Title

Presentation

Rent the Runway, Inc. misses on earnings expectations. Reported EPS is $-0.45 EPS, expectations were $-0.42.

Operator: Welcome to Rent the Runway’s Third Quarter 2023 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 General Counsel, Cara Schembri. Thank you. You may begin.

Cara Schembri: Good afternoon, everyone. And thanks for joining us to discuss Rent the Runway’s third quarter 2023 results. Joining me today to discuss our results for the quarter ended October 31, 2023 are CEO and Co-Founder, Jennifer Hyman; and CFO, Sid Thacker. During this call, we will make references to our Q3 2023 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 this afternoon’s press release, as well as our filings with the SEC, including our Form 10-Q that will be filed within the next few days. We undertake no obligation to revise or 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 to our Investor website and in our SEC filings. And with that, I’ll turn it over to Jen.

Jennifer Hyman: Hi, everyone, and thanks for joining. With a sub-dollar stock price and very little support from the public markets, my goal this evening is to address the elephants in the room when it comes to Rent the Runway. With transparency and convey that we believe that we have reached a positive, important turning point where our business can hopefully start to be evaluated on its strong business model and the vast opportunity ahead of us, as opposed to our challenged balance sheet. As of the end of Q3 2023, Rent the Runway has $312 million of outstanding debt, which obviously is a large amount, especially compared to our current equity value. Before COVID, Rent the Runway held significantly less debt with a sizable portion of it at low rates via an asset-backed loan, which used our inventory as collateral.

After COVID hit in mid-March 2020, we needed to move very quickly to refinance to secure the business and address the fact that our inventory was now being appraised at a small fraction of its pre-COVID value and we faced serious consequences under the term of our ABL. This pressure, alongside our precipitously declining revenue due to COVID lockdowns, meant that we had to take on a higher quantum of debt at high PIKs to save the company and repay our ABL. While the debt amount was always, in our view, high, it was essential to stabilize the business for the duration of the pandemic and support our post-COVID recovery and it felt manageable at a $1.7 billion IPO valuation. I believe it’s clear, based on many conversations with public investors, that a key reason why our stock price has declined into sub-dollar territory is because of this debt.

Because of our balance sheet, we believe that the market lacks confidence in our viability. Today, we are announcing significant modifications to our debt terms that we believe provide meaningful flexibility and will allow the company the opportunity to generate significant free cash flow before the debt’s maturity date. First, both PIK and cash interest have been eliminated for six quarters, beginning with Q4 2023, reducing total interest expense by $66 million over this period, $18 million of which is cash interest. This means that the debt will remain flat at $312 million during this period, which is intended to allow equity value to accrue as we grow and to reduce strain on company cash while we are driving the business to free cash flow break-evens.

In addition, the minimum liquidity covenant has been reduced from $50 million to $30 million, which provides additional cushion even in significant downside scenarios. We have also mutually agreed on spend caps in fiscal year 2024 for inventory CapEx, marketing and fixed operating expenses, which align with our profitability goals. I encourage you to read the full details of the amendment that has been filed in a Form 8-K prior to this call. While the quantum of debt still needs to be addressed, we believe that these modifications provide significant breathing room while we are laser-focused on significant free cash flow generation and proving the strength of our business model to the market. Simply put, don’t believe everything you read in the press, Rent the Runway is here to stay and I am confident that 2024 is going to be a big year for us.

The other significant elephant in the room has been a question mark as to whether Rent the Runway can grow. The market has lacked confidence in our growth opportunity because the business is expected to be more or less flat this year at around $300 million in revenue. I want to be clear that we believe our lack of growth in 2023 is a temporary problem primarily driven by the inventory depth issue that we explained in detail last quarter. Lack of depth in the style customers wanted to rent led to elevated rates of churn, and as a result, we enacted strategies to pull back acquisitions while we solved this problem. In great news, the actions we have already taken to fix our assortment and greatly improve inventory depth in the second half of 2023 have already made marked improvement on our customer experience.

We are seeing positive green shoots and momentum in the most important input and output metrics of the company, including subscription Net Promoter Scores that are both the highest we’ve seen since pre-COVID and that continue to climb weekly. Global churn is down since last quarter and the churn of our post-90-day subscribers is amongst the lowest levels we’ve seen since Q4 2021. With higher NPS and higher loyalty, we believe that our positive customer growth flywheel can be re-engaged. As a result, we’re highly confident that we’re on the right track. We believe we’re focused on the right priorities in 2023 to fix the foundations of our customer experience and we want to update our commitment to being a fully cash flow break-even business in 2024.

