Rent the Runway, Inc. (RENT) Earnings Call Transcript & Summary

For those of you who just joined, I cover U.S. sustainability here at Morgan Stanley. I'm very pleased to be joined by Anushka Salinas, President and Chief Operating Officer of Rent the Runway. Before we get started, I just need to read the quick disclosure. The views expressed or represented by non-Morgan Stanley speakers do not represent the views of Morgan Stanley or Morgan Stanley Research. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So to kick off the conversation, Anushka, maybe if you could just provide an introduction on yourself, and I'm sure many people are aware of Rent the Runway, but just sort of the overall business model.

Yes. Thanks for having us. Excited to be here. I know you've had a marathon time so far. So hopefully, we're wrapping up this conference...

So it's been wonderful, yes.

With some really fun material here. I would really like to keep it light for everyone, especially those who have been tuning in a lot already. So Anushka Salinas, President and COO of Rent the Runway. I've been with the company for 9.5 years, so I've seen it from the very beginning, 2009, all the way through to today, our IPO in October of last year, and so a real kind of trajectory of the company, which has been great. So maybe I can do a little bit of kind of the industry and Rent the Runway and the part that we play in the industries?

Yes. That would be great.

Awesome. So the industry as a whole traditionally is linear consumption model. So clothing is produced, clothing is purchased by consumers, clothing is worn one to a few times and then disposed of. Rent the Runway came to disrupt that traditional linear model. And what we offer is a shared designer closet, the first and largest shared designer closet. And what that means, practically speaking, is that women can come onto our platform and they can engage with us in 1 of 3 ways. They can rent à la carte. So they can come and say, "I have a wedding that I need to get dressed for and rent a dress for that wedding for a weekend." They can subscribe to using one of our subscriptions, which allows them a closet on rotation that they can access constantly. Or they can purchase pre-loved items from us. And the philosophy of our business is that we want our customers to be able to buy less, but wear more. And what we've seen over time through robust surveying of our subscribers is that 89% of them actually buy less clothing when they're subscribing to Rent the Runway. And 83% of them purchase less fast fashion over time. So we're able to actually change that behavior over time and so really impactful in terms of kind of the difference that our model has on consumption versus a traditional retail model. Traditional retail model revenue is directly tied to the amount of clothing -- new clothing that is produced. And then the rental model and specifically, the Rent the Runway model, revenue is directly tied to the amount of rentals of existing garments. So very different and puts our business goals in line with our ESG goals, which is quite different than a traditional retail model.

Can you maybe dive into some of the environmental business -- or sorry, benefits of that model? And maybe talk also about the dry cleaning process that you have?

