Rent the Runway: There's Salvage Value Here

seekingalpha05-25

Rent the Runway's stock has tripled year to date in sympathy with other small-cap meme stocks, but the company has also made significant fundamental improvements.The company offers a subscription ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nRent the Runway: There's Salvage Value Here\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-25 11:48 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4695617-rent-the-runway-theres-salvage-value-here><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Rent the Runway's stock has tripled year to date in sympathy with other small-cap meme stocks, but the company has also made significant fundamental improvements.The company offers a subscription ...</p>\n\n<a href=\"https://seekingalpha.com/article/4695617-rent-the-runway-theres-salvage-value-here\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4094","symbol_name":"服装零售","start_time":0,"source_url":"https://seekingalpha.com/article/4695617-rent-the-runway-theres-salvage-value-here","article_id":"2438002359","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/626856214/image_626856214.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2438002359","pubTimestamp":1716608883,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The company fills a void that leading e-commerce names don't fill today Simply put, Rent the Runway offers a subscription membership to keep a rotating closet of designer items at home. The snapshot below shows the company's three core subscription membership plans:   Rent the Runway subscriptions  The basic $89/month plan allows customers to have five of Rent the Runway's items at home. Customers keep can these items in their closets for the duration of their choosing, and then send them back for a replacement. Upgrading to more expensive plans allows customers to swap out items more frequently and access higher-tier products. On the marketplace end, Rent the Runway purchases the majority of its clothes wholesale from its brand partners. In some cases, the company also contracts with brand partners to acquire inventory via consignment , and in some rarer cases still the company contracts exclusive designs manufactured just for its customers. The company plans to spend $48-$50 million ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4094":"服装零售","RENT":"Rent the Runway, Inc.","BK4551":"寇图资本持仓","BK4200":"专卖店","CFA.SI":"NikkoAM-STC Asia REIT","BK4122":"互联网与直销零售","SFIX":"Stitch Fix Inc."},"translate_title":"租用跑道：这里有残值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CFA.SI":1,"RENT":1,"SFIX":1},"content_text":"Rent the Runway's stock has tripled year to date in sympathy with other small-cap meme stocks, but the company has also made significant fundamental improvements.The company offers a subscription membership for renting designer items, starting at $89/month.While subscribers have been declining, Rent the Runway is focusing on improving profitability and pushing inventory sales.The company expects to improve adjusted EBITDA margins to 16% in FY24, alongside hitting FCF breakeven.The stock trades at just 7x FY24 adjusted EBITDA.   Grosescu Alberto Mihai/iStock via Getty Images Well, it's pretty safe to say that the small-cap IPO hype is over. A tremendous number of companies cashed in on investors euphoria amid the pandemic, but now, with interest rates persistently high and a tough macro climate on the horizon, investors have shifted back into safety mode. Against this backdrop, Rent the Runway (NASDAQ:RENT) has shed hundreds of millions of market value. But year to date, the stock has already tripled, driven in no small part by the recent resurgence of \"meme\" stocks. But while as a small cap, Rent the Runway has a reputation to be clubbed in with other speculative trades, I do think there is a real fundamental business case to assess here. Data by YCharts I'll cut to the chase here: while I'm certainly not betting the farm on this stock, I'm encouraged by A) the stock's recent rally and B) the company's recent return to growth and improving profitability, and am initiating Rent the Runway at a buy rating. The next catalyst for the company is its Q1 earnings release, currently scheduled for June 6. How does Rent the Runway Work? The company fills a void that leading e-commerce names don't fill today Simply put, Rent the Runway offers a subscription membership to keep a rotating closet of designer items at home. The snapshot below shows the company's three core subscription membership plans:   Rent the Runway subscriptions (Rent the Runway) The basic $89/month plan allows customers to have five of Rent the Runway's items at home. Customers keep can these items in their closets for the duration of their choosing, and then send them back for a replacement. Upgrading to more expensive plans allows customers to swap out items more frequently and access higher-tier products. On the marketplace end, Rent the Runway purchases the majority of its clothes wholesale from its brand partners. In some cases, the company also contracts with brand partners to acquire inventory via consignment (i.e., Rent the Runway doesn't pay any acquisition cost upfront), and in some rarer cases still the company contracts exclusive designs manufactured just for its customers. The company plans to spend $48-$50 million (for sizing purposes, this is slightly more than half of the company's ~$75 million quarterly revenue run rate) on inventory acquisitions in FY24.   