I want to be clear, we are laser-focused on driving this business to free cash flow break-even next year. That’s why we are setting up a cost structure that is designed to enable us to do so even in a zero-growth scenario. Zero growth is clearly not our goal, but we think best to plan conservatively when it comes to cost. I firmly believe that creating a sustainable business will enable us to control our own destiny and capture as much of the large rental market as possible over the upcoming years. The rental market continues to grow at a clip far faster than the overall fashion market in the U.S. and around the world, as demand for a subscription to fashion and normalization of rental has never been higher. While we believe there will be many winners, we have generated the highest revenue of any fashion rental platform and we believe this is due to our positioning as the premium service for the more premium professional customer with the premium brand relationship.

Regarding this quarter specifically, we met expectations on the top and bottomlines. We ended the quarter with an active subscriber count of 131,725. We shared with you last quarter that we plan to make deliberate choices that we anticipated would negatively impact short-term revenue and subscriber count to drive profitability. We believe that the sub count is a result of our strategic decisions to hold the line on lower promotions and lower marketing spend to prioritize inventory and stock rates. In other words, we acquired fewer customers by design, but the customers we have acquired are more profitable. As we shared last quarter, for Rent the Runway, our customer experience is all about her ability to access the fashion she wants when she wants it, which is where our focus on inventory depth and in-stock rate comes into play.

The fashion informs her satisfaction with and loyalty to our offerings. Thus far, in the second half of 2023, we’ve improved the fashion on our platform in terms of depth, selection that is significantly more aspirational and versatile, and importantly, in line with what our core professional female customer is looking for. The green shoots we are seeing in the data are as follows. First, as we’ve shared, the most important component of our inventory strategy is greater investment of depth of styles and brands we know she wants so we are in stock more of the time. We told you that depths of our second half 2023 buy were expected to be approximately 1.7x the depths of our first half buys, which would increase our in-stock rate by 700 bps to 1,000 bps.

We have over-delivered against our plan. As of Q3, in-stock rate was 1,400 basis points higher than Q2 and 1,200 basis points higher than Q3 last year, contributing to increased customer satisfaction and retention rates. Beyond buying at greater depth, there have been several additional important strategies we have deployed to improve the customer experience with fashion on our platform, including consolidating key styles by warehouse, better site and app merchandising, and creating a unique onboarding experience for early-term subscribers. Loyalty is highly correlated to in-stock rates and we have early data to show that the focus on depth is working. As of October, inventory as a reason for churn has gone down by 40% over the past six months.

Additionally, her rental satisfaction rate has increased year-over-year. Not only is it easier for her to rent the items she wants, the assortment is resonating with her even more. Hearts on our new inventory are over 30% higher this year over last year. Workwear is a key driver of this satisfaction. Utilization of workwear is 1,000 basis points higher than last year, which is great for our business as there’s less seasonality involved in people who use our service to dress for work. We are also seeing that paid add-on rates have gone up as in-stock rates have improved and are at the highest level since before we launched our extra item plans. It’s great that when our inventory availability is higher, she will pay more to get more of it and ARPU increases.

We’re also pleased with our purchase rate this past quarter. We think that one of the most compelling elements of our business model for customers and for us financially is when customers use their subscription to try pieces and then purchase them from us when they already have them at home. In Q3, purchase rate is up 50% in units sold versus last year, indicating that the pricing and assortment is resonating and we are getting better at positioning try before you buy as a key value proposition of having a subscription with us. We think about the try before you buy channel as a Retail 2.0 experience where we are bringing the store directly into the customer’s home. In a dressing room, she tries out the product and gets a brief sense of fit and aesthetics, but with Rent the Runway, she experiences how the product fits into her life, receives validation from people she knows and determines whether she wants to make it a permanent part of her closet.

The vast majority of these at-home sales have recovery rates far above what we paid for the item and we see higher loyalty rates in subscribers who purchase from us, expect us to continue to push on this developing channel in a much bigger way in 2024. Next, exclusive designs continue to be beloved by our customers as evidenced by utilization, wear rate and love rate all up year over year. As a reminder, we create these designs in close collaboration with brand partners and leverage our own unique data. Today, just in time for holiday, Rent the Runway introduced The Vault, a new category of Luxury Evening Wear styles from 20 of the top brands in fashion, including many new to site designers like Etro, Oscar de la Renta, Brandon Maxwell, Anna October, Giambattista Valli, Rachel Gilbert, Paris Georgia and more, available exclusively for four-day and eight-day rentals.