Yes, for sure. So if I rewind to the beginning of the business, we founded Rent the Runway in 2009, and environmental goals at that point in time were very much on our mind as we were thinking about the core value proposition of rental. It's very clear when you think about -- especially as women think about getting dressed for special events, you generally would buy a dress and you would wear it like 1, 2, if you're lucky, 3 times. So the wastefulness of special occasion was always very acute, both financially and from an environmental standpoint. And so as we started to grow the business and we launched subscriptions, we made many kind of intentional choices along the way. We had always done things like repair garments, use nonhazardous biodegradable chemicals for dry cleaning. But we made intentional choices like, back in 2014, which was pretty -- before our time, we launched reusable packaging. And back in 2018, we launched a large-scale recycling effort with a company called Trex that does local recycling into plastic alternative -- wood alternative decking. And so as of 2019, we really had ambitions to better understand and become a leader in ESG. And so we did a couple of things. We did a Scope 1 and 2 baseline and a materiality assessment so that we could start to get the lay of the land of environmentally -- of environmental -- of our environmental footprint. And in 2020, which was candidly a really hard time for us to be thinking about ESG goals because as everyone can imagine, our business was pretty impacted by COVID, and particularly, the early lockdowns of COVID, we decided to push forward on doing a broad Life Cycle Assessment. And the goal of that Life Cycle Assessment was much more ambitious in nature than a traditional Life Cycle Assessment. So a traditional Life Cycle Assessment would be Hanes wants to evaluate one T-shirt from cradle to grave. We don't do anything that basic at Rent the Runway. So what we wanted to assess was the entire business model. What is the impact of the Rent the Runway business model and rental as a whole versus purchasing, right? And we also knew that the scale of our platform meant that we -- a study like this would basically be a study of rental overall, kind of the industry overall. And so it was a very ambitious study. We looked at 12 product categories, over 80% of our assortment. And we really dug in to see what is the impact of rental. And what we found was a number of really interesting things. First, we confirmed through the study that the majority of carbon emissions come from that upfront production phase. And that's even when you account for -- we debunked this sort of thing that people have asked about over time, which is that transportation to and fro, all of that kind of stuff, it's all about the majority of emissions are happening in the upfront production phase of the garment. 70% are coming from the production phase. And so we confirmed that through the study. We also confirmed what we had always believed to be true, which is that in a rental model, clothing is much more highly utilized on average than it is in a purchasing model. So I think the special occasion example is the one that's most tangible for people, which is, you can imagine that a dress on the Rent the Runway platform gets utilized many more times than the dress that you buy and if you're lucky, wear 2 or 3 times, right? But we looked at that across a broad swath of categories, not just dresses. And what we were able to understand through that study is that there are net environmental benefits of rental versus purchasing when we took into account all of this data. And so we estimate that we have been able to display, since 2010, from 2010 to 2019, the production of 1.3 million garments. So that basically means 1.3 million garments never had to be produced because of our platform. And those benefits just accrue over time as our business grows and as people continue to rent the clothing that we have on our platform. So I think really exciting data that we were able to get from this Life Cycle Assessment, which is we felt foundational to our understanding of ESG.

Yes. You debunked the question I was going to ask about, you know what, the deliveries. So I think this ties into the impact strategy that you have. Can you sort of talk about a little bit more how you measure your impact and why you think that's important? I think it's something that investors are trying to get more companies to do. But I think, broadly in the market, it's something that's still fairly early, so curious how you sort of led the way on this.

Yes. The Life Cycle Assessment, kind of the Scope 1 and Scope 2 baseline, plus the Life Cycle Assessment, were foundational efforts, as I said, that we started back in 2019, that we knew we needed before we could start to put together an impact strategy, right? To put together an impact strategy that has specific and measurable goals without actually understanding where you are today would be kind of fairy dust and not a real strategy that was solid. So we had to do all of that work so that we could build an impact strategy on top of it. And that's something that we've had ambitions of doing since back in 2019. It just has taken us time to build all of the foundation there. So in March of this year, after we had kind of all the results of the Life Cycle Assessment and we released the findings from our Life Cycle Assessment in our S-1 last year, we have been kind of hard at work on our impact strategy and really excited to kind of bring that out into the world and put pen to paper and kind of share with everyone, confirming the benefits of rental versus purchasing and the kind of ambitious goals that we have to continue to further our progress against kind of some of the most pressing issues for the fashion industry and for our business in general. And we've set specific goals for everything, from kind of waste management, all the way through to DE&I.

And sort of related, I think another thing that investors are looking for is operationalizing sustainability. And you're the Chief Operating Officer, so I think it's a great example of that. Can you maybe just speak to your views on this and why you think that's important?

Yes, it's a great question. So that is indeed my job, is I have to make sure it all happens. And so, for us, that started with, we began our ESG journey with a series of folks that we had internally that we pooled together as a task force and some external consultants. And early last year, we hired someone amazing in-house to run these efforts for us that had broad experience across consulting, accounting as well as kind of internal operations in fashion brands, so she had seen sort of both sides of that. And so she has been the steward of this strategy. And the way we've been sort of operationalizing it is she taps kind of a task force of people across every single department and very tactically, to those that think about operationalizing these kinds of things, we have bubbled this up to our company level OKRs or objectives and key results. And it kind of sits at that level of monitoring where, at the executive level, we're monitoring and measuring this on a monthly basis. I think that kind of oversight is really important to make sure that you're actually making progress, and it's not just lip service.

