Rent the Runway, Inc. ($RENT)

Greetings, and welcome to Rent the Runway's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Cara Schembri, General Counsel. Please go ahead.

Hello, everyone, and thanks for joining us today. Before we begin, we would like to remind you that this call will include forward-looking statements. These statements include guidance and underlying assumptions for the second fiscal quarter 2026 -- in the fiscal year 2026, and statements regarding the impact of our business strategies and plans, our ability to drive subscriber growth and customer loyalty in a cost-efficient manner and our planned increases in inventory. 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 today's press release and our Form 10-Q. We have no obligation to 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 and in our SEC filings. With that, I'll turn it over to Teri Bariquit, our Interim CEO.

Thank you, Cara, and thank you all for joining today. I want to take a moment to acknowledge what a meaningful and full [indiscernible] at Rent the Runway. As many of you know, Jennifer Hyman, our Co-founder and long-term CEO, stepped down from her role in mid-May after 18 years leading the company. I want to thank Jen on behalf of the Board, our team and everyone on this call. Jen took a bold idea and built it into a category-defining platform that has fundamentally changed how women get dressed and experience fashion. She will remain an adviser to the company through January of '27 to support a smooth position. Stepping into the interim CEO and President's role at this moment in Rent the Runway's story is truly an honor. For those of you I haven't had a chance to meet yet, I'd like to take a few minutes to introduce a little more about myself. I joined Rent the Runway's Board of Directors in October of last year and I stepped into the Interim CEO and President role following Jen's departure on May 15. Before joining the Board, I spent 37 years at Nordstrom, most recently as Chief Merchandising Officer, where I led more than 1,200 people across buying, planning, product development and inventory management. As part of the executive team at Nordstrom, I collaborated and worked with supply chain, technology, finance, marketing, human resources, legal, along with Nordstrom and Nordstrom Rack stores and online to deliver the best customer experience and offer. During my career, my work is centered on 3 things: understanding how customer needs are changing, building durable partnerships with brands, and leading the kind of operational transformations that allow a business to evolve and grow. I plan to bring all 3 of those focuses to my work at Rent the Runway. I've admired Rent the Runway for a long time now. First, as a retail partner at Nordstrom. Then as a customer who fell in love with what the company makes possible for women. And most recently, as a Board member, working closely with the full Board, Jen and the senior leadership team. I know the strategy, I know the team, and I have confidence in where this company is headed. I want to underscore my conviction in our core business strategy and in the health of this business. After nearly 40 years in retail, I know that the foundation of any good retail business is the same: putting the customer at the center of everything we do, surrounded by the right products and brands, in the right quantities, easily found by the customers. The inventory transformation this team executed in 2025 was a bold, well-placed at on exactly that principle, and the results are now showing up across the business. I firmly believe that Rent the Runway is operating from a strong foundation. We had a great first quarter fiscal year '26 where we grew revenue and made progress against our goal to diversify revenue streams. The numbers this quarter show that our strategy is working. Total revenue was $90 million, growing nearly 30% year-over-year and beating guidance of $85 million to $87 million. We also continued to see strong growth in our add-on business, with add-on revenue growing 70% year-over-year and 11% versus prior quarter. This is driven primarily by increasing our percentage of subscribers engaging with our add-on products feature. This signals to us that our customer is loving the assortment and that the membership flexibility we are offering is working. Spending time with the team over the past several weeks has reinforced what I observed from my Board seat. The customer accession and the merchandising [ muscles ] are real. Partnerships with brands our customers love continue to deepen, and our assortment is doing what we wanted to do, drawing customers in and keeping them engaged. The right brands, right quantities is working. Where I see the most opportunity ahead is on that third leg of the triad: making this inventory even easier for her to find. As you heard last quarter, 2026 is about discovery. In particular, we are focused on deploying AI to develop, deliver the closet of our customer streams with more choice and more flexibility. We've made some meaningful progress on that promise. In April, we launched personalized carousel across our platform, now live for all subscribers. She can now discover items similar to her recent favorites and explore a curated For You feed designed to [ whet ] her unique taste. The goal is simple: save her time and make every visit all tailored to her. Impact of these improvements are an 11% increase in hearting behavior for active subscribers. In May, we innovated with AI imagery to update outdated inventory to more relatable true-to-life visuals that help her picture herself in the item. This increases use on [indiscernible] by 129%. Also in May, we began internal testing of outfit generation. This allows us to suggest complete looks rather than individual items. We expect this to roll out in the coming months and believe it will meaningfully change how she discovers and rent on Rent the Runway. A healthy core makes new growth possible. From this position of strength, I want to share my excitement around new revenue streams. We have set an early-stage -- a set of early-stage growth initiatives: our online marketplace, our advertising and media platform and our B2B business. These have real room