We view this launch of luxury as a key step in reinvigorating our special events rental business, which was always based on renting aspirational brands that you couldn’t afford or didn’t make sense to buy and solidifying our premium positioning in the market. Overall, our brand relationships continue to be one of the resounding strengths of our business model. Even in this complex macro environment, brands see us as a powerful marketing partner. The new to site designers I just mentioned are a testament to that. Over the past few years, we have managed to continue reducing the input cost per unit while increasing the MSRPs of the fashion on our site. Simply, our costs are decreasing while the aspiration and premium nature of the assortment is increasing.

Our pay for performance revenue share model continues to scale in terms of the number of partners and in the percentage of the overall buy. Based on our buys to-date, we currently expect that in the first half of 2024, that almost 50% of our inventory acquisition will be acquired via pay for performance. Beyond our success in our inventory pillar, the teams have continued their work across our other strategic pillars, efficient and easy to use experience and best-in-class product discovery. We are pleased with the strides we have made across the Rent the Runway ecosystem and are offering a high touch luxury style experience that we believe our customers are noticing. Related to an easy to use experience, our SMS based styling and support service, Rent the Runway Concierge, has reached an all-time high adoption rate with over 30% of new subscribers opting in as of the end of Q3.

We have seen sustained retention improvements, not only for customers who use Concierge in their first 30 days, but also in their second months and third months with us. Early term customers who opt into Concierge have 15% lower churn rates than those who do not, so our plans are to continue to scale this program. Our in-product onboarding is also seeing encouraging results. 95% of new subscribers complete it, leading to a 33% drop in the time it takes her to place her first order. That means she has more of the month to enjoy her Rent the Runway items. We’ve come a long way in 2023 and feel excited about the path ahead.

Sid Thacker: Thanks, Jen, and thanks again everyone for joining us. While we met our third quarter guidance, as Jen mentioned, we’re disappointed with revenue that will essentially be flat this year in a growing fashion rental market. Despite this, we have continued to make underlying improvements to a financial model that may not be as apparent. In the context of our rental product issues this year, it’s easy to overlook that most of our rental product today is procured using cost advantaged non-wholesale channels. Due to the near-term gross margin impact of right-sizing our inventory debt, it’s easy to overlook that our year-to-date gross margins of approximately 40%, including both product and fulfillment costs, point to strong underlying unit economics.

It’s also understandable that both our $27 million reduction in the fixed cost base from the Q3 2022 restructuring program, as well as the incremental $5 million in annualized fixed cost reductions this quarter might go unnoticed. These building blocks, in combination with our current plans, give us confidence that Rent the Runway is on track to reach free cash flow break-even in FY 2024. We expect to bring our business to break-even sooner and at a far lower level of subscribers than we had initially announced. As we plan to outline next quarter, many of the actions that allow us to reach this milestone have already been taken. Our rental product spend is known and is expected to be considerably lower than FY 2023 levels that were impacted by the need to make inventory debt adjustments.

We have reduced our fixed cost base in the third quarter and expect to continue to find ways to optimize this further. Our transportation expenditures have good visibility. The balance sheet actions we announced today result in no interest expense for FY 2024. We do not assume that significant growth is required to reach our free cash flow goal. Let me now turn to our Q3 results. We ended Q3 with 131,725 ending active subscribers, down 1.9% year-over-year. Average active subscribers during the quarter were 134,646 versus 129,186 subscribers in the prior year, an increase of 4.2%. Ending active subscribers declined from 137,566 subscribers at the end of Q2 2023. As previously disclosed, we tested varying levels of promotions during Q2 and decided to be much less promotional in Q3.

Our lower Q3 ending subscribers primarily reflected these promotional tests ending in Q2 and lower ongoing new customer promotions during the third quarter. Total revenue for the quarter was $72.5 million, down $4.9 million, a 6.3% year-over-year. Revenue in Q3 2022 benefited by approximately $1.6 million from my exclusive design pilot program with Amazon. Subscription and reserve revenue was $64.7 million versus $68.8 million last year, a decrease of 6%, driven by continued weakness in our reserve business and lower average revenue per subscriber. The lower average revenue per subscriber was primarily driven by fewer full-price subscribers from the promotional testing previously discussed, along with expected declines in add-on revenues year-over-year.

