Rent the Runway

The first stock we’re looking at is Rent the Runway, an interesting e-commerce firm in the contemporary fashion niche. Rent the Runway makes high-end fashion garments, as well as accessories, jewelry, and handbags, available to the average consumer, for rent instead of purchase. The service includes free shipping and returns, a fast turnaround on orders, cleaning coverage, AI-powered fitting technology, and a several membership choices, allowing users to select from 4 to 16 items each month. Memberships are sold on a monthly subscription basis.

This unique company took its idea public last fall, with an IPO on October 27. RENT shares opened at a price of $21, at the top of the expected range, and the company sold 17 million shares, 2 million more than had been expected. The event saw the company raise $357 million gross proceeds.

After the IPO, RENT fell steadily before levelling off at the beginning of 2022. The shares saw a slight uptick this month, although the stock is down 70% since it debuted on the markets.

RENT has been trading publicly long enough to have released one quarterly financial report. The release, for Q3 of fiscal year 2021 (which ended on October 31) covers the quarter during which the company went public, and makes an interesting snapshot of RENT’s initial conditions as public entity.

The company reported 78% year-over-year increase in active subscribers, and a 66% increase in total revenue. The active subscriber total reached 116,833, while the revenue was up to $59 million. RENT reported gross margins of 33.7%, a huge improvement over the 6.8% seen in fiscal 3Q20.

In coverage of RENT for Jefferies, analyst Ashley Helgans writes: “We expect outsized growth from RENT, as the company sits at the intersection of multiple secular trends driving consumer behavior: 1) continued shift to ecom; 2) focus on sustainability; 3) access vs. ownership models; 4) desire for newness and variety; and 5) increase of women in the workforce.”

Getting into some deeper detail, Helgans adds, “Rent the Runway has ~150K subscribers and over 2.5M lifetime customers. In a recent survey, 56% of women expect they will subscribe to fashion in the next five years. The company defines their current opportunity set at 21M women. Today, subscribers represent 0.7% of the company’s defined TAM. On a TTM basis, 400K consumers used Rent the Runway (150K subscribers + 250K nonsubscribers). If 20% of those nonsubscribers convert, this would represent an incremental $90M in revenue.”

In line with this bullish outlook, Helgans rates RENT a Buy with a $13 price target that suggests an impressive 117% upside in the coming months. (To

Judging by the consensus breakdown, the analyst community is on the same page. Given that 4 Buys have been issued in the last three months compared to no Holds or Sells, the message is clear: RENT is a Strong Buy. In fact, the average price target is even more upbeat; at 18.75, the figure is expected to yield 12-month returns of 213%.