Executive Summary / Key Takeaways

• Rent the Runway is executing a strategic pivot in fiscal year 2025, shifting focus from cost discipline and achieving near free cash flow breakeven in FY24 to making a significant investment in inventory to accelerate subscriber growth.
• The company reported a 7.2% year-over-year revenue decline in Q1 FY25, primarily due to lower revenue per subscriber and average subscribers, but achieved a return to sequential ending active subscriber growth (up to 147,157) and the strongest quarterly customer retention in four years.
• Management expects double-digit ending active subscriber growth for the full fiscal year 2025, driven by the planned doubling of new inventory units and enhanced customer experience initiatives.
• This growth investment is projected to result in full-year cash consumption between negative $30 million and negative $40 million, a deliberate use of capital to build the inventory base and drive future growth, supported by a significant increase in capital-efficient Share by RTR inventory acquisition.
• Key risks include macroeconomic sensitivity impacting discretionary spending, challenges related to debt obligations and refinancing, unremediated material weaknesses in internal controls, and intense competition from diverse players in the fashion rental, retail, and resale markets.

Rent the Runway, Inc. (NASDAQ: RENT) pioneered the concept of a shared designer closet, fundamentally altering how women access high-end fashion. Launched in 2009, the company built its business on providing access to thousands of styles from hundreds of brands through its core Subscription offering and a-la-carte Reserve rentals. More recently, it added a Resale option, allowing customers to purchase pre-loved items from the rental fleet. This model positions Rent the Runway at the intersection of fashion, technology, and the burgeoning circular economy, appealing to consumers seeking variety, value, and sustainability.

The fashion rental and resale markets are intensely competitive, featuring a mix of pure-play rental services, traditional retailers expanding into rental (like Urban Outfitters (URBN)' Nuuly), and luxury resale platforms (such as The RealReal (REAL)). While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Rent the Runway differentiates itself through its curated selection of premium designer brands and a technology platform designed to manage the complex logistics of a high-volume rental business. Competitors like Stitch Fix (SFIX) focus more on personalized styling and ownership, while players like The RealReal specialize in authenticated luxury resale. Rent the Runway aims to stand out by offering a broad, desirable inventory accessible through flexible rental options, supported by technology that enhances the customer experience and operational efficiency.

Central to Rent the Runway's operations is its proprietary technology infrastructure. This system manages everything from receiving and processing inventory to fulfilling customer orders, cleaning and restoring garments, tracking items across its network, and powering the customer-facing website and mobile application. The company's data science capabilities inform crucial decisions, including inventory purchasing, merchandising, and customer targeting. Recent technological advancements have focused directly on improving the customer experience and driving loyalty. These include the introduction of back-in-stock notifications, a feature highly requested by subscribers, which has already seen 25% engagement among subscribers and nearly half of those users successfully adding an item to their bag from a notification. The company has also implemented personalized styling support, a 60-day customer promise for new members (offering free item replacements), and an RTR Concierge service involving proactive calls to early-term customers. Management reports these initiatives are showing promising early results in reducing churn, with styling support linked to a 27% reduction in first-month churn and the customer promise to a 34% reduction. Further tech improvements include faster loading grids on the platform, which have reportedly led to a 33% increase in grids viewed per session and a 61% increase in add-to-bag actions, and technology enabling faster, more frequent merchandising updates. This continuous investment in technology is designed to create a more seamless, personalized, and efficient experience, strengthening the competitive moat by improving operational leverage and directly addressing customer pain points related to inventory availability and discovery.

After several years focused on financial discipline and cost reduction, including restructuring efforts in 2022 and 2024, Rent the Runway entered fiscal year 2025 from a position of improved stability. Fiscal year 2024 saw the company achieve near free cash flow breakeven and record low cash consumption, demonstrating the underlying unit economics and operational efficiency gains. This financial foundation has paved the way for a strategic pivot in fiscal year 2025: a deliberate shift towards investing for growth.

The first quarter of fiscal year 2025, ended April 30, 2025, provided initial insights into this new phase. Total revenue for the quarter was $69.6 million, a decrease of 7.2% compared to $75.0 million in the prior year period. This decline was primarily attributed to lower Subscription and Reserve rental revenue ($62.0 million vs. $66.1 million, down 6.2%), driven by lower average revenue per subscriber (impacted by increased promotional spending) and a decrease in Average Active Subscribers (133,468 vs. 135,896, down 1.8%). Other revenue, primarily from Resale, also decreased by 14.6% to $7.6 million, mainly due to fewer items purchased per subscriber, partially offset by a higher average selling price.

Despite the revenue decline, a key positive signal in Q1 FY25 was the return to sequential subscriber growth. The company ended the quarter with 147,157 Active Subscribers, an increase from 119,778 at the end of Q4 FY24 and up approximately 1% year-over-year. Management highlighted this as the most ending subscribers at the end of a quarter in company history and noted the strongest quarterly customer retention in four years, with improved churn rates across subscriber tenures. This early retention improvement is seen as validation that the strategic focus on the customer experience and initial inventory investments are beginning to resonate.

