urbazon
Thesis
Lease the Runway’s (NASDAQ:RENT) growing subscriber base, strong product breadth and first-mover benefit, with a novel enterprise mannequin that gives shoppers entry to an infinite closet, might supply room to broaden. The pent-up demand for occasions after resumption of regular life and extra individuals returning to work are catalysts for the corporate’s continued gross sales beneficial properties. A discount in fastened prices by way of restructuring can assist maintain adjusted EBITDA constructive. I consider boosting its energetic person base and engagement is essential to persistent double-digit progress until 2025. I maintain a Purchase ranking on Lease the Runway with an finish of 12 months value goal of $5.6.
Why do I like RENT?
Gross sales Can Extra Than Double By way of 2025
Lease the Runway income might surpass $500 million in 2025 vs. $203 million in 2021, as the patron atmosphere normalizes. Lease the Runway has a first-mover benefit within the apparel-sharing financial system, given its skill to spice up consumers’ buying energy in a sustainable method by offering entry to lots of of manufacturers by way of resale and leases. This can be pushed by including energetic subscribers, which might attain over 250,000 in 2025 vs. about 134,000 in 3Q. Further catalysts are potential growth overseas, a rising mixture of unique collaborations with manufacturers, a loyalty-plan launch, and a brand new wholesale pilot program for Lease the Runway’s unique designs.
RENT’s historic gross sales progress (Ycharts.com)
Subscriber Base Drives Majority of The Income
Lease the Runway’s skill to transform current reserve and resale clients to subscribers, whereas attracting new shoppers, is essential to driving gross sales by way of 2025. Energetic subscribers propel the majority of income, reaching 86.3% of whole gross sales in 2021 vs. 84% in 2020. Its customizable subscription program, which debuted in 2020, can assist enhance income per subscriber and drive extra worthwhile gross sales. Lease the Runway has seen its members enhance spending as they grow to be extra comfy with renting, shifting up in membership plans, and including objects to month-to-month plans. In 3Q, 28% of subscribers added a number of paid objects, in-line with earlier robust charges. The corporate affords 4, eight or 16 objects a month, with plans starting from $94-$235. Every further piece is an additional $25-$29 in income.
Furthermore, Lease the Runway’s partnership with Amazon.com to promote a collection of unique design and secondhand attire from an internet storefront is a constructive transfer that may elevate stock turnover, enhance visibility and assist entice and develop its personal subscriber base. For Amazon, it additional extends its attain in attire and secondhand, broadening the assortment for its consumers.
Round Financial system Attracts Youthful Demographic
Lease the Runway’s strategy to wardrobing by way of rental and resale resonates extra with youthful consumers — a bunch that can dominate spending within the U.S. — which can support gross sales momentum for the foreseeable future. Extra shoppers are shifting to rental or secondhand garments when making shopping for choices, particularly youthful ones, who are typically extra environmentally acutely aware and more and more in the hunt for selection, worth and newness. About 73% of millennials are prepared to pay extra for sustainable items, together with apparel-rental plans. Of girls in a Lab42 survey, 19% have rented clothes or equipment prior to now, and 55% are open to the concept. In 2020, millennials overtook child boomers to grow to be the most important grownup cohort in America, with over $600 billion in spending energy, in line with Accenture.
Re-Commerce Double-Digit Good points Might Outpace Trade
Lease the Runway’s rental and resale (re-commerce) mannequin positions it nicely to take share from conventional retailers within the ∼$300 billion U.S. attire market, as extra shoppers search for methods to take part within the round financial system. Rental and resale are among the many fastest-growing sectors, with the rental market projected to extend at a 19% CAGR throughout 2022-2026, in line with GlobalData. RENT’s breadth of choices provides it a bonus over specialty-apparel and single-brand-owned rental fashions. Whereas resale solely represented 11.7% of gross sales in 2021, it provides RENT the chance to faucet into a possible $82 billion apparel-resale market, by 2026. That compares with a low-single-digit achieve within the broader attire trade.