These declines were partially offset by higher average revenue per subscriber due to lower new customer promotions. Fulfillment costs were $21.5 million in Q3 2023 versus $23.2 million in Q3 2022. Fulfillment costs as a percentage of revenue was slightly lower year-over-year at 29.7% of revenue in Q3 2023, compared to 30% of revenue in Q3 2022. Fulfillment costs as a percentage of revenue were flat to Q2 2023 despite higher new receipt processing costs. Fulfillment costs benefited from a new transportation contract with UPS, which locked in competitive rates and consolidated the vast majority of our shipping needs. Gross margins were 34.8% in Q3 2023 versus 41.1% in Q3 2022. Q3 2023 gross margins reflect higher rental product costs due to increased investment in inventory year-over-year.

The increased investment year-over-year is largely a one-time correction of inventory depth to increase inventory in stock rates, which are essential for fueling customer satisfaction and growth. Gross margins were negatively affected by approximately 400 basis points versus Q2 2023 due to seasonally higher revenue share expenses attributable to new receipts. Operating expenses were about 11% lower year-over-year, primarily due to the favorable impact of our 2022 restructuring plan, further fixed cost actions we have taken this year and lower marketing spending. Total operating expenses, which include technology, marketing, G&A and stock-based compensation, were about 60% of revenue versus approximately 63% of revenue last year. Adjusted EBITDA for the quarter was $3.5 million or 4.8% of revenue versus $6.6 million and 8.5% of revenue in the prior year.

In Q3 2022, adjusted EBITDA benefited by $4.6 million from the launch of the exclusive design pilot with Amazon and significantly higher inventory liquidation to third parties. Adjusted EBITDA was $4.2 million lower in Q3 2023 versus Q2 2023, largely due to seasonally higher revenue share receipts, which peak in Q1 and Q3. Free cash flow for the nine months ending October 31, 2023 was negative $47.3 million versus negative $69.9 million for the same period in fiscal year 2022. We continue to expect significant improvement in cash consumption in fiscal year 2023 versus last year. Let me now turn to guidance. We are maintaining revenue guidance for fiscal year 2023 and expect that FY 2023 revenue will be at or above fiscal year 2022 revenue of $296.4 million, with Q4 2023 revenue at or above $74 million.

We are also maintaining a fiscal year 2023 adjusted EBITDA margin guidance of 7% to 8% of revenue. We expect Q4 2023 adjusted EBITDA margin to be at or above 7% of revenue. We are no longer providing fiscal year 2023 free cash flow guidance. While we still expect significant improvement in cash consumption versus fiscal 2022, as evidenced by year-to-date results, we are focused on ensuring that fiscal year 2024 is free cash flow break-even. We anticipate incurring cash expenditure in Q4 in preparation toward meeting those goals. As an example, we expect to incur capital and operating costs during Q4 to improve warehouse operations that we expect will drive savings in fiscal year 2024. We think these are rational business decisions and are part of our fiscal year 2024 free cash flow break-even roadmap.

While this year has had its challenges, we believe we are making meaningful progress. Our balance sheet actions have been designed to provide us with greater financial flexibility. Our inventory strategy has yielded results and customer retention has improved. We are also making further improvements to our fixed cost structure during the third quarter. Finally, we are working to bring Rent the Runway to free cash flow break-even for fiscal year 2024. We will now take your questions.

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

See also 16 Best Franchises to Open With $10K in 2023 and 15 Best Selling Laptops in 2023.

Dana Telsey: Hi. Good afternoon, everyone. On the debt restructuring that you announced and the amended facility, as you think about the go-forward, I mean, obviously, you have six full quarters beginning with the fourth quarter of 2023. How do you see the continuation of the debt? How do you think that is positioned as we go through the next four quarters? And given the expense structure of the business, which you’re managing and looking to reduce the cost, what should we be seeing, whether it’s both from fulfillment expense and the cost structure that you mentioned that it sounds like still has opportunity to address in the face of the enhancements that you’re making to the model, like with the Luxury Vault and looking to improve active subscribers? Thank you.