Examining the cost structure in Q1 FY25, fulfillment expenses were $20.4 million (29.3% of revenue), slightly down in dollars but up as a percentage of revenue compared to Q1 FY24 (27.5%), primarily due to higher transportation costs. Technology expenses remained flat at $9.6 million but increased as a percentage of revenue (13.8% vs. 12.8%) due to lower revenue leverage. General and administrative expenses decreased by 9.2% to $20.7 million, benefiting from cost savings initiatives and lower share-based compensation. Rental product depreciation and revenue share increased by 5.0% to $27.3 million, reflecting a higher base of rental product and increased units acquired through the Share by RTR model. Overall, total costs and expenses decreased by 2.4% to $89.3 million.

The combined impact of lower revenue and shifts in the cost structure resulted in a wider operating loss of $19.7 million in Q1 FY25 compared to $16.5 million in Q1 FY24. Gross profit decreased to $21.9 million (31.5% margin) from $28.4 million (37.9% margin), primarily due to higher revenue share and fulfillment costs as a percentage of sales. Adjusted EBITDA for Q1 FY25 was negative $1.3 million (-1.9% margin), down from $6.5 million (8.7% margin) in Q1 FY24, reflecting the lower revenue and higher revenue share/fulfillment costs.

The strategic narrative for fiscal year 2025 centers on a significant investment in inventory, planning to approximately double the new rental product units added to the platform year-over-year. This is based on extensive data indicating that inventory depth, breadth, and newness are the most significant drivers of customer satisfaction, retention, and ultimately, acquisition. The company plans to significantly increase the quantity and desirability of items from its top 25 "pillar brands" and expand its exclusive design collections. A crucial aspect of this investment is the planned acquisition mix, with approximately 62% of new units expected to come through the capital-efficient Share by RTR program, a 2.5x increase in units via this channel compared to FY24. This strategy aims to mitigate the upfront capital outlay associated with traditional wholesale purchases.

Management's outlook for fiscal year 2025 reflects this investment phase. They expect double-digit growth in ending active subscribers for the full year. This growth is anticipated to accelerate throughout the year as the new inventory arrives and customer experience enhancements take full effect, although there may be a lag before acquisition benefits fully materialize. The financial implication of this investment is projected full-year cash consumption between negative $30 million and negative $40 million. This range is presented as indicative of a deliberate strategy to invest prudently in the customer proposition to drive future growth, even if it results in negative free cash flow in the short term. The guidance for Q2 FY25 anticipates revenue between $76 million and $80 million and adjusted EBITDA margins between negative 2% and 2%. Management explicitly stated that guidance does not factor in potential impacts from tariffs due to uncertainties but believes the rental value proposition may offer some resilience.

Rent the Runway operates under the constraints of its long-term debt facility, which had $340.6 million outstanding as of April 30, 2025, maturing in October 2026. The facility includes a minimum liquidity maintenance covenant of $30 million and requires mutually agreed-upon expenditure levels for rental product capital, fixed operating, and marketing expenses. Recent amendments extended the deadline to finalize the FY25 expenditure levels to July 31, 2025. While management intends to work constructively with the lender regarding the debt terms, the need for potential refinancing or restructuring before maturity poses a significant risk. The company also has a shelf registration statement allowing for the potential offer of up to $40 million in securities, providing flexibility for future capital raising, though any issuance would dilute existing shareholders.

Further risks include the inherent sensitivity of the business to consumer discretionary spending, which can be negatively impacted by macroeconomic conditions like inflation and potential recession. Operational challenges in shipping and reverse logistics, reliance on brand and manufacturing partners, and the ability to effectively manage a large, circulating inventory also pose ongoing risks. Regulatory changes, particularly concerning data privacy and online subscriptions, could impact operations and costs. The company has also disclosed unremediated material weaknesses in its internal control over financial reporting related to control documentation, segregation of duties, and IT general controls, which could affect financial reporting accuracy and investor confidence until fully remediated. Ongoing litigation, including a securities class action and a derivative lawsuit, represents potential financial and reputational liabilities.

Conclusion

Rent the Runway is at a critical juncture, deliberately shifting from a period focused on achieving financial stability to one centered on investing aggressively for subscriber growth. The Q1 FY25 results, while showing a revenue decline, also provided encouraging signals of sequential subscriber growth and improved retention, which management attributes to early impacts of their strategic pivot. The core of this strategy is a significant investment in inventory, enabled by capital-efficient acquisition models and supported by technological enhancements aimed at improving the customer experience.

The outlook for double-digit ending active subscriber growth in FY25 is ambitious and hinges on the successful execution of the inventory strategy and customer experience initiatives. Investors should weigh the potential for accelerated growth against the planned negative cash consumption, the challenges posed by debt obligations, and the need to fully remediate internal control weaknesses. The competitive landscape remains dynamic, requiring Rent the Runway to effectively leverage its brand, technology, and unique acquisition models to differentiate itself and capture market share in the evolving fashion rental and resale markets. The success of this strategic pivot will ultimately determine the company's long-term growth trajectory and path to sustainable profitability.