Welcome to Rent the Runway's Third 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 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 morning, everyone, and thanks for joining us today. During this call, we will make references to our Q3 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 today's press release as well as our filings with the SEC, including our Form 10-Q that we plan to file later today. We undertake no obligation to 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. We entered 2024 laser focused on bringing our business to free cash flow breakeven and returning Rent the Runway to growth. I'm pleased to report that we were well that we are well on our way on both fronts and are reiterating our guidance that we will be free cash flow breakeven this fiscal year. This is a huge accomplishment for a business that burned $70 million in cash last year and we believe it proves that our business model is sustainable and our margins are attractive. On the growth front, the most important work that we've done is realigning our organization around growth. This realignment has come from one, simplifying key internal goals and processes; two, transforming talent in critical areas by recruiting the right external talent and elevating and orienting internal talent towards growth and three, setting up cross functional teams with clear mandates and resources to work in an agile manner towards their goals. Thus far, our special event rental business Reserve is up 21% year-over-year in Q3. Our Resale business is up 23% year-over-year in Q3, and we've achieved significant gains in loyalty amongst our post 90 day subscribers. Our plan is to spend 2025 accelerating subscriber growth, and we feel set up to win here. The rental market is now established. What was a radical idea when we started 15 years ago to rent designer clothes is now mainstream with women of all ages more comfortable with renting than ever before. We have much progress to share, but first, let's cover the financials. Q3 revenue was $75.9 million at the midpoint of our $75 million to $77 million guidance range, up 4.7% year-over-year. Q3 was our fourth consecutive quarter of positive year-over-year revenue growth and the fastest…

Thanks, Jen, and thank you, everyone, for joining us. We continue to make good progress in the third quarter of fiscal '24, with improvements in revenue growth, ending active subscriber growth, adjusted EBITDA and free cash flow. Revenue growth of 4.7% versus Q3 '23 was better than the 4.2% year-over-year growth we experienced in Q2 '24. Indeed, year-over-year revenue growth has shown improvement in the fourth consecutive quarter. Consistent with our expectations, ending active subscribers returned to growth after declining year-over-year in Q2 '24. As a reminder, Q2 '24 ending active subscribers were down 6.2% versus Q2 '23 due to changes in our promotional strategy. Ending active subscribers grew 0.6% in Q3 '24 versus Q3 '23 due to stronger year-over-year subscriber acquisition and retention versus the prior quarter. Adjusted EBITDA and free cash flow improved substantially versus Q2 '23. Adjusted EBITDA was 12.3% of revenue in Q3 '24 compared to 4.8% of revenue in Q3 2023. Adjusted EBITDA margins were slightly lower than Q3 adjusted EBITDA guidance of 13% to 15% of revenue primarily due to lower-than-expected other revenue. We chose to sell less inventory as our rental business continued to improve. In addition, we expect the timing of inventory sales to third parties to be more Q4 weighted than originally anticipated. As evidenced by our reiteration of full year adjusted EBITDA guidance, we continue to expect strong progress on profitability improvement this fiscal year. Free cash flow for the nine months ending October 31st, 2024 was negative $9.3 million versus negative $47.3 million for the nine months ended October 31st, 2023. As I will outline in more detail, we are reiterating our guidance to be free cash flow breakeven for fiscal year 2024. Let me now provide a more detailed review of third quarter results. We ended Q3 '24…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Boone with Citizens JMP. Please proceed with your question.

Good morning and thanks so much for taking my questions. I wanted to ask specifically about the 4Q revenue guide. This quarter, it looks like it's a more or less $6 million guide for 4Q that compares to $2 million in the last three quarters. Can you talk about the widening of the range? And then what may be embedded at the high end versus the low end in terms of expectations?