Jennifer Hyman: Hi, Dana. Thanks so much for the question. So, first of all, we think that focus on the business model in general has been tremendously clouded by the fact that we did have and we do have this debt. Now, by essentially reducing all interest or eliminating all interest for the next six quarters, by reducing the minimum liquidity covenant, what it does is it allows the business to drive to break-even next year. It allows us to be in a position where we can generate significant free cash flow profitability before the debt is due, which is around three years from now. And in so doing, really show the market the strength of this business model. We have high margins. We continue to improve those margins. We have high flow through margins.

And we are excited to deliver a break-even business in 2024 and are really encouraged by the fact that the growth flatness that we’ve experienced this year, that we were able to identify the problem, that we were able to start to make significant corrections to that problem in terms of our debt strategy in the second half and that we’re really seeing green shoots in the data that give us confidence going into next year.

Sid Thacker: Yeah. Dana, I would say, the only things I would add here are, number one, what should you take away from the debt modifications you’ve announced? The first thing is that we actually have a very supportive lending partner who understands the business and is willing to work with us. That’s important. The second thing is the debt doesn’t mature until October of 2026 and what we’re focused on, what’s in our control is to deliver the best business results possible and to prove the strength of the business to the market and I think we’ve taken, as Jen outlined, very important steps along this path this year.

Dana Telsey: Got it. And just, Jen, health of the consumer, what are you seeing as we go into this holiday season that’s the same or different than last year?

Jennifer Hyman: Well, one of the most encouraging things that we’re seeing in our business is this significant increase year-over-year in workwear and we started to see that last quarter. We mentioned it, but it has continued to accelerate, which to us is really just what the pre-COVID Rent the Runway behavior was, where women utilized our service throughout the year to get dressed for work in addition to her everyday life and special occasions. So for us, we feel encouraged by the fact that behaviors that our customers are using now feel more normalized to a pre-COVID kind of set of behaviors. We’re also seeing that we’ve continued to see nice impact to improve the retention, we continue to see good acquisition despite the macro environment and the fact that we’ve significantly decreased both our marketing spend and our promotions over the last few quarters, because we didn’t want to intentionally bring people into an experience where the inventory depth was not there and we feel that — we feel very encouraged by the results that we’re seeing thus far.

Sid Thacker: Yeah. I think a couple of other encouraging signs that we’ve seen that give us some confidence that the health of our customer is strong. Number one, as we’ve improved the inventory assortment, we’ve actually seen them engage with the inventory more. So as Jen pointed out, we’ve started to see improvement in our add-on rate. People are willing to pay more for inventory they like. The second thing that Jen mentioned in her remarks is, we’ve actually improved and seen encouraging signs in terms of our ability to sell inventory to our customers in a profitable way. So I think these are just indications that the customer remains healthy, retention is improving, they’re engaging with the inventory in a way that benefits us and recognizing the value that we provide.

Dana Telsey: Thank you.

Operator: Thank you. Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question.

Eric Sheridan: Thanks so much for taking the questions. Two, if I could, just coming back to the inventory issue, is there a way to either put a quantification or maybe a duration around what’s left in terms of getting the inventory issue to where you want it to be to invest back in the flywheel for the business as we get into 2024? That’d be number one. And as you have this period over the next six quarters with savings on the capital structure, what are the priorities to invest those savings back in the business to, again, capitalize on this 2024 and beyond potential for momentum? Thank you.

Jennifer Hyman: Yeah. So one of the things that we shared last quarter that we’re reiterating is that, the improvements that we made in the back half of this year where we increased depth by 1.7x versus the first half of this year was really our first step towards a much broader depth strategy in 2024. Now, as a reminder, the first half of 2024, those orders have already been placed. So that’s why we had insight into the almost 50% that’s coming from pay for performance. That’s why we can tell you that the depth strategy in the first half of next year is already more robust than it was in the back half of this year. Now, we’ve seen that across all cohorts, loyalty rates have improved markedly, and in particular, they’ve improved significantly amongst folks that have been with us for 90-day plus, and we showed that as of the end of Q3, those — that loyalty rate is kind of 15% better than last year, which is really a significant increase for the segment that’s the majority of our customer base — of our subscriber base kind of thus far.

