Analyzing Rent the Runway’s (Inevitable) Death

🧠 The Takeaways

Rent the Runway will die this year. Here are the 3 existential lessons to learn from their inevitable death.

1. Don’t pretend to be something you’re not for higher valuations. It always backfires.

2. Not pivoting into a B2B model earlier and selling off their Supply Chain skills.

3. Not spinning their Software out as a high-margin tool.

+  My DTC podcast tour.

LBAB! Community - Podcast Tour

I’ve been going on a podcast tour recently to share more about what we’re working on at the portfolio, the current landscape of eCom acquisitions, and talking more about the fund and our journey.

• For an overview of the state of acquisitions in Ecom, check out the interview I did on the DTC podcast.

• For more on how we got started with our fund + the state of buying a biz in general (plus what that process involves), Tim Richardson and I went deep on the Factory podcast.

I did a bunch more interviews that I’ll share soon. 

We also have a lot of exciting updates coming on the Coco side.

Let’s Examine This Biz

Note: As always, none of what follows is legal, tax, investing, financial, or any other sort of advice. And I was never here.

Rent the Runway, which started as “renting the Prada dress instead of buying it for that special occasion” has degraded into another box-of-the-month biz and will go bankrupt by EOY.

• Share price: $6.14

• Market Cap: $24.45m

• L5 Performance: -98%

• P/E Ratio: N/A

They have $77m in cash, lost -$69m last year, and have $333m in long term debt. 

This biz is sinking with no land in sight.

Financial Summary

TLDR Analysis: Dead, But doesn’t know it yet.

• OPEX cuts are drops in the bucket. Not deep or quick enough. 🥱

• Gross Margin % declined for the 3rd straight year. 😰

• Net Loss is decreasing but not fast enough. ⚰️

This is really an asset biz masquerading as a tech biz. The pivot to another subscription rental biz is its last gasp.

The core biz got too expensive + unpopular, and now they’re stuck with massive expenses and depreciating assets (clothing + reverse supply chain).

Clothes are not assets that get more valuable with time. The more they’re used, the less valuable they are.

Let’s Review This Biz

There’s no saving this biz, so here are the 3 mortal mistakes Rent the Runway (RTR) made.

1) Pretending to be a tech biz

The biggest mistake RTR made was being an incredibly asset-heavy biz but lying to themselves and everyone else (and convincing the world) that it was a tech biz. 

Their P&L makes this painfully obvious. (All numbers are a % of Rev.)

• Rental Product Costs (COGS): 45%

• Fulfillment: 27%

• Technology: 12%

• Marketing: 9%

• G&A: 28%

3 obvious tells this isn’t a “tech biz:”

1. Tech bizs call their spend on technology COGS. Not “Technology.”

2. Their Tech spend is >>> 12% of Rev.

3. THEY BUY PHYSICAL PRODUCT COSTS.

RTR’s model was never going to work because everything they did was maximally capital intensive.

Three money sucks:

1. Massive inventory (clothes)

2. Tons of equipment (giant laundromat)

3. Best-of-breed tech (supply chain)

Takeaway: Invest in your core. Outsource everything else.

2) Not Pivoting into B2B

RTR should have pivoted into a B2B model long before they went public. The real value they created wasn’t allowing someone to rent a Prada dress for 1 event and returning it. 

It was the incredible reverse supply chain they built.

The ability to track returns, inspection, washing, restocking, and inventory valuation/depreciation is more valuable than $25m.

It’s also obvious from their P&L that their consumer model was never going to make sense. Marketing as a % of Rev declined every year for the past 4 years:

• 2021: 14% of Rev

• 2022: 12%

• 2023: 10% 

• 2024: 9%

With OPEX @ 110% of Rev, even in RTR’s best year, its biz model was never profitable enough to invest in marketing. And 14% is a low % to start out at for a growing consumer brand.

If they had sold off their Supply Chain as a Service to other bizs that need massive cleaning + restocking infrastructure (Hotels, Hospitals, Sports Facilities, etc.), they could have turned almost every cost center into a profit center.

• Dumped all the clothes (Largest expense @ 45% of Rev) 

• Lost the Marketing line item

• Added Surcharges on fulfillment fees

That alone would have flipped almost all of their expenses into profit.

Takeaway: Admit defeat in 1 model + pivot into the (much) more lucrative one.

3) Not Selling off their software

I don’t know for a fact, but I’ll bet you $25m RTR has built some of the most impressive Reverse logistics tech.

• Their ability to know where any item of clothes is in their supply chain

• Amount of fully cleaned restock

• Remaining shelf life 

That’s the truly valuable part of this biz.

Hemorrhaging cash for ~2 decades to realize the real value you’ve built is the biggest crime.

The US Laundry and Linen Services market is $12.7B + growing at a 5% CAGR (Source). Much larger, more valuable brands would have paid incredible SaaS + Service fees to drive improvements in their supply chains.

To be worth ~$25m, RTR as SaaS would need to sell only $2.5m in SaaS contracts (~15 real deals) to be worth as much as they are right now.

Takeaway: Know what the real value you sell is. Only focus on that.

Final Thought

The lack of pivoting or even trying a B2B model is infuriating here. 

Especially since our model at Because Ventures is:

• Acquire the platform DTC brand.

• Build/acquire Tech/SaaS to solve that brand’s problem.

• Sell the SaaS to others.

The obsession with being a DTC consumer-serving model blinded them from what is a $1B biz.

It might be less sexy (no one grows up wanting to work in Reverse Logistics), but RTR built the tech and infrastructure to become a serious player in the Linen and Services markets. And it’s clear the consumer bet didn’t work.

Easy partnership example: Four Seasons. 

Clean all of their staff uniforms, linens, guest items. Even offer renting items to guests.

Four Seasons takes on all the front end effort. RTR just delivers clean items.

They might not get the same valuation multiple, but they’d be worth a lot more than $25m.

There’s no way none of the 900 brilliant people who work there never thought about this. They just never pulled the trigger because they could always get more cheap capital.