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Rent the Runway: Plenty Of Good Reasons To Be Bullish

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Thesis

Rent nan Runway's (NASDAQ:RENT) expanding subscriber base, robust merchandise breadth and first-mover advantage, pinch a unsocial business exemplary that provides consumers entree to an unlimited closet, could connection room to expand. The pent-up request for events aft resumption of normal life and much group returning to activity are catalysts for nan company's continued income gains. A simplification successful fixed costs done restructuring tin thief support adjusted EBITDA positive. I judge boosting its progressive personification guidelines and engagement is cardinal to persistent double-digit maturation till 2025. I support a Buy standing connected Rent nan Runway pinch an extremity of twelvemonth value target of $5.6.

Why do I for illustration RENT?

Sales Can More Than Double Through 2025

Rent nan Runway gross whitethorn surpass $500 cardinal successful 2025 vs. $203 cardinal successful 2021, arsenic nan user situation normalizes. Rent nan Runway has a first-mover advantage successful nan apparel-sharing economy, fixed its expertise to boost shoppers' purchasing powerfulness successful a sustainable measurement by providing entree to hundreds of brands done resale and rentals. This whitethorn beryllium driven by adding progressive subscribers, which could scope complete 250,000 successful 2025 vs. astir 134,000 successful 3Q. Additional catalysts are imaginable description abroad, a rising operation of exclusive collaborations pinch brands, a loyalty-plan launch, and a caller wholesale aviator programme for Rent nan Runway's exclusive designs.

RENT's humanities income growth

RENT's humanities income maturation (Ycharts.com)

Subscriber Base Drives Majority of The Revenue

Rent nan Runway's expertise to person existing reserve and resale customers to subscribers, while attracting caller consumers, is cardinal to driving income done 2025. Active subscribers propel nan bulk of revenue, reaching 86.3% of full income successful 2021 vs. 84% successful 2020. Its customizable subscription program, which debuted successful 2020, tin thief summation gross per subscriber and thrust much profitable sales. Rent nan Runway has seen its members boost spending arsenic they go much comfortable pinch renting, moving up successful rank plans, and adding items to monthly plans. In 3Q, 28% of subscribers added 1 aliases much paid items, in-line pinch erstwhile beardown rates. The institution offers four, 8 aliases 16 items a month, pinch plans ranging from $94-$235. Each further portion is an other $25-$29 successful revenue.

Moreover, Rent nan Runway's partnership pinch Amazon.com to waste a action of exclusive creation and secondhand apparel from an online storefront is simply a affirmative move that tin raise inventory turnover, summation visibility and thief pull and turn its ain subscriber base. For Amazon, it further extends its scope successful apparel and secondhand, broadening nan assortment for its shoppers.

Circular Economy Attracts Younger Demographic

Rent nan Runway's attack to wardrobing done rental and resale resonates much pinch younger shoppers -- a group that will predominate spending successful nan U.S. -- which whitethorn assistance income momentum for nan foreseeable future. More consumers are shifting to rental aliases secondhand apparel erstwhile making buying decisions, particularly younger ones, who thin to beryllium much environmentally conscious and progressively successful hunt of variety, worth and newness. About 73% of millennials are consenting to salary much for sustainable goods, including apparel-rental plans. Of women successful a Lab42 survey, 19% person rented clothing aliases accessories successful nan past, and 55% are unfastened to nan idea. In 2020, millennials overtook babe boomers to go nan largest big cohort successful America, pinch complete $600 cardinal successful spending power, according to Accenture.

Re-Commerce Double-Digit Gains May Outpace Industry

Rent nan Runway's rental and resale (re-commerce) exemplary positions it good to return stock from accepted retailers successful nan ∼$300 billion U.S. apparel market, arsenic much consumers look for ways to participate successful nan information economy. Rental and resale are among nan fastest-growing sectors, pinch nan rental marketplace projected to summation astatine a 19% CAGR during 2022-2026, according to GlobalData. RENT's breadth of offerings gives it an advantage complete specialty-apparel and single-brand-owned rental models. While resale only represented 11.7% of income successful 2021, it gives RENT nan opportunity to pat into a imaginable $82 cardinal apparel-resale market, by 2026. That compares pinch a low-single-digit summation successful nan broader apparel industry.

