Welcome to Rent the Runway's Second Quarter 2024 Earnings Results Conference Call. At this time, all participants are on 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 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 Q2 2024 earnings presentation, which can be found in the events and presentation 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 which 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 within 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 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 last two earnings calls, I highlighted our two big goals for 2024, getting to free cash flow break-even and returning to growth. I'm excited to report results for Q2 that beat our expectations. And as a result, we're raising revenue guidance for the full year. What you're seeing in our results is momentum. We've dramatically simplified our internal goals and organizational structure so that we can aggressively pursue the biggest opportunity areas for our business. We believe that the business is demonstrating that it's at an exciting inflection where continued growth and free cash flow break-even this year are squarely within our reach. Q2 '24 revenue was $78.9 million, up 4.2% year-over-year, exceeding the high end of our $76 million to $78 million guidance. Adjusted EBITDA was $13.7 million, or 17.4% of revenue, our ninth consecutive quarter of positive EBITDA and exceeding the high end of our 14% to 15% margin guidance. Moving on to Q3, we are guiding to an acceleration in revenue growth with Q3 revenue expected to increase 3% to 6% year-over-year. Finally, we are reiterating our goal to be free cash flow break-even in full year '24. One of the areas of our business where we believe that the momentum is most palpable is in our special event rental business reserve. The reserve business is what we launched the company with 15 years ago. It's a simple value proposition. Every woman has to buy outfits for events, a wedding, a prom, a gala, a holiday party, that she rarely wears again. So we give her the ability to rent dresses and accessories a la carte for around 10% to 15% of the retail price. The addressable market for event rentals is large, and we are still…

Thanks Jen, and thank you everyone for joining us. We continued to make good progress in the second quarter. Both Q2 revenue and adjusted EBITDA exceeded the high end of our guidance range. Our Q3 2024 revenue guidance of 75 million to 77 million or 3% to 6% revenue growth versus Q3 2023 implies a continued acceleration of revenue growth versus Q1 and Q2 of fiscal 2024 at the midpoint of the guidance range. As I will discuss further, we are also raising our revenue guidance for fiscal year 2024 and reiterating our commitment to reach free cashflow breakeven for the full year. In short, we expect to grow revenue and significantly improve profitability this year. I would like to take a moment to discuss the year-over-year decline in Q2 ending active subscribers. We believe the primary reason for this year-over-year decline is the significant reductions in promotions this quarter versus last year's second quarter. In fact, excluding subscribers generated from the highest level of promotions in Q2 '23, our year-over-year subscriber growth would have been much better than the 6% decline we reported as of Q2 '24. Notably, ending active subscribers as of September 1, 2024 were already roughly flat year-over-year. We also believe that our stronger revenue performance in Q2 2024, despite lower ending active subscribers, demonstrates the success of our strategy to be less promotional. As Jen outlined, we are focused on driving innovation and enhancement to the customer experience across nearly every aspect of our business. We are excited by our second half plan. The underlying financial position of the company and our go-forward expectations are considerably stronger versus last year with growing revenue and meaningful improvement in cashflow, which I will walk through in more detail. Our Q3 and full year 2024 guidance are positive…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Matt Condon with Citizens JMP Securities. Please proceed with your question.

My first one is just on resurrecting past users. Can you just talk about what you're seeing there currently and then maybe just talk about the broader opportunity?

So we're seeing strength in rejoin rates of past customers. I think that we've always seen that as we make improvements in customer experience, the first people to notice are people who are actively engaged on our marketing kind of comms list, people who have been customers before. So we're seeing that that's actually a tremendous source of growth for us now, our rejoiners. And then just the opportunity for us is big. Obviously, this market is growing very quickly. It has gone from being an early adopter behavior to being a behavior rental, being a behavior that's way more mainstream. And over the past few years at Rent the Runway until 2024, we've been heavily focused on costs and profitability. Now we have that clear vision to free cash flow break even, and we've reoriented the entire company around growth. We've hired the right people, we've reignited marketing creative, we've simplified our goals. And these actions give me the confidence and you can see it demonstrated in our metrics that growth is coming for RTR. We have momentum and we have momentum across all different aspects of our business right now. It's not just in one area. So I'm really excited about second half and I'm particularly excited about how our strategies that we've deployed, where we put these cross-functional mini startups on really simplified business goals are going to help us into 2025 and 2026 ignite tremendous growth for RTR.

Great, that's very helpful. And then my second one is just on the reserve business and going off of your points on just the cross-functional teams, understood that's contributing to the success which you guys are having there, but maybe just from a product perspective, what do you see that these teams are coming up with that's really driving the acceleration of that business?

So the teams are focused on the full end-to-end experience for reserve. So to be clear, until quite recently, until June, there had been no dedicated focus of a cross-functional team to reserve in many years. And we hadn't seen that business decline for the past few years. Just by nature of focus on our special event business, we were able to go from declining year-over-year revenues to up 10% year-over-year in July and what I mentioned up 20% year-over-year in August with new customers, importantly, up close to 50% year-over-year. Some of the things that the team are focused on are maximizing our inventory availability to make sure that our units can turn as many times as possible and hit as many customers as possible. They're focused on our booking windows. They're focused on the UX and UI of the experience. They're focused on making sure that all of our customers understand that we give them a fit guarantee so they have nothing to fear in coming to RTR. We'll always ensure that they have something awesome to wear for their event. So you will see us make agile changes to this business over second half. And I feel very confident in improved momentum in this business and importantly, having this be a tremendous funnel of new customers into RTR.