Yes. Exactly. And thinking about your targets, I think one that stood out is you're targeting net zero by 2040, which is a lot sooner than a lot of companies. Why do you pick that year? And sort of what's the pathway to get there?

Yes. I mean we felt, given kind of the -- how serious we take our position in the industry as one of the, we believe, few players in the fashion industry that truly has a business model that is forward-looking and where our business model is inherently sort of aligned with ESG goals, so we take that very seriously. And carbon emissions is something that everyone needs to be taking very, very seriously. And so it felt important to us to have this as a goal. Obviously, the strategy today doesn't outline the full path from here to there. But what we have done is put sort of stepping stones in place in that strategy, which is a strategy between here and the end of fiscal year 2026. And those 2 stepping stones are a commitment to 100% renewable, powering our owned-and-operated facilities by 100% renewables by the end of 2026 and then performing a Scope 3 baseline by the end of 2024, which is an incredible challenging thing to do, but we are challenging ourselves to do it. And we do believe that more and more companies are going to need to step up and do this, and so we're wanting to stay ahead of that.

Yes. I think that's a great point. I think we were just mentioning in a couple of panels prior to this, we've been speaking with a lot of people about the SEC rules that are coming. And obviously, Scope 3 is an area of tension in the market just because it is so hard to estimate. And so I think what's come out of this is just how important it is for companies to stay ahead of these things and even before, say, rules like that can finalize, start putting in place the framework. So that's great to hear. Curious to the role of carbon oxides. A lot of your emissions come from, as you mentioned earlier, the delivery of the product, which unfortunately are sort of outside of your control in many respects. So curious how you think about carbon oxides in that context.

Yes. For sure. I know it's kind of a hot topic. To be clear, we are focused on reducing emissions overall, and that's why we have kind of the long-term goal. But we are very realistic about a couple of things. One is we want to be taking steps kind of immediately in the here and now. And the customer perception around transportation, kind of even -- I'm assuming you're not a customer, but the perception is, "Oh, my God, the transportation is such a big piece," one, in fact, actually our Life Cycle Assessment showed, when you account for all of that, renting is still better. But we have to kind of answer to that with our consumers. So we decided to do high-quality carbon offsets that we started doing as of February, and that's to offset both shipping to and from the customer. Remember, every item we ship out comes back for the most part. And so we do those carbon offsets starting as of this year. And it's, of course, great for consumers to be able to see that. It gives them that extra understanding of kind of how better, how much better a choice rental is versus purchasing new and especially purchasing fast fashion. And it's been also a way to signal to our team internally that we want them to continue to innovate on our transportation network to continue to find low carbon solutions. And so I think that signaling has been really important. And we've done things like consolidation of our inbound shipments in kind of inbound consolidation centers and other kind of innovations that the team is going to continue to push forward on.

Maybe I'll stop here to see if there's any questions.

Maybe to continue on that last point. For your customers, is it sort of generically important to them that there's a sustainability element here? Are there really specific things that get them excited? Is this maybe second or third priority over assortment and so forth? And then companion question. Talk about your work to partner with different designers and suppliers and how much of what you're talking about extends backwards as well.

Yes. So I would say, for consumers, what they see -- so I'll kind of answer that in 2 parts. What they see is what they believe to be most important. So what the consumer sees is lots of packages going back and forth and any packaging that comes along with that. So the things that we hear from consumers is, "I'm worried that the shipping back and forth is bad for the environment and that the plastic packaging is bad." So the plastic, one of our goals is to remove any plastic packaging that's not necessary. And so that's something that we're answering to as well. And the transportation side, we wanted to address, even though, as I said, our full assessment tells us that it's still better, but we wanted to make sure that we could signal that we kind of hear consumers, and we're doing something about that. I would say, to your sort of broader question around how much do consumers care about kind of the environment in general as it relates to their sort of purchasing decisions, from our customer base, we've seen over the last 2 years that -- we do a lot of surveying, and we've seen that, historically, people kind of called out environment -- like joining because they care about the environment as one of the bottom reasons, kind of not a key driver. What we've seen over the last 2 years is it's risen to the top as 1 of the top 3 drivers as to why people are renting from us, either kind of on a one-off basis or via subscription. So it has risen to the top of mind for our consumers. We've also done, kind of as part of our S-1 process last year, we did a robust consumer study of people outside of our customer base. And what we found was that about 3/4 of the women we had surveyed, so within our core demo, but not our customer, said that they are now very conscious about the environment when they're shopping online. So there's been a real shift there. And over 1/2 of them said they care much more now than they did 5 years ago. So we're seeing that kind of consumer shift. But again, it's a lot about the things that are tangible and understandable to them because taking them through 150-page Life Cycle Assessment is like we're not going to be successful with that. Yes.

