💩Rent the Runway = a Future Debtor💩
The business will hit public markets now, and maybe a bankruptcy court later.
We’re at the stage in the cycle when every company under the sun — even those like Warby Parker Inc. ($WRBY) that have enough brand appeal to overcome zero lifetime profitability — are finding that it might be now or never to go public and cash out.
Here are some specs that will make you understand why we’re vomiting in our own mouths even as we write this:
In 2019, the business had 147,866 memberships.
In 2020, that figure dropped to 95,245.
In 2019, the business had 133,572 active subscribers.
In 2020, that number dipped to 54,797.
If those trends mortify you, well, congratulations. You are excellent at issue spotting a dramatic hemorrhage in need of a tourniquet.
But…BUT…this is 2021 and so far this year the business appears to be winning back customers who want to re-enter the world with a spruced up wardrobe.
Over the first six months of 2021, the business counted 97,614 active subscribers. That’s against 54,228 in the same timeframe during 2020 (PETITION Note: OUCH. This means the business only added ~570 active subscribers TOTAL in the last six months of ‘20).
What does all this mean in terms of financial performance? Glad you asked.
In 2020, the company generated $157.5mm in revenue (and a $171.1mm net loss) against $256.9mm in 2019 (and a $153.9mm net loss). This thing was a cash-bleeding machine pre-pandemic. During the pandemic? It somehow found even more blood to flood the streets.
But the past is the past. What about 2021? After all, for the IPO, that’s really all that matters. Well, that and it’s potential go-forward growth trajectory. Well, for the first six months ended July 31, the company did $80.2mm of revenue (which, we should note, only puts it slightly ahead of its wildly depressed ‘20 numbers) and lost $84.7mm (which, we should note, only puts it slightly ahead of its wildly sh*tty ‘20 numbers). Congratulations, folks, you managed to somehow lose ~$3.3mm fewer dollars on an annualized basis! If that doesn’t say “time to IPO,” well, we don’t know what does.
Man this thing is a turd.
The business makes money via a variety of subscription options that permit active subscribers to rent designer clothing and accessories. As one example, a customer can rent eight items/month for $99 for the first two months and $135/month thereafter. They can also rent a la carte.
The company has been busy iterating. Over the last year the company has (i) closed all off its brick-and-mortar presence, (ii) scrapped its unlimited subscription option, and (iii) channeled its inner Poshmark Inc. ($POSH) and Thredup Inc. ($TDUP) and gone balls to the wall into resale. PETITION Note: RENT may want to reconsider using those comps considering this:*
PETITION Note II: We’re actually sanguine about these businesses in the near-term, especially in light of reports about supply chain issues. If retailers cannot fill shelves with new inventory, it stands to reason that consumers flush with cash will go elsewhere to fill their closets. But we digress. Also, not investment advice, DOYR.
Some other notes:
The company is proposing a dual-class structure. We’d love for someone to tell us what it is about this business generally — and the business performance specifically — that justifies the two co-founders here, Jennifer Hyman and Jennifer Fleiss, getting insulation from proper shareholder oversight.
We have to give kudos: “The Closet in the Cloud” is an interesting way of framing the business. It’s complete and utter nonsense but, damn!, it sounds techie and cool. 🤯
Its stats are interesting but meaningless. 18k styles? (PETITION Note: Uh, awesome, we guess). 750+ designer brands? (PETITION Note: Are there really that many in existence? Damn this planet is wasteful). Approximately 88% of customers acquired organically? (PETITION Note: Ok, sure, but we can’t help but notice that the business intends to up its marketing spend). Approximately 80% of revenue from subscribers? (PETITION Note: Uh, given subscriber numbers, that may just as well be a negative). 40mm items shipped? (PETITION Note: Uh, impressive … we think … though … aren’t those costs going up? And nice try on the ESG narrative). $16b of gross merchandise value shipped! (PETITION Note: Wow. We love the footnote though: “GMV is calculated using original retail and/or comparable value prices.” Which means it’s a fugazi figure, frankly).