So our strategy is to continue to push on depth, to continue to buy a selection that resonates more with who our core customer is, who is this more aspirational woman in her 30s and 40s, who is professional, who is educated and we see that it’s not just about the depth, it’s the fact that the selection is resonating more than before. Hearts are up 30%. She’s buying more inventory. She’s adding more inventory into her cart, which is obviously increasing our ARPUs again and our margins. So we feel really good about the continuation of this strategy leading to even higher rates of loyalty. But even more so, we feel that the business is poised to really step on the gas pedal as it relates to marketing and growth and acquisition, that this is a customer experience based on improved Net Promoter Scores that are some of the highest Net Promoter Scores we’ve seen since pre-COVID that we feel excited about bringing new customers into.

Sid Thacker: What was your second question?

Eric Sheridan: Just generally over the next six quarters, how you think about the priorities to reinvest the savings from the capital structure changes, how to think about the priorities there?

Sid Thacker: I would say we’re very clear about our priorities for fiscal 2024. And the priorities for fiscal 2024 are number one, to ensure that we bring this business to pre cash flow break-even. That is a non-negotiable, really important initiative for us next year. So that’s the first thing. The second thing I would say is that, if you actually look at fiscal 2023, we have done — given the results and so on, some of these things perhaps aren’t, they get lost sometimes, but we have done a huge amount to invest in the customer experience this year, all the way from rolling out a program that is tailor-made for individual subscribers, styling, one-on-one interaction. These are things we never had before, but now are available to everyone who joins the program.

We have invested $70-plus million in inventory capital this year. Our — now our customers have access to, amongst the newest inventory they’ve had in a long time, the freshest inventory, inventory they love and at high in-stock rates. So I think if you think about our mindset and think about investment in the customer, yes, it’s true that the modifications and the debt will free up some resources, but really we have never stopped investing in the customer experience and I think that is going to continue. Where we will see additional focus next year, in addition to obviously getting the cost structure right and making sure we break-even on a pre cash flow basis, is on the growth side, really turning our attention to making sure more people and more customers experience this program and we drive excitement amongst the potential customers that have yet to try Rent the Runway.

Jennifer Hyman: I think the strength of our brand relationships as well is helping us to deliver incrementally more value to the customer month-over-month. I mean, one example of that is the launch that we did today of Luxury Evening Wear on our platform, which not only is the first launch of Luxury Evening Wear for us, but it’s the first time that many of these brands have ever participated in rental before. We’re starting to rent gowns and dresses on our site that retail for up to $8,000 MSRPs at rental price points that are quite accessible and affordable and so this is really continuing to offer our customers even more and doing it oftentimes on a pay for performance model with the vendors that we’re working with so that everyone really got it.

Eric Sheridan: Thanks for the detail.

Operator: Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Juliana Duque: Hi, everyone. Thank you for taking my question. This is Juliana for Ike. Just a couple of questions. First, on how you’re thinking of G&A marketing and tech spending efficiencies moving forward. I know you mentioned about 200 basis points and efficiencies there this quarter. If you can maybe give me some more color on that.

Sid Thacker: Sure. I think, look, the — we obviously called out two numbers on the prepared remarks. The first is, we saved $27 million in fixed costs as a result of the Q2 2022 restructuring so far. In the third quarter, we enacted further changes primarily affecting the technology line that we will — we expect will save another $5 million on an annualized basis starting the fourth quarter. And I think the message that we’re sending to you is, it’s not — we’re continuing to focus on the cost structure. We continue to look at every spend no matter how small it is and making sure that we bring that fixed cost structure to a level where if we don’t rely — if we don’t want to rely on any sales growth, can we get this business to break-even in fiscal 2024? So that is our aim and we’ll make sure that the cost structure reflects those ambitions.

Juliana Duque: Great. Thank you. And then just one follow up. Are there any thoughts on subscription pricing, taking price there or maybe tying that into there’s any updates on market share, how you’re feeling about your position in the rental market overall?

Jennifer Hyman: We think our subscription pricing is in a really good place. Of course, as Sid mentioned, our goal is to continuously be offering our customers more and more value quarter-over-quarter. We started this year with that philosophy in mind by launching an extra item for all of our customers, really giving them 25% more value for the same price. We’ve followed that up by now giving them free Concierge and free styling via text. Now expanding the MSRPs of our selection. Our selection has continued to become more high end over time, even as they’re getting more items. So for us right now, it is about delivering a better experience, a more aspirational and premium experience to our user base. It is not going to be about increasing price.

