As Rent The Runway Walks Onto Wall Street, Can Its Business Rebound?

Rent the Runway has had a wild year.

About a year after the company announced a round of funding that valued it at $1 billion, the COVID-19 pandemic hit, pummeling its business. With many people working from home and special events canceled, few people wanted to rent formal dresses or designer clothing.

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The company raised money amid the pandemic, but at a reduced valuation of $750 million. 

Now, it’s going public in an IPO that seeks a valuation as high as $1.5 billion. 

Among the largest shareholders in New York-based Rent the Runway are Bain Capital Ventures, TCV, Highland Capital and Ares Corporate Opportunities Fund V. Rent The Runway is expected to start trading on the Nasdaq on Wednesday under the ticker RENT. The company set an IPO price range of between $18 and $21 per share.

Changing business model

Rent the Runway began with the idea that people could rent designer dresses for special occasions at a fraction of the price of buying them outright. The company eventually added a subscription model, where customers could pay a monthly fee to rent a certain number of items per month (it used to have an unlimited option but that ended during the pandemic). 

Rent the Runway customers can browse styles online and rent clothing, which is shipped to them, sometimes with a backup option or size. Shoppers can either ship the clothes back to Rent the Runway, or drop them off at a physical location. 

In a way, Rent the Runway leans into the idea of the “circular economy,” or of sustainable fashion practices like buying clothes second hand, according to Paula Rosenblum, co-founder and managing partner of retail advisory firm RSR Research.

“Rent the Runway’s a bit of a hybrid,” Rosenblum said. “On one hand you’re not buying something you’re never going to use again. You’re renting it and then you’re giving it back.”

Rent the Runway said in a filing that 83 percent of its revenue for the first six months of fiscal year 2021 was generated by recurring subscriptions. In that way, it’s an e-commerce company based on subscriptions, according to Kat Liu, a research analyst at IPOX Schuster LLC, which offers financial services related to new listings.

During the pandemic, the company pivoted to offer a resale option, where customers could buy pre-owned designer clothing, similar to the business models at Poshmark, The RealReal and ThredUp. Its resale business doesn’t bring in the big bucks though, bringing in only about 9.4 percent of Rent the Runway’s total revenue for the six month period that ended on July 31, 2021. 

The COVID-19 impact

The pandemic hit Rent the Runway hard. The company said in its S-1 filing that revenue dropped more than 38 percent from $256.9 million in 2019 to $157.5 million in 2020. At the same time, its losses grew from $153.9 million in 2019 to $171.1 million in 2020. 

Its total subscribers also dropped from nearly 148,000 in 2019 to around 95,000 in 2020. However, subscribers have been returning as society reopens—in the six-month period ending in July, the company reported having nearly 127,000 subscribers.

“The global shelter-in-place restrictions significantly reduced our number of active subscribers and engagement with all of our offerings because of the decrease in special events, social gatherings and interactions outside the home,” the company wrote, adding that a “significant number of subscribers” paused or canceled their subscriptions.

As a result of the pandemic’s impact, Rent the Runway slashed costs, cut staff and shuttered its physical stores, where customers could go to try on and rent clothes.

Usually shuttering stores isn’t a good sign for investors, but in Rent the Runway’s case, it made sense, according to Liu.

“Because of their business model, they don’t really depend on the resale part. If you have a physical store where you have people go in to try clothes to rent them, that doesn’t make as much sense,” Liu said, adding that people aren’t actually buying the clothes there.

Accounting for depreciation

Although the dominance of its subscription business might give Rent the Runway SaaS vibes, its financials reflect the fact that it deals with physical goods, not software. And that means depreciating assets. 

As The Wall Street Journal points out, the company’s financial calculations show a gross profit margin excluding depreciation of 54 percent. That’s a generous way of looking at things, considering that Rent the Runway’s clothing inevitably depreciates, given how frequently they’re worn and how regularly fashion evolves. 

As the Journal noted, Rent the Runway hasn’t turned a profit since spring 2019, if accounting for adjusted earnings before interest, taxes, depreciation and amortization. It’s also unclear how often Rent the Runway refreshes its own closet. (For context, its website still carries a dress I wore to a wedding in 2018. It also still carries the navy version of the dress former Bachelorette JoJo Fletcher wore for her engagement in 2016.)

A holiday and return-to-office boost?

But the company could be poised for a comeback. Unless another COVID-19 variant flares up again, Rent the Runway could see an uptick in rentals for holiday parties, where people want to wear something unique that they haven’t worn before, Rosenblum said.

There’s also the opportunity that comes with women returning to physical offices as they re-open. CEO Jennifer Hyman alluded to that in a letter included in the S-1.

“It’s inevitable that women will be entering the workforce at record rates as they’re already outpacing men with college degrees,” Hyman wrote. “It’s inevitable that these financially empowered women will want and need more choices in their clothing, from styles to sizes, at lower prices. They’re going to want these choices to be sustainable and they’re not going to want to own them. As a result, the opportunity in front of us is immense.” 

One wild card, according to Rosenblum, is the global supply chain issues that have plagued nearly all industries. If the company’s new inventory for the new season is delayed, that could present issues for the newly public company. 

E-commerce companies that have gone public in recent months haven’t done especially well in the public markets, according to Liu, but e-commerce companies continue to go public.

Rosenblum still thinks it’s hard to make money as a pure-play e-commerce company (meaning all sales are online without any retail presence). Part of the reason for that is the return rate of items, the cost of shipping, and the need to overbuy inventory to satisfy customer demand. But Rent The Runway leans into emerging trends, and that could be in its favor.

“I think renting and resale are going to become more of a thing,” Rosenblum said. “But again it’s all about sustainability.” 

Illustration: Li-Anne Dias

Correction: A previous version of this article incorrectly stated Rent the Runway’s IPO price range. The company set a price range of between $18 and $21. We regret the error.