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DATE
Thursday, June 5, 2025 at 4:30 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Jennifer Hyman
Chief Financial Officer — Siddharth Thacker
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RISKS
CFO Siddharth Thacker stated that gross margins (GAAP) decreased to 31.5% in Q1 FY2025, down from 37.9% a year earlier and 37.7% in the previous quarter, due to higher revenue share costs and increased fulfillment costs.
Adjusted EBITDA was negative $1.3 million, down from $6.5 million a year ago, as a result of both declining revenue and higher revenue share expenses.
Free cash flow was negative $6.4 million, compared to negative $1.4 million a year ago, due to lower adjusted EBITDA and higher inventory investment.
Fulfillment costs rose to 29.3% of revenue in Q1 FY2025, up from 27.5% a year ago, driven by increased transportation costs and a shift to maintaining more inventory for subscribers.
TAKEAWAYS
Ending Active Subscribers: There were 147,157 ending active subscribers in Q1 FY2025, representing a 1% year-over-year increase and the highest quarter-end subscriber count in company history.
Average Active Subscribers: Average active subscribers totaled 133,468, down 1.8% from 135,896 a year ago.
Revenue: Total revenue was $69.6 million, a decrease of $5.4 million, or 7.2% year over year, and down $6.8 million, or 8.9%, quarter over quarter.
Gross Margin: Gross margin was 31.5%, down from 37.9% a year ago and 37.7% in the previous quarter, reflecting both higher revenue share and fulfillment costs.
Fulfillment Costs: Fulfillment costs were $20.4 million, nearly flat year over year, but rose to 29.3% of revenue from 27.5% a year ago due to higher transportation costs.
Adjusted EBITDA: Adjusted EBITDA was negative $1.3 million, or negative 1.9% of revenue, compared to $6.5 million and 8.7% of revenue a year earlier.
Free Cash Flow: Free cash flow was negative $6.4 million, compared to negative $1.4 million a year ago, primarily due to increased rental product purchases supporting the inventory strategy.
Inventory Investment: Inventory volume received in Q1 FY2025 rose 24% year over year, with 36 new brands and over 1,000 new styles launched during the quarter.
Inventory Engagement: Spring 2025 inventory recorded a 23% higher share of use, 46% more 'hearts,' and a 14% higher 'love rate' compared to the prior year. April add-on gross bookings increased 11% year over year (all metrics as reported for FY2025).
Revenue Mix Shift: Exclusive designs and revenue share are projected to account for 70% of acquired items in FY2025, up from 20% in FY2019.
Q2 and FY2025 Guidance: Q2 FY2025 revenue is projected between $76 million and $80 million, with adjusted EBITDA margin guidance at negative 22%. The company maintains a double-digit subscriber growth target for FY2025 and expects full-year cash consumption of negative $30 million to negative $40 million, but may invest beyond that range if prudent.
Product and Service Innovation: Introduced back-in-stock notifications with 25% subscriber adoption and a 48% completion rate since launch; stylist support reduced first-month churn by 27%; the 60-day customer promise dropped churn by 34%; and RTR Concierge lowered churn by up to 18% so far.
Customer Retention: Achieved the strongest quarterly retention in four years. Churn improvement in Q1 FY2025 was the best year over year and quarter over quarter since the pandemic recovery period.
Marketing and Engagement: Organic social engagement rate rose 163% since the April and May branding shift (compared to the two months prior). New member-driven events attracted over 350 attendees and expanded virtual community channels.
Upcoming Initiatives: The company plans to launch more than 40 new brands and add over 2,700 new styles in FY2025, expand into 19 new brands in Q2 FY2025, and continue scaling customer experience enhancements and a new rewards program.
SUMMARY
Rent the Runway delivered record quarter-end active subscribers and demonstrated sequential subscriber growth in Q1 FY2025, despite reporting a year-over-year decline in both average active subscribers and total revenue. The company faced compression in gross margin and negative free cash flow due to higher revenue share expenses, increased inventory investment, and rising fulfillment costs. Management reaffirmed double-digit subscriber growth guidance for FY2025 and outlined plans for rapid inventory expansion, differentiated merchandising, and further investment in customer innovations through the year.