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

Hi, it's Blake on for Ashley. Thanks for taking our question. Wanted to start off with marketing. You talked about several different exciting marketing initiatives. Can you discuss your willingness to lean into marketing to stimulate sales growth, kind of depending on what ROIs you see, and maybe if you could kind of talk about what you're most excited about in terms of your marketing initiatives in the second half.

Yes. I think the important thing to realize here is, we historically have never even had a chief marketing officer. We have not really had people focused on this area in a way that considers the entirety of the marketing experience. It's not marketing for us historically has been very heavily focused on pay channels, on few pay channels in particular. And I think what we're trying to do now is evaluate very critically, what is the return we're getting on each of those pay channels? How much can we broaden out those channels to increase the kind of returns we're getting there? Can we build out new channels using, whether it's affiliates, whether it's influencers, just new ways in which we can reach customers. Now, as a result of doing some of this work, what we're finding is that there are opportunities to improve efficiency, take some of the dollars that were probably not working as hard for us and reinvest those in exciting brand initiatives and other initiatives that Jen mentioned, a college tour and so on, that really allow us to go out into the world and get people excited about what we have to offer.

Yeah, and just to clarify one thing that Sid said, we very much did have chief marketing officers and full funnel marketing approach really until COVID. And it's in the post COVID years that the focus had really been, as I've mentioned in previous call, more on bottom of the funnel and on things that we knew what the ROI was the very next day. We, by nature of hiring new talent here, new leadership, new team, that was the first indication of our desire and willingness to reinvest into marketing in a new way. And reinvesting means diversifying our channels. It means pulling up from being a solely bottom of funnel marketer to now being mid funnel and full funnel, which is what we did, for the first 10, 11, 12 years of the business. It is fundamentally to us, one of the key goals of our company, as I mentioned, we have three goals we're aligning behind. One of those three goals is increasing organic traffic. The way that you increase organic traffic is yes, SEO is a component of it, but the other larger component is making customers fall in love with you again, so that they come to your site directly. How do you do that? It's via investment into brand. It's via investment into in real life events, into ambassador networks, into influencer networks, into things that we did very successfully in the past that we're bringing back, modernizing them for 2024. And we're really excited because the brand awareness of Rent the Runway is extremely high. The brand love for this company is incredibly high. And we're just looking to reactivate some of that kind of latent love that's out there. We mentioned on the last call that we had done these in real life events in New York and Atlanta, and we saw hundreds and hundreds and hundreds of women standing on lines around the block to get into an RTR event. That is just demonstration of the palpable emotion that people have towards this brand. We haven't given our customers a way to demonstrate that palpable emotion over the last few years because of how bottom of the funnel focused we have been. And so by reigniting everything around marketing, I think that it will not only drive higher organic traffic, but higher customer engagement and higher customer virality. So just be on the lookout for an enormous amount of activity in the second half of the year that we mentioned in the call is on deck and we're back.

I think the main, one interesting point to highlight here is if you actually examine all of the decisions we've made in the past, we spend a lot of time addressing costs, addressing the cost structure. We spend a lot of time thinking about inventory and making sure inventory in stock rates were appropriate for our customers in fiscal '23. If you look at all of the decisions, we've made post that point in time, it should give you a pretty good indication of how much we're interested in leaning into growth and into marketing and into the kinds of things that will make customers fall in love with. So if you think about the events we're doing in real life, if you think about the New York City store, if you think about the college tour, I mean, all of the things that broadening our channel, all of the work we're doing is really critically focused on just growth and driving growth.

That's really helpful. And then wanted to revisit in light of kind of the challenge consumer, wanted to revisit your decision to reduce promos and just kind of talk about learnings from that decision so far and how you're thinking about your price points.

Sure. So just a quick recap of what we've discussed previously. Historically, we used to have a lot of promotions that were multi-month in nature. So we would do two and three month promotion. We have gone out and changed all of those promotions to largely be single month focused. So one month focused promotion. The other thing we discussed when last year at the time was, we tested a variety of different promotional strategies, some low, some high in Q2 of '23. And what we have learned is to discontinue some of the promotions that were not returning adequate dollars to us, that were not beneficial to retention and so on. And to continue promotions to target the customer segments that we thought were beneficial to bringing customers in. And so what you're seeing in terms of the sub count for Q2 '24 versus Q2 '23 is really just a reflection of discontinuing or not repeating some of the particularly high levels of promotions that we weren't particularly satisfied with. And so as we pointed out in September, sub count is roughly flat year-over-year. So clearly those promotions didn't have a strong retention element to them. And I think where we are now is pretty satisfied with where the promotional cadence of the business is. We think it's in a healthy place and we're really spending all of our time not focused on promotions, but really focused on all of the other ways to drive growth and retention for our customers.

And I think that the reserve business and the momentum that we've had there, where again, we've seen 50% new customer growth into that business in August, is testament that without incremental marketing dollars, without promotions, without detrimenting price in those arenas, by nature of improving the customer experience and focusing on maximizing our inventory availability, you can drive a lot more customers into RTR. And I think that that's due to the product market fit of this business. And it's due to the value that we already give the customer by nature of enabling her to rent a designer dress for around 10% to 15% of the retail price. That is huge value that makes our price points more competitive with fast fashion than with traditional designer fashion.

That's great color. Thanks so much and best of luck for the second half.

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

Thanks for joining us today. We're really excited about the second half of the year and hope you stay tuned.

Thank you so much.

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