Rent the Runway inventory acquisition (Rent the Runway investor overview) The bad news: subscribers have been in decline, which makes sense as a tough macro environment has pushed many customers to assess their costs, especially recurring subscription fees. In Rent the Runway's most recently reported quarter (Q4), active subscribers dropped by 6k sequentially to 126%, down -1% y/y.   Rent the Runway subscription counts (Rent the Runway Q4 investor deck) And yet, revenue still grew +1% y/y in the fourth quarter. While subscription represents roughly 80% of Rent the Runway's top line, management is starting to more heavily push inventory sales. The unit economics of this make a lot of sense: Rent the Runway can get a lot of mileage from a single item by renting it out multiple times and then finally selling the item to a customer that really likes it. Note as well that Rent the Runway purchases clothes at wholesale prices (whereas a typical luxury designer will mark up its pieces at 2.5x, according to the company's investor presentation). As shown in the chart below, inventory sales revenue grew 49% y/y in Q4:   Rent the Runway inventory sales (Rent the Runway Q4 investor deck) Direct sales of inventory is being more firmly embedded into the Rent the Runway experience now to encourage customers to keep their clothes. For example, if the app notices that a customer has held onto a product for several months, it will send the user a promotional code to acquire the item at a discount. Rent the Runway is the most well-known clothing rental subscription in the market, and it fills a void that other creative e-commerce companies like Stitch Fix (SFIX) have struggled with. Stitch Fix declined because of a poor product/market fit: it originally thrived on the novelty of receiving a stylist-curated \"Fix\" of items, but struggled on its direct-sales model in part because it was neither cheap/fast fashion nor true designer. Rent the Runway appeals to customers by offering access to top designers at subscription prices, while encouraging purchases later in the customer lifecycle. Improving profitability Amid a slightly declining customer base, Rent the Runway has been substantially improving its profitability. As shown in the chart below, adjusted EBITDA margins jumped 6 points y/y in the most recent quarter to 15%:   Rent the Runway adjusted EBITDA improvement (Rent the Runway Q4 investor deck) Note that while gross margins declined -5 points y/y to 39%, underlying fulfillment expenses improved three points as a percentage of revenue to 27%, while it was a six-point increase in rental depreciation expenses (due to an accounting adjustment) that hit gross margins the hardest. Meanwhile, on the opex side, and after adjusting for one-time restructuring costs and depreciation/amortization (which, as mentioned was a hit to gross margins), the company achieved savings on technology costs and G&A. The company is targeting a 15-16% adjusted EBITDA margin in FY24 (versus a 9% adjusted EBITDA margin in FY23), as well as breakeven free cash flow (versus -$70 million, or a -23% FCF margin, in FY23):   Rent the Runway outlook (Rent the Runway Q4 investor deck) Note the one red flag here: Rent the Runway does have a challenging balance sheet, so it needs to get to breakeven FCF as soon as possible. It had just $84 million of cash left on its books as of its most recent balance sheet, on top of $307 million of debt:   Rent the Runway Q4 balance sheet (Rent the Runway Q4 earnings release) And though not entirely applicable for a non-industrial company, we note that shareholders' equity on the balance sheet is negative, reflecting the accumulation of losses in Rent the Runway as it has scaled (something the company is hopefully correcting now). Valuation, risks and key takeaways At current share prices around $30, Rent the Runway has a market cap of $108.9 million, and after netting off the $84.0 million cash and $306.7 million of debt on the company's most recent balance sheet, the company's resulting enterprise value is $331.6 million. Assuming the outlook midpoint of the company's 15-16% adjusted EBITDA margin and $301-$306 million in revenue (+1-6% y/y) for the current year, we'd arrive at ~$47 million in adjusted EBITDA in FY24, and a valuation multiple of just 7x EV/FY24 adjusted EBITDA. That cheap valuation, of course, is laden with a number of risks:  A debt heavy balance sheet, as previously noted Continued risk of subscriber churn and a possible slowdown in direct inventory sales, after a recent uptick   I wouldn't take more than a small position here, but all in all, I think there's more reward than risk here.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2438002359"}