Important Moat with Companions & Logistics Investments
Probably the most compelling causes to love RENT in my opinion, is the corporate’s infrastructure. It has spent over a decade and lots of of thousands and thousands of {dollars} growing proprietary methods and infrastructure to supply its service at scale. I consider with a excessive diploma of confidence that the likelihood of somebody trying to duplicate what RENT has constructed within the US is pretty unlikely. It is just too expensive and too totally different from any conventional e-commerce warehouse arrange, that it is unlikely a enterprise investor would fund a competitor firm as a laggard to RENT, nor do I see any giant scale e-commerce corporations (like Amazon) trying this enterprise mannequin. Thus, RENT is in a category of its personal, and has an open runway to construct a big enterprise with out the specter of many opponents coming into. This can be a very uncommon state of affairs amongst shopper web investments.
Additional, RENT differentiates itself by partnering straight with designers, making certain robust working relationships, which has resulted in ~100% model retention with over 750 designers. Designers are aligned with RENT’s enterprise mannequin, in contrast to most different secondhand attire marketplaces the place their merchandise are resold with none enter round model, authenticity, presentation or pricing.
When it comes to PP&E investments, RENT’s enterprise mannequin requires the necessity for warehouses and a reverse logistics system, during which each merchandise that’s despatched out is returned and re-processed. This round mannequin is laborious, troublesome, and distinctive, which I consider insulates RENT from any imminent competitors. Beneath I’ll element a clothes path from rental to rental and the steps taken within the warehouse between every flip to make sure readiness.
Proprietary Infrastructure To Course of Each Garment (Firm Presentation)
Restructuring Plan Drives Operational Efficiencies
Lease the Runway’s plans to scale back $25-$27 million in annual working prices might take its adjusted EBITDA margin to fifteen% within the close to time period, particularly because it already posted its first constructive EBITDA margin in Q2, nicely forward of its purpose to get a constructive EBITDA margin by early 2023 and earlier than any restructuring-cost advantages. I do not anticipate the associated fee cuts to intrude with progress, given they’re concentrating on back-office capabilities akin to labor and are anticipated to haven’t any affect on buyer expertise. Administration anticipates holding advertising expense fixed at about 10% of income. Investments in know-how, achievement capabilities and product-acquisition channel shifts might additionally gas margin beneficial properties. RENT’s longer-term adjusted margin EBITDA purpose of 30% implies a 15% EBITDA margin when excluding rental-product depreciation.
Valuation
I worth Lease the Runway utilizing a ahead EV/Gross sales ratio of 1.2x on my FY23 income estimate of $290 million to provide you with an end-of-year value goal of $5.6. I consider on the present value, the corporate’s shares supply a binary threat/reward final result: 2x-4x from right here, or the enterprise goes to flail round as an overvalued expensive-to-run niche-business that by no means scales, and therefore the fairness is flat-to-down.
RENT’s ahead EV to Gross sales Ratio (Ycharts.com)
Dangers to Ranking
Lease the Runway is an attire web service catering to upper-income girls. Nevertheless, the corporate’s whole addressable market (TAM) is in query as many e-commerce corporations catering to comparable demographics have struggled to broaden past a low-single-digit million buyer base. Moreover, RENT’s enterprise mannequin burns money, and the corporate shouldn’t be anticipated to realize constructive free money stream by way of 2024. This is because of RENT’s excessive fastened prices and low margins, which require important capital expenditures to develop income. Moreover, the pandemic had a major affect on RENT’s subscriber base, which was halved. It stays unclear if a number of the firm’s core use instances, akin to work-from-home, have been completely impaired.
Closing Ideas
There are a number of causes for my liking Lease the Runway. Firstly, regardless of issues about its TAM, RENT has solely scratched the floor of its potential subscriber base. In line with estimates, the corporate generates round $200 million in income per 100,000 subscribers, indicating important room for progress. Secondly, RENT has invested closely in growing proprietary methods and infrastructure, which supplies the corporate a aggressive edge and units it aside from its friends. Thirdly, RENT is increasing into new classes and use instances, akin to dwelling decor and pet attire, which might considerably broaden its income streams. Fourthly, new stock fashions are enhancing RENT’s unit economics, which might result in improved margins and profitability in the long term. Due to this fact, I stay bullish on the inventory whereas retaining an finish of 12 months value goal of $5.6.
