Rent the Runway eyes subscriber growth on strut toward profitability

Commerce companies often operate in a push and pull between growth and profitability. In 2023, Rent the Runway is right in the middle of it.

In 2022, the fashion rental service took steps to cut costs, undergoing what CEO Jennifer Hyman said was a “significant financial transformation.” That included layoffs to 24% of the corporate workforce and improvements to efficiency in product acquisition. It was a move to get out of the red, as the company doubled gross margins in comparison with 2019, and reduced cash consumption by 50%.

But 18 months after going public, Rent the Runway is not in the black yet. As is the case with many of the last decade’s generation of ecommerce companies that went public, Rent the Runway is not yet profitable, as it reported a loss of $138.7 million for fiscal year 2022. That was down from $211.8 million, and the company also made strides in net loss as a percentage of revenue as net revenue increased by 46%.

But to get to profitability, Rent the Runway must move back into growth mode. Hyman told analysts on the company’s earnings call this week that boosting the subscriber base is now the key to the company’s prospects for profitability. For 2023, the company is projecting ending active subscriber growth of 25%. That would bring boost cash consumption of more than $20 million on an annualized basis. At 185,000 average subscribers, it will be able to fully cover fixed costs, and break even on free cashflow on a maintenance basis.

“Higher subscribers are the most important inputs towards free cash flow profitability,” Hyman said.

In 2022, the company was not satisfied on the subscriber front, Hyman said, as it ended the year with 127,000 active subscribers. There are encouraging signs already this year, as that metric jumped up to an all-time high of about 141,000 as of April 8.

While a price increase in April 2022 likely hurt subscriber growth, this year’s priorities will not only growing subscribers, but putting a focus on retention. Rent the Runway is powered by a word-of-mouth engine that the company seeks to activate.

“The majority of our historical subscriber acquisitions have been organic, and almost 60% of customers hear about us from someone they know. Our customers have always been our best marketers. New customers will undoubtedly hear about the more positive experience we are trying to create via word of mouth,” Hyman said.

So by making the experience better, Rent the Runway can in turn increase the likelihood that subscribers will stick around, and that they will recommend the service to others. The first move on this front came as the company added a free extra item to all shipments in March. By providing five items instead of four, it is increasing the value of a subscription by more than 25%.

In 2023, the company will focus on getting more inventory to subscribers. It plans to invest $69 million-$72 million in increasing available items, and is shifting to styled models on the site that allow users to rent items from a look that is displayed.

“We are investing in greater depth amongst brands and styles customers love so that more of her desired styles are in stock when she's browsing and picking for her next shipment,” Hyman said.

The company also aims to improve discovery, and has already taken a step toward this by integrating a new product catalog. It is also seeking to improve speed on the Rent the Runway website.

Early results of this focus are positive, Hyman said.

“We are seeing significantly higher loyalty improvements amongst our full customer base than we had expected, meaning both completely new customers to Rent the Runway and tenured customers have all been churning less,” Hyman said. “Former subscribers are re-joining our program.”

Rent the Runway's recent moves demonstrate a couple of key points:

Fundamentals matter alongside making a splash. While Rent the Runway got a lot of press attention for the free item, site speed and search are just as important to improving the overall experience.

Growth and profitability require a balance. Often, these are presented as competing forces. But as it pursues growth to get to profitability, Rent the Runway shows that a focus can be placed on both at the same time.