarlett O’Sullivan: And just to double-click on that a little bit more, Michael. We've been doing sample sales for years, right? This is not a new strategy. This is something that we've always done and has always been a really successful strategy. It really points to the fact that our items even at end of life are still valued by customers. And I just want to double-click on something that Jenn said which is that sample sale revenue does not hit the revenue line. That is recognized as a gain or sale because we've already finished depreciating the product and is at the end of its useful life. So that's actually not reflected in our resale line.

Okay. Very helpful clarification. And congrats again on a nice quarter.

Thank you.

Our next question comes from the line of Abbey Zvejnieks with Piper Sandler.

Going a little bit off of Michael's question with wedding season being the highest it's been in decades. What do you see in the mix of like customers that are coming to Rent the Runway for events? Are they going into the reserve business? Or do you see them convert to subscribers later? Or because you get a discount in like your first two months of subscribing, do you see them going directly into the subscription business? Like what's the mix there?

Well, we've done a better and better job over time and this is intentional, about positioning subscription as a solution for multiple events and trying to drive first-time renters into subscription before they even try renting for a special event. And so we are seeing a healthy amount of new customers come directly into subscription. We see based on the inventory that they rent that some of them may be event intending. So this is certainly kind of a reason why people are signing up for subscription this year. That being said, our reserve business continues to be such a critical funnel for us because even though over 80% of our revenue comes from subscribers, the majority of our customers continue to be people that come in a few times a year, rent a la carte, buy from us resale. And that continues to have a really healthy funnel of people that we can tap into as our future subscribers. So we're kind of agnostic. We just want you to come in, try renting, see the depth and breadth of our inventory, see that we carry aspirational designer brands, that we deliver an incredible customer experience. And once you use Rent the Runway, of course, it's our job over time to try to convince you that a subscription is a smarter and more sustainable way to get dressed for your everyday life.

Our next question comes from the line of Andrew Boone with JMP Securities.

I'd like to start on paused subs. As we think about COVID just becoming more normalized, is there a way for us to think about what percentage of paused subs should -- or I guess, should be expected? In other words, are you guys seeing a continued impact from COVID in terms of paused accounts? Or how do we think about that going forward? And then secondly, on the price increase, how do we think about the potential for future price increases? I'm not looking for guidance in terms of whether that is next year or whether it's multiple years. But just more structurally, given your learnings from this past price increase, how do we think about that going forward?

So on paused, paused is just a natural part of how people use the subscription. It creates flexibility for our subscribers which keeps them loyal. I want to call out that the people that are in pause this month are a different group of people than who's in pause next month. That people are kind of coming in and coming out of the subscription based on what's going on in their lives, like we mentioned that there's seasonality to our business. So people think more about and care more about their wardrobes and fashion in general between March and May, between September and November when they -- generally, we've been trained as consumers to actually buy new clothes during this period of time. So we see a lot of engagement with customers wanting to use the subscription for newness and for a variety at those periods of time during the year as opposed to, let's say, during the dead of winter in January when we're kind of snuggled up in our sweaters and pajamas at home, that might be a more natural period of time where we see higher rates of pause. Now in terms of how the percentage of folks that are in pause right now compare to pre-COVID, we do think that we're in a very different environment than we were in 2019. We have a product that we have different programs that have almost double the margins of the programs that we had in 2019. We have a customer who's using us for a much wider array of use cases than she used us for in 2019. And to be completely honest, we don't know what the baseline percentage of people in pause is going to be in this post-COVID world. We know what it was in…

Our next question comes from the line of Ashley Helgans with Jefferies.

Congrats on the nice quarter. Just a quick one for us. We wanted to follow up and see if you could just provide a little bit more color on the nice gross margin expansion. Scarlett O’Sullivan: Thanks for the question, Ashley. I'll take that one. So we've talked a lot in the past about some of the very transformative changes that we've made to the business model, like changing the program, changing the way that we acquire products and that was really intended to benefit the gross margin. And now that we see revenue scaling out of COVID, we're really seeing these changes show up even more in our numbers. If I break down the reasons why gross margin was so much higher this year versus last year, I'd say there's a couple of reasons. One, our revenue was up 100% in Q1 versus last year. And then you'll see that the product depreciation dollars are actually pretty similar to last year. So that basically means that those costs now represent about half as much as a percentage of revenue as what they did last year. So that's one significant reason which we've been talking about but it's really nice to see it show up in the numbers today. Two, we mentioned the higher ARPU than we had expected, obviously, because of what I just said it which is the strong add-on activity and that always is going to improve margin for us. And then three is what we also discussed which is the revenue share as a percent of revenue was favorable versus our forecast because of those MACs payout where we no longer have to pay the brand. So those are really the three elements that contributed to the gross margin being substantially better than it was last year. And maybe, Jenn, maybe I'll hand it off to you a little bit if you want to talk about product depreciation and the dynamic of the longevity of our items which is really unique to our business model.