And then work with designers and suppliers...

Oh, yes. And on the designer side, I would say, we partner with hundreds and hundreds of designers. And one of the things that's been really exciting about the work that we've done up until now, the impact strategy as well as having someone in-house that really owns this strategy, is that our goal is to continue to partner with brands. We are a great way for brands to further their own ESG commitments and strategies. So often, if they're selling direct-to-consumer on their own, again, they sort of fall into the challenge of they're wanting to sell more and more, which is sort of inherently at odds with ESG goals. So by working with us, we're working to do a better job of getting them to understand the benefit of -- the ESG benefits of working with Rent the Runway as a platform and being a partner to them on kind of what are the choices that they can make in their business to help drive better outcomes over time. Often, we have brands that don't have -- maybe like the Ralph Laurens and the PdHs of the world have huge teams, but many of the brands we work with are relatively small and don't have kind of dedicated teams or the resources to really understand how to improve their outcomes.

I'm curious, maybe it's part of your impact strategy, but could you talk a bit about how you plan? Or if so, to -- like do you engage with companies that you have their brands on the site in terms of trying to find more women-owned brands or brands that maybe have their own like in-house carbon strategy for carbon and other ESG goals?

Yes. So maybe I'll talk about the S part a little bit based on that question because we haven't really touched -- we've talked a lot about E. So as part of our impact strategy -- so I guess, zooming out, our business model is all about serving women. And I think everyone's aware, the cost of being a woman and showing up as a woman is significantly higher than the cost of being a man, especially for working women. And one of the things about our platform that we're incredibly proud of is it sort of levels that playing field and gives women access, regardless of socioeconomic status, color, any of those things, to this kind of shared designer closet of items that helps them get perfectly dressed for a Board meeting or an interview or any of the things that she needs to show up for and kind of put them on the same playing field. So from a kind of platform perspective, we've taken a number of steps as part of our impact strategy and even leading up to that to make sure that we use the power of our platform to continue to level the playing field with the partners that we work with. So in 2020, we were one of the first brands to sign the Aurora James Fifteen Percent Pledge. And if people aren't familiar with that, it was a call to action for retailers to commit to stocking their shelves and website with 15% representation of Black-owned brands. And so we were very early in signing on to that. And happy to say that as of June 2021, we met the commitment that we made there to spend $1 million with Black-owned brands, and we've made further commitments in our impact strategy as well. And I would say, kind of from an employee base standpoint, we've always been a very diverse company, as you might imagine, given kind of the business that we're in. And so we've made continued commitments as part of our impact strategy to maintain and grow the diversity of our employee base as well. Did that answer your question?

Yes. Yes.

And if I'm not mistaken, it was also the first female-led CEO, CFO and COO field...

That is right. That is right. Yes, we are both excited about that and also kind of shocked. I wish that wasn't the case, but I hope it inspires many more companies to kind of go through that process and kind of see that it's all possible. I am -- I will say I'm very encouraged by some of the work that NASDAQ is doing around for diversity. We have an incredibly diverse Board. We always have more than 50% women, but excited to see that there's kind of more energy coming from NASDAQ around kind of putting that into place for more companies.

Any others in the room?

I guess as a percentage of your stock, how much of that isn't rented? And then what happens to that?