CFO Siddharth Thacker said, "Our full-year guidance remains unchanged." indicating that major strategic and financial targets are intact despite short-term margin pressures.
The exclusive design and revenue share model is anticipated to account for 70% of inventory sourced in FY2025, a shift management identifies as central to brand partnerships and value creation.
Engagement with newly launched inventory in spring FY2025—measured by digital interaction 'hearts,' share-of-use, and add-on bookings—suggests an early positive response to increased assortment and category depth.
Operational discipline continues, with leadership stating willingness to "invest prudently when it makes sense for our customers, even if that results in free cash flow outside the provided ranges."
INDUSTRY GLOSSARY
Revenue Share Inventory: Merchandise supplied by brands or designers where Rent the Runway, Inc. pays a share of rental revenue rather than purchasing outright.
Share by RTR Inventory: Items procured through Rent the Runway, Inc.'s revenue share agreements rather than traditional wholesale purchase.
Hearts/Love Rate: User engagement metrics specific to Rent the Runway, Inc., tracking customer preference and interaction with inventory selections.
RTR Concierge: A program providing direct outreach and customer support to new and returning subscribers to boost retention and education.
Full Conference Call Transcript
Jennifer Hyman: Thank you, Cara, and thank you all for joining today. On our last earnings call, we walked you through our plan to transform Rent the Runway, Inc. as we increase the breadth and depth of our inventory, innovate on our product to give customers what they want, and get back to our customer-obsessed roots. In the past quarter, we've put this plan into action and we've seen very positive results.
We drastically increased the desirability and quantity of inventory on the platform, with much more to come, launched some of the most highly requested features from our members, including back-in-stock notifications, and a customer promise for new and rejoining subscribers, and restored our relationship with customers through a revitalized authentic approach to organic social and customer service. And as I speak with you today, I'm happy to report that our transformation strategy is working. We've seen a return to subscriber growth in Q1, ending the quarter with over 147,000 active subscribers, the most ending subscribers at the end of a quarter in company history.
We've also seen the strongest quarterly customer retention in four years, with improved churn rates for both early-term and long-term subscribers. Today, I'll walk through strategy and the results we're seeing in more detail as we show our community and the world that Rent the Runway, Inc. is back.
First and foremost, our bold inventory strategy. Rent the Runway, Inc. provides our customers with a valuable offering: a risk-free way to try new styles and brands that may have previously not been on their radar or in their closet. This ability to discover newness is a key reason why so many women love our service. And with the rejuvenated inventory this year, we're giving her an even greater opportunity to discover new brands and items that she loves. As we detailed on our last earnings call, we are planning our largest-ever investment in new inventory this year. Our new brands and styles have already started to roll out on our site and into the hands of our customers.
Throughout this transformation, we have been guided by our customer feedback and data, so that we can be more specific about the aesthetic of the styles we offer on Rent the Runway, Inc. with the ultimate goal of attracting new customers and retaining existing customers. We've been focused on building an assortment that resonates with our feminine, polished, and playful core customer. And we're building depth across categories that we know our customers desire, like denim, outerwear, day dresses, casual everyday clothing, handbags, and workwear. I truly believe that we've not only created visual differentiation between us and our competitors, but we're also well on our way to significantly improving customer loyalty.
Q1 inventory volume received was up 24% year over year. We launched 36 new brands and over 1,000 new styles that align with what we know our customer is looking for. And we've been right. Our customers are more engaged with our selection than ever before. Our spring 2025 inventory has a 23% higher share of use, 46% more hearts, and a 14% higher love rate than our spring buy last year. She's also adding more to her shipment, with April add-on gross bookings up 11% year over year.
We've identified several pillar brands like Veronica Beard, AL Ola Johnson, and Stodd, which drive a higher perception of the value of Rent the Runway, Inc. when a customer has one of them in her order. To double down on these pillar brands, we've considerably increased our buys from them. We've also released four new collaborations with Sea New York, Plan C, Ghani, and Simon Miller, and they are leading the way in customer engagement. The new Simon Miller collection alone drove almost 3 million views. And from a cost perspective, I want to remind you that these collections deliver comparable quality at approximately 40% lower cost on average.