Yes. So one of the things that I've observed and based on kind of feedback that I've gotten over the last few months, one of the things that is misunderstood about Rent the Runway is how clothing -- how it's possible to monetize clothing over time. So there is this big miss in the fashion industry that things go out of style right away because that's how the retail industry has functioned forever, that you launch a product and a few weeks later, you mark it down and then you mark it down again and then you have to clear it. And we have 12 years of data that show that, number one, things actually don't go out of style after a season, that we can monetize inventory for many years and that what the customer cares about is she cares about wearing something that is new to her every single time she comes to Rent the Runway. Often, our customers don't know and they don't care whether something is right off the runway or it's from previous seasons as long as they've never worn it before. So that's why we've invested so much in personalization because we constantly want to show our customers a fresh assortment of new items that are new to her. So the other thing that's really important to understand is that the lifetime of the garment is much more highly correlated to how frequently it's been used and cleaned to how many seasons old it is. So the lifetime is not dependent on fashion trends. It's entirely dependent on our ability to restore the items into like new condition and how many times it's been cleaned. So we have inventory cohorts that we kind of acquired in 2018 and 2019 that are still monetizing and were producing revenue in Q1. And that inventory has already been fully depreciated. We can still make money off these cohorts because customers still want them and they didn't actually get as much use as we originally anticipated during COVID. So I think that, that dynamic as well of really understanding how we're able to use personalization to drive monetization of inventory over time, I think, is one of the most important things to understand about Rent the Runway.

And our next question comes from the line of Dana Telsey with Telsey Advisory Group.

As you think about the product costs which have been coming down, what do you see the opportunity in product costs going forward? It certainly seems like, obviously, it's been product costs reduced by 20% of revenue year-over-year. Where could that come from and why? And then very interesting on the at home, any data points on the 20 markets that you have it in so far, what you're learning from that it all enhances the next 20 markets you put it in? Any learnings there?

We've mentioned that our goal to drive to free cash flow profitability was to move non-wholesale product acquisitions. So non-wholesale for us is our consignment business Share by RTR and Exclusive Designs, to move that from 60% of our product acquisition to 66%. And as a reminder, we only started non-wholesale acquisition in Q4 of 2018. So we've gone from 0% of our acquisition being non-wholesale to 66% in 3.5 years. So we feel highly confident in our ability to kind of move product acquisition from 60% to 66% over the short to midterm. Scarlett O’Sullivan: Maybe I can add something to that.

Yes. Yes. Scarlett O’Sullivan: So -- and I think your follow-up question on that was just as a percentage of revenue, where do we think product CapEx is. So you can see with our guidance of about $60 million spent on product CapEx and at the midpoint of the range and we're talking about 20% of revenue. And we do feel confident that, that number comes down over time for the reasons that Jenn just said which is that we see the mix shifting more and the fact that you have higher percentage of Exclusive Designs obviously helps with the total dollars and the percentage of revenue. So we do feel optimistic and confident in that and that's a key element of getting to free cash flow breakeven in the midterm.

I think that the biggest learning on this launch of at-home pickup is how much the customer wants it. So it is -- it was a very non-technical launch. The only way that you could find out that we'll pick up the order at your house right now is via a sticker on the garment bag that, in many cases, you may never even see. And once customers see the sticker, they're like 100% yes. Come pick it up at my house and that is so much more convenient for me and it gives me the ability to control and to schedule, especially given who the customer is. She is this busy woman who has a job, who has a life, who has a family, who has social engagement. And so we make the experience -- we're taking some of the friction out of the Rent the Runway experience. Now I think the real data is going to come, Dana, over the next few months as we launch at-home pickup into our site and into our app. Because of how high kind of the customer satisfaction rate has been of at-home pickup, we've tried to just launch it more broadly. So as you saw, like it's in a lot more markets than we predicted it to be at the end of Q1. We're moving very quickly to getting to the full of it being in 50% of -- available to over 50% of subs by the end of the year. So we're really thrilled. And I think we'll have a lot more data once it's launched in the app and on the site.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to management for closing remarks.

So thanks so much to everyone who joined us today. I'm excited about our continued momentum. I'm energized by the plans we have in place. And we look forward to continuing to update you on our progress on our Q2 2022 call. So thanks again for joining us.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation