Welcome to Rent the Runway's First Quarter 2024 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 call is being recorded. I would now like to turn the call over to Rent the Runway's Chief Legal and Administrative Officer, Cara Schembri. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us today. During this call, we will make references to our Q1 2024 earnings presentation, which can be found in the Events and 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 today. We undertake 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 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 thank you, everyone, for joining. On our Q4 earnings call, I shared that 2024 would be focused on two major goals for Rent the Runway. One, getting to free cash flow breakeven for full year 2024; and two, reigniting the growth flywheel of the business. I'm proud to report that we believe we are well on our way on both fronts. And as a result, we are reiterating our guidance for the year. Q1 2024 was a strong quarter for Rent the Runway. We hit the top end of our guidance on revenue coming in at $75 million for the quarter, and we beat on adjusted EBITDA coming in at $6.5 million or 8.7%. This was our eighth consecutive quarter of positive EBITDA. Most exciting, we reduced free cash flow burn to $1.4 million, a record low. Our Q1 free cash flow of negative $1.4 million is an $11 million reduction in cash burn versus Q1 2023 and a $27 million reduction in cash burn versus Q1 2022. We've come a long way over a short time frame. One way that I look at our evolution from a heavily cash consumptive model to a business that is on the cusp of free cash flow breakeven, is through the lens of operational rigor. We set a goal to be free cash flow breakeven for full year 2024, and we've been relentless in inspecting every aspect of our P&L and working to find operational efficiencies and opportunities for margin expansion. But the other way I'd love for you to think about our profitability journey is by digging into the strength of our core business model, brand and position in the fashion industry. We believe our business model's competitive advantages have been a big part of getting us closer to…

Thanks, Jen, and thank you, everyone, for joining us. I'll begin by underscoring the key message from this quarter. Our business improved in nearly every dimension. Active subscriber growth after being negative for the past two quarters on a year-over-year basis grew versus Q1 2023. We added almost 20,000 subscribers quarter-over-quarter. Our reserve business has shown improved year-over-year trends this quarter relative to the past three quarters. Resales continued to be strong in Q1. Total revenue grew again on a year-over-year basis after declines in Q2 and Q3 of 2023 and 0.5% growth in Q4 2023. As I will discuss shortly, our Q2 guidance implies a further improvement in growth trends next quarter at the midpoint of the guidance range. We made noticeable progress on profitability. Adjusted EBITDA margins for Q1 2024 were at their highest levels versus Q1 in prior periods. As outlined in our Q2 adjusted EBITDA margin guidance, we expect our highest second quarter adjusted EBITDA margin in the company's history. Free cash flow also improved this quarter. Free cash flow was just negative $1.4 million in Q1 2024 versus negative $12.1 million in the same period last year. Today, we are reiterating our guidance to be free cash flow breakeven for fiscal year 2024 versus free cash flow consumption of approximately $70 million in fiscal year 2023. Please refer to the detailed bridge we shared with you during last quarter's earnings call and included in today's slides for more detail on the path to free cash flow breakeven. Rental Product purchases continue becoming more capital efficient with almost 50% of new Rental Product units in fiscal year 2024 sourced through a share by RTR platform, requiring no or low upfront cost. Indeed combined with our exclusive design platform, we expect that more than 70% of total…

Thank you. [Operator Instructions] Our first question is from Andrew Boone with JMP Securities. Please proceed.

Thanks so much for taking my question. Jen, I wanted to ask about marketing. It sounds like you guys have a lot of hirings and the [fire] (ph) there. Can you speak to the opportunity with untapped audiences and increasing awareness just across the entirety of the population as well as kind of resurrecting users? And then Sid, you guys had a bunch of qualitatively positive things, as it relates to subscribers for 1Q, 2Q seasonally is typically a step down. Is there any way that we should be thinking about ending active subs for 2Q as it relates to the guide and just the cadence of that for the rest of the year. Thanks so much.