We're excited and proud to be giving customers more styles from pillar brands they covet and introducing new brands that excite them. And we are just getting started. We expect that the remainder of the year will be significantly more impactful. In Q2 alone, new receipts are expected to be up over 420% year over year. And for the rest of the year, we expect new receipts to be up 134% year over year. We're also planning to launch over 40 new brands and post over 2,700 new styles. For the designers and brands themselves, we believe that Rent the Runway, Inc. is now well established as a core marketing channel.
We've delivered brands an opportunity to reach new customers outside of traditional paid marketing channels. We've done this by spending the last fifteen years building trust with brands and connecting them to our customers. The growth of our revenue share and exclusive design channels are unique to Rent the Runway, Inc. and a testament to the excitement that brands have to partner with us during a time in which they are losing confidence in other retail channels. About 20% of items acquired in fiscal year 2019 were exclusive designs and revenue share. This fiscal year, it's expected to be around 70%. And this momentum is expected to continue.
In Q2 alone, we're planning to expand into 19 new brands, launch three new exclusive collections, introduce fresh use cases like beach and tennis, and double down on the summer categories our customers crave most when temperatures rise. We expect that the new inventory will continue to have a dramatic effect as more of it hits the site over the course of the year.
Now let's walk through our recent product innovations, all of which are in response to direct customer feedback and are designed to make the experience with Rent the Runway, Inc. best in class for every customer. We know that inventory alone isn't everything. We want our customers to feel that they are getting the white glove experience they expect from a luxury brand, and we're investing in the product and customer service experiences designed to deliver on that vision. We've introduced enhancements to the product for both new members and for customers who've been with us for a while, including back-in-stock notifications, our number one most requested new feature.
Now a subscriber can set a notification if she has her eye on a style but it is not available at the time she is building her order. If it's back in stock, she gets notified and can add it to her next order. People are really excited about this feature. 25% of all subscribers have engaged with it since launch, and 48% of those who've engaged with it have successfully added a back-in-stock item to their bag after getting a notification. Secondly, we launched personalized styling support for our early-term customers, where stylists help build hearts lists, place orders, and provide personalized suggestions.
We believe that this is a very valuable service to our subscribers, many of whom are professional women that value the extra assistance with discovery and ordering. We provide a complimentary first thirty-minute session and have seen a 27% reduction in first-month churn when subscribers talk to stylists. We've also introduced a sixty-day customer promise for all new and rejoining customers. If a customer doesn't like any of the items in her order during the first sixty days, we'll send her new items at no cost. We've seen that this leads to a 34% reduction in churn.
RTR Concierge, where new and rejoining customers receive a call from us to explain the service and answer any questions, is another new initiative that members love. So far, we've seen an 18% reduction in churn for those who answered our call, and a 14% reduction in churn for those who didn't answer. This has been so successful that we're planning to scale it from 50% of new and rejoining subscribers to 100% by the end of Q2. And lastly, we've launched a more personalized homepage and browse experience, tailored to what she has happening that month. A key focus for the remainder of the year is to scale these improvements to as many of our subscribers as possible.
And we have even more in store. In Q2, we're planning to launch a new rewards program that will give subscribers perks and rewards to celebrate break points. We're also planning to introduce Harding Progression and more personalized feeds to provide a more curated and personalized subscriber browsing and picking experience. All of this innovation is rooted in the pod structure we have developed for our teams at Rent the Runway, Inc. Our four pods—retention, revenue, customer growth, and inventory—map directly to our strategy and are designed to enable us to simplify and be more agile in the way we introduce new products and serve customers.
This has allowed us to shift new features rapidly, respond quickly to customer needs, and operate much more efficiently overall.
The third area we've been focused on has been restoring the relationship with our customers through authentic, transparent branding and communications, along with member experiences for our community. We know that Rent the Runway, Inc. is an emotional and aspirational product. It's not purely about renting and purchasing clothing items. In Q1, we significantly shifted the tone of our marketing towards transparency and community, showing customers we heard you and getting back to the basics of what this brand is all about. This wasn't about deploying more marketing dollars. Rather, we employed a customer-centric, radically authentic strategy ensuring customers felt valued, informed, and excited about the changes.
