The Positive, Negative, and Negative

I spoke to several friends today about the Hire The Runway IPO, and I quickly attempted to extract my fiery take on the good, the bad, and the ugly in a somewhat premature country Western movie style…

The Good:

The inventory began buying and selling for $23 per share, over 10% more than the I.P.O. value of $21. Jennifer Hyman, the immensely charming creator of Hire the Runway, is admired by retail buyers for her vision and approach. It’s also a milestone company: Hire the Runway is the first company to go public with a female Founder/CEO, COO, and CFO. #girlpower. It’s also a very tiny IPO for this kind of company, demonstrating that there’s space in the public markets for more diverse entries.

RTR has also shown a vital model discovery engine by creatively expanding their product range with manufacturers. According to their S-1, RTR Split accounted for 36% of the product acquisition, as they “buy things on consignment from model partners at zero to low upfront cost and share revenue with our manufacturers every time an item is rented.” For each rental, the manufacturers also pay us a logistical fee.” Another 18 per cent of stock is private label or exclusives created by manufacturers for RTR, which boosts margins and customer pleasure.

Because many people believe the rental industry is still in its infancy, there may be plenty of potentials for RTR to grow. Why? Many reasons, to be sure. Prospects have been prompted to reconsider their buying habits as their concern for the environment has grown (even when a few of these efforts to be sustainable are greenwashed). This was hastened entirely by COVID; according to an LEK survey, 57% of respondents said COVID-19 helped them realise that some of their pre-pandemic discretionary expenditure was unnecessary. Furthermore, with the rise of the sharing economy and the normalisation of the concept of access over possession by shopper brands like Netflix and Airbnb, customers are less concerned about preserving one thing from their closet if those very same dollars could provide higher and more plentiful entry.

Outfit weariness and social media peacocking are among the primary drivers of the cultural zeitgeist, according to RTR. “33 percent of females consider an outfit to be ‘past’ after wearing it less than twice,” according to a study in their S-1. Another is that “one out of every seven females thinks being photographed in the same dress twice to be a style faux pas.” The pressure to seek luxury and variety in our wardrobes has increased due to social media, and other companies have noticed. In 2019, City Outfitters launched Nuuly, a rental business, and brands such as Vince, Rebecca Taylor, Ganni, Ralph Lauren, and Selfridges produced high-profile rental packages. Coresight Analysis estimates the size of the US rental clothing industry at $1.3 billion in 2019, down from $1.1 billion the previous year. According to analytical firm GlobalData, the government predicts a comeback to “at least” $1.2 billion in 2021 and $2.5 billion by 2023. According to a a recent Bain & Company report, luxury manufacturers’ rental income might account for 10% of their total revenue by 2030.

My buddy, David Goldberg, has been positive about this house since he established his own men’s rental firm: “As someone who has created a rental business before than, I can speak to the complications. So I’m not surprised that they’re still experiencing big losses after 11 years and $700 million in venture capital. They’ve also built an incredible business and customer base that will serve them well as a pacesetter in a movement that is still in its infancy.”

The Dangerous:

At $19.29, the inventory finished the day 8% below opening price.

Let’s look at some of why some purchasers are less enthusiastic about leases. First, there’s the issue of long-term viability. According to credible research, renting clothing is worse for the environment than discarding them. It’s because, in terms of emissions, renting is based on the concept of purchasing and selling a variety of trend-driven items with a defined lifespan in terms of wearability and fashionability. The cost of transporting these products to and from customers might be quite costly, and it’s no better than fast style in terms of environmental impact.

Second, conduct business from home and informally in the long run. “Evaluating the company’s active subscriber count from FY2019 to FY2020 suggests a dramatic -42 per cent YoY reduction,” Lacey Wisdom of Eniac Ventures told me. While we may ascribe some of this to COVID, there might be more at work here. The 126,841 subscriber count includes both active and paused customers (though they do separate actives and non-active later) is also a negative sign. It indicates that the company deals with larger headwinds in light of changing shopper preferences almost entirely about clothing. Sure, as Jennifer Hyman points out, more women are entering the workforce at record rates. Still, the future of work hangs in the balance, and workforces are increasingly shifting to casual attire, yet RTR continues to focus on the formal wear/enterprise informal sector. While COVID has expedited this trend, it was well underway even before the pandemic’s assault.”

It’s been the worst year for fashion in almost all of recorded history: ” The state of fashion is sweatpants.” Casualization is the newest trend, as employees stay in their homes for longer than they did before the epidemic. Despite the possibility of a Roaring Twenties-style comeback, there is a growing desire for much less.

Third, there seems to be some shady, non-GAAP accounting going on inside the walls of this very lucrative business. The company’s profit fell from $257 million in 2020 to 158 million in 2021, while losses increased from $154 million in 2020 to $171 million in 2021. RTR reported an $84 million internet loss in the first half of 2021, down from $88 million in the same period in 2020. And none of these losses is attributable to product depreciation. They define Gross Revenue as Income minus success bills and income shares to manufacturers in response to the S-1. It excludes product depreciation, which accounts for around 30% of sales.

What’s the big deal about that? RTR is a company built on shelving merchandise after a period of usage and time (in this instance, they claim to keep merchandise for three years with a salvage value of 20%, which seems generous considering how quickly clothes wear out and fashion trends change—a significant attraction for the brand, ironically). So, in essence, there is a benefit to conducting business right here that includes the depreciation of rental clothing. However, according to their accountants, that must be removed from the business. Here is a great in-depth article? RTR purchased $8.5 million in new garments in the first half of 2021 while selling or liquidating $9 million in items that same year, according to this excellent in-depth report.

The Bad:

Why would they want to go through such accounting gymnastics to point out (additional) income, given how much they’ve done to maximise the stock purchase aspect? The answer, in my opinion, is that their activities are completely unsustainable.

The cost of success and reverse logistics, or the return, cleaning, restocking, and 2-way expedited delivery of items (typically 2-3 returns each purchase cycle), adds up quickly. Constructing a reverse logistics and cleaning business has several challenges, especially when a garment is used for years at a time. Many businesses have completely outsourced this task. Castle, a for-hire rental service provider, claims to have a 25% profit margin on its service, but it’s proving difficult for many. RTR has $104 million in cash and a $674 million accumulated loss as July 31.

I believe in the principle of access over ownership and circularity in its purest form. Still, I wonder whether certain rental businesses are unsustainable from both an environmental and a financial standpoint. Compared to non-rental manufacturers, Hire the Runway may circulate more clothing and deteriorate them faster due to trend-driven marketing and planned obsolescence. While more assets are being used to make new clothing, the company is also using more air freight to convey and return the merchandise and more equipment and chemical substances to clean them. Furthermore, removing the depreciation of specified garments from the variable value-stack is not beneficial. I’m happy for the founders, and I’m happy that the markets (almost) agree, but, like the company itself, I could return this stock to the sender.