Thanks Andrew. So first, on marketing. There's a huge opportunity to increase, first of all general awareness for Rent the Runway. Our offering that we both do special event rental as well as subscription and to go broad in terms of the customer demographics that we are going after because the over 800 brands that we carry have wide appeal. And given the price point, especially for special event rental, where we're renting at between -- around 10% of the retail price, it's a price point that is accessible to the mass market. So you heard that there are multiple engines that we are building out within marketing. Number one, there is the reignition of our brand and ensuring that our brand is building emotional connections with women is actually doing things in real life, showing up events, stores, building back our ambassador network, all of the things that actually used to drive that organic virality of our business were fueled by actually our brand efforts and by the customer experience that we were delivering. So making a major investment into shifting our dollars away from bottom of funnel more towards mid-funnel and top of funnel of which brand is an important component is key there. Creative is critical. We now know that whether it's on a paid channel or whether it's how creative shows up on your app or on your site, that is what is Number One, increasing the efficacy of our ad spend. It's Number Two, actually putting a stake in the ground as to what our brand stands for and kind of the psychographic that we are going after. So you've seen really what I would call a creative kind of revolution in terms of how we are actually showcasing our inventory to our customers and giving them more inspiration and ideas for how they can actually put together Alpha style themselves, et cetera, and really to just cement our position as the premium player in the space. Now even we are making strides on the things that we were doing before, like the paid marketing, by nature of changing some of our tactics and strategies on bottom and mid-funnel, we've been able to increase traffic like we were saying by 40% month-over-month. So we're bringing more new customers to the site. We're engaging them across the entire funnel, and you will see a whole host of new partnerships, new in-real-life experiences, new brand networks, new channels and of course a tremendous investment into lifecycle marketing. So that we are really building very strong relationships with every customer cohort and ensuring that we are driving as much revenue from each customer as possible. So very, very excited by the progress in marketing. And of course, this is the beginning. But I think we'll see a lot of things change in the second half of the year in a positive direction.

Great. And on the second part of your question, Andrew, I'd say three things. The first is we are obviously not guiding specifically to subscriber growth on a quarterly basis. But I will say that the most important takeaway from the guidance that we have issued is that we are confident about the business. We are expecting an improvement in year-over-year growth in Q2 relative to Q1 at the midpoint of the guidance range. And of course, you are right, our business is seasonal. We do expect higher acquisitions in Q1 and Q3, but the important takeaway here is we feel very good about the way the business is trending.

Our next question is from Ashley Helgans with Jefferies. Please proceed.

Hi, it's Blake on for Ashley. Thanks for taking our questions. So I wanted to follow up on the cadence question of the top-line and subscribers. It sounds like you've made a lot of progress on initiatives. Can you talk at all about just the monthly trends you're seeing perhaps? Or maybe just what gives you confidence those could potentially continue to build to give you maybe at that high end of the revenue guide for the year?

Yes, we are not going to comment on any particular monthly trends, but I think what you can surmise from the guidance that we've issued. I mean, I pointed out earlier that the strength we see in our business isn't just limited to any one particular area, right? I mean if you think about the reserve business, we've called out that we are seeing improved trends in the reserve business year-over-year relative to the past few quarters. We're obviously seeing very good rejoiner activity. We are seeing very strong retention, and that is providing a lot of confidence in the guidance that we issued. And finally, we are continuing to see subscribers engage with us in a very positive way on the resale business. So all of the key input metrics in the business that we believe contribute to that acceleration in year-over-year growth that we've guided to in Q2 make us confident that we are on the right track.

I mean one of the things that we shared on this call is that we saw significant improvements in our loyalty rates and our rejoiner rates in Q1. And we mentioned that typically, when you change an experience, and this is true for all businesses like ours where there is frequency of behavior. The first people to notice that you've improved the experience are your current and former customers. And they are going to give you a glaring signal one way or the other as to whether they like the changes that you've made. And the fact that both our current customers who are active, who are paying us as well as former customers who weren't formally paying us but now are coming back, have really showed us that they think that the inventory experience has improved. Our inventory churn is down significantly. They're having those great customer experience as evidenced by very high kind of Net Promoter Scores and Net Promoter Scores that are higher than in many years past, That to us coupled with all of the work that we are doing in marketing to actually drive new customers, really gives us a lot of confidence because I think that we have a signal from our former and current customers that the experience is much improved. So now it feels great to go out to new customers and bring them into this experience. The other really -- more qualitative piece, but I think that matters is when we have an event of which we've had two over the past six weeks, thousands of people show up. And those thousands of people aren't just current customers. 80% of the people that showed up in New York were not current customers. They are just people that love the brand that are interested in the brand that want to engage. There is so much latent brand love for Rent the Runway, and we have opportunity to harness it in an entirely new way, which is why we just shared that we're reopening our flagship store. We are going to make retail a big priority over the next few years. And that's really not just about the sales that we are going to drive out of these stores. It's about reigniting the in real-life experience of interacting with our brand, and the virality that, that creates in the markets where we show up.