Sid Thacker: And I think the one important clarification to my — to the answer to the earlier question is that on marketing, we do not at this point expect to have any changes in marketing spend for fiscal 2024. So we do not expect to reduce our fixed cost reduction plans, do not involve reductions in marketing spend. In fact, as we pointed out earlier, we want to expose more people to a significantly improved experience in fiscal 2024.

Juliana Duque: Got it. Thank you so much.

Operator: Thank you. Our next question comes from the line of Lauren Schenk with Morgan Stanley. Please proceed with your question.

Nathan Feather: Hey. Thanks for taking my question. This is Nathan Feather on for Lauren. On the purchase rate for resale being a 50% year-over-year, what have really been the key drivers moving that up and then any plans or how are you thinking about driving that up further in fiscal 2024? And then as you transition to greater depth across the inventory base, how are you using resale as a method, if at all, to kind of trim that existing lower depth inventory? Thank you.

Jennifer Hyman: Yeah. So number one, we’ve seen a lot of success that as the selection has become more attractive to the user, demand to purchase the inventory has gone up. Number two, we’ve gotten even more sophisticated with our pricing algorithms. So we know exactly how to price the inventory so that we’re still selling it profitably, but doing it in a way that is compelling to our user base. I would say that both of those two improvements are within a strategic channel that is really unique to a subscription or rental model. You think about other companies that are selling items that have been worn before. They don’t have the advantage of the fact that our customers always have at least five things at-home in their closets already.

They’ve already worn them. They’ve already experienced them. They’ve already fallen in love with them. So if we’re able to price it at the right price point, both for them and for us, there’s a much higher likelihood that they will convert on that inventory. The other thing that we started to do, quite honestly, is started to tell customers that this was a benefit of their program. So one of the reasons why some of our customers might sign up for a subscription is that they’re busy. They’re professional women. They have kids. They have other things going on. And this is an easier way for them to kind of shop, because they can try things before they buy it. So just by nature of positioning this as a value set of the program is also another benefit.

The last thing I’ll say is that in the past, we used our Try to Buy channel primarily around much older inventory. So inventory that was in our base for two years or three years or four years and kind of when they had it at-home. We have started to really build the muscle around using currencies in inventory as part of our Try to Buy and building replenishment businesses around that inventory. So really understanding that our customers might want to buy, for example, denim from us, and as opposed to just selling it to them and depleting the amount of denim we have on our platform, instead just replenishing that denim with our partners so that we’re both providing a customer value, making money off of the inventory and not depleting the supply of important categories.

Sid Thacker: Yes. I would say there are three things that we think about when we think about resale. The first is, we have now this quarter, this past quarter, actually become quite surgical at looking at category-by-category, brand-by-brand, trying to understand age of inventory, what we can sell that inventory for, how much that matters to our customers and so on. So we’re utilizing some of those lessons to actually drive some good decisions in terms of what we can sell to whom. The second thing is we have actually made product enhancements to the customer experience and to the technology backbone here where we can target specific items that customers have at-home and convince them to try that item and perhaps buy it if they like it.

And then the third thing is you’ve got to remember all of this, this year has been about making sure that the inventory experience for our customers and the in-stock rate is in good shape. So what we want to also make sure is we protect that. So all of this increase in resale has been essentially dovetailed at the same time with a real protection of the in-stock rates that our customers are experiencing and so we are working on a replenishment type system that ensures that we can not only sell items that customers want, improve loyalty for them, but also, of course, maintain the inventory experience that they are now becoming accustomed to.

Operator: Thank you. Our next question comes from the line of Andrew Boone with JMP Security. Please proceed with your question.

Andrew Boone: Thanks for taking the question. I wanted to ask about promotions. I want to think about [Technical Difficulty]

Jennifer Hyman: Andrew, we can’t hear you. Can you repeat what you were saying?

Andrew Boone: Okay. I wanted to ask about learnings from promotions over the last quarter and how we should think about that as a way to start growth going forward [Technical Difficulty]

Sid Thacker: We couldn’t quite hear you, but if I understand your question correctly, it’s to do with how we’re thinking about promotions going forward. Is that right?

Andrew Boone: And learnings from the last quarter.

Jennifer Hyman: Learnings from the last quarter.