I don't know that I can answer that exact question, but I would say, I'll speak to sort of end of life of clothing. So we have nearly 100% diversion of items from landfill on our platform, which is amazing and something I'm really proud of. And if you compare that to, again, kind of going back to our Life Cycle Assessment, what we found out, which I find to be somewhat horrifying, which is that in sort of a regular linear model, 2/3 of clothing ends up in a landfill. And so from our platform, almost nothing ends up in the landfill. And we have various channels of liquidation. Some is -- we sell some items directly to consumers. We work with recycling partners for some clothing that's no longer kind of in usable condition. We do sample sales for items that are somewhat damaged, but it's amazing what people can do with those items. So we'll, as an example, sell an evening gown that has maybe a little rip on the seam, and someone will buy that and kind of alter it and make it kind of a cocktail dress or short enough for them or kind of repurposing of clothing that comes out of our platform. So we monetize our apparel over the course of years.

Switching gears a little bit. You plan to disclose, I think, your ESG goals in the 10-K in 2024, if I'm not mistaken?

Yes.

Obviously, most companies do that, try to do that in their sustainability report, and we see very few companies doing the 10-K. So curious what drove that decision and why that was important to you.

Yes. I mean I'm glad you asked. When we sort of started on this journey several years ago, we knew that we wanted to hold ourselves to a very high standard. I think there's many companies out there, some kind of in the retail space, that have decided to take a more marketing-led effort and amazing, beautiful sustainability presentations and kind of reports cycle on their website, but they can choose if and when they decide to do those things, on what cadence. And we wanted to be really kind of raising the bar in terms of the standard. And so the best way for us to do that was kind of via the S-1 and through our annual report. So next year is when we will be kind of sharing our goals for the first time, and then we'll be reporting on it thereafter. Yes. And there's -- I mean, we believe there's a real need for more standardization. There's so many different standards out there. Like we need to kind of come together, such that it's, I think, easier for investors to even understand how to compare different business models.

Right. Right. You've had a lot of engagement efforts, I know that you've highlighted, following the IPO. Curious if you could talk about sort of what you learned from that and how it's impacted your strategy.

Yes. I mean I will say that our business model was complex. So kind of at a baseline getting the investor community to understand how our business model works, I think, is like -- has been step 1. We haven't seen as much deep probing on the ESG side of the business yet. I welcome it. I think we're excited to engage deeply in those conversations from the investors that are excited about it. But we're, I would say, like we're still kind of at step 1. We haven't seen as much engagement there as candidly I would have hoped for. And I think some of these sort of standardization efforts that may be coming through, the NASDAQs of the world, will help sort of level the playing field in terms of the information that's available, such that investors will be able to compare companies across sort of the same scorecard.

And I actually want to go back to the prior question about 10-K reporting and clearly, the SEC's proposing rules around this. I think there are a lot of pushback around, say, Scope 3, which, in theory, would impact the fashion industry. So curious how you think about the industry in the context of these rules that have been proposed.

Yes. I think it's going to be really challenging for the majority of the industry. I mean it's something that we are trying to stay very ahead of because it's -- regardless of the regulations, it's something that's important to us either way. But I do think it will be challenging. I think it will expose more clearly -- it's going to push more people to do reporting this way, which I think is a net positive. And I do think it's going to more clearly expose which business models are sort of at odds with ESG goals. I think fast fashion certainly comes to mind when you think about many fast fashion companies have sort of ESG strategies and impact strategies, but at the end of the day, they're driving overproduction of clothing. And so I think when we have more standardization across the reporting, it's going to be more clear.

Maybe I'll stop here and see if there's any more questions? I guess, for me, and I'm not sure how much of this you can get into, because you're thinking about sort of putting together sort of the targets, I think you mentioned next year. Are there any key priorities that you're sort of thinking through?

Yes. I mean one of the things that we are, I would say, most excited about because it's most unique about our model is our goal that we've set forth in the impact strategy around the displacement of production of new clothing. So historically, we found that to be true, and we've set a goal for ourselves, between now and 2026, to displace the production, the need for production for 0.5 million garments. And so that's one that I'm probably most excited about. And I think, looking forward, with the business in growth mode, it's very exciting to know that our business, as it grows, continues to deliver better environmental outcomes versus sort of the traditional retail model, where growth is sort of is at odds with that.