And a follow-up on that would be, how do you think about the importance of word of mouth referrals right now because I know you're doing a lot of work on digital marketing and for media. But can you talk about the balance of those two sources of growth for acquisition going forward?

The majority of our growth over the past 15 years has been through word of mouth. It's been through women sharing this experience authentically with their friends, with their colleagues and them wearing something that they are obsessed with to a party, to work, having conversations with other women and kind of sharing this amazing Rent the Runway like secret that they have. And it used to be a secret. And now it is something that they share openly and broadly, and it goes up on social media as well. So this has been the Number One driver of our business' growth over time. I believe that it's the most important driver of every business' growth because the more customers have an authentic brand connection with you and actually want to advocate on your behalf, like the stronger and healthier your business will be and the more you can invest in customer experience as opposed to just investing in bottom of funnel paid marketing. So we are very proactively moving our marketing dollars away from bottom of funnel marketing, up the funnel towards mid and top of funnel because we think that, that's also a healthier way to build relationships with customers and market the brand.

And I would say that if you followed us over the last year, 1.5 years, you'll see that a lot of this company's energy has been focused on making sure that our existing customers and new customers who join have a really terrific experience because that really does fuel the referral behavior and all of the positive word of mouth that you're referring to. We spend a significant amount of money last year on inventory. We improved debt significantly. We exposed customers to a significantly improved inventory experience. And way beyond inventory, it went into providing styling services. It went into providing a better product experience, more aspirational imagery content and all the things that Jen mentioned. So I think what we're seeing now is the rewards of all of that investment in the loyalty and improved loyalty and rejoiner rates that we have mentioned. So we do expect that focus to continue and manifest itself in referrals and positive customer behavior.

That's super helpful. If we could just ask one more Jen, I was curious your thoughts on if we were to just take a step back on fashion trends, anything you could comment on that you are seeing there, what your customers are asking for? And then just casual, I know you've talked about that assortment changing a little bit since or during the pandemic, and I think your assortment there had kind of increased. But can you update us where you are on casual use cases as well or what you define as casual?

Yes. So our use cases have not changed much since 2023, let's say when life really returned to normal in the sense that roughly about 50% of the use cases are for casual everyday occasions, around a quarter are for what I would call events in the evening where you want to get a little bit more dressed up, that could be a party, it could be a wedding. It could be a gala, and about 25% is for work. So we think that, that's a really healthy balance in the business. We have assorted ourselves to those use cases. I think that we've seen in terms of fashion trends, I would say the most unique thing about our model that I pointed out and I will point out many times again, that nearly half of our inventory, we procure at zero or very little upfront cost, and we revenue share only based on performance. So if the items don't rent, we don't pay for them. That means that for nearly half of our assortment, we have zero fashion risk. So fashion risk is the Number One risky sting, killer of various apparel companies and brands over time. If you miss the trend, you suffer in terms of your financial performance. The fact that nearly half of our inventory, we do not suffer from that same risk, I think dramatically distinguishes our business model and our competitive advantages. So that business model because the other attribute of it is, it is a win-win for us and our brand partners, the more something rents, the more money we make and the more money our brand partners make. Therefore, when things are successful, they're more likely to give us replenishment units on those units. They're more likely to come to us for reorders and to make sure that the very best inventory is on our platform. So we've created a business model that mutually incentivizes us to be aligned with our brand partners, which is very different than many others in the space. And I think, that this eliminates fashion risk and allows us to respond very quickly to what's going on in the market.

Makes a lot of sense. Thank you so much. And best of luck for the rest of the year.

Thank you.

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

Thanks so much for joining us today. We're really excited about our performance in Q1. This is going to be a milestone year for Rent the Runway and stay tuned.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.