Sure. As you know, we started the year with revenue guidance of 2% to 6% for the full year, and we narrowed that range to 2% to 4% for the full year now. The Q4 implied guidance range is really a function of the 2% to 4% guidance range for the full year. Now we're already about three quarters through the year, so it made sense to narrow the range to reflect the sort of likely range of outcomes for the year. I think the main variation or the main reason for the range is, number one, part of the reduction in the top end is a function of other revenue that we highlighted in Q3 and the fact that we actually want to hold on to more inventory both in Q3 as well as in Q4 because we see the rental business doing better as the year has progressed. And then the second factor in terms of the range as well as the reduction in the top end of the range is the timing of subscriber acquisitions and the impact of lower promotions, as we discussed last quarter, which also factored into the decision. So I think the primary reason for the Q4 range is just dependent on how much inventory we choose to sell in Q4, but it is not a reflection as we've seen over the past four quarters. Revenue growth has continued to accelerate. We feel better about underlying trends. The Subscription businesses and the Reserve business is starting to do better. So it really isn't a function of anything other than us desiring to keep more inventory for our customers and the range is reflective of that uncertainty.

And then if I think about subscriber growth going forward, right, it seems like there's traction with Reserve, better top of funnel now as you guys think about new customers trying product. It seems like inventory is in a better place. Can you guys just outline the key levers as we think about subscriber growth for 2025? What are the key metrics or operational initiatives that you guys have as we think about accelerating the subscriber growth next year?

I think just to backtrack a bit. Just as a reminder, between 2020 and 2023, Rent the Runway was primarily in cost cutting and kind of margin generation mode. This is what we had to do at the time and it's certainly what we prioritized. We prioritized financially transforming our P&L. When we entered 2024, we had confidence that we would be able to bring the business to free cash flow breakeven this year, even in lower growth scenarios. So we had two goals. Let's actually achieve free cash flow breakeven and let's change the company from the culture of cost cutting back into growth mode. So we were certainly successful between 2020 and 2023 in really transforming our P&L, we move from an asset-heavy business into an asset-light business. And this year, we have accomplished an enormous amount in setting up the business for growth. So number one, we've changed talent. We've reoriented internal talent towards growth. We reorganized our business in terms of how we operate. We simplified our goals. We have created cross functional teams to achieve these goals and we are already seeing really nice traction. So we talked about, as you mentioned, in Q3, our Reserve business is up over 20% year-over-year. Our Resale business is up over 20% year-over-year, and that we're seeing some really nice leading indicators of Subscription going up like our loyalty rate and our tax going down. So now the whole business is really primed for our key growth lever, which is subscriber growth. Now how do we drive subscriber growth? First and foremost, we're focused on inventory. So inventory is one of the most important, the inventory position is one of the most important predictors of growth. And we've set up these incredible inventory acquisition channels in our rev share business and our exclusive design business to be able to acquire a lot of inventory at very low or no cost of capital. So we are investing heavily into our inventory position into 2025 as a key to unlock subscriber growth. So that's one component of it. Another component is that we've set up a cross functional team internally, that we've mentioned over the last few calls, focused on the subscriber onboarding experience and improving, therefore, retention. So between kind of the pod that's focused on subscriber experience and retention and between are focused on depth and breadth across inventory for 2025 to drive subscriber growth, we feel set up really to win here.

That's helpful, Jen. And then just for my last question, I wanted to double-click on inventory. You guys have made some changes in terms of retail. Understood. But can you just talk about the timeline of when you guys will feel like inventory is in the right place? Can you guys get there in the next quarter or two or is that more like an evolving thing where we expect that's a multiyear initiative? Thanks so much guys.

Look, I don't think we want to get into specific plans for '25. I think what we will say is we can make, I mean, I kind of bring you back to fiscal '23 for a second, just to show that we can actually make fairly substantial improvements in a reasonably short period of time, right? So if you recall, in fiscal '23, we talked a lot about in-stock rates, and the fact that in-stock rates were an issue for us. And within effectively one fiscal year, we were able to buy a significantly more depth and have that problem be significantly lower than it was. So I think we can make a lot of progress. If you look at our evolution of the channel mix that we purchased inventory through, we have made considerable strides in relatively short periods of time on revenue share for instance. I mean almost half of the units we're buying this year coming from revenue share. So I think we're going to utilize all of the lessons we've learned, both from what customers want, how to target that customer more appropriately, the channels we have unlocked and the learnings we have to make some pretty quick progress on inventory.