to scale. We made measurable progress this quarter on several of these initiatives. Last quarter, we launched a pilot of the RTR Marketplace with a small subset of our most loyal subscribers. Based on what we learned, we expanded access in April, and the Rent the Runway Marketplace is now live to our customers directly from our home page. While this initiative remains nascent and small from a revenue perspective, the early signal is encouraging. Our near-term focus is on integrating it with the core rental experience to make it seamless for subscriber to complete her look and [indiscernible] transaction. In our advertising and media business, we are seeing meaningful momentum and interest from major partners. Looking at it with fresh eyes, what excites me is the dual nature of the opportunity. Media revenue from brands that recognize the purchasing power and life stage relevance of the RTR customer and a uniquely efficient new channel for subscriber acquisition. We see meaningful room to scale both sides of that equation over time. And in terms of B2B opportunities, we launched a BD dry cleaning service pilot in Q1. We've made the underlying investments needed to support scaling. And over time, we believe our logistics infrastructure can be a meaningful stand-alone revenue stream. Again, these are just a few of the early initiatives we are exploring. To help with further commercialization and revenue generation, I am pleased to share new senior leadership appointments. First, I'm pleased to welcome Paige Thomas, a 25-plus year retail veteran, who is joining RTR as our Chief Commercial Officer. Paige's first day was June 1. Second, I'd like to introduce Dave Loretta, our Interim CFO. Paige has one of the strongest track records in the industry and someone I've known admired for years. Most recently, Paige served as Chief Merchant and Product Innovation Officer at Signet Jeweler, where she led the merchandising strategy, global sourcing, new product innovation across the enterprise. Prior to Signet, she served as President and CEO of Saks OFF 5TH, leading the business through a major repositioning across stores, digital and brand partnerships. Earlier in her career, Paige spent over a decade at Nordstrom, including 5 years leading and scaling Nordstrom Rack as EVP and General Merchandise Manager. There are a few leaders in retail with Paige's blend of strategic muscle, commercial instinct, operational depth and digital fluency. The fact she's choosing to spend this next chapter with Rent the Runway says something about the moment that we are in. Second, Dave Loretta is joining Rent the Runway as our Interim Chief Financial Officer and Treasurer, while we recruit a permanent leader. His first official day will be next Monday, June 8. Dave brings a deep financial leadership to RTR. Most recently, he served CFO of the Honest Company, and before that, he spent 6 years as CFO of Duluth Trading Company where he led not just finance and accounting, but also inventory planning, strategy and investor relations. Before Duluth, he spent more than a decade at Nordstrom, including roles as President and CFO of Nordstrom Bank and as Corporate Vice President and Treasurer. Dave also ran his own business in the food and beverage industry. That entrepreneurial spirit and instinct combined with his enterprise experience filling public companies' finance functions makes him uniquely a strong fit for Rent the Runway. As we enter this next chapter, the addition of Page and Dave further enhances the depth of our leadership bench. In closing, I see a real inflection point at Rent the Runway. The inventory focus of 2025 worked. We're seeing net new opportunities across the business that give me confidence in what lies ahead. And we are building for the future, working to deepen discovery through AI, expanding into exciting new categories and strengthening the relationships we have with both our customers and our brand partners. The growth opportunities in front of us are significant and I could not be more excited for what's to come. As you know, this is his last earnings call with Rent the Runway as CFO. Before I hand it over to Sid, I want to thank him for the impact he's made to improve our financial foundation. He's truly left it better than he found it. Thank you, Sid. With that, I'm handing it to Sid.

Thanks, Teri, and thank you, everyone, for joining us. I'd like to focus on 3 key topics related to Q1 earnings before providing a more detailed review of results for the quarter. First, I'd like to reiterate the strength of our business in Q1. Second, I want to discuss the deceleration in ending active subscriber growth in the quarter versus prior quarters. Finally, I will address free cash flow for Q1 and why, as evidenced by our adjusted EBITDA and rental product acquired guidance, we continue to expect improved free cash flow for the full fiscal year. Q1 2026 was a strong quarter for Rent the Runway with almost 30% revenue growth versus Q1 2025. We believe subscription revenue growth was excellent and driven by both higher average revenue per subscriber and higher active subscribers. We saw notable strength in customers adding on extra items in their shipments, indicating to us that customers are happier with the inventory investments we have made in fiscal years '25 and '26. We also saw strength in other revenue driven by increases in our retail business. Finally, despite declining year-over-year, our reserve business exhibited improving trends versus the prior quarter. Consistent with the expectations shared in our Q4 earnings call, we saw a deceleration in year-over-year ending active subscriber growth in Q1 '26. As we outlined last quarter, the deceleration is largely a function of the tough comparisons we faced in the first half of fiscal '26 due to normalized marketing spending versus Q4 2025 and due to strong promotional activity last year to get customers excited about the significant increases in inventory. I believe that our underlying business drivers remain strong as evidenced by the double-digit revenue growth guidance for fiscal year 2026. Finally, free cash flow for Q1 '26 was lower than Q1 '25, despite roughly similar levels of adjusted EBITDA and lower inventory-related