The company is right to highlight emerging consumer trends like (i) the shift from ownership to access, (ii) the desire for variety and newness, (iii) growth of online shopping, (iv) social media driving fashion, (v) an increasingly female workforce,** (vi) the importance of sustainability, and (vii) the normalization of secondhand. The question is whether this is the company to seize upon those trends.
To be fair, there are structural shifts in the designer retail landscape that RENT could benefit from like (a) the decline of traditional wholesale channels (read: department stores succumbing to bankruptcies and liquidation, in certain cases), (b) heightened competition from mass and fast fashion require creativity from designer brands, (c) the need for brands to have some sort of DTC channel (PETITION Note: why they’d want to outsource that to RENT is beyond us, but, yeah, sure, we understand the idea), (d) a larger more fractured discovery landscape, and (e) an aging consumer base. The question is: will they capture these shifts?
Color us unconvinced by the story:
This is a business with an accumulated deficit of $674.1mm whose go-forward plans depend in many respects on the increasingly-crowded resale market. And there are no indications that this sucker can scale. Jason Stoffer at venture capital shop, Maveron, points out: “CAC has been consistently below $55, with payback of < 3 months at a contribution margin of 30%. But they need to increase new subscribers by many multiples of where they are today, and I have big questions on the actual addressable market. Despite starting way back in 2008, @renttherunway has very little social media presence. On millennial friendly Instagram, @renttherunway has 384K followers v. 836k for stitch fix, 510K for therealreal, 2.1M for Olaplex, 21.9M for Shein, 641K for thredup. Gen Z focused TikTok is even more abysmal for @renttherunway. There are 11.2M views of #renttherunway v 31M for #Stitchfix, 28.6M for TheRealReal, 388M for #Olaplex, 4.3B for #shein, 6.3M for thredup.” No wonder marketing costs are slated to increase (more on this below).
The company has negative adjusted EBITDA of ($8.1mm). And even that may be generous AF considering what some think are liberties taken on depreciation:
Even if this accounting is justified, do people really want to be investing in a glorified tuxedo rental company?
The contribution margin here is uncompelling. We’re talking approximately 30% in the first six months of fiscal ‘21 with marketing sitting at approximately 9% of sales. Notably, the company indicates that marketing spend may go up too. Similarly, shipping costs are likely to increase — the USPS is already touting big changes, as our other delivery services. In other words, variable costs appear to be heading in the wrong direction. Similarly, we imagine the cost of fixed assets and servicing fixed assets is also headed in the wrong direction in this environment.
There is debt on this sucker: $74.5mm ‘23 8% PIK/6.5% cash first lien paper (held by Ares Corporate Opportunities Fund V LP) and $230mm of ‘23 15% PIK subordinated junior lien loans held by Temasek Holdings (exclusive of $82.4mm of accrued PIK interest). And believe it or not, Ares actually imposed covenants! We nearly forgot what covenants even were!! There’s a springing maturity on the Ares facility in the event that the Tamasek facility remains outstanding in April ‘23. Circle your calendars folks.
The company is filing for an IPO while also acknowledging that it has identified material weaknesses in their internal control over financial reporting. HAHAHAHAHA.
PETITION readers know we love the idea of resale. But there’s not much to love about RENT’s numbers/business. This is a cynical dump of a shite company onto the public markets by the founders and other investors like Bain Capital Ventures, Ares, Highland Capital Partners and TCV. Nothing more. In fact, with numbers like these ⬆️, it wouldn’t shock us if this sucker ended up in a bankruptcy court in a few years.
*Thredup enjoyed a banner 6.2% jump yesterday, Tuesday October 5, lifting it out of negative territory since its IPO. But just by 4.2% (which is $0.84/share at its level).
**Some take issue with this being a tailwind for the business:
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🌲New Chapter 11 Bankruptcy Filing - CalPlant I Holdco LLC🌲
On October 5, 2021, CA-based CalPlant Holdco LLC and its affiliate CalPlant I LLC (together, the “debtors”) filed chapter 11 bankruptcy cases in the District of Delaware. Politics is not our forte but we can’t help but find the timing of this filing to be a little unfortunate.
