Unpacking Rent the Runway’s IPO

Rent the Runway shares fell on their first day of trading Wednesday, as investor concerns about the company’s path to profitability overshadowed ambitious growth plans.

The rental platform’s Nasdaq debut was one of the most anticipated amid a herd of fashion IPOs this year. Rent the Runway’s business model, lending everything from gowns to athleisure to subscribers who pay a monthly fee, was instrumental in kickstarting the online secondhand clothing boom. It remains the leader in clothing rentals, even as other startups and retailers such as Urban Outfitters have since joined the fray.

And though the pandemic put a halt to its momentum, the company said it has plenty of room to grow. RTR said its current members use only half of their rented pieces for work and evening occasions, while the rest are chosen for casual wear. And although most of its current customers are college educated working women 25 years old and above in major cities, there are early signs that it’s diversifying its base.

“Our growth over the last eight to nine months has come much faster in secondary or tertiary markets, places like Charlotte, [North Carolina],” said Anushka Salinas, Rent the Runway’s president and chief operating officer. “That goes to show it’s not just a fashionista customer … [or] a wealthy woman in New York City.”

But investors weren’t entirely sold on that story. Though the stock’s listing price of $21 represented the top of its pre-IPO range, and rose as high as $23 in early trading, it later fell, ending at $19. The rocky debut stands in contrast with that of other recent fashion IPOs, including Warby Parker and Olaplex, both of which saw stock prices soar on their first day of trading.

Rent the Runway is not yet profitable and remains modest in size; revenue totalled $157.5 million last year, down from $257 million in 2019. It counted about 112,000 customers as active members of its monthly subscription service as of Sept. 30. It posted $171 million in net losses in 2020, and $154 million the year prior.

Even so, RTR’s market capitalisation of $1.7 billion at its peak Wednesday was a marked improvement from its reported valuation of $750 million in May 2020, which reflected a drop from the unicorn status it earned the year prior, when institutional investors T. Rowe Price and Franklin Templeton led a $125 million funding round.

“Being able to access goods outside of our pricing comfort zone, temporarily adopting the identity of these prestige labels and not contributing to waste — these benefits make up an efficient way to do something magical,” said Cait Lamberton, professor of marketing at University of Pennsylvania’s Wharton School of Business, and a former Rent the Runway subscriber.

Looking at its balance sheet, however, critics are wary of Rent the Runway’s future trajectory.

The company’s hypothesis is that continued topline growth will eventually lead to profitability, but so far, there hasn’t been any indication that the costs of running the business will go down with scale, financial experts say.

One pain point is the inevitable depreciation of Rent the Runway’s inventory and its role in calculating profitability. Clothing naturally diminishes in value through wear-and-tear and as trends fall out of favour, which makes depreciation a significant factor in the company’s business model. But critics say RTR hasn’t demonstrated how depreciation costs will impact its path to profitability. The company created a novel metric of gross profit that excluded “product depreciation” without sufficient clarification.

“Effectively [Rent the Runway] is saying the usage of the clothes does not affect their profitability, but we know that’s not true,” said Daniel McCarthy, marketing professor at Emory University. “We need to understand just how much of the clothes are losing value as people wear them to [understand] the appropriate amount of expenses associated with clothing costs.”

For its part, the company said new models of acquiring inventory, such as consignment and private label manufacturing with designer partners rather than buying merchandise outright, will help alleviate cash flow issues. Currently, RTR procures more than half of its inventory through the consignment revenue-sharing model as well as exclusive products made in house, and expects this share to increase.

An even bigger concern is whether Rent the Runway can attract a significant user base at a time when many professionals are still working from home.

“How many people want a rentable closet in a world where more and more people are working from home, and a lot of them are working from home wearing athleisure?” said Jason Stoffer, partner at venture capital firm Maveron.

But Lamberton argues that even if people continue to work from home in the future, it doesn’t necessarily mean there will be less interest for rental.

“When people haven’t seen each other in a long time and they reconnect, they want to feel transformed,” she said. “They want to spend money on goods that allow them to be a different person, and Rent the Runway allows for that transformational experience.”

Ultimately, rental remains a difficult space because of its novelty. Convincing shoppers to trade the traditional ownership for a subscription model will take time and ample investment in marketing. And hopefully along the way, Rent the Runway will skim its losses too, for the sake of its stock price.

“It’s a completely new way of consuming and it takes a lot of change to the consumer and their purchase habits to make something like this take off,” said Sucharita Kodali, an analyst at Forrester. “This is evident in the fact that their user base is tiny.”

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Editor’s note: This story was revised 28 October, 2021. An earlier version stated that Warby Parker and Olaplex saw their stock prices dip after strong demand on their opening days. This is inaccurate. Their stock prices remained above their respective initial listing prices in their debut.