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.

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.

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…

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…

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.

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?

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.

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.

Thanks very much. All the best.

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

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?

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.

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.

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.

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…

Thank you.

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

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.

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.

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.

Great. Thanks very much.

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

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.

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.

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.

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.

Great. Thank you for the color.

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

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.

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.

Thanks.

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

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.

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.

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?

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.

Great. Thank you.

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

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?

Yes, I think...

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.

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.

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

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.

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.

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.

Thank you.

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

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.

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