We mentioned on this call that we have an enormous amount of data on what our customers love and we see that there are a set of brands on our platform that have incredibly high demand, have high customer satisfaction rate, have high hearts, have high love rate. And on a rental platform, you're never going to have perfect availability at every point in time. But we certainly can improve our position and really double down into these pillar brands to ensure that for the brands that people come to Rent the Runway for, we're giving her an even better chance of being able to wear those brands when she comes. And so that's just an example of a strategy that we've already executed against for 2025 as it relates to inventory. And that's just about the distribution of our dollars, that's not necessarily more dollars. That's saying, okay, more of these top 25 pillar brands.

I think the other thing to point out is, if you think about this year, for instance, on inventory, it isn't our main progress on inventory isn't something that necessarily requires huge amounts of time. This year has been really a function of running a very tight shift. We went from negative $70 million in cash consumption last year to what we expect will be free cash flow breakeven for the full year. And as part of that, we also needed to continue to make significant progress in diversifying the channel mix, making sure revenue share partners were comfortable with us providing significant inventory and so on. So I think what we're telling you is the building blocks are in place, the customers are responding, as you can see with Reserve and with Resale and with the leading indicators of the Subscription business, the business is breakeven. It really now is up to us to put in the investment to accelerate revenue growth and we're telling you that we're trying to do this in a way that preserves the capital sustainability of the business and the cash characteristics of the business, while really trying to accelerate the growth element of things.

Thank you.

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

Hi. Thanks for taking our questions. So to start, maybe you can talk a little bit about the difference in customer between Reserve, Resale and Subscribers? Any trends to call out? And just how they're each performing? Thanks.

So our Reserve business certainly provides an easy way to enter Rent the Runway for Reserve pricing as low as kind of 10% of the retail price starting at just $30 to rent a dress, you can come and have a great experience renting for a holiday party or wedding, et cetera. And so we've always seen a diverse customer base across age, across geography, across income level into the Reserve business. And prior to 2024, we had seen that, that business had been declining year-over-year, which was not great in terms of driving new customer growth into Rent the Runway because traditionally, Reserve has been a driver of new customer growth. And so we really put an emphasis on Reserve this year to reaccelerate it. We've made some very quick and significant progress given that our Reserve business is up over 20% in Q3 and new customers into that business are up 35% year-over-year in Q3. So we're showing that we can drive more people into the ecosystem of Rent the Runway. And then we've set up really great life cycle marketing communications. Once you have a great experience in Rent the Runway, obviously, to familiarize that customer with the suite of products that we have from Resale to Subscription. And even the launch of this one swap $119 a month Subscription plan this month gives us yet another kind of entree to sell our Reserve customer into a more lightweight Subscription program where you get that one shipment a month, but have access to the full assortment of our inventory. So one of the really positive things that we're seeing about Subscription is five, six years ago, a Subscription to fashion was fundamentally about early adopters, people that were comfortable with what was then a radical new way to get dressed. Now even a Subscription to fashion has become more mainstream. And how do we know that? We know that because of the diversification of the customers coming into Subscription as the first product that they engage with, with Rent the Runway. And we're seeing very high kind of engagement amongst a much more diverse age demographic into Subscription, more diverse geographies where she's coming from and certainly diverse use cases. So we see a lot of really nice momentum in our Subscription business and feel very confident that with this very simplified focus within the company right now and cross functional alignment around key goals that 2025 is going to be the year where we really accelerate our subscriber acquisition and growth.

Great. Thanks so much.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any closing comments.

Thank you for joining us on this Q3 call. We're really excited about our progress this year, and we look forward to chatting with you on our Q4 call in April.

Thanks, everyone.

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