Fashion subscription service Rent the Runway jumps on market debut

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Shares in the luxury fashion rental business Rent the Runway jumped on its stock market debut on Wednesday, highlighting the continued investor appetite for new issues as exchanges set fresh highs.

The company priced its initial public offering on Nasdaq at the top of its predicted range and sold more shares than originally planned due to strong demand. The stock rose a further 10 per cent when it started trading on Wednesday morning, giving it a fully-diluted market value of $1.7bn.

The warm reception marks a sharp turnround for the 12-year-old company, which was badly hit by the coronavirus pandemic last year, and was forced to raise cash at a 25 per cent discount to its earlier $1bn valuation.

Jenn Hyman, chief executive, said Rent the Runway had achieved “our ideal outcome because this gives us all the capital we need to continue to grow, to reach profitability and significantly delever all at the same time”.

Despite the deal’s relatively small size, it has been closely followed as a high-profile test of a new business model in the fashion industry, and of investors’ willingness to continue backing heavily lossmaking companies.

Several senior bankers have warned that IPO investors were becoming more selective as stock markets stuttered in late September and early October, leading to a decline in post-listing performance and encouraging a small number of companies to postpone their offerings.

However, markets have regained momentum in the past few weeks. The Renaissance IPO index, which tracks the performance of recent US listings, has climbed 12 per cent from its early October low, compared with a 7 per cent gain in the broader S&P 500 stock index.

Rent the Runway pioneered a subscription-based model for clothing, comparing itself to technology companies such as Netflix and Spotify rather than traditional retailers. The majority of its revenue comes from customers who pay a monthly fee to borrow garments from a selection of 18,000 items in its online “closet”. 

The Brooklyn, New York-based company pitches itself to consumers as a more affordable and environmentally friendly way to wear luxury fashion, and to brands as a way to reach new customers and compete with fast-fashion businesses such as Zara.

It has been widely criticised for publishing adjusted financial numbers that exclude many key costs, including depreciation in the value of the clothes that it rents out.

In response to the criticism, Hyman said the company had “tried to lead with complete transparency”.

“We have not suggested to investors what metrics they should use to evaluate us,” she said.

Even on its preferred adjusted earnings measure, Rent the Runway still reported a loss of $20m in the year ending January 31. On a statutory basis, it reported a net loss of $171m, more than its loss of $154m in the previous year.

The company said its performance had rebounded so far this year, though customer numbers have not fully recovered to pre-pandemic levels. It had about 143,000 subscribers at the end of September, 3 per cent shy of its level at the end of January 2020. Hyman said the company’s investors “see [a] really long runway ahead of us to continue to grow”.

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