We also launched a brand new organic strategy that broke the fourth wall, meaning we acknowledged the presence of the audience and spoke directly to them through our channel. We engaged with our most opinionated community on Reddit, and through a very active Reddit AMA. Launched new social features like Instagram Q&A and Gen Reacts, and introduced a new face of Rent the Runway, Inc. social channels. And it's working. The engagement rate on social channels is up 163% since we launched our new strategy in April and May, as compared to the two months prior. I am also personally still responding to customer emails and feedback that comes my way and very actively engaging with our customers regularly.
Lastly, we reintroduced member-first experiences, engaging hundreds of members both online and in real life. We kicked off the We Heard You hybrid webinar, which allowed our community to hear directly from our leadership team on what's to come. We also hosted a Women at Work styling event, a Wixow exclusive design preview, a meet-the-drop event that drew over 350 attendees. All of these are examples of how we are bringing the power of our community back in person and virtually. In conclusion, we are confident that our new strategy is working. Thanks to the new inventory and product innovation, our quarterly customer retention is the strongest it's been in four years.
In Q1 2025, we experienced our greatest year-over-year and quarter-over-quarter Q1 churn improvement since the pandemic recovery period. We're incredibly excited about the early signals that this inventory strategy is driving results and believe the best is yet to come. I think this is only the beginning. We're optimistic and excited. We created this category and we know where it's going. With that, I'll hand it over to Siddharth Thacker.
Siddharth Thacker: Thanks, Jen, and thank you everyone for joining us. As Jen outlined in her remarks, the key message in this quarter's results is that we believe our inventory and product strategies are working. Our teams are energized and we are finding ways to improve our customers' experience every day. We believe our significant inventory investment this year will continue to drive retention as customers experience the full impact of the new arrivals in May and in the months to follow. Let me spend a few minutes discussing why it's taken until fiscal year 2025 to put these plans into action and how we expect fiscal 2025 to unfold.
Over the past two months, I've been asked by new and existing investors why it's taken us so long to implement the strategies we're executing on in fiscal 2025. Indeed, some investors have indicated that for the first time they feel like Rent the Runway, Inc. wants to grow. Let me begin in fiscal 2022. We had emerged from COVID with a similar-sized subscriber base as existed before COVID, but with a relatively small amount of inventory purchased in the intervening period. Over time, we focused on increasing depth and exiting older inventory within the context of managing our cash consumption and our balance sheet.
In order to continue funding improvements to our customer experience, we substantially reduced costs in fiscal 2022 and fiscal 2023 and made significant strides in moving to an asset-light inventory acquisition model. In fiscal 2024, we brought the business to almost free cash flow breakeven to demonstrate to stakeholders both the strength of our underlying revenue base as well as our sound unit economics. Finally, in fiscal 2025, armed with the right-sized cost structure, brands willing to provide more than double the amount of share by RTR inventory and having already demonstrated progress on cash flow, in fiscal 2024, we are ready to invest.
While it hasn't been easy, we're proud of the considerable progress made over the past three years. And yes, we are ready to grow.
Let me discuss fiscal 2025. Jen has already outlined how fiscal 2025 is off to a good start with the fastest sequential growth in ending active subscribers in Q1 versus Q4 over the last four years. An important driver of that growth is significantly improved retention on both a sequential and year-over-year basis. We believe we can improve retention further in fiscal 2025 given the planned buildup of inventory throughout the year as well as new product launches. We also expect subscriber acquisitions to benefit from our investments in fiscal 2025 albeit with a lag to retention improvements, as customers tell others about the positive changes they are seeing at Rent the Runway, Inc.
We expect acquisition improvements to also be driven by improved organic marketing as well as higher levels of promotional spending to expose more customers to our improved offering. Our results for Q1 demonstrated these trends. Improved subscriber growth, with revenue growth lagging subscriber growth due to higher promotional spending. The good news is that we've reactivated both paused and former customers' success in Q1. And so far, retention for those subscribers is better than we've seen historically. We expect continued improvement in ending active subscriber growth throughout the fiscal year. As I will also outline shortly, we will not hesitate to invest further in the customer proposition if we think it is prudent.