capital expenditures due to receipts arriving earlier in the fiscal year, cash interest expense and working capital timing. Our April 2026 debt amendment allows us to pay interest in kind through April 2027. As evidenced by our adjusted EBITDA and rental product acquired guidance for fiscal year 2026, we continue to expect improvements in free cash flow in fiscal year '26 versus fiscal year '25 as timing-related factors become less relevant over the full fiscal year. Let me now review results for the first quarter before turning to Q2 and full year 2026 guidance. We ended Q1 '26 with 155,692 ending active subscribers, up 5.8% year-over-year. Average active subscribers during the quarter were 149,744 subscribers versus 133,468 subscribers in the prior year, an increase of 12.2% year-over-year. Subscriber growth was driven primarily by a higher base of active subscribers at the end of Q4 '25 versus Q4 '24 and higher subscriber acquisitions in Q1 '26 versus Q1 '25, partially offset by higher additions to the [ POS ] subscriber base year-over-year. Ending active subscribers increased 8.3% from 143,796 subscribers in Q4 '25, primarily due to seasonal factors. Total revenue for the quarter was $89.9 million, up $20.3 million or 29.2% year-over-year and down $1.8 million or 2% quarter-over-quarter. Subscription and reserve rental revenue was up $15.7 million or 25.3% year-over-year in Q1 '26, primarily due to higher average subscribers and higher average revenue per subscriber due to the subscription price increase effective August 1, partially offset by lower reserve revenue versus Q2. Other revenue increased $4.6 million or 60.5% year-over-year, primarily due to significantly high retail revenue. Fulfillment costs were $23.6 million in Q1 '26 versus $20.4 million in Q1 '25 and $21.6 million in Q4 '25. Fulfillment costs as a percentage of revenue were 26.2% of revenue in Q1 '26, compared to 29.4% of revenue in Q1 '25. Fulfillment costs declined as a percentage of revenue, primarily due to high revenue per order driven by an August price increase and higher retail revenue, partially offset by higher transportation costs as a result of carrier rate increases, higher fuel surcharges and higher warehouse processing costs. Gross margins were 25.9% in Q1 '26 versus 31.5% in Q1 '25. Q1 '26 gross margins reflect higher revenue share costs as a percentage of revenue due to higher share by RTR inventory levels, partially offset by lower rental product depreciation and write-off costs and lower fulfillment cost as a percentage of revenue. Q1 '26 gross margins decreased quarter-over-quarter from 38.6% in Q4 '25, primarily due to higher fixed revenue share costs as a percentage of revenue on account of seasonally higher receipts of share by RTR inventory and the impact of lower revenue per order on fulfillment expenses as a percentage of revenue. Q1 '26 operating expenses were 4.9% higher year-over-year due primarily to higher G&A expenses. Total operating expenses, which include technology, marketing and G&A were 45.4% of revenue in Q1 '26 versus 55.9% of revenue in Q1 '25. Adjusted EBITDA for Q1 '26 was negative $0.8 million or negative 0.9% of revenue versus negative $1.3 million or negative 1.9% of revenue in Q1 '25. The increase in adjusted EBITDA as a percentage of revenue versus the prior year is primarily a result of lower operating expenses as a percentage of revenue and lower fulfillment expenses as a percentage of revenue, partially offset by higher revenue share expenses as a percentage of revenue due to greater share by RTR inventory levels. Free cash flow for Q1 '26 was negative $13.6 million versus negative $6.4 million in Q1 '25. Free cash flow decreased versus the prior year primarily due to increased cash used in working capital, driven by timing of payments and higher cash interest expense in Q1 '26 versus Q1 '25, partially offset by lower inventory-related capital expenditures. I will now discuss guidance for Q2 2026 and fiscal year 2026. We are reiterating our double-digit revenue growth guidance for fiscal year '26 versus fiscal year '25. We believe the business is off to a strong start in Q1 '26, building confidence in revenue guidance for the year. We are also reiterating our adjusted EBITDA guidance of 4% to 7% of revenue for fiscal year '26. We also continue to expect rental product acquired to be between $45 million and $50 million in fiscal year 2026. For Q2, we expect revenue to be between $91 million and $95 million, representing growth of between 12% and 17% versus Q2 '25. Note that our guidance range reflects our decision to preserve inventory for our rental business and the significant increase in our retail business that we saw in Q2 '25. It also assumes a continued decline in the reserve business, our expectations around the timing of subscriber growth and uncertainty around customer reaction to passing along fuel surcharges this fiscal year. We expect Q2 adjusted EBITDA to be between 5% and 8% of revenue. Finally, I would emphasize that the macroeconomic and geopolitical environment remains highly uncertain, with potential impacts on transportation costs, fuel surcharges and consumer confidence. Our guidance is based on current conditions and assumptions and does not contemplate material deterioration, including from our decision to pass on fuel surcharges to customers or volatility in factors. Accordingly, actual results may differ materially if such conditions change. Before concluding, I'd like to take a personal moment. As you know, this will be my last earnings call as CFO of Rent the Runway. I believe that Rent the Runway's business is the strongest it's been since I joined the company in mid-2022. I believe that our customers are happier, our growth is solid, expected free cash flow trends continue to improve, and we have a markedly better balance sheet. I want to thank our shareholders for the trust you've extended to me over the years. I also want to thank Jen, Teri and our past and current Board of Directors for their support. It has been a privilege to represent this country -- company. I'm excited about Rent the Runway's return to growth and wish the team the very best going forward. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.