Significant Moat pinch Partners & Logistics Investments

One of nan astir compelling reasons to for illustration RENT successful my view, is nan company's infrastructure. It has spent complete a decade and hundreds of millions of dollars processing proprietary systems and infrastructure to connection its work astatine scale. I judge pinch a precocious grade of assurance that nan probability of personification attempting to replicate what RENT has built successful nan US is reasonably unlikely. It's simply excessively costly and excessively different from immoderate accepted e-commerce storage group up, that it's improbable a task investor would money a competitor institution arsenic a laggard to RENT, nor do I spot immoderate ample standard e-commerce companies (like Amazon) attempting this business model. Thus, RENT is successful a people of its own, and has an unfastened runway to build a ample business without nan threat of galore competitors entering. This is simply a very uncommon business among user net investments.

Further, RENT differentiates itself by partnering straight pinch designers, ensuring beardown moving relationships, which has resulted successful ~100% brand retention pinch complete 750 designers. Designers are aligned pinch RENT's business model, dissimilar astir different secondhand apparel marketplaces wherever their products are resold without immoderate input astir brand, authenticity, position aliases pricing.

In position of PP&E investments, RENT's business exemplary requires nan request for warehouses and a reverse logistics system, successful which each point that is sent retired is returned and re-processed. This information exemplary is laborious, difficult, and unique, which I judge insulates RENT from immoderate imminent competition. Below I will item a garments way from rental to rental and nan steps taken successful nan storage betwixt each move to guarantee readiness.

Proprietary Infrastructure To Process Every Garment

Proprietary Infrastructure To Process Every Garment (Company Presentation)

Restructuring Plan Drives Operational Efficiencies

Rent nan Runway's plans to reduce $25-$27 cardinal successful yearly operating costs could return its adjusted EBITDA separator to 15% successful nan adjacent term, particularly arsenic it already posted its first affirmative EBITDA separator successful Q2, good up of its extremity to get a affirmative EBITDA separator by early 2023 and earlier immoderate restructuring-cost benefits. I don't expect nan costs cuts to interfere pinch growth, fixed they're targeting back-office functions specified arsenic labour and are expected to person nary effect connected customer experience. Management anticipates holding trading disbursal changeless astatine astir 10% of revenue. Investments successful technology, fulfillment capabilities and product-acquisition transmission shifts could besides substance separator gains. RENT's longer-term adjusted separator EBITDA extremity of 30% implies a 15% EBITDA separator erstwhile excluding rental-product depreciation.

Valuation

I worth Rent nan Runway utilizing a guardant EV/Sales ratio of 1.2x connected my FY23 gross estimate of $290 cardinal to travel up pinch an end-of-year value target of $5.6. I judge astatine nan existent price, nan company's shares connection a binary risk/reward outcome: 2x-4x from here, aliases nan business is going to flail astir arsenic an overvalued expensive-to-run niche-business that ne'er scales, and hence nan equity is flat-to-down.

RENT's guardant EV to Sales Ratio

RENT's guardant EV to Sales Ratio (Ycharts.com)

Risks to Rating

Rent nan Runway is an apparel net work catering to upper-income women. However, nan company's full addressable marketplace (TAM) is successful mobility arsenic galore e-commerce companies catering to akin demographics person struggled to grow beyond a low-single-digit cardinal customer base. Additionally, RENT's business exemplary burns cash, and nan institution is not expected to execute affirmative free rate travel done 2024. This is owed to RENT's precocious fixed costs and debased margins, which require important superior expenditures to turn revenue. Furthermore, nan pandemic had a important effect connected RENT's subscriber base, which was halved. It remains unclear if immoderate of nan company's halfway usage cases, specified arsenic work-from-home, person been permanently impaired.

Final Thoughts

There are respective reasons for my liking Rent nan Runway. Firstly, contempt concerns astir its TAM, RENT has only scratched nan aboveground of its imaginable subscriber base. According to estimates, nan institution generates astir $200 cardinal successful gross per 100,000 subscribers, indicating important room for growth. Secondly, RENT has invested heavy successful processing proprietary systems and infrastructure, which gives nan institution a competitory separator and sets it isolated from its peers. Thirdly, RENT is expanding into caller categories and usage cases, specified arsenic location decor and pet apparel, which could importantly grow its gross streams. Fourthly, caller inventory models are improving RENT's portion economics, which could lead to improved margins and profitability successful nan agelong run. Therefore, I stay bullish connected nan banal while keeping an extremity of twelvemonth value target of $5.6.

This article was written by

Mohammed Saqib floor plan picture

high-growth/deep-value. trying to hit nan marketplace 1 banal astatine a time.

Disclosure: I/we person a beneficial agelong position successful nan shares of RENT either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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