I will now review results for the first quarter before providing Q2 and full year 2025 guidance. We ended Q1 2025 with 147,157 ending active subscribers, up approximately 1% year over year. Average active subscribers during the quarter were 133,468 subscribers versus 135,896 subscribers in the prior year, a decrease of 1.8%. Ending active subscribers increased from 119,778 subscribers at the end of Q4 2024 due primarily to sequentially higher subscriber acquisitions, higher promotional spending, a decrease in paused subscribers, and improved retention. Total revenue for the quarter was $69.6 million, down $5.4 million or 7.2% year over year and down $6.8 million or 8.9% quarter over quarter.
Subscription and reserve rental revenue was down 6.2% year over year in Q1 2025 primarily due to lower average revenue per subscriber driven by increased promotional spend and lower average subscribers versus Q1 2024. Other revenue decreased 14.6% or $1.3 million year over year. Fulfillment costs were $20.4 million in Q1 2025 versus $20.6 million in Q1 2024 and $20.2 million in Q4 2024. Fulfillment costs as a percentage of revenue were 29.3% of revenue in Q1 2025 compared to 27.5% of revenue in Q1 2024. Fulfillment costs primarily reflect higher transportation costs as a result of carrier rate increases. Gross margins were 31.5% in Q1 2025 versus 37.9% in Q1 2024.
Q1 2025 gross margins reflect higher revenue share costs as a percentage of revenue due to greater share by RTR inventory in addition to higher fulfillment costs as a percentage of revenue. Q1 2025 gross margins decreased quarter over quarter to 31.5% from 37.7% in Q4 2024 due primarily to seasonally higher revenue share payments combined with higher fulfillment costs as a percentage of revenue. Sequentially higher fulfillment costs as a percentage of revenue reflect lower revenue per order as we chose to sell less inventory this quarter to increase inventory available for subscribers. Operating expenses were 6% lower year over year due primarily to lower stock-based compensation expenses.
Total operating expenses, which include technology, marketing, and G&A, were 55.9% of revenue in Q1 2025 versus 55.2% of revenue in Q1 2024 and 44% of revenue in Q4 2024. Adjusted EBITDA for Q1 2025 was negative $1.3 million or negative 1.9% of revenue versus $6.5 million or 8.7% of revenue in Q1 2024. The decrease in adjusted EBITDA versus the prior year is primarily a result of lower revenue and higher revenue share expenses. Free cash flow for Q1 2025 was negative $6.4 million versus negative $1.4 million in Q1 2024.
Free cash flow decreased versus the prior year primarily due to lower adjusted EBITDA and higher purchases of rental product on account of our inventory strategy for fiscal year 2025.
I will now discuss guidance for Q2 2025 and fiscal year 2025. Our full-year guidance remains unchanged. We continue to expect double-digit growth in ending active subscribers for fiscal year 2025. We also continue to expect full-year cash consumption to be between negative $30 million and negative $40 million. As I outlined last quarter, I want to emphasize that this free cash flow range is indicative with many factors that may influence the final result. The overarching message remains that Rent the Runway, Inc. is playing offense and that we intend to invest prudently when it makes sense for our customers, even if that results in free cash flow outside the provided ranges.
Let me now discuss Q2 guidance. For Q2 2025, we expect revenue to be between $76 million and $80 million. We expect adjusted EBITDA margins to be between negative 22% of revenue. Finally, let me reiterate my comments on tariffs from our April earnings call. Our guidance does not factor in any potential impact from tariffs given all the uncertainties. We believe we are fortunate that we directly import a relatively small portion of inventory and have placed orders for the majority of our inventory receipts for fiscal year 2025. However, there is no guarantee that this will mitigate any impact.
It's also difficult to predict customer behavior, but we believe renting does offer substantially greater value for consumers versus buying. We are mindful that the environment remains uncertain and plan to operate prudently in the months ahead.
In conclusion, we're pleased to see customers respond enthusiastically to our significant investment in inventory in fiscal 2025. The energy from both our customers and employees is palpable. Our brand messaging is authentic. We have more to do, but believe we are firmly on the right track.
Jennifer Hyman: Thanks for the call today, and we look forward to continuing to update you on Rent the Runway, Inc. Great. Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.