Yes. We've got a question here into the line. If you are reducing the need for production, how do you stay current with fashion and not being in conflict with sort of the general industry?

Yes, it's a great question. So we find that the majority of clothing, right, there's some edge cases here, obviously, trends that really -- micro trends that only last for a very short period of time. But in general, we find that trends have more longevity than you might think. And so clothing has more longevity than you might think. So we can get through multiple seasons with a garment, where it's still relevant, maybe not to the exact same customer. You might have a customer that wants to be the first person wearing tie-dye or crop tops or what-have-you. But there's always going to be sort of like a tail end to that, too. And we cover kind of a customer base that we have the early adopters and the later adopters, too. So that, I think, that helps us manage through the life cycle. And it's actually better if you think about the fact that the same items can serve that trend throughout its life cycle versus needing to continue to make the crop tops last year, this year and next year. It's like we can monetize them over a long period of time, which is sort of the length of time of the trend.

Got it. Makes a lot of sense.

That's a great question. Thank you for whoever asked.

I'm curious if you could link all that you've been saying to capital allocation decisions, just general spending decisions. You've also got a lot of improvements in your own efficiencies that also have environmental benefits. How do you compare that with investing in something that customers might like but maybe is less impactful and also less kind of ROI for you? Is it all the same process internally, that everything gets vetted against? Or are they kind of separate...

Well, here's what's unique and cool about our business is that even before we understood kind of all the nuances of ESG, even before we had an impact strategy, we were -- if you had asked me 4 years ago, like how are we working to improve the bottom line of our business, I would tell you, we're continuously working to improve the longevity of our garments that we can monetize them more over time, right? We're doing things like investing in a garment science team. We're doing things like improving the cleaning processes that we have, the repair processes that we have, using the mountains of data that we have to bring a feedback loop to designers on how they can design clothing that will stand the test of time and dry cleaning longer, right? Those are all things that we've been doing for years and years and years. And it turns out that those are the exact things that we need to do to further our ESG goals, right? Because, as I mentioned, that the -- and what the LCA told us is every incremental time we can rent a garment, the better it is because that's a very low footprint activity versus kind of the production of the garment to begin with. And so there's not a lot of conflict. I think it's quite different actually. And we have our Head of Sustainability here and she tells me this all the time because she worked for several other large companies whose names I won't mention. But it's much more harmonious with the functioning of the business because our core business model is actually aligned with ESG goals. And I do think that's very, very different. So we're not sitting at the boardroom table and having a ton of trade-off debates and arguments around capital allocation because in reality, it's what we're doing anyway as a business, right? Grow the platform, improve the longevity of our garments, use the data to deliver better outcomes on kind of garment quality, all of that's tied to kind of improved environmental goals anyway. So it's a much easier task for us than it is for many.

Maybe last question here for me, if you think about it, is there anything that we did not get to today about the Rent the Runway story that you want investors to know?

Oh, yes. There's always more to tell. Yes, I think that -- I mean, I would just kind of highlight, I think the displacement piece is really interesting. And the overproduction challenge is very real in this industry. The shift in consumer behavior to this sort of like, from what used to be 4 seasons of clothing that was pretty highly utilized in a woman's closet, to kind of just like 52 micro seasons. You go into Azara, and the entire floor is different than when you went there 3 weeks ago, has trained the consumer behavior that is pretty challenging for the environment. And what I'm most excited about is that I don't think we're shifting consumer behavior overnight to be uniform culture, everyone is wearing the same thing, hundreds and hundreds of times. I just don't think that's feasible right now. I'm excited that our business model can be a direct answer to this overproduction challenge and really serve customers with a way to get dressed the way they want, be able to show up with confidence the way they want, but be able to do that with high-quality garments at a low cost and with a lower environmental footprint. So we think the business model power is pretty great.

Wonderful. Well, thank you.

Thank you.

And thanks again, everybody, for joining.

Thanks, guys.