Rent the Runway is in 'investor purgatory,' CEO explains

Rent the Runway (RENT) fell short of third-quarter earnings estimates while issuing a debt restructuring.

Rent the Runway CEO Jennifer Hyman sits down with Yahoo Finance Live to discuss investor sentiment and the future of the high-end clothing subscription service.

"There is zero belief in the business from an investor standpoint," Hyman says, elaborating on the company's debt restructuring: "What we've done... is we've basically removed $66 million in cash and PIK [paid-in-kind] interest over the next six quarters, we've frozen the debt with our lenders who have been very constructive, and we've reduced our minimum liquidity covenant."

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Video transcript

JULIE HYMAN: As part of that earnings report, you also did a debt restructuring to kind of buy us some breathing room, right, where you're not going to have those debt servicing costs over the next few years. And on your conference call, you referred to the elephant in the room, that, you know, you were carrying this debt, that your stock has really come down quite a bit to say the least. Do you think you convinced the Street? I mean, the stock has still been going down. What do you think you need to do to convince investors?

JENNIFER HYMAN: Yeah. I mean, we are in a world of investor kind of purgatory, in that there's zero belief in the business from an investor standpoint. Now why is that? And there's really two elephants in the room. The first is that we have a balance sheet that is out of whack right now, because we had to take on debt during COVID to really secure the business.

What we've done with our debt refinancing is we've basically removed $66 million in cash and pick interest over the next six quarters. We've frozen the debt with our lenders, who have been very constructive. And we've reduced our minimum liquidity covenant. What it really does is it does two things. Number one is it makes an announcement to the world that Rent the Runway is here to stay, because Rent the Runway is also going to be a break even free cash flow business next year. So any of rumor around the viability of the business, we hope to kind of squash.

Second thing it does is it gives the market an opportunity to actually dig in and look at our business model, which we think is very attractive. We have gross margins upwards of 40%, inclusive of our cost of inventory, inclusive of our costs of fulfillment. If you look at other profitable retailers, we have a gross margin already that has a 10 to 15-point advantage. So we think that by nature of freezing the debt for a period of time and bringing the business to free cash flow breakeven that hopefully the investor community will start to evaluate our business model.

But the second component to this is that the second elephant in the room, is can Rent the Runway grow? And we just have been delivering a year in 2023 around $300 million, which is essentially flat to last year. So I understand why there is that question. What we want to detail on the call is that we've made some significant improvements in our inventory, which was a real problem that was causing elevated rates of churn.

And so we diagnosed the problem. We-- it's temporary. We've started to fix the problem. We're seeing incredible traction in green shoots of data and that gives us a lot of confidence for growth going into 2024.