Sid Thacker: Yes. I think what we have seen is — so if you look at the big changes we’ve made, right? We used to have promotions that span several months and we have shrunk those the last quarter to essentially a one-month promotion. We’ve changed some of the promotional pricing for new customers that enter into the program. And what we have found is a fairly encouraging response in terms of our ability to attract customers at price points that don’t involve giving away three months or four months worth of pricing for new customers. Obviously, these are all subject to change. We may decide to bring more people into the program as the experience improves and so on, but I think that what we have learned is that, it isn’t essential to be as promotional as we once were.

Jennifer Hyman: As an example, this Black Friday, Cyber Monday, we were far less promotional than Black Friday, Cyber Monday in previous years. So, as an example, our promotion this year ran for 15 fewer days than last year, we spent 40% less promo dollars than last year and we are acquiring customers in a more profitable way. Now, the fact that loyalty rates are up across all of our cohorts, meaning that LTV is up and our margins are improving, it means that we have also more room to play around with promotions at different points during the year. So, we are going to continue to experiment, but to Sid’s point, we do not believe that we have to be as promotional as we once were.

Andrew Boone: Thank you.

Operator: Thank you. Our next question comes from the line of Ross Sandler with Barclays. Please proceed with your question.

Ross Sandler: Hey, Sid. Question on the gross margins. So your fulfillment margin looks fine. The gross margin was down a little bit from the rental depreciation uptick. So, is that just from the overall aggregate rental product purchases being higher last couple of quarters on the inventory replenishment or was there some mixed shift back to wholesaler, some kind of channel mix thing we should be aware about, and I guess, what is the outlook for gross margin for next year? And then the second question for, Jen, picked up kind of anecdotally in some of the surveys that you guys are looking or experimenting a little bit with lower price points. Could you just talk about what you are seeing there and is that part of the strategy? Thank you.

Sid Thacker: On the first question, so, yes, you are absolutely right. The gross margin decline this quarter really reflects a much higher level of inventory spend over the last couple of quarters and certainly relative to last year. We are not giving specific gross margin guidance for fiscal 2024, but I will say and as we pointed out several times in this call, we do expect to be pre cash flow break-even in fiscal year 2024. And obviously, one part of that is, our inventory spend is expected to be considerably lower than it is in fiscal 2023 as we have really adjusted all of the depth issues and fixed the depth issues that we needed to address.

Jennifer Hyman: Ross, I am not sure what you mean about lower price points because the MSRPs of our rental products are actually going up, meaning we are renting more aspirational higher end product, even though the cost of those products are going down because of the either discounts we get with our vendors or the pay for performance deals that we have with them. So, were you talking about price points of inventory or something else?

Ross Sandler: Yeah. The inventory. It might just be anecdotal, but are there — is there any new strategy around lower price inventory? It sounds like no, but that is what I was asking.

Jennifer Hyman: No. If you track our inventory over the last four years or five years, the MSRPs have gone up every year, meaning the inventory across all of our categories is actually getting more aspirational. Our brands are better. They are more premium. And while there are growing competitors in the space, there is very little brand overlap between Rent the Runway and fashion rental competitors. We really hold the premium space in the market with the hundreds of designer brands that we have and we further buttressed that today with the launch of luxury.

Sid Thacker: And I think the last thing to clarify that I think I didn’t mention, to your point — to answer your question around is the mix changing at all, the mix is not changing towards wholesale. In fact, it’s going the other way. As Jen mentioned in her remarks, in the first half of fiscal 2024, we expect almost 50% of our total inventory buy to come on consignment or pay.

Jennifer Hyman: And I’ll just kind of remind everyone that when we IPO’d the business two years ago, we stated that over the medium- to long-term that we would expect a third of inventory to come in via pay for performance and we’re already announcing that close to 50% of the inventory in the first half of fiscal 2024 is coming in via pay for performance, meaning we do not pay for it up front and the only revenue share on the performance. This is no risk inventory for us. So we are really beating the goals that we set out in basically the most important category — the most important expense bucket of the business.

Ross Sandler: Thank you.

Operator: Thank you. There are no further questions at this time and I would like to turn the call back over to management for any closing comments.

Jennifer Hyman: So thanks for joining us today. We were really happy to have the opportunity to really transparently address what we think are the real elephants in the room as it relates to our business. We are excited about this constructive relationship we have with our lender about our debt restructuring. We think that it gives the business opportunity to break-even, to become a profitable business, to prove out this model to the market. We’re very excited about the path ahead and the data that we’re seeing in the business and looking forward to talking to you more about it.

Operator: This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation. Good-bye.