In case you haven’t heard, there’s been a ton of drama in Washington DC over the last several weeks as politicians try to hammer out, among other things, a grand infrastructure plan. Within that plan, the Biden Administration hopes to promote positive change for the environment while also investing in R&D and technologies of the future. We’re talking trillions of dollars people.
Here — with the help of the state of California — the debtors constructed and (sort of) operate the world’s first manufacturing plant (the “Plant”) that converts rice straw — a waste product of rice farming — into medium density fiberboard (“MDF”). MDF is an engineered wood product that counts as one of the most versatile building materials available in the market today; it has a density, strength and durability greater than plywood.
The debtors’ Plant has been in development for almost three decades but it only recently — in 2017 — obtained the financing necessary to finance the construction and operation of the Plant. Consequently, the debtors only very recently started selling MDF. The debtors expect, however, to be able to convert approximately 280k tons of post-harvest rice straw into 140-150mm square feet of MDF annually once the Plant becomes fully operational.
This being a CA-based company and all, environmental conservation is at the heart of the debtors’ history. Per the debtors:
The Plant eliminates more traditional methods of rice straw disposal, which historically involved the incineration of leftover rice straw and currently necessitates the reincorporation of straw into the soil, followed by flooding the field with water and chemicals to hasten decomposition. The Debtors’ method not only reduces methane emissions and water consumption, it also offers rice farmers a less expensive, less labor intensive, and more sustainable means to dispose of waste. Further, using rice straw as feedstock reduces the need to cut down trees that filter CO2 from the atmosphere. To date, no other large-scale economically-viable post-harvest uses for rice straw have been developed, so the Plant represents the sole source for disposing of rice straw in an environmentally friendly and economically favorable manner.
And ESG considerations are at the heart of the debtors’ (extensive) government-issued funding.
In June 2017, the California Pollution Control Financing Authority (“CPCFA”) issued $228.1mm in Solid Waste Disposal Revenue Bonds a/k/a “Green Bonds” agented by BOKF NA (as successor indenture trustee). The CPCFA then loaned the proceeds of these “Senior Bonds” to the debtors. The bonds are secured by, among other things, the Plant and 273 acres of the debtors’ property in Willows, California.
In August 2019, the CPCFA issued another series of bonds totaling $73.685mm which are subordinate in priority to the ‘17s. The indenture trustee under these bonds is UMB Bank NA.
In October 2020, the CPCFA issued an additional $42mm of Senior Bonds.
The debtors are in default under both indentures, having failed to make installment payments due under the respective bonds. Consequently, the debtors have been operating under non-acceleration agreements with both trustees.
The failure to make the installment payments stems from a variety of operational difficulties too boring to list here. Suffice it to say that anyone who has ever personally dealt with general contractors on construction projects can assume the cliche that the construction process suffered delays and cost overruns because, like, that always happens.
So where is this thing going?
Let’s all say it together:
The debtors have a plan support agreement (“PSA”) with certain consenting senior bondholders that contemplates a sale process via court-approved bidding procedures, an auction (assuming bidders), and consummation via a chapter 11 plan of reorganization. Alternatively, if no bidder emerges, the PSA calls for a pivot to a chapter 11 plan that would initiate a debt-of-equity swap with the senior bondholders. The debtors foreshadow that any such plan would involve take-back paper and exit financing. The senior bondholders who’ve consented to the PSA will provide $30.1mm in 9.5% DIP financing ($26mm new money) and consent to use cash collateral to fund the sale/plan process.
And now we wait and see whether a buyer emerges.
The debtors are represented by Morrison & Foerster LLP (Jennifer Marines, Benjamin Butterfield, Miranda Russell) & Morris James LLP (Eric Monzo, Brya Keilson) as legal counsel and Paladin Management Group (Sheon Karol, Peter Richter) as financial advisor. BOKF NA, as indenture trustee to the senior bondholders, is represented by Mintz Levin Cohn Ferris Glovsky & Popeo PC (Miyoko Sato, William Kannel).
Rahul Chopra (Analyst) joined Caspian Capital LP from Guggenheim Partners.
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